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<SEC-DOCUMENT>0000796534-03-000004.txt : 20030331
<SEC-HEADER>0000796534-03-000004.hdr.sgml : 20030331
<ACCEPTANCE-DATETIME>20030331110406
ACCESSION NUMBER:		0000796534-03-000004
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		9
CONFORMED PERIOD OF REPORT:	20021231
FILED AS OF DATE:		20030331

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-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-15204
		FILM NUMBER:		03627867

	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-K
<SEQUENCE>1
<FILENAME>form10k.txt
<DESCRIPTION>FORM 10K 2002
<TEXT>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

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

   For the fiscal year ended                  Commission file number
      December 31, 2002                             0-15204

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

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

      101 Hubbard Street
      Blacksburg, Virginia 24060
- ----------------------------------------
(Address of principal executive offices)

Registrant's telephone number, including area code      (540) 951-6300
                                                     --------------------

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

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act).
Yes   X      No
    -----        -----

The aggregate market value of the voting common equity held by nonaffiliates of
the Registrant at $26.75, the price at which the common equity was sold as of
June 30, 2002, the last business day of Registrant's most recently completed
second quarter, was $88,230,408.

                                     <PAGE>


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

           Class                               Outstanding at March 3, 2003
- ------------------------------                ------------------------------
Common Stock, $2.50 Par Value                           3,511,377


                       DOCUMENTS INCORPORATED BY REFERENCE

Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 2002, is incorporated by reference into Parts I and II
of this report.

Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 8, 2003 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.


                        (This report contains 81 pages.)
                  (The Index of Exhibits are on pages 47 & 48.)


                                     <PAGE>



                                Table of Contents


                                                                            Page
Part I

Item 1.      Business                                                        3
Item 2.      Properties                                                      32
Item 3.      Legal Proceedings                                               32
Item 4.      Submission of Matters to a Vote of
              Security Holders                                               32
             Executive Officers of the Registrant                            33
Part II

Item 5.      Market for Registrant's Common
              Equity and Related Stockholder
              Matters                                                        35
Item 6.      Selected Financial Data                                         35
Item 7.      Management's Discussion and Analysis
              of Financial Condition and Results
              of Operations                                                  35
Item 7A.     Quantitative and Qualitative
              Disclosures About Market Risk                                  35
Item 8.      Financial Statements and
              Supplementary Data                                             37
Item 9.      Changes in and Disagreements with
              Accountants on Accounting and
              Financial Disclosure                                           38
Part III

Item 10.     Directors and Executive Officers of
               the Registrant                                                38
Item 11.     Executive Compensation                                          38
Item 12.     Security Ownership of Certain
               Beneficial Owners and Management                              38
Item 13.     Certain Relationships and Related
               Transactions                                                  38
Item 14.     Controls and Procedures                                         39

Part IV

Item 15.     Exhibits, Financial Statement
               Schedules, and Reports on Form 8-K                            39

Signatures                                                                   43

Index to Exhibits                                                          47-48


                                       2
                                     <PAGE>






                                     Part I


($ In Thousands Except Per Share Data)

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

History and Business

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

The National Bank of Blacksburg

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

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

  At December 31, 2002, NBB had total assets of $381,099. Total deposits at this
date were $340,751. NBB's net income for 2002 was $6,426 which produced a return
on average assets of 1.76% and a return on average stockholders' equity of
17.57%. Refer to footnote 12 of the Company's 2002 Annual Report to Stockholders
for NBB's risk-based capital ratios.

Bank of Tazewell County

  The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell
County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with

                                       3
                                     <PAGE>

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

  At December 31, 2002 BTC had total assets of $300,347. Total deposits at this
same date were $267,553. BTC's net income for 2002 was $3,499 which produced a
return on average assets of 1.22% and a return on average stockholders' equity
of 11.68%. Refer to footnote 12 of the Company's 2002 Annual Report to
Stockholders for BTC's risk-based capital ratios.

National Bankshares Financial Services

  On April 9, 2001 National Bankshares Financial Services Inc., a wholly-owned
subsidiary began offering non-deposit investment products and insurance products
for sale to the public. NBFS is working with Bankers Insurance, LLC, a joint
effort of Virginia Banks originally sponsored by the Virginia Bankers
Association. In another cooperative effort, NBFS is working with UVEST Financial
Services Group, Inc. to offer investment services.

Commercial Loans

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

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

Residential Real Estate Loans

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

                                       4
                                     <PAGE>

Urban Development, the Veterans Administration and the Virginia Housing
Development Authority.

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

Construction Loans

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

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

Consumer Loans

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

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

Sales and Purchases of Loans

  NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market residential mortgage
loans regularly sold by NBB.

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

  The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)

                                       5
                                     <PAGE>

if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.

  The following table sets forth, for the three fiscal years ended December 31,
2002, 2001 and 2000 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.

                                                              Percentage of
Period                       Class of Service                Total Revenues
- ------                       ----------------                --------------
December 31, 2002            Interest and Fees on Loans          66.90%
                             Interest on Investments             20.65%
December 31, 2001            Interest and Fees on Loans          55.84%
                             Interest on Investments             21.37%
December 31, 2000            Interest and Fees on Loans          66.74%
                             Interest on Investments             21.22%

Market Area

The National Bank of Blacksburg Market Area

  NBB's primary market area consists of the northern portion of Montgomery
County, all of Giles County, all of Pulaski County, the City of Radford, the
City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia.
This area includes the towns of Blacksburg and Christiansburg in Montgomery
County, the towns of Pearisburg, Pembroke and Rich Creek, in Giles County, and
the towns of Dublin and Pulaski in Pulaski County. The local economy is diverse
and is oriented toward higher education, retail and service, light manufacturing
and agriculture.

  Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment at
VPI & SU has remained relatively stable over the past three years, and it is not
expected to change materially in the next few years. A second state supported
university, Radford University, is located in NBB's service area. It too has
provided stable employment opportunities in the region. The State of Virginia
has announced significant cuts in financial support to both universities. To
date, these cuts have not translated into large reductions in employment.

  Giles County's primary employer is the Celanese Corp. plant, a manufacturer of
the material from which cigarette filters are made. Employment at this plant has
remained relatively stable over the past several years.

  Pulaski County's major employer is the Volvo Heavy Trucks production facility.
During 2000, the Volvo company laid off a significant number of workers, however
the company has recently consolidated manufacturing from another plant at the
Pulaski County location and has recalled a portion of the laid off employees.
The county also has several large furniture plants, most notably Pulaski
Furniture and Ethan Allen.

  The City of Galax is located in the Virginia-North Carolina

                                       6
                                     <PAGE>

furniture-manufacturing region. Three furniture companies, Vaughan Bassett
Furniture Company, Vaughan Furniture Company, Inc. and Webb Furniture Company
together employ the largest percentage of the area's work force. The Galax
economy is stable, but furniture manufacturing has been negatively affected in
the recent economic downturn.

  Several other small manufacturing concerns are located in Montgomery, Giles
and Pulaski Counties and in the City of Galax. These concerns manufacture
diverse products and are not dependent on one sector of the economy. Agriculture
and tourism are also important to the region, especially in Giles County and in
the area near Galax.

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

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

Bank of Tazewell County Market Area

  Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell, Richlands and
Bluefield, Virginia and Bluefield, West Virginia. BTC also has offices located
in the Towns of Wytheville, Marion and Abingdon located in Wythe, Smyth and
Washington Counties, Virginia, respectively. BTC's primary market area has
largely depended on the coal mining industry and farming for its economic base.
In recent years, coal companies have mechanized reducing the number of
individuals required for the production of coal. However, there are still a
number of support industries for the coal mining business that continue to
provide employment in the area. Additionally, several new businesses have been
established in the area, and Bluefield, West Virginia has emerged as a regional
medical center. Real estate values remain stable and comparable to other areas
in Southwest Virginia. BTC's expanded market areas in Wythe, Smyth and
Washington Counties have a diverse economic base, with manufacturing,
agriculture, education and service industries all represented.


                                       7
                                     <PAGE>


Competition

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

Registrant's Organization and Employment

  Bankshares, NBB, BTC and NBFS are organized in a holding company/subsidiary
structure. Until January 1, 2002, Bankshares had no employees, except for
officers, and it conducted substantially all of its operations through its
subsidiaries. Until January 1, 2002, all compensation paid to Bankshares
officers was paid by the subsidiary banks, except for fees paid to Chairman,
President and Chief Executive Officer James G. Rakes and to Corporate Officer
Cameron L. Forrester for their service as directors of the Company. On January
1, 2002, several administrative functions that serve multiple subsidiaries were
moved to the holding company level. These functions include audit, compliance,
loan review and human resources. Employees performing these functions who were
formerly employed at the bank level are now employed at the holding company
level.

  At December 31, 2002, NBB employed 129.5 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 2002
employed 102 full time equivalent employees in its various offices and
operational areas. Bankshares had 12 and NBFS had 3 full time employees at
December 31, 2002.

Certain Regulatory Considerations

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

                                       8
                                     <PAGE>

BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.

National Bankshares, Inc.

  Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Gramm-Leach-Bliley Act of
1999.

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

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

  Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be incident to
banking. Under recent amendments to the BHCA, included in the Gramm-Leach-Bliley
Act of 1999 (see below), any bank holding company, all the depository
institution subsidiaries of which are well-capitalized, well managed (as those
terms are defined in the BHCA) and have a satisfactory or better rating under
the Community Reinvestment Act as of their last examination, may file an
election with the Federal Reserve Board to become a Financial Holding Company. A
Financial Holding Company may engage in any activity that is (i) financial in
nature (ii) incidental to a financial activity or (iii) complementary to a
financial activity. The BHCA provides a long list of "financial activities",
including: insurance underwriting; securities dealing and underwriting;
providing financial, investment or economic arising services; and merchant
banking activities. Financial Holding Companies may also engage in other
activities that the Federal Reserve Board has determined are permissible under
the BHCA, by regulation or order.
  The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of

                                       9
                                     <PAGE>

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

  The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the GLBA), enacted on
November 12, 1999, broadly rewrote financial services legislation. The GLBA
permits significant combinations among different sectors of the financial
services industry; allows for significant expansion of financial service
activities by Bank holding companies and provides for a regulatory framework by
various governmental authorities responsible for different financial activities;
and offers certain financial privacy protections to consumers. The GLBA repealed
affiliation and management interlock prohibitions of the Depression-era
Glass-Steagall Act and, by amending the Bank Holding Company Act, the GLBA added
new substantive provisions to the non-banking activities permitted under the
BHCA with the creation of the financial holding company. The GLBA preempts most
state laws that prohibit financial holding companies from engaging in insurance
activities. The GLBA permits affiliations between banks and securities firms
within the same holding company structure, and the Act permits financial holding
companies to directly engage in a broad range of securities and merchant banking
activities.

  The Gramm-Leach-Bliley Act has led to important changes in the manner in which
financial services are delivered in the United States. Bank holding companies
and their subsidiary banks are able to offer a much broader array of financial
services; however, there is greater competition in all sectors of the financial
services market.

  The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued under Virginia law by the Commission have
been complied with, and may make examinations of any bank holding company and
its subsidiaries. The Virginia Banking Act allows bank holding companies located
in any state to acquire a Virginia bank or bank holding company if the Virginia
bank or bank holding company could acquire a bank holding company in their state
and the Virginia bank or bank holding company to be acquired has been in
existence and continuously operated for more than two years. The Virginia
Banking Act permits bank holding companies from throughout the United States to
enter the Virginia market, subject to federal and state approval.

10
<PAGE>


NBB and BTC

  General. NBB is a national banking association incorporated under the laws of
the United States and is subject to examination by the Office of the Comptroller
of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare quarterly
reports on NBB's financial condition and to conduct an annual audit of its
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC. NBB also is required by the OCC to adopt internal control structures
and procedures in order to safeguard assets and monitor and reduce risk
exposure. While appropriate for safety and soundness of banks, these
requirements impact banking overhead costs.

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

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

Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
place substantial importance on a bank's product delivery system, particularly
branch locations. The regulations require banks, other than small banks, to

                                       11
                                     <PAGE>

comply with significant data collection requirements. The regulatory agency's
assessment of the bank's record is made available to the public. Further, this
assessment is required for any bank which has applied to, among other things,
establish a new branch office that will accept deposits, relocate an existing
office, or merge, consolidate with or acquire the assets or assume the
liabilities of a federally regulated financial institution. It is likely that
banks' compliance with the CRA, as well as other fair lending laws, will face
ongoing government scrutiny and that costs associated with compliance will
continue to increase.

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

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

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

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

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

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

                                       12
                                     <PAGE>


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

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

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

  National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval of
the OCC, NBB will be able to acquire existing banking operations in Virginia. As
a state bank, BTC is subject to Virginia state branching laws, with state
banking regulatory and Federal Reserve Bank approval, BTC is able to acquire
existing banking operations in the state.

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


                                       13
                                     <PAGE>


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

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

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

  Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the GLBA) allows
national banks, with OCC approval, to acquire financial subsidiaries to engage
in any activity that is financial in nature or incidental to a financial
activity, as defined in the Bank Holding Act, except (i) insurance underwriting,
(ii) merchant or insurance portfolio investments, and (iii) real estate
development or investment. Well-capitalized national banks are also given the
authority to engage in municipal bond underwriting.


                                       14
                                     <PAGE>


  To establish or acquire a financial subsidiary, a national bank must be
well-managed, and the consolidated assets of its financial subsidiary must not
exceed the lesser of 45% of the consolidated total assets of the bank or $50
billion. The relationship between a national bank and a financial subsidiary are
subject to a variety of supervisory enhancements from regulators. The GLBA also
provides that state banks that establish or acquire financial subsidiaries are
required to comply with the same safeguards imposed on the financial
subsidiaries of national banks.

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

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

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

  As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and

                                       15
                                     <PAGE>

bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.

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

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

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

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

  In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total average assets less intangibles) guidelines that are
applicable to Bankshares and BTC. The OCC has adopted similar regulations
applicable to NBB. These guidelines provide for a minimum ratio of 4.0% for
banks that meet certain specified criteria, including that they have the highest
regulatory CAMELS rating and are not anticipating or experiencing significant
growth and have well-diversified risk. All other banks will be required to
maintain an additional cushion of at least 100 to 200 basis points, based upon
their particular circumstances and risk profiles. The guidelines also provide

                                       16
                                     <PAGE>

that banks experiencing internal growth or making acquisitions will be expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.

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

Other Legislative and Regulatory Concerns

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

Other Business Concerns

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

Company Website

  National Bankshares maintains a website at www.nationalbankshares.com.
Beginning with this Form 10-K, the Company will make available through its
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after the material is electronically filed with the Securities and
Exchange Commission.


                                       17
                                     <PAGE>


                         Statistical Disclosure by National Bankshares, Inc.
                                   and Subsidiaries (The Company)

  I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential

        A.     Average Balance Sheets

        The following table presents, for the years indicated, condensed daily
        average balance sheet information.
 ($ in thousands)
<TABLE>
<CAPTION>
                                                                  December 31,
                                                   --------------------------------------------
Assets                                                  2002          2001           2000
===============================================================================================
<S>                                                <C>              <C>           <C>
Cash and due from banks                            $    10,737      $  10,221     $  11,355
Interest - bearing deposits                             17,765         10,986        10,683
Federal funds sold                                       2,644         18,419         6,149
Securities available for sale:
   Taxable                                              43,882         69,486        87,813
   Nontaxable                                           52,995         40,196        31,302
Securities held to maturity:
   Taxable                                              48,815         46,043         9,029
   Nontaxable                                           45,801         33,084        14,542
Mortgage loans held for sale                               955            808           519
Loans, net                                             404,717        376,958       310,624
Other assets                                            27,472         29,491        18,365
                                                   --------------------------------------------
     Total assets                                  $   655,783      $ 635,692     $ 500,381
===============================================================================================

Liabilities and Stockholders' Equity
===============================================================================================
Noninterest-bearing demand                         $    74,269      $  66,793     $  56,709
 Deposits
Interest-bearing demand deposits                       147,749        116,529        85,713
Savings deposits                                        49,151         47,175        43,138
Time deposits                                          312,129        338,642       248,113
                                                   --------------------------------------------
     Total deposits                                $   583,298      $ 569,139     $ 433,673
Short-term borrowings                                      311            295         9,011
Other liabilities                                        2,279          2,798         2,015
                                                   --------------------------------------------
   Total liabilities                               $   585,888      $ 572,232     $ 444,699
Stockholders' equity                                    69,895         63,460        55,682
                                                   --------------------------------------------
   Total liabilities and
    Stockholders' equity                           $   655,783      $ 635,692     $ 500,381
===============================================================================================
</TABLE>


                                       18
                                     <PAGE>



B.       Analysis of Net Interest Earnings
         The following table shows the major categories of interest-earning
         assets and interest-bearing liabilities, the interest earned or paid,
         the average yield or rate on the daily average balance outstanding, net
         interest income and net yield on average interest-earning assets for
         the years indicated.
<TABLE>
<CAPTION>
                     ----------------------------------------------------------------------------------------------------------
                              December 31, 2002                   December 31, 2001                   December 31, 2000
                     ----------------------------------------------------------------------------------------------------------
                                               Average                            Average                           Average
                      Average                   Yield/     Average                 Yield/     Average                Yield/
($ in thousands)      Balance      Interest     Rate       Balance    Interest      Rate      Balance     Interest    Rate
                     ----------------------------------------------------------------------------------------------------------
<S>                  <C>         <C>           <C>          <C>         <C>        <C>         <C>         <C>        <C>
Interest-earning
 Assets:
Loans, net (1)(2)(3)     $410,437    $32,556     7.93%     $381,778    $33,584      8.80%      $314,685    $28,454    9.04%
Taxable securities         92,697      5,490     5.92%      115,529      7,501      6.56%        96,842      6,760    6.98%
Nontaxable
 Securities (1)            98,796      6,885     6.97%       73,280      5,091      6.95%        45,844      3,420    7.46%
Federal funds sold          2,644         42     1.59%       18,419        652      3.54%         6,149        338    5.50%
Interest bearing
 Deposits                  17,765        276     1.55%       10,986        577      5.25%        10,683        689    6.45%
                     ----------------------------------------------------------------------------------------------------------
Total interest-
 Earning assets          $622,339    $45,249     7.27%     $599,992    $47,405      7.91%      $474,203    $39,661    8.36%
                     ==========================================================================================================
Interest-bearing
 Liabilities:
Interest-bearing
 Demand deposits         $147,749    $ 2,219     1.50%     $116,529    $ 2,518      2.16%      $ 85,713    $ 2,243    2.62%
Savings deposits           49,151        508     1.03%       47,175        919      1.95%        43,138      1,135    2.63%
Time deposits             312,129     13,032     4.18%      338,642     19,326      5.71%       248,113     14,157    5.71%
Short-term
 Borrowings                   311          5     1.61%          295          8      2.71%         1,727        118    6.83%
Long-term debt                ---        ---       ---          ---        ---       ---          7,284        510    7.00%
                     ----------------------------------------------------------------------------------------------------------
Total interest-
 Bearing liabilities     $509,340    $15,764     3.09%     $502,641    $22,771      4.53%      $385,975    $18,163    4.71%
                     ==========================================================================================================
Net interest income
 and interest rate
 spread                              $29,485     4.18%                 $24,634      3.38%                  $21,498    3.66%
                     ==========================================================================================================
Net yield on average
 Interest-earning
 Assets                                          4.74%                              4.11%                             4.53%
                     ==========================================================================================================
</TABLE>
(1)      Interest on nontaxable loans and securities is computed on a fully
         taxable equivalent basis using a Federal income tax rate of 34%.
(2)      Loan fees of $660 in 2002, $608 in 2001 and $381 in 2000 are included
         in total interest income. (3) Nonaccrual loans are included in average
         balances for yield computations.

                                       19
                                     <PAGE>


C. Analysis of Changes in Interest Income and Interest Expense

         The Company's primary source of revenue is net interest income, which
         is the difference between the interest and fees earned on loans and
         investments and the interest paid on deposits and other funds. The
         Company's net interest income is affected by changes in the amount and
         mix of interest-earning assets and interest-bearing liabilities and by
         changes in yields earned on interest-earning assets and rates paid on
         interest-bearing liabilities. The following table sets forth, for the
         years indicated, a summary of the changes in interest income and
         interest expense resulting from changes in average asset and liability
         balances (volume) and changes in average interest rates (rate).
<TABLE>
<CAPTION>
                                   ==========================================================================================
                                                  2002 Over 2001                                 2001 Over 2000
                                   ------------------------------------------------------------------------------------------
                                          Changes Due To                               Changes Due To
                                   ------------------------------               -------------------------------
                                                                   Net Dollar                                     Net Dollar
($ in thousands)                     Rates(2)       Volume(2)        Change         Rates(2)       Volume(2)        Change
=============================================================================================================================
<S>                                  <C>          <C>              <C>             <C>             <C>          <C>
Interest income:(1)
  Loans                              $ (3,442)    $  2,414         $ (1,028)       $  (791)        $ 5,921      $   5,130
  Taxable securities                     (619)      (1,392)          (2,011)          (430)          1,171            741
  Nontaxable securities                    16        1,778            1,794           (249)          1,920          1,671
  Federal funds sold                     (239)        (371)            (610)          (157)            471            314
  Interest bearing deposits              (540)         239             (301)          (131)             19           (112)
- -----------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
 income on interest-
 earning assets                      $ (4,824)    $  2,668         $ (2,156)       $ 1,758         $ 9,502      $   7,744
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest-bearing demand
   deposits                            $ (877)    $    578         $   (299)       $  (437)        $   712      $     275
  Savings deposits                       (448)          37             (411)          (315)             99           (216)
  Time deposits                        (4,824)      (1,421)          (6,294)             3           5,166          5,169
  Short-term borrowings                    (3)         ---               (3)           (46)                          (110)
  Long-Term Borrowings                    ---          ---              ---            ---             (64)          (510)
                                                                                                      (510)
- -----------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in expense of
 interest-bearing liabilities        $ (6,201)     $  (806)        $ (7,007)      $   (795)        $ 5,403      $   4,608
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
 interest income                     $  1,377      $ 3,473         $  4,851       $   (963)        $ 4,099      $   3,136
=============================================================================================================================
</TABLE>
(1)      Taxable equivalent basis using a Federal income tax rate of 34%.


                                       20
                                     <PAGE>


(2)      Variances caused by the change in rate times the change in volume have
         been allocated to rate and volume changes proportional to the
         relationship of the absolute dollar amounts of the change in each.


 II.     Investment Portfolio

         A.     Book Value of Investments
                The amortized costs and fair values of securities available for
                sale as of December 31, 2002, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>

                                          ==============================================================================
                                                                          December 31,
                                          ------------------------------------------------------------------------------
                                                     2002                      2001                      2000
                                          ------------------------------------------------------------------------------
                                            Amortized       Fair       Amortized      Fair      Amortized      Fair
($ in thousands)                              Costs        Values        Costs       Values       Costs       Values
========================================================================================================================
<S>                                               <C>         <C>           <C>         <C>          <C>         <C>
 Available for sale:
 U.S. Treasury                                    $3,748      $3,962        $6,248      $6,248       $6,246      $6,331
 U.S. Government agencies and
  corporations                                     7,038       7,132         5,340       5,375       54,815      54,034
 States and political subdivisions                68,876      70,692        51,030      51,189       35,456      35,606
 Mortgage-backed securities (1)                   16,244      16,809        13,178      13,415       11,818      11,776
 Corporate debt securities                        16,993      17,411         9,066       9,093       14,341      14,058
 Federal Home Loan Bank stock                      1,655       1,655         1,411       1,411        1,329       1,329
 Federal Reserve Bank stock                          209         209           209         209          209         209
 Other securities                                  1,670       1,864         1,328       1,485          442         442
                                          ------------------------------------------------------------------------------
    Total securities available for sale         $116,433    $119,734      $ 87,810     $88,667     $124,656    $123,785
========================================================================================================================
</TABLE>

                The amortized costs of securities held to maturity as of
                December 31, 2002, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>

                                            =============================================
                                                               December 31,
                                            ---------------------------------------------
($ in thousands)                                   2002          2001           2000
=========================================================================================
<S>                                                 <C>       <C>            <C>
Held to maturity:
 U.S. Treasury                                      $ ---     $     ---      $    ---
 U.S. Government agencies and corporations         10,013        17,025         8,500
 States and political subdivisions                 52,610        49,230        17,288
 Mortgage-backed securities (1)                     8,989        13,723           288
 Corporate                                         27,948        22,831         6,483
                                            ---------------------------------------------
    Total securities held to maturity            $ 99,560     $ 102,809      $ 32,559
=========================================================================================
</TABLE>

                (1)    The majority of mortgage-backed securities and
                       collateralized mortgage obligations held at December 31,
                       2002 were backed by U.S. agencies. Certain holdings are
                       required to be periodically subjected to the Financial
                       Institution Examination Council's (FFIEC) high risk
                       mortgage security test. These tests address possible
                       fluctuations in the average life and price sensitivity


                                       21
                                     <PAGE>


                       which are the primary risks associated with this type of
                       security. Such tests are usually subject to regulatory
                       review.

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


B.       Maturities and Associated Yields
         The following table presents the maturities for those securities
         available for sale and held to maturity as of December 31, 2002 and
         weighted average yield for each range of maturities.
<TABLE>
<CAPTION>

                                   =======================================================================================
                                                                   Maturities and Yields
                                                                     December 31, 2002
                                   ---------------------------------------------------------------------------------------
($ in thousands except for % data)       < 1 Year     1-5 Years     5-10 Years     > 10 Years       None          Total
==========================================================================================================================
<S>                                       <C>           <C>              <C>            <C>          <C>           <C>
Available for Sale:
- -------------------

U.S. Treasury                             $1,544        $2,418           $---           $---         $---          $3,962
                                           5.44%         5.72%            ---            ---          ---           5.61%
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies                     ---         2,548          2,741          1,843          ---           7,132
                                             ---         5.09%          4.82%          5.88%          ---           5.19%
- --------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities                   ---           363          2,687         13,759          ---          16,809
                                             ---         3.56%          3.68%          5.76%          ---           5.38%
- --------------------------------------------------------------------------------------------------------------------------
States and Political                         317           855            ---          1,803          ---           2,975
 Subdivision - taxable                     7.02%         7.03%            ---          7.33%          ---           7.21%
- --------------------------------------------------------------------------------------------------------------------------
States and Political Subdivision           3,207         6,243         27,177         31,091          ---          67,717
 - nontaxable(1)                           6.75%         6.74%          6.08%          6.22%          ---           6.24%
- --------------------------------------------------------------------------------------------------------------------------
Corporate                                  1,025         4,969         11,417            ---          ---          17,411
                                           6.96%         5.90%          5.77%            ---          ---           5.88%
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock                 ---           ---            ---            ---        1,655           1,655
                                             ---           ---            ---            ---        5.25%           5.25%
- --------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock                   ---           ---            ---            ---          209             209
                                             ---           ---            ---            ---        6.00%           6.00%
- --------------------------------------------------------------------------------------------------------------------------
Other securities                             634           ---            ---            ---        1,230           1,864
                                           1.10%           ---            ---            ---        1.30%           1.29%
- --------------------------------------------------------------------------------------------------------------------------
Total                                      6,727        17,396         44,022         48,496        3,093         119,734
                                           5.96%         6.02%          5.80%          6.12%        3.76%           5.92%
- --------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ----------------

U.S. Treasury                                ---           ---            ---            ---          ---             ---
                                             ---           ---            ---            ---          ---             ---
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies                   1,000         7,000          2,013            ---          ---          10,013
                                           7.86%         5.04%          4.41%            ---          ---           5.19%
- --------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities                   ---            40              3          8,946          ---           8,989
                                             ---         7.64%          9.00%          5.95%          ---           5.95%
- --------------------------------------------------------------------------------------------------------------------------
States and Political                         ---         1,349            683          2,000          ---           4,032
 Subdivision - taxable                       ---         6.11%          5.98%          5.32%          ---           5.69%
- --------------------------------------------------------------------------------------------------------------------------
States and Political                       2,255         2,955         25,599         17,769          ---          48,578
 Subdivision - nontaxable                  7.03%         7.06%          6.13%          6.27%          ---           6.28%
- --------------------------------------------------------------------------------------------------------------------------

                                       22
                                     <PAGE>


Corporate                                    898        16,098         10,952            ---          ---          27,948
                                           6.66%         6.13%          6.72%            ---          ---           6.37%
- --------------------------------------------------------------------------------------------------------------------------
Other securities                             ---           ---            ---            ---          ---             ---
                                             ---           ---            ---            ---          ---             ---
- --------------------------------------------------------------------------------------------------------------------------
Total                                      4,153        27,442         39,250         28,715          ---          99,560
                                           7.15%         5.95%          6.21%          6.10%          ---           6.15%
==========================================================================================================================
</TABLE>
(1) Rates shown represent weighted average yield on a fully taxable basis.


                                       23
                                     <PAGE>


III.    Loan Portfolio

        The Company concentrates its lending activities in commercial and
        industrial loans, real estate mortgage loans both residential and
        business, and loans to individuals. The following tables set forth (i) a
        comparison of the Company's loan portfolio by major category of loans as
        of the dates indicated and (ii) the maturities and interest rate
        sensitivity of the loan portfolio at December 31, 2002.

        A. Types of Loans
<TABLE>
<CAPTION>
                                     ================================================================
                                                              December 31,
                                     ----------------------------------------------------------------
($ in thousands)                          2002         2001        2000        1999        1998
=====================================================================================================
<S>                                       <C>         <C>         <C>         <C>          <C>
Commercial and industrial
 loans                                    $209,368    $189,764    $163,929    $149,386     $110,509

Real estate mortgage
 loans                                      82,193      77,339      71,163      58,829       48,724

Real estate construction
 loans                                      22,294      19,573      16,726      14,669       12,827

Loans to individuals                        96,762     113,413     110,176      73,825       69,493
                                     ----------------------------------------------------------------
 Total loans                              $410,617    $400,089    $361,994    $296,709     $241,553

Less unearned income and
 deferred fees                              (1,278)     (1,775)     (2,313)     (1,916)      (2,296)
                                     ----------------------------------------------------------------
 Total loans, net of
  unearned income                         $409,339    $398,314    $359,681    $294,793     $239,257

Less allowance for loans
 losses                                     (5,092)     (4,272)     (3,886)     (3,231)      (2,679)
                                     ----------------------------------------------------------------
 Total loans, net                         $404,247    $394,042    $355,795    $291,562     $236,578
=====================================================================================================
</TABLE>

        B.     Maturities and Interest Rate Sensitivities
<TABLE>
<CAPTION>

                                        =============================================================
                                                             December 31, 2002
                                        -------------- --------------- -------------- ---------------
                                                                           After
($ in thousands)                           <1 Year       1-5 Years        5 Years         Total
======================================= ============== =============== ============== ===============
<S>                                           <C>             <C>            <C>            <C>
Commercial and
 industrial                                   $50,675         $98,804        $59,889        $209,368
Real estate
 construction                                  18,806           3,488            ---          22,294
Less loans with
 predetermined interest
 rates                                         10,847          22,631         19,896          53,374
                                        -------------- --------------- -------------- ---------------
Loans with adjustable
 rates                                        $58,634         $79,661        $39,993        $178,288
======================================= ============== =============== ============== ===============
</TABLE>


                                       24
                                     <PAGE>


        C.     Risk Elements

               1.     Nonaccrual, Past Due and Restructured Loans
                      The following table presents aggregate amounts for
                      nonaccrual loans, restructured loans, other real estate
                      owned, net and accruing loans which are contractually past
                      due ninety days or more as to interest or principal
                      payments.
<TABLE>
<CAPTION>

                                               ========================================================
                                                                    December 31,
                                               --------------------------------------------------------
($ in thousands)                                  2002       2001       2000       1999        1998
- -------------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>              <C>         <C>        <C>
Nonaccrual loans:
  Commercial and industrial                    $  102     $  175           $ 65        $ 65       $---
  Real estate mortgage                            152         11              5          33         28
  Real estate construction                        ---        ---            ---         ---        ---
  Loans to individuals                             34        168             18          53        ---
- -------------------------------------------------------------------------------------------------------
                                               $  288     $  354           $ 88        $151       $ 28
- -------------------------------------------------------------------------------------------------------
Restructured loans:
  Commercial and industrial                       ---        ---            ---          40        ---
- -------------------------------------------------------------------------------------------------------
Total nonperforming loans                      $  288     $  354           $ 88        $191       $ 28
Other real estate owned, net                      537        211            540         447        628
- -------------------------------------------------------------------------------------------------------
Total nonperforming assets                     $  825        565           $628        $638       $656
                                               ========================================================
- -------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more:
  Commercial and industrial
  Real estate mortgage                         $  462     $  303           $242        $ 99       $186
  Real estate construction                        119        277            664         704        160
  Loans to individuals                            ---        ---            ---         ---        ---
                                                  396        400            415         274        204
- -------------------------------------------------------------------------------------------------------
                                               $  977     $  980         $1,321      $1,077       $550
=======================================================================================================
</TABLE>

                                       24
                                     <PAGE>

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

                                 =====================================
($ in thousands)                    2002        2001         2000
======================================================================
Scheduled interest:
  Nonaccrual loans               $    16            $ 37         $ 11
  Restructured loans                 ---             ---          ---
                                 -------------------------------------
     Total scheduled interest    $    16            $ 37         $ 11
                                 -------------------------------------
Recorded interest:
  Nonaccrual loans               $   ---             $ 7         $---
  Restructured loans             $   ---             ---          ---
                                 -------------------------------------
     Total recorded interest     $   ---             $ 7         $---
======================================================================

                      Interest is recognized on the cash basis for all loans
                      carried in nonaccrual status. Loans generally are placed
                      in nonaccrual status when the collection of principal or
                      interest is ninety days or more past due, unless the
                      obligation is both well-secured and in the process of
                      collection.

                                       25
                                     <PAGE>



               2.     Potential Problem Loans

                      At December 31, 2002, management was unaware of any
                      potential problem loans other than those presented in the
                      table above.

               3.     Foreign Outstandings

                      At December 31, 2002, 2001, and 2000, there were no
                      foreign outstandings.

               4.     Loan Concentrations

                      The Company does a general banking business, serving the
                      commercial, agricultural and personal banking needs of its
                      customers. NBB's trade territory consists of the northern
                      portion of Montgomery County, all of Giles County, all of
                      Pulaski County, the City of Radford, the City of Galax and
                      adjacent portions of Carroll and Grayson Counties,
                      Virginia. NBB's operating results are closely correlated
                      with the economic trends within this area which are, in
                      turn, influenced by the area's three largest employers,
                      Virginia Polytechnic Institute and State University,
                      Montgomery County Schools and Celanese Corp. Other
                      industries include a wide variety of manufacturing, retail
                      and service concerns. Much of BTC's business originates
                      from the communities of Tazewell and Bluefield and other
                      communities in Tazewell County, Virginia and in Mercer
                      County, West Virginia. BTC also serves the counties of
                      Wythe, Smyth and Washington in Virginia. BTC's primary
                      service area has largely depended on the coal mining
                      industry and farming for its economic base. In recent
                      years, coal companies have mechanized and reduced the
                      number of persons engaged in the production of coal. There
                      are still a number of support industries for the coal
                      mining business that continue to provide employment in the
                      area. Additionally, several new businesses have been
                      established in the area and Bluefield, West Virginia has
                      emerged as a regional medical center. The ultimate
                      collectibility of the loan portfolios and the recovery of
                      the carrying amounts of repossessed property are
                      susceptible to changes in the market conditions of these
                      areas.

                      At December 31, 2002 and 2001, approximately $202 million
                      and $177 million, respectively, of the loan portfolio were
                      concentrated in commercial real estate. This represents
                      approximately 49% and 44% of the loan portfolio at
                      December 31, 2002 and 2001, respectively. Included in
                      commercial real estate at December 31, 2002 and 2001 was
                      approximately $97 million and $101 million, respectively,
                      in loans for college housing and professional office


                                       26
                                     <PAGE>

                      buildings. Loans secured by residential real estate were
                      approximately $116 million and $119 million at December
                      31, 2002 and 2001, respectively. This represents
                      approximately 28% and 30% of the loan portfolio at
                      December 31, 2002 and 2001, respectively. Loans secured by
                      automobiles were approximately $24 million and $32 million
                      at December 31, 2002 and 2001, respectively. This
                      represents approximately 6% of the loan portfolio at
                      December 31, 2002 and 8% at December 31, 2001.

                      The Company has established operating policies relating to
                      the credit process and collateral requirements in loan
                      originations. Loans to purchase real and personal property
                      are generally collateralized by the related property and
                      with loan amounts established based on certain percentage
                      limitations of the property's total stated or appraised
                      value. Credit approval is primarily a function of
                      collateral and the evaluation of the creditworthiness of
                      the individual borrower or project based on available
                      financial information.


                                       27
                                     <PAGE>


 IV.     Summary of Loan Loss Experience

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

                                     ============================================================================
                                                                    December 31,
                                     ----------------------------------------------------------------------------
($ in thousands)                          2002           2001            2000           1999           1998
=================================================================================================================
<S>                                        <C>             <C>            <C>            <C>            <C>
Average net loans outstanding              $404,717        $380,970       $310,624       $266,431       $225,613
                                     ============================================================================

Balance at beginning of year                 $4,272          $3,886         $3,231         $2,679         $2,438

Charge-offs:
 Commercial and industrial loans                276             141             55            185             32
 Real estate mortgage loans                      61              32            ---             33             80
 Real estate construction loans                 ---             ---            ---            ---            ---
 Loans to individuals                         1,234             955            715            760            526
                                     ----------------------------------------------------------------------------
 Total loans charged off                      1,571           1,128            770            978            638
                                     ----------------------------------------------------------------------------
Recoveries:
 Commercial and industrial loans                 13               8              3             51            ---
 Real estate mortgage loans                     ---             ---            ---              1              2
 Real estate construction loans                 ---             ---            ---            ---            190
 Loans to individuals                           127              98             93             78             63
                                     ----------------------------------------------------------------------------
 Total recoveries                               140             106             96            130            255
                                     ----------------------------------------------------------------------------
Net loans charged off                         1,431           1,022            674            848            383
                                     ----------------------------------------------------------------------------
Additions charged to operations               2,251           1,408          1,329          1,400            624
                                     ----------------------------------------------------------------------------
Balance at end of year                       $5,092          $4,272         $3,886        $ 3,231         $2,679
                                     ============================================================================
Net charge-offs to average net loans
 Outstanding                                  0.35%           0.27%          0.21%          0.32%          0.17%
=================================================================================================================
</TABLE>


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

                                       28
                                     <PAGE>



 B. Allocation of the Allowance for Loan Losses

The allowance for loan losses has been allocated according to the amount deemed
necessary to provide for anticipated losses within the categories of loans for
the years indicated as follows:
<TABLE>
<CAPTION>

               ===================================================================================================================
                                                                        December 31,
               -------------------------------------------------------------------------------------------------------------------
                         2002                      2001                   2000                    1999                  1998
               -------------------------------------------------------------------------------------------------------------------
                             Percent                 Percent              Percent of             Percent of            Percent of
                               of                      of                  Loans in               Loans in              Loans in
                            Loans in                Loans in                 Each                   Each                  Each
                              Each                    Each                Category to            Category to           Category to
                           Category to             Category to            Total Loans            Total Loans           Total Loans
 ($ in          Allowance  Total Loans  Allowance  Total Loans  Allowance              Allowance             Allowance
  thousands)      Amount                 Amount                   Amount                Amount                Amount
==================================================================================================================================
<S>                <C>      <C>           <C>       <C>            <C>     <C>           <C>      <C>          <C>      <C>
Commercial
 and
 industrial
 loans             $235     50.98%        $557      47.43%         $255    45.29%        $555     50.35%       $222     45.75%
- ----------------------------------------------------------------------------------------------------------------------------------
Real estate
 mortgage
 loans              911     20.01%          50      19.33%          120    19.66%         119     19.83%         73     20.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Real estate
 construction
 loans              ---      5.44%         ---       4.89%          ---     4.62%         ---      4.94%        ---      5.31%
- ----------------------------------------------------------------------------------------------------------------------------------
Loans to
 individuals      3,092     23.57%       2,909      28.35%        1,709    30.43%         978     24.88%        497     28.77%
- ----------------------------------------------------------------------------------------------------------------------------------
Unallocated         854                    756                    1,802                 1,579                 1,887
- ----------------------------------------------------------------------------------------------------------------------------------
                 $5,092    100.00%      $4,272     100.00%       $3,886   100.00%      $3,231    100.00%     $2,679    100.00%
               ===================================================================================================================
</TABLE>


                                       29
                                     <PAGE>


Loan Loss Allowance

  The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit as well as other
internal and external factors such as general economic conditions.

  The evaluation of the allowance for loan losses is performed by the internal
credit review department.

  Guidance for the evaluations performed are established by the regulatory
authorities who periodically review the results for compliance.

  As a part of this process, loans are grouped principally into two classes. The
first involves loans that are individually reviewed and direct allocations made
based on collateral values, financial statements of the borrower, their cash
flow capabilities to repay, and other documentation. In addition, an estimate is
made for losses inherent to this portfolio.

  The second class includes pools of loans. Allocations from this analysis are
derived and based on historical loss averages.

  The unallocated portion of the allowance for loan losses is the residual
amount after allocation to the above classes. An unallocated component is
maintained to cover uncertainties that could affect management's estimate of
possible losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the methodologies
for estimating specific and general loss in the portfolio.

  As previously stated, adequacy of the allowance for loan losses is subject to
periodic regulatory review. These reviews cover the allocation process and
overall adequacy of the allowance for loan losses. Regulatory authorities at
their discretion may set minimum levels for the allowance and/or require the
charge-off of loans as a result of their examination. This independent grading
process by regulators serves as a standard to gauge the effectiveness of the
internal credit review process.

                                       30
                                     <PAGE>


V.      Deposits

        A. Average Amounts of Deposits and Average Rates Paid

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

                              =======================================================================
                                                           December 31,
                              -----------------------------------------------------------------------
                                       2002                    2001                   2000
                              -----------------------------------------------------------------------
                                            Average                Average                 Average
                                Average      Rates      Average     Rates      Average   Rates Paid
 ($ in thousands)               Amounts       Paid      Amounts      Paid      Amounts
- -----------------------------------------------------------------------------------------------------
<S>                                <C>          <C>       <C>          <C>        <C>          <C>
Noninterest-bearing
 demand deposits                  $ 74,269        ---    $ 66,793        ---    $ 56,709         ---

Interest-bearing
 demand deposits                   147,749      1.50%     116,529      2.16%      85,713       2.62%

Savings deposits                    49,151      1.03%      47,175      1.95%      43,138       2.63%

Time deposits                      312,129      4.18%     338,642      5.71%     248,113       5.71%

- -----------------------------------------------------------------------------------------------------
Average total
 deposits                         $583,298      3.10%    $569,139      4.53%    $433,673       4.64%
=====================================================================================================
</TABLE>


        B. Time Deposits of $100,000 or More

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

                                ====================================================================
                                                         December 31, 2002
                                ====================================================================
                                             Over 3 Months   Over 6 Months
                                 3 Months      Through 6      Through 12
                                  or Less       Months          Months        Over 12
($ in thousands)                                                              Months       Total
- ----------------------------------------------------------------------------------------------------
  <S>                                 <C>             <C>             <C>         <C>         <C>
Total time
   deposits of
   $100,000 or more                 $18,641         $18,532         $22,494     $29,594     $89,261
====================================================================================================
</TABLE>


                                       31
                                     <PAGE>


 VI.    Return on Equity and Assets

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

                                     ========================================
                                                  December 31,
                                     ----------------------------------------
                                         2002         2001          2000
=============================================================================
Return on average assets                    1.53%         1.15%        1.46%
- -----------------------------------------------------------------------------
Return on average equity                   14.33%        11.53%       13.13%
- -----------------------------------------------------------------------------
Dividend payout ratio                      34.01%        41.29%       40.87%
- -----------------------------------------------------------------------------
Average equity to average assets           10.66%         9.98%       11.13%
=============================================================================



Item 2.  Properties

  Bankshares' headquarters and one branch office of NBB are located at 101
Hubbard Street, Blacksburg, Virginia. NBB's Main Office is at 100 South Main
Street, Blacksburg, Virginia. In addition to the Bank's Main Office location and
the Hubbard Street branch office, NBB owns eleven branch offices: Three in the
Town of Blacksburg; one in the Town of Christiansburg; and three in the County
of Giles, two in Pulaski County, one in the City of Radford and one in the City
of Galax. A fourteenth branch office is under construction in Downtown
Christiansburg in Montgomery County. This office is expected to open in Summer,
2003.

  Bank of Tazewell County owns the land and building of seven of its ten
offices. The bank leases the land and building for three offices. The Main
Office is located at Main Street, Tazewell, Virginia. Three additional branches
are located in Tazewell, and two are located in Bluefield, Virginia. The bank
also has branch offices in Richlands, Wytheville, Abingdon, and Marion,
Virginia. Management believes that its existing facilities are adequate to meet
present needs and any anticipated growth.

  NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC utilizes this same system for data processing.

Item 3.  Legal Proceedings

  Bankshares, NBB, BTC, and NBFS are not currently involved in any material
pending legal proceedings, other than routine litigation incidental to NBB's and
BTC's banking business.

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

  None


                                       32
                                     <PAGE>


                                Executive Officers of the Registrant

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 8,2003.

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

================================================================================
                                                                 Year Elected an
Name                   Age   Offices and Positions Held         Officer/Director
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
James G. Rakes         58    Chairman, President and Chief Executive      1986
                             Officer, National Bankshares, Inc.;
                             President and Chief Executive Officer
                             of The National Bank of Blacksburg
                             since 1983. President and Treasurer of
                             National Bankshares Financial Services,
                             Inc. since 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. Robert Buchanan     51    Treasurer, National Bankshares, Inc.;        1998
                             Cashier and Senior Vice President/Chief
                             Financial Officer of The National Bank
                             of Blacksburg since 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Marilyn B. Buhyoff     54    Secretary & Counsel, National                1989
                             Bankshares, Inc.; Secretary & Counsel
                             of the National Bank of Blacksburg
                             since 1989 and Senior Vice President/
                             Administration, since 1992. Secretary
                             of National Bankshares Financial
                             Services, Inc. since 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F. Brad Denardo        50    Corporate Officer, National Bankshares,      1989
                             Inc.; Executive Vice President/Chief
                             Operating Officer of the National Bank
                             of Blacksburg since 2002; prior thereto
                             Executive Vice President/Loans of The
                             National Bank of Blacksburg since 1989.
- --------------------------------------------------------------------------------

                                       33
                                     <PAGE>


- --------------------------------------------------------------------------------
Cameron L. Forrester   54    Corporate Officer, National Bankshares,      2001
                             Inc.; President and Chief Executive
                             Officer of Bank of Tazewell County
                             since 1998; prior thereto Vice
                             President of First Virginia Bank,
                             Clinch Valley (formerly Premier Bank,
                             N. A.)
================================================================================


                                       34
                                     <PAGE>


                                     Part II


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

  Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December
1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis
in the over-the-counter market and was not listed on any exchange or quoted on
Nasdaq. As of December 31, 2002 there were 1,024 stockholders of Bankshares
common stock.

  Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 12 of Bankshares' 2002 Annual
Report to Stockholders and is incorporated herein by reference. Prices prior to
December 1, 1999 do not necessarily reflect the prices which would have
prevailed had there been an active trading market, nor do they reflect
unreported trades, which may have been at lower or higher prices.


Item 6.  Selected Financial Data

  The table entitled "Selected Consolidated Financial Data" on page 4 of
Bankshares' 2002 Annual Report to Stockholders is incorporated herein by
reference.


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


  The information contained under "Management's Discussion and Analysis" on
pages 5 through 12 of Bankshares' 2002 Annual Report to Stockholders is
incorporated herein by reference.

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. The
Company use historical loss factors as one factor in determining the inherent
loss that may be present in the loan portfolio. Actual losses could differ
significantly from previously acceptable method to another method. Although the
economics of the Company's transactions would be the same, the timing of events
that would impact the transactions could change.


                                       35
                                     <PAGE>


Allowance for the 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 an 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.

  The Company's 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 either the formula or specific allowance.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Sensitivity" on pages
36 through 37 and the section "Derivatives and Market Risk Exposure" on page 11
of Bankshares' 2002 Annual Report to Stockholders and is incorporated herein by
reference.


                                       36
                                     <PAGE>


Analysis of Interest Rate Sensitivity

The following discussion of interest rate sensitivity 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.

 The Company uses simulation analysis to forecast its balance sheet and monitor
interest rate sensitivity. One test used by Bankshares is shock analysis which
measures the effect of a hypothetical, immediate and parallel shifts in interest
rates. The following table shows the results of a rate shock of 100, 200, and
300 basis points and the effects on net income and return on average assets and
return on average equity at December 31, 2003.

<TABLE>
<CAPTION>

                                     ($ in thousands, except for percent data)
- ---------------------------- ------------------------ -------------------------- --------------------------------
        Rate Shift            Change in Net Income    Return on Average Equity      Return on Average Assets
- ---------------------------- ------------------------ -------------------------- --------------------------------
<S>         <C>                            <C>                 <C>                            <C>
            300                         $ (3,927)              11.56%                         1.28%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
            200                           (2,507)              13.27%                         1.48%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
            100                           (1,239)              14.78%                         1.66%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
          (-) 100                          1,193               17.61%                         2.00%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
          (-) 200                          1,628               18.11%                         2.06%
- ---------------------------- ------------------------ -------------------------- --------------------------------
- ---------------------------- ------------------------ -------------------------- --------------------------------
          (-) 300                          1,199               17.61%                         2.00%
- ---------------------------- ------------------------ -------------------------- --------------------------------
</TABLE>

 Simulation analysis allows the Company to test asset and liability management
strategies under rising and falling rate conditions. As a part of simulation
process, certain estimates and assumptions must be made dealing with, but not
limited to, asset growth, the mix of assets and liabilities, rate environment,
local and national economic conditions. Asset growth and the mix of assets can
to a degree be influenced by management. Other areas such as the rate
environment and economic factors cannot be controlled. For this reason actual
results may vary materially from any particular forecast or shock analysis.

 This shortcoming is offset to a degree by the periodic reforecasting of the
balance sheet to reflect current trends and economic conditions. Shock analysis
must also be updated periodically as a part of the asset and liability
management process.

Item 8.  Financial Statements and Supplementary Data

  The following consolidated financial statements of the Registrant and the
Independent Auditor's Report set forth on pages 13 through 36 of Bankshares'
2002 Annual Report to Stockholders are incorporated herein by reference:

                                       37
                                     <PAGE>


 1. Independent Auditor's Report

  2.    Consolidated Balance Sheets - December 31, 2002 and 2001

  3.    Consolidated Statements of Income - Years ended December 31, 2002, 2001
        and 2000

  4.    Consolidated  Statements of Changes in  Stockholders'  Equity - Years
        ended December 31, 2002, 2001 and 2000

  5.    Consolidated Statements of Cash Flows - Years ended December 31, 2002,
        2001 and 2000

  6.    Notes to Consolidated Financial Statements - December 31, 2002, 2001
        and 2000

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

         None

                                    Part III

Item 10.  Directors and Executive Officers of the Registrant

  Executive Officers of Bankshares as of December 31, 2002 are listed on page 33
and 34 herein.

  Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 13, 2003 which information is incorporated herein by
reference.

Item 11.  Executive Compensation

  The information set forth under "Executive Compensation" on pages 6 through 10
of Bankshares' Proxy Statement dated March 13, 2003 is incorporated herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management And
         Related Stockholder Matters

  Certain responses to this Item will be included under the caption "Stock
Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares'
Proxy Statement for the Annual Meeting of Stockholders to be held April 8, 2003,
which was filed on March 13, 2003.


                                       38
                                     <PAGE>


The following table summarizes information concerning National Bankshares equity
compensation plans at December 31, 2002:
<TABLE>
<CAPTION>
                                                                                     Number of Shares
                                        Number of Shares to                              Remaining
                                           be Issued upon       Weighted Average       Available for
                                            Exercise of        Exercise Price of      Future Issuance
                                        Outstanding Options   Outstanding Options      Under Equity
                                            and Warrants          and Warrants      Compensation Plans
                                                                                     (Excluding Shares
            Plan Category                                                           Reflected in First
                                                                                          Column)
- --------------------------------------- --------------------- --------------------- --------------------
<S>                                                 <C>                  <C>                  <C>
Equity compensation plans approved by
shareholders-1999 Stock Incentive Plan                51,500               $ 24.06              198,500

Equity    compensation    plans    not
approved by shareholders                                 N/A                   N/A                  N/A
                                        --------------------- --------------------- --------------------
Total                                                 51,500               $ 24.06              198,500
                                        ===================== ===================== ====================
</TABLE>


Item 13.  Certain Relationships and Related Transactions

  The information contained under "Certain Transactions With Officers and
Directors" on page 14 of Bankshares' Proxy Statement dated March 13, 2003 is
incorporated herein by reference.


Item 14. Controls and Procedures

  Under the supervision and with the participation of management, including our
principal executive officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing of this annual report. Based on that
evaluation, our principal executive officer and principal financial officer have
concluded that these controls and procedures are effective. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.

  Disclosure controls and procedures are our controls and procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.


                                     Part IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

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


                                       39
                                     <PAGE>



                                                     2002 Annual Report
1. Financial Statements:                          To Stockholders Page(s)*

       Independent Auditor's Report                          13
       Consolidated Balance Sheets -
         December 31, 2002 and 2001                          14

       Consolidated Statements of                            15
         Income - Years ended December
         31, 2002, 2001 and 2000


       Consolidated Statements of Changes
         in Stockholders' Equity - Years                     16
         ended December 31, 2002, 2001 and
         2000

               Consolidated Statements of Cash 17
                Flows - Years ended December 31,
         2002, 2001 and 2000

       Notes to Consolidated
         Financial Statements - December                   18-36
         31, 2002, 2001 and 2000


2.     Financial Statement Schedules: None

*Incorporated by reference from the indicated pages of the 2002 Annual Report
 to Stockholders.

3.     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 reference
              value                                         to Exhibit 4(a) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1993)

   4(i)       Article Four of the Articles of               (incorporated
              Incorporation of National 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)   National Bankshares, Inc. 1999                (incorporated herein
              Stock Option Plan                             by reference to
                                                            Exhibit 4.3 of
                                                            the Form S-8, filed
                                                            as Registration No.
                                                            333-79979 with the
                                                            Commission on June
                                                            4, 1999)

*10(iii)(A)   Employment Agreement dated January 2002       (incorporated herein
              between National Bankshares, Inc. and         by reference to
              James G. Rakes                                Exhibit 10(iii)(A)
                                                            of Form 10Q for
                                                            the period ended
                                                            June 30, 2002)

*10(iii)(A)   Employee Lease Agreement dated August 14,     (incorporated herein
              2002, between National Bankshares, Inc.       by reference to
              and The National Bank of Blacksburg           Exhibit 10 (iii)(A)
                                                            of Form 10Q for
                                                            the period ended
                                                            September 30, 2002)

*10(iii)(A)   Change in Control Agreement dated             Pages 51-59
              January 5, 2003, between National
              Bankshares, Inc. and Marilyn B. Buhyoff

*10(iii)(A)   Change in Control Agreement dated             Pages 60-68 2003,
              January 8, between National Bankshares,
              Inc. and F. Brad Denardo

*10(iii)(A)   Change in Control Agreement dated             Pages 69-79 1998,
              June 1, between Bank of Tazewell County
              and Cameron L. Forester

                                       41
                                     <PAGE>


   13(i)      2002 Annual Report to Stockholders (such
              Report, except to the extent incorporated
              herein by reference, is being furnished
              for the information of the Commission
              only and is not deemed to be filed as part
              of this Report on Form 10-K)



   21(i)      Subsidiaries of National Bankshares, Inc.     Page 80

    23        Consent of Yount, Hyde & Barbour, P.C. to     Page 81
              incorporation by reference of independent
              auditor's report included in this Form
              10-K, into registrant's registration
              statement on Form S-8.

   99(a)      Certification of Chief Executive Officer      Page 82
              Pursuant to 18 U.S.C. Section 1350

   99(b)      Certification of Chief Financial Officer      Page 83
              Pursuant to 18 U.S.C. Section 1350


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

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

        None

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

        See Item 15(a)3 above.

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

        See Item 15(a)2 above.


                                       42
                                     <PAGE>


                                   Signatures

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



I, James G. Rakes,Chairman, President and Chief Executive Officer of National
Bankshares, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of National Bankshares, Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,

                                       43
                                     <PAGE>

summarize and report financial date and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.

Date:  03-21-03
       --------

/s/ James G. Rakes
- ---------------------------
James G. Rakes
Chairman
President and Chief Excutive Officer



I, J. Robert Buchanan, Treasurer (Chief Financial Officer) of National
Bankshares, Inc. certify that:

1. I have reviewed this annual report on Form 10-K of National Bankshares, Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and

                                       44
                                     <PAGE>


procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial date and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.

Date:  03-21-03
       --------

/s/ J. Robert Buchanan
- ---------------------------
J. Robert Buchanan
Treasurer (Chief Financial Officer)


                                       45
                                     <PAGE>


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

Name                                   Date                  Title
- ----                                   ----                  -----

/s/ L. A .Bowman                       03-12-03              Director
- -----------------------                --------------
L. A. Bowman

/s/ A. A. Crouse                       03-24-03              Director
- -----------------------                --------------
A. A. Crouse

/s/ J. A. Deskings, Sr.                03-12-03              Director
- -----------------------                --------------
J. A. Deskins, Sr.

/s/ P. a. Duncan                       03-12-03              Director
- -----------------------                --------------
P. A. Duncan

/s/ C. L. Forrester                    03-12-03              Director
- -----------------------                --------------
C. L. Forrester

/s/ W. T. Peery                        03-12-03              Director
- -----------------------                --------------
W. T. Peery

/s/ J. G. Rakes                        03-12-03              Chairman of the
- -----------------------                --------------        Board President
J. G. Rakes                                                  and Chief Executive
                                                             Officer - National
                                                             Bankshares, Inc.

/s/ J. M. Shuler                       03-12-03              Director
- -----------------------                --------------
J. M. Shuler

/s/ J. R. Stewart                      03-12-03              Director
- -----------------------                --------------
J. R. Stewart


                                       46
                                     <PAGE>



                                Index to Exhibits

                                                                Page No. in
Exhibit No.                   Description                    Sequential System
- -----------                   -----------                    -----------------
   3(i)       Articles of Incorporation, as amended,          (incorporated
              of 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)   National Bankshares, Inc. 1999 Stock            (incorporated
              Option 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)

*10(iii)(A)   Employment Agreement dated January 2002         (incorporated
              between National Bankshares, Inc. and           herein by
              James G. Rakes                                  reference to
                                                              Exhibit 10(iii)(A)
                                                              of Form 10Q for
                                                              the period ended
                                                              June 30, 2002)

                                       47
                                     <PAGE>

                                                                Page No. in
Exhibit No.                   Description                    Sequential System
- -----------                   -----------                    -----------------

*10(iii)(A)   Employment Lease Agreement dated August         (incorporated
              14, 2002, between National Bankshares,          herein by
              Inc. and The National  Bank of Blacksburg       reference to
                                                              Exhibit 10(iii)(A)
                                                              for the period
                                                              ended September
                                                              30, 2002)

*10(iii)(A)   Change in Control Agreement dated January       Pages 49-57
              5, 2003, between National Bankshares, Inc.
              and Marilyn B. Buhyoff

*10(iii)(A)   Change in Control Agreement dated January 8,    Pages 58-66
              2003, between National Bankshares, Inc. and
              F. Brad Denardo

*10(iii)(A)   Change in Control Agreement dated June 1,       Pages 67-77
              1998, between Bank of Tazewell County and
              Cameron L. Forester

13(i)         2001 Annual Report to Stockholders (such
              Report, except to the extent incorporated
              herein by reference, is being furnished
              for the information of the Commission only
              and is not deemed to be filed as part of
              this Report on Form 10-K)

   21(i)      Subsidiaries of National Bankshares, Inc.       Page 78

    23        Consent of Yount, Hyde & Barbour, P.C. to       Page 79
              incorporation by reference of independent
              auditor's report included in this Form 10-K,
              into registrant's registration statement on
              Form S-8.

  99 (a)      Certification of Chief Executive Officer        Page 80
              Pursuant to 18 U.S.C. Section 1350

  99 (b)      Certification of Chief Financial Officer        Page 81
              Pursuant to 18 U.S.C. Section 1350

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

                                       48
                                     <PAGE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>ex10forrester.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT FORRESTER
<TEXT>
                           CHANGE IN CONTROL AGREEMENT


        THIS AGREEMENT is entered into as of the 1st day of June, 1998 by and
between BANK OF TAZEWELL COUNTY, a Virginia corporation (the "Company"), and
CAMERON L. FORRESTER (the "Executive").


                                    RECITALS

I. As of the Agreement Effective Date, the Executive serves as President of the
Company and is key member of management of the Company and its affiliates and
his services and knowledge are valuable to the Company and its affiliates.

II. The Board (as defined below) has determined that it is in the best interests
of the Company and its shareholders to assure that the Company and its
affiliates will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change in Control (as defined below)
of the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change in Control and to encourage the
Executive's full attention and dedication to the Company and its affiliates
currently and in the event of any threatened or pending Change in Control.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.

        NOW THEREFORE, it is hereby agreed as follows:

1.      CERTAIN DEFINITIONS

(a)     "Agreement Effective Date" means June 1, 1998.

(b)     The "Agreement Term" means the period commencing on the Agreement
        Effective Date and ending on the earlier of (i) the Agreement Regular
        Termination Date or (ii) the date this Agreement terminates pursuant to
        Section 7. The "Agreement Regular Termination Date" means the third
        anniversary of the Agreement Effective Date, provided, however, that
        commencing on the third anniversary of the Agreement Effective Date, and
        on each biannual anniversary of such third anniversary date (such date
        and each biannual anniversary thereof shall be hereinafter referred to
        as the "Renewal Date"), unless this Agreement previously terminated, the
        Agreement Regular Termination Date shall be automatically extended for
        two years from the latest Renewal Date, unless at least one year prior
        to the latest Renewal Date the Company shall give notice to the
        Executive in accordance with Section 10(c) of this Agreement that the
        Agreement Regular Termination Date shall not be so extended.

(c)     "Board" means the Board of Directors of the Company if the reference is
        not to the Board of the Parent, or the Board of Directors of the Parent
        Company if the reference is to the Board of the Parent Company.

(d)     "Cause" means:

(i)     the willful and continued failure of the Executive to substantially
        perform his duties with the Company or one of its affiliates (other than
        any such failure resulting from incapacity due to physical or mental
        illness), after a written demand for substantial performance is

                                       67
                                     <PAGE>


        delivered to the Executive by the Board which specifically identifies
        the manner in which the Board believes that the Executive has not
        substantially performed his duties, or

               (ii) the willful engaging by the Executive in illegal conduct or
        gross misconduct which is materially and demonstrably injurious to the
        Company.

For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or based upon the advice of counsel for the Company shall
be conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The cessation of employment
of the Executive shall not be deemed to be for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three quarters of the entire membership
of the Board at a meeting of the Board called and held for such purpose (after
reasonable notice is provided to the Executive in accordance with Section 10(c)
of this Agreement and the Executive is given an opportunity, together with
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, the Executive is guilty of the conduct described in paragraph (i)
or (ii) above, and specifying the particulars thereof in detail.

(e) The "Change in Control Date" means the first date during the Agreement Term
on which a Change in Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change in Control occurs and if
the Executive's employment with the Company is terminated prior to the date on
which the Change in Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment either (i) was the request of a
third party who has taken steps reasonably calculated to effect a Change in
Control or (ii) otherwise arose in connection with or anticipation of a Change
in Control, then for all purposes of this Agreement the "Change in Control Date"
shall mean the date immediately prior to the date of such termination of
employment.

(f) "Company" means the Bank of Tazewell County, a Virginia corporation.

(g) "Coverage Period" means the period of time beginning with the Change in
Control Date and ending on the earliest to occur of (i) the Executive's death
and (ii) the sixty-first day after the second anniversary of the Change in
Control Date.

(h) "Disability" means the absence of the Executive from his duties with the
Company on a full-time basis for one year as a result of incapacity due to
mental or physical illness or injury which is determined to be total and
permanent by a physician selected by the Company or its insurers and acceptable
to the Executive or the Executive's legal representative. If the Company
determines in good faith that the Disability of the Executive has occurred, it
may give to the Executive written notice in accordance with Section 10(c) of
this Agreement of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of his duties.

(i) "Good Reason" means any good faith determination made by the Executive
(which determination shall be conclusive) that any of the following has
occurred:

                                       68
                                     <PAGE>


               (i) the occurrence, on or after the Agreement Effective Date and
        during the Coverage Period, of any of the following:

                      (A) the assignment to the Executive of any duties
               inconsistent in any material adverse respect with the Executive's
               position (including status, offices, titles and reporting
               requirements), authority, duties or responsibilities immediately
               prior to the Change in Control, or any other action by the
               Company which results in a diminution in such position,
               authority, duties or responsibilities, excluding for this purpose
               an isolated, insubstantial and inadvertent action not taken in
               bad faith and which is remedied by the Company promptly after
               receipt of notice thereof given by the Executive in accordance
               with Section 10(c)of this Agreement.

                      (B) a reduction by the Company in the Executive's rate of
               annual base salary, benefits (including, without limitation,
               incentive or bonus pay arrangements, stock plan benefits, and
               retirement and welfare plan coverage) and perquisites as in
               effect immediately prior to the Change in Control or as the same
               may be increased from time to time thereafter, other than an
               isolated, insubstantial and inadvertent failure not occurring in
               bad faith and which is remedied by the Company promptly after
               receipt of notice thereof given by the Executive in accordance
               with Section 10(c) of this Agreement;

                      (C) the Company's requiring the Executive to be based at
               any office or location more than 35 miles from the facility where
               the Executive is located at the time of the Chance in Control or
               the Company's requiring the Executive to travel on Company
               business to a substantially greater extent then required
               immediately prior to the Change in Control Date (but determined
               without regard to travel necessitated by reason of any
               anticipated Change in Control);

                      (D)any purported termination by the Company of the
               Executive's employment otherwise than as expressly permitted by
               this Agreement; or

                      (E) any failure by the Company to comply with and satisfy
               Section 9(c) of this Agreement by obtaining satisfactory
               agreement from any successor to assume and perform this
               Agreement.

               (ii) any event or condition described in paragraph (i) of this
        Section 1(i) which occurs on or after the Agreement Effective Date, but
        prior to a Change in Control, but was at the request of a third party
        who effectuates the Change in Control, notwithstanding that it occurred
        prior to the Change in Control, but such event or condition shall not be
        considered to actually have occurred until the Change in Control Date.

        (j) "Covered Termination" means a termination of Executive's employment
during the Coverage Period (i) by the Company for any reason other than Cause or
the Executive's Disability or death, or (ii) by the Executive for Good Reason.

        (k) "Noncovered Termination" means a cessation of Executive's
employment, which is not a Covered Termination.


                                       69
                                     <PAGE>


        (l) "Parent Company" means National Bankshares, Inc., a Virginia
corporation, which as of the Agreement Effective Date is the sole shareholder of
the Company.

        2. CHANGE IN CONTROL. "Change in Control" means the occurrence, during
the Agreement Term, of either an "Acquisition of Controlling Ownership" (as
defined in Section 2(a) below), a "Change in the Incumbent Board" (as defined in
Section 2(b) below), a "Business Combination" (as defined in Section 2(c)
below), or a "Liquidation or Dissolution" (as defined in Section 2(d) below).

        (a) "Acquisition of Controlling Ownership" means the acquisition by any
individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (x) the then outstanding shares
of common stock of the Company or the Parent Company (the "Outstanding Common
Stock") or (y) the combined voting power of the then outstanding voting
securities of the Company or the Parent Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"). Notwithstanding
the foregoing, for purposes of this Section 2(a) the following acquisitions
shall not constitute a Change in Control:

               (i) any acquisition directly from the Company or the Parent
        Company,

               (ii) any acquisition by the Company or the Parent Company,

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

               (iv) any acquisition by any corporation pursuant to a transaction
        which complies with paragraphs (i), (ii) and (iii) of) of this Section
        2(c).

        (b) "Change in the Incumbent Board," means that individuals who, as of
the Agreement Effective Date, constitute the Board of the Parent Company (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board. For this purpose, any individual who becomes a director subsequent to the
Agreement Effective Date whose election, or nomination for election by the
Parent Company's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be thereupon considered
a member of the Incumbent Board (with his predecessor thereafter ceasing to be a
member), but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of the Parent Company.

        (c) "Business Combination" means the consummation of a reorganization,
merger or consolidation or sale or other disposition of all or substantially all
of the assets of the Company or the Parent Company (a "Business Combination")
unless all of the following occur:

               (i) all or substantially all of the individuals and entities who
        were the beneficial owners respectively, of the Outstanding Common Stock
        and Outstanding Voting Securities immediately prior to such Business
        Combination beneficially own, directly or indirectly, more than 60% of,
        respectively, the then outstanding shares of common stock and the
        combined voting power of the then outstanding voting securities entitled

                                       70
                                     <PAGE>


        to vote generally in the election of directors, as the case may be, of
        the corporation resulting from such Business Combination (including,
        without limitation, a corporation which as a result of such transaction
        owns the Company or the Parent Company or all or substantially all of
        the Company's assets or the Parent Company's assets either directly or
        through one or more subsidiaries, in substantially the same proportions
        as their ownership, immediately prior to such Business Combination of
        the Outstanding Common Stock and Outstanding Voting Securities, as the
        case may be,

               (ii) no Person (excluding any corporation resulting from such
        Business Combination or any employee benefit plan (or related trust) of
        the Company or the Parent Company or such corporation resulting from
        such Business Combination) beneficially owns, directly or indirectly,
        20% or more of, respectively, the then outstanding shares of common
        stock of the corporation resulting from such Business Combination, or
        the combined voting power of the then outstanding voting securities of
        such corporation except to the extent that such ownership existed prior
        to the Business Combination, and

               (iii) at least a majority of the members of the board of
        directors of the corporation resulting from such Business Combination
        were members of the Incumbent Board or were elected by such majority at
        the time of the execution of the initial agreement, or of the action of
        the Board, providing for such Business Combination.

        (d) "Liquidation or Dissolution" means the approval by the shareholders
of the Parent Company of a complete liquidation or dissolution of the Parent
Company.

        3. OBLIGATIONS OF THE EXECUTIVE TO REMAIN EMPLOYED. The Executive agrees
that in the event any person or group attempts a Change in Control, he shall not
voluntarily leave the employ of the Company without Good Reason (i) until such
attempted Change in Control terminates or (ii) if a Change in Control shall
occur, until the change in Control Date. For purposes of the foregoing clause
(i), Good Reason shall be determined as if a Change in Control had occurred when
such attempted Change in Control became known to the Board.

        4. OBLIGATIONS UPON THE EXECUTIVE'S TERMINATION.

        (a) Notice of Termination. Any termination of the Executive's employment
by the Company or by the Executive, other than by reason of death, shall be
communicated by Notice of Termination to the other party hereto given. For
purposes hereof:

               (i) "Notice of Termination" means a written notice given in
        accordance with Section 10(c) of this Agreement which (A) states whether
        such termination is for Cause, Good Reason or Disability, (B) indicates
        the specific termination provision in this Agreement relied upon, if
        any, (C) to the extent applicable, sets forth in reasonable detail the
        facts and circumstances claimed to provide a basis for termination of
        the Executive's employment under the provision so indicated, and (D) if
        the Date of Termination is other than date of receipt of such notice,
        specifies the termination date. The failure by the Executive or the
        Company to set forth in the Notice of Termination any fact or
        circumstance which contributes to a showing of Good Reason, Cause or
        Disability shall not waive any right of the Executive or the Company,
        respectively, hereunder or preclude the Executive or the Company,
        respectively, from asserting such fact or circumstance in enforcing the
        Executive's or the Company's rights hereunder.

                                       71
                                     <PAGE>


               (ii) "Date of Termination" means (A) if the Executive's
        employment is terminated by reason of Disability, the Disability
        Effective Date, (B) if the Executive's employment is terminated by the
        Company for any reason other than Disability, the date of the
        Executive's receipt of the Notice of Termination or any later date
        specified therein, as the case may be, and (C) if the Executive's
        employment is terminated by the Executive for any reason, the date of
        the Company's receipt of the Notice of Termination or any later date
        specified therein, as the case may be:

        (b) Obligations of the Company in a Covered Termination. If the
Executive's employment shall cease by reason of a Covered Termination, then:

               (i) the Company shall pay or cause to be paid to the Executive in
        a lump sum in cash within 30 days after the Date of Termination an
        amount equal to the product of (A) [two] and (B) the sum of the
        Executive's (1) highest aggregate annual base salary from the Company
        and its affiliated companies in effect at any time during the 24 month
        period ending on the Change in Control Date and (2) highest aggregate
        annual bonuses (including any deferrals thereof) from the Company and
        its affiliated companies payable for the Company's two fiscal years
        immediately preceding the fiscal year which includes the Change in
        Control Date (such other amount may be hereinafter sometimes referred to
        as the "Change in Control Benefit"); and

               (ii) to the extent not theretofore paid or provided, the Company
        shall timely pay or cause to be paid or provide or cause to be provided
        to the Executive any other amounts or benefits required to be paid or
        provided or which the Executive is eligible to receive under any
        compensation arrangement, plan, program, policy or practice or contract
        or agreement of the Company and its affiliated companies (such other
        amounts and benefits shall be hereinafter referred to as the "Other
        Benefits").

        (c) Obligations of the Company in a Noncovered Termination. If the
Executive's employment shall cease by reason of a Noncovered Termination, this
Agreement shall terminate without further obligations to the Executive other
than the obligation timely to pay or cause to be paid or provide or cause to be
provided to the Executive his Other Benefits.

5. FULL SETTLEMENT.

        (a) No Offset or Mitigation. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive. In no event shall the Executive be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment.

        (b) Executive's Expenses in Dispute Resolution. The Company agrees to
pay as incurred, to the full extent permitted by law, all legal fees and
expenses which the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Executive or others of
the validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").

                                       72
                                     <PAGE>


        (c) Payment prior to Dispute Resolution. If there shall be any dispute
between the Company and the Executive in the event of any termination of
Executive's employment, then, unless and until there is a final, nonappealable
judgment by a court of competent jurisdiction declaring that such termination
was a Noncovered Termination, that the determination by the Executive of the
existence of Good Reason was not made in good faith, or that the Company is not
otherwise obligated to pay any amount or provide any benefit to the Executive
and his dependents or other beneficiaries, as the case may be, under Section
4(b), the Company shall pay all amounts, and provide all benefits, to the
Executive and his dependents or other beneficiaries, as the case may be, that
the Company would be required to pay or provide pursuant to Section 4(b) as
though such termination were not a Noncovered Termination. Notwithstanding the
foregoing, the Company shall not be required to pay any disputed amounts
pursuant to this Section 5(c) except upon receipt of an adequate bond, letter of
credit or undertaking by or on behalf of the Executive to repay all such amounts
to which the Executive is ultimately adjudged by such court not to be entitled.

6. PAYMENT LIMITATIONS.

        (a) Excise Tax Payment Limitation. Notwithstanding anything contained in
this Agreement or any other agreement or plan to the contrary, the payments and
benefits provided, to, or for the benefit of, the Executive under this Agreement
or under any other plan or agreement which became payable or are taken into
account as a result of the Change in Control (the "Payments") shall be reduced
(but not below zero) to the extent necessary so that no payment to be made, or
benefit to be provided, to the Executive or for his benefit under this Agreement
or any other plan or agreement shall be subject to the imposition of an excise
tax under Section 4999 of the Code (such reduced amount is hereinafter referred
to as the "Limited Payment Amount"). Unless the Executive and the Company shall
otherwise agree, the Company shall reduce or eliminate the Payments to the
Executive by first reducing or eliminating those payments or benefits which are
not payable in cash and then by reducing or eliminating cash payments, in each
case in reverse order beginning with payments or benefits which are to be paid
the farthest in time from the Determination (as hereinafter defined). Any notice
given by the Executive pursuant to the preceding sentence shall take precedence
over the provisions of any other plan, arrangement or agreement governing
Executive's rights and entitlements to any benefits or compensation.

        (b) Excise Tax Payment Limitation Determinations. All determinations
required to be made under this Section 6 shall be made by the Company's public
accounting firm (the "Accounting Firm"). The Accounting Firm shall provide its
calculations, together with detailed supporting documentation, both to the
Company and the Executive within fifteen days after the receipt of notice from
the Company that there has been a Payment (or at such earlier times as is
requested by the Company) and, with respect to any Limited Payment Amount, a
reasonable opinion to the Executive that he is not required to report any excise
tax on his federal income tax return with respect to the Limited Payment Amount
(collectively, the "Determination"). In the event that the Accounting Firm is
serving as an accountant or auditor for the individual, entity or group
effecting the Change in Control, the Executive shall appoint another nationally
recognized public accounting firm to make the determination required hereunder
(which accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees, costs and expenses (including, but not limited to, the
costs of retaining experts) of the Accounting Firm shall be borne by the
Company. The Determination by the Accounting Firm shall be binding upon the
Company and the Executive (except as provided in Section 6(c) below).

                                       73
                                     <PAGE>


        (c) Excise Tax Excess Payments Considered a Loan. If it is established
pursuant to a final determination of a court or an Internal Revenue Service (the
"IRS) proceeding which has been finally and conclusively resolved, that Payments
have been made to, or provided for the benefit of, the Executive by the Company,
which are in excess of the limitations provided in Section 6(a) (hereinafter
referred to as an "Excess Payment"), such Excess Payment shall be deemed for all
purposes to be a loan to the Executive made on the date the Executive received
the Excess Payment and the Executive shall repay the Excess Payment to the
Company on demand, together with interest on the Excess Payment at the
applicable federal rate (as defined in Section 1274(d) of the Code) from the
date of Executive's receipt of such Excess Payment until the date of such
repayment. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the Determination, it is possible that Payments which
will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made under this
Section 6. In the event that it is determined (i) by the Accounting Firm, the
Company (which shall include the position taken by the Company, or together with
its consolidated group, on its federal income tax return) or the IRS or (ii)
pursuant to a determination by a court, that an Underpayment has occurred, the
Company shall pay an amount equal to such Underpayment to the Executive within
ten days of such determination together with interest on such amount at the
applicable federal rate from the date such amount would have been paid to the
Executive until the date of payment.

        (d) Banking Payment Limitation. Notwithstanding anything contained in
this Agreement or any other agreement or plan to the contrary, the payments and
benefits provided to, or for the benefit of, the Executive under this Agreement
or under any other plan or agreement shall be reduced (but not below zero) to
the extent necessary so that no payment to be made, or benefit to be provided,
to the Executive or for his benefit under this Agreement or any other plan or
agreement shall be in violation of the golden parachute and indemnification
payment limitations and prohibitions of 12 CFR Section 359.

        7. TERMINATION OF AGREEMENT. This Agreement shall be effective as of the
Agreement Effective Date and shall normally continue until the later of the
Agreement Regular Termination Date or, if a Change in Control has occurred,
until the end of the Coverage Period. Notwithstanding the foregoing, this
Agreement shall terminate in any event upon the Executive's cessation of
employment in a Noncovered Termination.

        8. CONFIDENTIAL INFORMATION.

        (a) No Disclosure by Executive. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or date to anyone other than the Company and those
designated by it.

        (b) Remedies for Breach. It is recognized that damages in the event of
breach of Section 8(a) above the Executive would be difficult, if not
impossible, to ascertain, and it is therefore specifically agreed that the
Company, in addition to and without limiting any other remedy or right it may
have, shall have the right to an injunction or other equitable relief in any

                                       74
                                     <PAGE>


court of competent jurisdiction, enjoining any such breach. The existence of
this right shall not preclude the Company from pursing any other rights and
remedies at law or in equity, which it may have.

        (c) Breach Not Basis to Withhold Payment. In no event shall an asserted
violation of the provisions of this Section 8 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.

        9. BENEFIT AND SUCCESSORS.

        (a) Executive's Benefit. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributes, devisees and
legatees. If the Executive should die and any amount remains payable hereunder
after his death, any such amount, unless otherwise agreed by the Company or
provided herein, shall be paid in accordance with the terms of this Agreement to
the Executive's devisee, legatee or other designee of such payment or, if there
is no such designee, the Executive's estate.

        (b) Company's Benefit. This Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns.

        (c) Assumption by Successor to Company. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) 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. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.

        10. MISCELLANEOUS.

        (a) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Virginia, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect.

        (b) Amendment. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or their respective
successors and legal representatives.

        (c) Notices. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:

        If to the Executive:

               Cameron L. Forrester
               220 Church Street
               Tazewell, Virginia  24651


                                       75
                                     <PAGE>


        If to the Company:

               Bank of Tazewell County
               Care of the Chairman of the Board
               309 East Main Street
               P.O. Box 687 Tazewell, Virginia 24651-0687

or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.

        (d) Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.

        (e) Tax Withholding. The Company may withhold from any amounts payable
under this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.

        (f) Waiver. The Executive's or the Company's failure to insist upon
strict compliance with any provision of this Agreement or the failure to assert
any right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to this Agreement, shall not be deemed to be a waiver of such provision
or right or any other provision or right of this Agreement.

        (g) Executive's Employment. The Executive and the Company acknowledge
that, except as may otherwise be provided under any other written agreement
between the Executive and the Company, the employment of the Executive by the
Company is "at will" and, subject to paragraph (ii) of Section 1(i) hereof
deeming a termination to have occurred on or after the occurrence of a Change in
Control Date, the Executive's employment and/or this Agreement may be terminated
by either the Executive or the Company at any time prior to the Change in
Control Date, in which case the Executive shall have no further rights under
this Agreement.

        (h) Nonexclusivity of Rights. Except as expressly provided in Section 6,
nothing in this Agreement shall prevent or limit the Executive's continuing or
future participation in any plan, program, policy or practice provided by the
Company or any of its affiliated companies and for which the Executive may
qualify, nor shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Executive's termination shall be
payable in accordance with such plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Executive's termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.

        (i) Statutory References. Any reference in this Agreement to a specific
statutory provision shall include that provision and any comparable provision or
provisions of future legislation amending, modifying, supplementing or
superseding the referenced provision.

        (j) Nonassignability. This Agreement is personal to the Executive, and
without the prior written consent of the Company, no right, benefit or interest
hereunder shall be subject in any manner to anticipation, alienation, sale,

                                       76
                                     <PAGE>


transfer, assignment, pledge, encumbrance or charge, except by will or the laws
of descent and distribution, and any attempt thereat shall be void; and no
right, benefit or interest hereunder shall, prior to receipt of payment, be in
any manner liable for or subject to the recipient's debts, contracts,
liabilities, engagements or torts.

        (k) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be considered an original and all of which
together shall constitute one agreement.

        (l) Employment with Affiliates. Employment with the Company for purposes
of this Agreement shall include employment with any corporation or other entity
in which the Company has a direct or indirect ownership interest of 50% or more
of the total combined voting power of the then outstanding securities of such
corporation or other entity entitled to vote generally in the election of
directors or which has a direct or indirect ownership interest of 50% or more of
the total combined voting power of the then outstanding securities of the
Company entitled to vote generally in the election of directors.


        IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.


                                    /s/     CAMERON L. FORRESTER
                                    -----------------------------
                                    CAMERON L. FORRESTER, Executive



                                    BANK OF TAZEWELL COUNTY


                                    By /s/    WM. T. PEERY
                                       ---------------------------------
                                       William T. Peery
                                       Chairman of the Board of Directors

                                       77

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>annual2002.txt
<DESCRIPTION>2002 ANNUAL REPORT
<TEXT>



                            National Bankshares, Inc.






























                               2002 Annual Report


<PAGE>


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


<PAGE>





                              Financial Highlights

$ In thousands, except per share data
                                              2002           2001         2000
- ------------------------------------------------------------------------------

Net income                                $  10,014         7,314         7,309
Basic and diluted net income per share         2.85          2.08          2.08
Cash dividends per share                       0.97          0.86          0.85
Book value per share                          20.82         18.59         17.04
Loans, net                                $ 404,247       394,042       355,795
Total securities                            219,294       191,476       156,344
Total assets                                684,935       644,623       593,497
Total deposits                              608,271       576,618       530,648
Stockholders' equity                         73,101        65,261        59,834


Graph of "Cash Dividends Per Share"
(dollars)

      2000              2001              2002
- ----------------   ---------------   ---------------
      .85               .86               .97



Graph of "Book Value Per Share"
(dollars)

      2000              2001              2002
- ----------------   ---------------   ---------------
    $17.04             $18.59            $20.82


Table of Contents

To Our Stockholders............................................................2
Selected Consolidated Financial Data...........................................4
Management's Discussion and Analysis...........................................5
Independent Auditor's Report..................................................13
Consolidated Financial Statements.............................................14
Notes to Consolidated Financial Statements....................................18
Selected Quarterly Data.......................................................37
Boards of Directors...........................................................38
Corporate Information.........................................................40


                                       1
                                     <PAGE>



To Our Stockholders:

We are committed to community banking at National Bankshares, Inc. We
demonstrate this commitment every business day. Our subsidiary banks, The
National Bank and Bank of Tazewell County, have each been a strong presence in
their hometowns for more than a century. The banks have a long tradition of
exemplary corporate citizenship. Bank employees regularly take leadership roles
in civic, cultural, and charitable organizations, and the banks donate to many
worthy causes. As our two banks have expanded into new markets, our company's
civic involvement has followed. Whenever possible, we believe that bank office
managers should live in the area in which they do business. This allows them to
become personally familiar with the needs of their communities. And since their
customers are often also acquaintances from church or scouts, or neighbors, or
lifelong friends, our managers form long-term, personal relationships with the
people with whom they do business.

We know, however, that personal service is not enough. Our customers expect and
deserve service of the highest quality. We strive to provide this, with trained,
experienced, and dedicated employees at all levels of the organization. From the
newest teller, who completes rigorous training with excellent teller trainers,
to the loan officer with decades of experience, each of our employees
understands that the reputation of our company depends upon them doing their
very best every day. At National Bankshares and its subsidiaries, we hire good
people, and we support them with the training they need to do an outstanding
job.

Even though our business is built on the cornerstone of excellent personal
service, we believe that being committed to community banking also includes
offering our customers access to a full range of financial services utilizing
the most up-to-date technology. Many of our customers choose one or more
alternative methods of doing their banking. Those who wish to do so may access
their bank checking and savings accounts at ATM's, with debit cards, or by using
TeleBanc, our automated voice response system. The National Bank's customers
also have the option of worldwide access to their account information, account
transfers, and electronic bill payment by using Internet banking. Business
customers at both banks frequently take advantage of ACH electronic transfers to
automatically make payroll and other recurring payments.

As I mentioned, we think that community banking must include a full range of
financial services. Our customers should be able to stay in the National
Bankshares family for all of their financial needs. That is why we now offer
insurance and investments through National Bankshares Financial Services, Inc.

                                       2
                                     <PAGE>

Both The National Bank and Bank of Tazewell County have Trust Departments to
assist customers with their trust, estate and financial planning needs. We issue
our own credit cards and debit cards, and our own employees are available
locally to answer merchants' and customers' questions and to resolve any
problems they might encounter.

Because National Bankshares and its subsidiaries is able to provide a full range
of financial services to our customers, and because they are free to choose from
a wide array of service delivery options, I believe that the future is bright
for community banking in general and for National Bankshares in particular. To
insure that future, The National Bank is building a new office in Downtown
Christiansburg, and we are looking forward to opening this summer. We have plans
for some exciting new bank products this year. The National Bank is currently in
the process of installing a new generation of host computer to support the core
banking operations at both banks. This will be followed later in the year by
enhancements to our computer network. This investment in hardware and software
will allow us to provide even better service to our customers. In the coming
year, we are looking forward to continuing and expanding our commitment to
community banking.

Although we are looking ahead to the future, I would like to take a moment to
share some highlights of 2002. As you know, the past year was a very good one
for National Bankshares, Inc. By taking advantage of the interest rate
environment to maximize net interest income, maintaining good levels of
non-interest income, and holding the line on non-interest expense, National
Bankshares, Inc. achieved record net income of over $10 million, an increase of
nearly 37% over 2001. We shared this success with our stockholders by increasing
cash dividends per share from $0.86 per share in 2001 to $0.97 per share in
2002. National Bankshares, Inc. ended the year with total assets of nearly $685
million up by almost 6.3% over total assets at December 31, 2001.

I would like to thank you, our stockholders, for your confidence and support. We
know that you share the commitment and enthusiasm of the directors and employees
of National Bankshares, Inc. and each of its subsidiaries to offering our
communities the very best in community banking.


Picture of                              /s/ James G. Rakes
"James G. Rakes"
                                        James G. Rakes
                                        Chairman of the Board
                                        President and Chief Executive Officer

                                       3
                                     <PAGE>


National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data.

<TABLE>
<CAPTION>
                                                                Years ended December 31,
                                                 2002        2001        2000        1999         1998
- ---------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>          <C>        <C>          <C>
Selected        Interest income              $  42,747      45,527       38,358     33,603       31,828
Income          Interest expense                15,764      22,771       18,163     14,203       13,928
Statement       Net interest income             26,983      22,756       20,195     19,400       17,900
Data:           Provision for loan losses        2,251       1,408        1,329      1,400          624
                Noninterest income               5,712       5,204        4,082      3,512        3,174
                Noninterest expense             17,427      16,953       12,876     11,868       11,061
                Income taxes                     3,003       2,285        2,763      2,556        2,591
                Net income                      10,014       7,314        7,309      7,088        6,798

Per Share       Basic and diluted net income $    2.85        2.08         2.08       1.96         1.79
Data:           Cash dividends declared           0.97        0.86         0.85       0.80         0.74
                Book value per share (1)         20.82       18.59        17.04      14.99        16.00

Selected        Loans, net                   $ 404,247     394,042      355,795    291,562      236,578
Balance Sheet   Total securities               219,294     191,476      156,344    137,492      166,754
Data at End     Total assets                   684,935     644,623      593,497    472,134      445,166
of Year:        Total deposits                 608,271     576,618      530,648    407,187      382,696
                Stockholders' equity            73,101      65,261       59,834     52,723       58,503

Selected        Loans, net                   $ 404,717     380,970      310,624    266,431      225,613
Balance Sheet   Total securities               191,493     188,809      142,686    151,424      152,432
Daily           Total assets                   655,783     635,692      500,381    454,189      420,988
Averages:       Total deposits                 583,298     569,139      433,673    391,583      359,970
                Stockholders' equity (1)        69,895      63,460       55,682     56,196       58,282

Selected        Return on average assets         1.53%       1.15%        1.46%      1.56%        1.61%
Ratios          Return on average equity (1)    14.33%      11.53%       13.13%     12.61%       11.66%
                Dividend payout ratio           34.01%      41.29%       40.87%     39.70%       41.29%
                    Average equity to
                        average assets (1)      10.66%       9.98%       11.13%     12.37%       13.84%

(1) Includes the amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets in 1998.
</TABLE>


                                       4
                                     <PAGE>


Management's Discussion and Analysis

($ In Thousands, except per share data)

Performance Summary
        Net income in 2002 for 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 (NBFS), (the
Company), was $10,014, an increase of $2,700 or 36.92% over the previous year.
This produced a return on average assets and a return on average equity of 1.53%
and 14.33%, respectively.
        Net income for the Company for 2001 was $7,314, an increase of $5 or
0.07% over 2000. The return on average assets and return on average equity for
2001 were 1.15% and 11.53%, respectively. Basic and diluted net income per share
over the three-year period was $2.85 per share in 2002, compared to $2.08 in
2001 and 2000. The dividend payout ratio for 2002 was 34.01%, which compares to
41.29% in 2001 and 40.87% in 2000.

Graph of "Net Income"
($ in millions)

      2000              2001              2002
- ----------------   ---------------   ---------------
      $7.3              $7.3             $10.0

Net Interest Income
        Net interest income for 2002 was $26,983, an increase of $4,227 or
18.58% over 2001. This increase was primarily the result of the low interest
rate environment the Company experienced throughout all of 2002. The yield on
earning assets for 2002 was 7.27%, declining 63 basis points during the year.
During the same period, the cost to fund earning assets decreased by 127 basis
points. These combined to produce an increase in the net interest margin of 64
basis points. As can be seen by this data, the cost to fund earning assets
declined at a faster rate than the yield on earning assets.
        While the current rate environment continues to be generally favorable
to the Company's overall profitability, it is the opinion of management that
current rate levels are not sustainable over a long period of time. It is
believed that, as the general economy recovers, interest rates can be expected
to increase to negate or control inflationary pressures. Rising interest rates
generally have a short to intermediate term adverse effect on the Company's net
interest income and profitability.
        In the meantime, while interest rates remain at low levels, it is
expected that the Company's yield on earning assets will gradually decline as
older, higher rate loans and investments mature or are called. In particular,
longer-term investments purchased during the period to replace those matured or
called may ultimately have a negative impact on net interest income. As
indicated by the statement of cash flows, approximately $44,995 in securities
available for sale were purchased in 2002. These securities consisted
predominately of securities with maturities in excess of five years.
        In purchasing these securities, the Company has increased the level of
interest rate risk in its balance sheet. While the securities have been
classified as available for sale, a future rising rate environment and the
accompanying decrease in asset value could make the sale of the securities
undesirable from a profitability perspective. (In addition, with callable
securities purchased during a period of low interest rate levels, the
expectation of the call feature being activated is somewhat diminished). Hence,
in a rising rate scenario the Company's ability to re-price these assets could
be limited and result in a negative impact on the Company's net interest margin.
           Risk factors which affect interest rates and the general economy
include the pace and extent at which the economy recovers, the timing and extent
of interest rate increases, and other factors including, but not limited to,
future terrorist activities, potiential disruptions in oil supplies and
political problems in the Middle East.
              Net interest income for 2001 was $22,756, an increase of $2,561 or
12.68%. The net interest margin for 2001 was 4.11%, a 42 basis point decrease
from 2000.
              These results were caused in part by the rising interest rate
environment that existed throughout 2000, which steadily increased interest
expense until January 2001 when the Federal Reserve Bank initiated a series of
interest rate reductions to stimulate the faltering national economy. The
falling rate environment benefited the Company by the end of 2001.
             Another factor that affected the interest rate margin was
acquisition activity. In late 2000, the Company purchased six branches from
AmSouth Bank. While the assumption of the interest expense was immediate, it was
not possible to channel the new funds immediately into the loan portfolio due to
economic conditions. Surplus funds, instead, were placed in the lower yielding

                                       5
                                     <PAGE>

investment portfolio. Accordingly, interest expense grew at a faster rate than
interest income, adversely affecting the net interest margin.

Interest Rate Sensitivity
        The Company considers interest rate risk to be a significant market risk
and has systems in place to measure the exposure of net interest income and fair
market values to movement in interest rates. Interest rate sensitivity analyses
provides management with information related to repricing opportunities, while
interest rate shock simulations indicate potential economic loss due to future
interest rate changes.
               During 1999 and 2000, interest rates rose substantially. In
addition to the adverse effects on the net interest margin, the rising rates
reduced the Company's ability to respond to interest rate movements. At December
31, 2000, the Company's investment portfolio contained a substantial amount of
longer-term securities with call features. Due to the higher interest rate
levels, the securities were not called as anticipated. At the time, the net
unrealized losses made the sale of the securities impractical, thereby
restricting one of management's primary means of controlling the effects of
interest rate changes.
               With the onset of the declining rate environment that began in
January 2001, both of the aforementioned problems began to abate. Interest
expense, which had been at high levels at the beginning of 2001, declined
rapidly and market values of the securities rebounded making the sale of the
securities feasible, if deemed necessary.
         During 2002, the Company continued to benefit from the low interest
rate environment. While this favorable interest rate level is expected to
continue into 2003, it is not within management's ability to predict the timing
or extent of any future interest rate increases.
                Risk factors and forward looking statements previously discussed
under "Net Interest Income" apply. As previously stated, the Company uses
simulation analysis to forecast its balance sheet and monitor interest rate
sensitivity. One test is a shock analysis that measures the effect of a
hypothetical, immediate and parallel shift in interest rates. The following
table shows the results of a rate shock and the effects on net income and return
on average assets and return on average equity projected at December 31, 2003.
        For purpose of this analysis noninterest income and expenses are assumed
to be flat.

($ In thousands, except for percent data)
- --------------------- ------------------- -------------------- -----------------
     Rate Shift         Change In Net      Return On Average      Return On
 ( In basis points)         Income              Equity          Average Assets
- --------------------- ------------------- -------------------- -----------------
            300           (-) 3,927               11.56%             1.28%
            200           (-) 2,507               13.27%             1.48%
            100           (-) 1,239               14.78%             1.65%
        (-) 100               1,193               17.61%             2.00%
        (-) 200               1,628               18.11%             2.06%
        (-) 300               1,199               17.61%             2.00%


        Simulation analysis allows the Company to test asset and liability
management strategies under rising and falling rate conditions. As a part of the
simulation process, certain estimates and assumptions must be made. These
include, but are not limited to, asset growth, the mix of assets and
liabilities, rate environment, and local and national economic conditions. Asset
growth and the mix of assets can to a degree be influenced by management. Other
areas, such as the rate environment and economic factors, cannot be controlled.
For this reason actual results may vary materially from any particular forecast
or shock analysis.
        This shortcoming is offset to a degree by the periodic re-forecasting of
the balance sheet to reflect current trends and economic conditions. Shock
analysis must also be updated periodically as a part of the asset and liability
management process.

Provision and Allowance for Loan Losses
        The adequacy of the allowance for loan losses is based on management's
judgment and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit and asset
quality, as well as other internal and external factors such as general economic
conditions.
        An internal credit review department performs pre-credit analyses of

                                       6
                                     <PAGE>

large credits and also conducts credit review activities that provide management
with an early warning of asset quality deterioration.
        The internal credit review department also prepares regular analyses of
the adequacy of the provision for loans losses. These analyses include
calculations based upon a mathematical formula that considers identified
potential losses and makes pool allocations for historical losses for various
loan types. In addition an amount is allocated based upon such factors as
changing trends in the loan mix, the effects of changes in business conditions,
the effects of any changes in loan policies, and the effects of competition and
regulatory factors on the loan portfolio. The internal credit review department
has determined that the Company's provision for loan losses is sufficient.
        Loan loss and other industry indicators related to asset quality are
presented in the Loan Loss Data table.

Loan Loss Data Table
($ In thousands)
                                    2002           2001          2000
                                ------------- --------------- ------------
Provision for loan losses       $   2,251          1,408         1,329
Net charge-offs to average
net loans                            0.35%          0.27%         0.21%
Allowance for loan losses to
  loans, net of unearned
  income and deferred fees           1.24%          1.07%         1.08%

Allowance for loan losses to
  nonperforming loans            1,768.06%      1,206.78%     4,415.91%
Allowance for loan losses to
  nonperforming assets             617.21%        756.11%       618.79%
Nonperforming assets to
  loans,  net of unearned
  income and deferred fees,
  plus other real estate
  owned                              0.20%          0.14%         0.17%
Nonaccrual loans                $     288            354            88
Restructured loans                    ---            ---           ---
Other real estate owned, net          537            211           540
                                -------------- -------------- ------------
Total nonperforming assets      $     825            565           628
                                ============== ============== ============
Accruing loans past due 90
  days or more                  $     977            980         1,321
                                ============== ============== ============


Note: Nonperforming loans include nonaccrual loans and restructured loans, but
do not include accruing loans 90 days or more past due.

        Several factors contributed to the Company's decision to increase the
 provision for loan losses in 2002. While overall asset quality remained
 satisfactory in 2002, the level of exposure to loss increased, particularly in
 the loans to individuals' category. In addition, much of the growth in 2002 was
 in the commercial loan category, which increased the Company's exposure to
 losses resulting from defaults in large dollar loans. While the number of such
 defaults would only constitute a small number of loans, the sizable dollar
 amount of the individual credits tends to increase the possibility of greater
 loss. Declining economic conditions in the Company's market area have also
 contributed to a higher net charge-off ratio which rose from .26% in 2000 to
 .27% in 2001 and .35% in 2002. In addition, total nonperforming assets were at
 $825 on December 31, 2002, an increase of 46% from 2001. Declining economic
 conditions in the Company's market area have also contributed to a higher net
 charge-off ratio which rose from .26% in 2000 to .27% in 2001 and .35% in 2002.
 In addition total nonperforming assets were at $825 on December 31, 2002, an
 annual increase of 46% from 2001.
        Nonperforming assets at December 31, 2001 were $565, a decrease of $63
or 10.03% from 2000. Net charge-offs to average net loans for 2001 was 0.27%.
The provision for loan losses for 2001 was $1,408, an increase of $79 or 5.94%
from 2000.
        While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
existing and future problem assets will be resolved. Changing economic
conditions, the timing and extent of changes, and the ultimate impact on the
Company's asset quality is not within management's ability to predict with any
degree of precision. In addition, precise loss predictions may be difficult to
determine because of the complex circumstances that surround troubled debts.

Noninterest Income
        Noninterest income for 2002 was $5,712, an increase of $508 or 9.76%.
The largest increase occurred in realized gains and losses on securities and
other income categories. Non-recurring income described below accounted for much
of the increase.
        Noninterest income for 2001 was $5,204, an increase of $1,122 or 27.49%
from 2000. The increase for the most part was due to the acquisition of the six
AmSouth Bank branches in late 2000 and a seventh branch from First Union
National Bank in the first quarter of 2001.

                                       7
                                     <PAGE>

        The level of service charges on deposits is driven by demand deposit
volume, types of accounts opened, service charge rates in effect, the level of
charges such as overdraft fees, and the fee waiver policy for these fees.
        Service charges on deposit accounts were $2,229 for 2002, a decrease of
$17 or 0.76% from 2001. There were no unusual factors that had a material impact
on this category in 2002.
        Service charges on deposit accounts for 2001 were $2,246, an increase of
$563 or 33.45% from 2000. The increase was due primarily to the purchase of six
branches in late 2000 and a single purchase in the first quarter of 2001. An
increase in fee schedules also contributed to the increase, though to a lesser
extent.
        Trust income for 2002 was $968, a decrease of $123 or 11.27% from 2001.
Trust income is dependent upon market conditions as well as the types of
accounts being handled at any given point in time. Market conditions, which
directly affect the value of trust assets managed and in turn trust fees, were
less favorable in 2002. Management believes that current market conditions will
continue to have a negative impact on trust fees for the foreseeable future.
        In 2001 trust income was $1,091, an increase of $206 or 23.28% over
2000. This increase was mostly due to a higher level of estate business. Due to
its nature, estate business volume and the related income is not within
management's ability to predict and may fluctuate considerably from time to
time.
        Credit card income is composed of several types of fees and charges,
including transaction or interchange fees, merchant discount fees, and
over-limit charges. Given the highly competitive market, which limits the amount
of set charges, revenue increases result from growth in the number of merchant
accounts processed and increases in the number of customer credit and debit card
accounts.
        Credit card income for 2002 was $1,409, an increase of $182 or 14.83%
when compared to 2001, primarily due to increased volume. A portion of this
increase was due to reduced charges from the Company's credit card processor.
These charges are tiered and, having reached the next higher volume level, the
charges decreased accordingly. Increased income in this area was also in part
due to volume created by the addition of new merchants.
        Credit card fees for 2001 were $1,227, an increase of $215 or 21.25%
over 2000. This increase was due in part to the purchase of six branches, which
expanded the company's service area and also to the introduction of the
Company's debit card service to BTC's trade area.

Other Income
        Other income for the year ended December 31, 2002 was $500, an increase
of $170 or 51.52%. For 2002 other income contained several non-recurring items.
Included in this was nontaxable proceeds from a life insurance policy, which was
approximately $36 and a legal expense recovery of $14 from a prior year. Other
income also includes commissions from the sale of securities and insurance,
which totaled approximately $239 in 2002 and $99 in 2001.
        Other Income for 2001 was $330, up 127.6% over 2000. Of this increase,
approximately $99 was due to income derived from securities and insurance
commissions generated by the Company's non-bank subsidiary National Bankshares
Financial Services.
        Net realized gains and losses on securities was $346, an increase of
$342 over 2001. In the second and third quarter of 2002, the Company sold
investments at a total gain of approximately $335. The remainder of the net
increase was due to called securities and routine equity adjustments on certain
investments.
        Net realized gains for 2001 of $4 were primarily due to the write down
of the Company's investment in two limited liability companies established for
the sale of title insurance and insurance services, offset by the call of a
single bond in late 2001.

Noninterest Expense
        Noninterest expense for 2002 was $17,427, an increase of $474 or 2.80%
from 2001. The largest increase was in the salaries and employee benefits
category, which increased $827 or 10.23%. Net costs of other real estate owned
increased to $145 or 16.00%. These items are described in further detail below.
        Noninterest expense for 2001 was $16,953, an increase of $4,077 or
31.66%. In November of 2000, the Company purchased six AmSouth Bank branches.
Since the acquisition was in late 2000, the impact on 2000 was minimal, with the
full effect not felt until 2001. Categories such as salaries and benefits,
occupancy, intangibles and other operating expense all increased due to these
acquisitions. Noninterest expense for 2001 also increased with the purchase of a
branch in March of 2001.
        Salaries and employee benefits, as previously mentioned, increased at a
rate higher than average for the company for several reasons. In the first
quarter of 2001, the Company's BTC affiliate acquired a branch office in
Bluefield, Virginia. Salaries and employee benefits expense for this office were

                                       8
                                     <PAGE>

included for nine months in 2001, as opposed to twelve months for 2002. For the
first time since it became a participating employer in the National Bankshares,
Inc. the Company's BTC affiliate had a contribution expense of $120 to the ESOP
in 2002. Additional costs associated with employee health insurance, executive
compensation and other benefits also experienced increases.
        Occupancy expense was $1,692, a decrease from 2001 of $23. While this
category included new expenses in part associated with acquisition activity
previously mentioned, efforts to restrain expenditures produced an overall
decrease.
        In the second quarter of 2002, the Company's NBB affiliate announced its
intent to open a new branch office in Christiansburg, Virginia. The office is
expected to open in the second quarter of 2003.
        The Company's BTC affiliate consolidated two of its Bluefield, Virginia
offices into a single office during the fourth quarter of 2002.
        Occupancy expense for 2001 was $1,715, an increase of $400 or 30.42%
over the year 2000. Acquisition activity accounted for a majority of the
increase.
        Data processing expenses decreased by $247 or 18.39% when 2002 and 2001
are compared. This decline was primarily due to a reduction in maintenance costs
and the absence of conversion costs associated with the 2001 branch acquisition
that were previously discussed.
        In 2002 the Company was advised by its host computer hardware provider
that operating system support would be terminated by the end of 2004. Given the
importance of this area, management initiated a project to determine the
appropriate course of action. Management has elected to upgrade its host
computer system in 2003.
        Data processing expenses for 2001 were $1,343, an increase of $412 or
44.25% over 2000. The acquisition of six AmSouth Bank branches late in 2000 and
the purchase of one branch in March 2001 were the primary contributors to the
increase.
        Credit card processing expenses were up $32 for 2002. An increase in
volume offset by two nonrecurring items totaling $52 combined to produce the
increase. Of the two nonrecurring items, one represented a refund of certain
processing charges. The second, for $10, consisted of a signing bonus connected
with acquiring a new vendor.
        Credit card processing costs for 2001 were $1,004, a decrease of $21 or
2.05% from 2000. The cost decrease was primarily due to a combination of
factors. The previously mentioned branch acquisitions and the introduction of
debit card services at the company's BTC affiliate added to this expense. A
one-time loss experienced in 2000, offset the volume related increases to
produce a net decrease.
        Expenses related to other real estate owned were $145 for 2002. The
primary cause of this increase was a $75 write-down of certain properties. These
properties had been held for a period of more than ten years. While several
sales had taken place over the past few years, they could best be characterized
as somewhat slow. This effort, which was designed to accelerate sales of the
properties, was in large part successful.
        The net cost of other real estate owned includes expenses to acquire,
maintain and dispose of foreclosed properties. Net gains and losses on
disposition are also included. During 2001 these expenses were $125, an increase
of $42 or 50.60% over 2000.
        Other operating expenses were $3,592 for 2002, a decrease of $175 or
        4.65% from 2001 Other operating expenses for 2001 were $3,767, an
        increase of $834 or 28.44%. The majority of the
increase was due to acquisition activities, which as expected, increased various
categories such as telephone, courier service, and stationery and supplies.

Income Taxes
        Income tax expense increased in 2002 due to the increase in net income
and was offset to a degree by a higher level of investment in tax free
obligations.
        Tax exempt interest income continues to be the primary difference
between the "expected" and reported income tax expense. The Company's effective
tax rates for 2002, 2001 and 2000 were 23.07%, 23.80% and 27.43%, respectively.
        See Note 10 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.

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

                                       9
                                     <PAGE>


Balance Sheet
        Total assets for the Company at December 31, 2002 were $684,935. This
represents an increase of $40,312 or 6.25% when compared to 2001. Total daily
average assets were $655,783 for 2002, which compares to $635,692 for 2001.
Growth for 2002 was from the development of the Company's existing franchise as
there were no acquisitions in 2002.
        Total assets for the Company were $644,623 at December 31, 2001. This
represents an increase of $51,126 or 8.61% over 2000. This increase was
primarily due to the acquisition of a branch from First Union National Bank in
March 2001. The transaction included the acquisition of approximately $34,000 in
deposits and approximately $9,200 in loans.

Graph of "Total Assets"
($ in millions)

      2000              2001              2002
- ----------------   ---------------   ---------------
     $593.5            $644.6            $684.9

Loans
        Loans net of unearned income and deferred fees grew by $11,025 or 2.77%
during 2002. As can be seen by the balance sheet, the composition of the loan
portfolio shifted toward the commercial category during 2002. Loans to
individuals have experienced a moderate decline. 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 types of
loans. A prolonged and substantial run-off of these loans could have a
measurable adverse impact on the Company's net interest margin.
        Loans net of unearned income and deferred fees grew by $38,633 or 10.74%
in 2001. Of this amount, approximately $9,200 was due to the First Union
National Bank branch purchase referred to previously. Excluding purchased loans,
the Company experienced moderately strong growth in 2001.
        The Company engages in the origination and sale of mortgage loans in the
secondary market. In 2002 and 2001, the Company originated $36,915 and $28,247,
respectively, and sold $37,214 and $27,102, respectively, of mortgage loans.

Graph of "Net Loans"
($ in millions)

      2000              2001              2002
- ----------------   ---------------   ---------------
     $355.8            $394.0            $404.2

Securities
        Securities available for sale at December 31, 2002 were $119,734, an
increase of $31,067 or 35.04% over 2001. Securities held to maturity totaled
$99,560 at December 31, 2002. These securities decreased by $3,249 or 3.16% from
the totals at December 31, 2001.
        As can be seen in the consolidated statement of cash flows, $44,995 was
re-invested in securities available for sale and $16,953 in securities held to
maturity. Maturities for bonds purchased were generally longer term, with
maximization of yields being the primary objective.
        Securities available for sale at December 31, 2001 were $88,667. This
represents a decrease of $35,118 or 28.37% from December 31, 2000. Securities
held to maturity increased $70,250 or 215.76% when the two periods are compared.
The increased emphasis on held to maturity represented an effort to manage the
level of unrealized gains and losses, which had fluctuated substantially in the
prior three years. New volume was the result of the branch acquisitions
previously discussed.
        At December 31, 2002 and 2001, the Company had no investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.

Deposits
        Total deposits at December 31, 2002 were $608,271, an increase of
$31,653 or 5.49% from December 31, 2001. Noninterest-bearing demand deposits
grew by 3.18%, while interest-bearing demand deposits grew by 23.08%. Savings
deposits increased by 0.26%, with time deposits declining by 0.54%. Management
believes that the increase in interest-bearing demand deposits is in part due to
customers' expectations of higher interest rates in the near to intermediate
term, which has created a reluctance to commit to longer term deposit
instruments. If this trend continues, it would have the effect of making the
Company increasingly liability sensitive, which in a rising rate scenario could
negatively affect the net interest margin.
        At December 31, 2001, total deposits were $576,618, an increase of
$45,970 or 8.66% over December 31, 2000. Of this increase, approximately $34,000
was due to the purchase of the First Union National Bank branch referred to
previously.

                                       10
                                     <PAGE>


Derivatives and Market Risk Exposures
        The Company is not a party to derivative financial instruments with
off-balance sheet risks such as futures, forwards, swaps, and options. The
Company is a party to financial instruments with off-balance sheet risks such as
commitments to extend credit, standby letters of credit, and recourse
obligations in the normal course of business to meet the financing needs of its
customers. See note 14 of Notes to Consolidated Financial Statements for
additional information relating to financial instruments with off-balance sheet
risk. Management does not plan any future involvement in high risk derivative
products. The Company has investments in mortgage-backed securities, principally
GNMA's, with a fair value of approximately $26,199, which includes $2,006 of
structured notes. In addition, the Company has investments in
non-mortgage-backed structured notes with fair value of approximately $2,041.
See Note 3 of Notes to Consolidated Financial Statements for additional
information relating to securities.
        The Company's securities and loans are subject to credit and interest
rate risk, and its deposits are subject to interest rate risk. Management
considers credit risk when a loan is granted and monitors credit risk after the
loan is granted. The Company maintains an allowance for loan losses to absorb
losses in the collection of its loans. See Note 5 of Notes to Consolidated
Financial Statements for information relating to the allowance for loan losses.
See Note 15 of Notes to Consolidated Financial Statements for information
relating to concentrations of credit risk. The Company has an asset/liability
program to manage its interest rate risk. This program provides management with
information related to the rate sensitivity of certain assets and liabilities
and the effect of changing rates on profitability and capital accounts. While
this planning process is designed to protect the Company over the long-term, it
does not provide near-term protection from interest rate shocks, as interest
rate sensitive assets and liabilities do not, by their nature, move up or down
in tandem in response to changes in the overall rate environment. The Company's
profitability in the near term may be temporarily affected either positively by
a falling interest rate scenario or negatively by a period of rising rates. See
Note 16 of Notes to Consolidated Financial Statements for information relating
to fair value of financial instruments and comments concerning interest rate
sensitivity.

Liquidity
        Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demand or withdrawal of
existing deposits. Sources of liquidity include deposits, loan principal and
interest repayments, sales, calls and maturities of securities, and short-term
borrowings. The Company also has available a line of credit with the Federal
Home Loan Bank to provide for liquidity needs. The Company maintained an
adequate liquidity level during 2002 and 2001.
        Cash flows from operating activities for 2002 were $14,244. The
principal source of cash was net income.
        Net cash used in investment activities was $43,013. While the majority
of the called and maturing securities were re-invested in the securities
available for sale category, these funds may not be available in the future to
meet liquidity needs. Given the low interest rate environment currently being
experienced, a rising rate environment would tend to erode securities values
making their sale undesirable from a profitability perspective. A rising rate
scenario would further inhibit the activation of any call features. The company
experienced a similar situation in the last period of rising rates that occurred
in the 1999 and 2000 time periods. (See additional comments under "Interest Rate
Sensitivity").
        Cash provided by financing activities was $28,792 compared to $39,133 in
2001. The majority of the difference between the two years was in deposits
purchased, which totaled $29,862 in 2001 and none in 2002. Time deposits
decreased by $1,743 in 2002 and $38,490 in 2001. Other deposits increased
$33,396 in 2002. Comments made under "Deposits" apply.
        Net cash from operating activities for 2001 was $10,017, up from $9,691
in 2000.
        Cash used in investing activities was $47,987, down from $113,774 in
2000. Purchases of loans and federal funds sold declined substantially from
2000. This corresponded to a substantial increase in cash provided by financing
activities in 2000, which was due to acquisition activity.
        The Company's liquidity position remained satisfactory throughout 2001.
The acquisition of the First Union National Bank branch in March 2001 further
enhanced liquidity, which was already in satisfactory condition following the
late 2000 acquisition of the AmSouth branches. Securities purchases accounted
for the largest use of funds, with purchased deposits and an increase in the
other deposit category the primary sources.
        Management is not aware of any other commitments or events that will
result in or are reasonably likely to result in a material and adverse decrease
in liquidity.


Capital Resources
        Total shareholders' equity at December 31, 2002 was $73,101, an increase
of $7,840 or 12.01%. Total average capital to total average assets was 10.66%
for 2002, which compares to 9.98% in 2001. Of the increase, net income accounted
for $10,014, offset by dividends to shareholders in the amount of $3,406. Net
unrealized gains and losses from securities available for sale accounted for the

                                       11
                                     <PAGE>

remainder of the increase. There were no shares repurchased by the Company in
2002. Management was authorized to repurchase up to 50,000 shares in 2002 as
deemed appropriate considering market conditions. The dividend payout ratio for
2002 was 34.01% and 41.29% for 2001.
        Total stockholders' equity increased by $5,427 or 9.07% for the year
2001. Growth was the result of net income of $7,314, offset by dividends to
shareholders of $3,020. Stock in the amount of $8 was repurchased.
        Banks are required to apply percentages to various assets, including
off-balance sheet assets, to reflect their perceived risk. Regulatory defined
capital is divided by risk weighted assets in determining the banks' risk-based
capital ratios. No regulatory authorities have advised NBI, NBB or BTC of any
specific leverage ratios applicable to them. NBI, NBB and BTC's capital adequacy
ratios exceed regulatory requirements and provide added flexibility to take
advantage of business opportunities as they arise. See Note 11 of Notes to
Consolidated Financial Statements for additional information.

Recent Accounting Pronouncements
        See Note 1 of Notes to Consolidated Financial Statements for information
relating to recent accounting pronouncements.

Branch Acquisitions
        In a move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it would acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition involved the purchase of
approximately $34,000 in deposits and $9,200 in loans. The acquisition was
completed in the first quarter of 2001.

Common Stock Information and Dividends
        National Bankshares, Inc.'s common stock is traded on the Nasdaq
SmallCap Market under the symbol "NKSH". As of December 31, 2002, there were
1,024 record stockholders of Bankshares common stock. The following is a summary
of the market price per share and cash dividend per share of the common stock of
National Bankshares, Inc. for 2002 and 2001.

<TABLE>
<CAPTION>
Common Stock Market Prices
                                2002                            2001                   Dividends per share
                   --------------- --------------- --------------- --------------- --------------- ---------------
                        High            Low             High            Low             2002            2001
                   --------------- --------------- --------------- --------------- --------------- ---------------
<S>                 <C>                 <C>            <C>             <C>             <C>            <C>
First Quarter       $  23.00            20.03          20.25           18.00             ---            ---
Second Quarter         30.00            22.00          20.80           17.80            0.46           0.43
Third Quarter          28.45            26.00          24.60           20.00             ---            ---
Fourth Quarter         31.15            26.75          23.00           20.10            0.51           0.43

</TABLE>


        NBI's primary source of funds for dividend payments is dividends from
its subsidiaries, NBB and BTC. Bank regulatory agencies restrict dividend
payments of the subsidiaries, as more fully disclosed in Note 11 of Notes to
Consolidated Financial Statements.

                                       12
                                     <PAGE>



                          Independent Auditor's Report

To the Board of Directors and Stockholders
National Bankshares, Inc.
Blacksburg, Virginia

We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Bankshares,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years ended December 31, 2002, 2001 and
2000 in conformity with accounting principles generally accepted in the United
States of America.




Winchester, Virginia
January 23, 2003


                                       13
                                     <PAGE>


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

$ In thousands, except share data. December 31, 2002 and 2001.

                                                                                   2002        2001
                                                                                ----------- -----------
<S>                                                                             <C>            <C>
Assets                Cash and due from banks                                   $  12,316      12,293
                      Interest-bearing deposits                                    18,818      15,510
                      Federal funds sold                                            1,724       1,080
                      Securities available for sale, at fair value                119,734      88,667
                      Securities held to maturity (fair value approximates
                        $103,187  at December 31, 2002 and $103,234 at
                        December 31, 2001)                                         99,560     102,809
                      Mortgage loans held for sale                                    846       1,145
                      Loans:
                              Real estate construction loans                       22,294      19,573
                              Real estate mortgage loans                           82,193      77,339
                              Commercial and industrial loans                     209,368     189,764
                              Loans to individuals                                 96,762     113,413
                                                                                ----------- -----------
                                     Total loans                                  410,617     400,089
                              Less unearned income and deferred fees               (1,278)     (1,775)
                                                                                ----------- -----------
                              Loans, net of unearned income and deferred fees     409,339     398,314
                              Less allowance for loan losses                       (5,092)     (4,272)
                                                                                ----------- -----------
                                     Loans, net                                   404,247     394,042
                                                                                ----------- -----------
                      Premises and equipment, net                                   9,938      10,132
                      Accrued interest receivable                                   4,290       4,917
                      Other real estate owned                                         537         211
                      Intangible assets and goodwill, net                          10,912      11,866
                      Other assets                                                  2,013       1,951
                                                                                ----------- -----------
                                     Total assets                               $ 684,935     644,623
                                                                                =========== ===========
Liabilities and       Noninterest-bearing demand deposits                       $  74,032      71,751
Stockholders'         Interest-bearing demand deposits                            165,216     134,230
Equity                Savings deposits                                             48,956      48,827
                      Time deposits                                               320,067     321,810
                                                                                ----------- -----------
                                     Total deposits                               608,271     576,618
                                                                                ----------- -----------
                      Other borrowed funds                                            748         203
                      Accrued interest payable                                        700       1,101
                      Other liabilities                                             2,115       1,440
                                                                                ----------- -----------
                                     Total liabilities                            611,834     579,362
                                                                                ----------- -----------

                      Commitments and contingencies
                      Stockholders' equity:
                              Preferred stock, no par value, 5,000,000 shares
                                 authorized; none issued and outstanding              ---         ---
                              Common stock of $2.50 par value. Authorized
                                 5,000,000 shares; issued and outstanding,
                                 3,511,377 shares                                   8,778       8,778
                              Retained earnings                                    62,525      55,917
                              Accumulated other comprehensive income, net           1,798         566
                                                                                ----------- -----------
                                Total stockholders' equity                         73,101      65,261
                                                                                ----------- -----------
                                Total   liabilities  and   stockholders equity  $ 684,935     644,623
                                                                                =========== ===========

The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

                                       14
                                     <PAGE>



National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>

$ In thousands, except per share data. Years ended December 31, 2002, 2001 and
2000.

                                                                              2002          2001          2000
                                                                           ------------ ------------- -------------
<S>                                                                          <C>             <C>           <C>
Interest         Interest and fees on loans                                  $ 32,420        33,456        28,326
Income           Interest on federal funds sold                                    42           652           338
                 Interest on interest-bearing deposits                            276           577           689
                 Interest on securities - taxable                               5,490         7,501         6,760
                 Interest on securities - nontaxable                            4,519         3,341         2,245
                                                                           ------------ ------------- -------------
                         Total interest income                                 42,747        45,527        38,358
                                                                           ------------ ------------- -------------
Interest         Interest on time deposits of $100,000 or more                  3,470         4,605         3,455
Expense          Interest on other deposits                                    12,289        18,158        14,080
                 Interest on borrowed funds                                         5             8           628
                                                                           ------------ ------------- -------------
                         Total interest expense                                15,764        22,771        18,163
                                                                           ------------ ------------- -------------
                         Net interest income                                   26,983        22,756        20,195
                 Provision for loan losses                                      2,251         1,408         1,329
                                                                           ------------ ------------- -------------
                       Net interest income after provision for loan losses     24,732        21,348        18,866
                                                                           ------------ ------------- -------------

Noninterest      Service charges on deposit accounts                            2,229         2,246         1,683
Income           Other service charges and fees                                   260           306           348
                 Credit card fees                                               1,409         1,227         1,012
                 Trust income                                                     968         1,091           885
                 Other income                                                     500           330           145
                 Realized securities gains, net                                   346             4             9
                                                                           ------------ ------------- -------------
                         Total noninterest income                               5,712         5,204         4,082
                                                                           ------------ ------------- -------------

Noninterest      Salaries and employee benefits                                 8,912         8,085         6,360
Expense          Occupancy and furniture and fixtures                           1,692         1,715         1,315
                 Data processing and ATM                                        1,096         1,343           931
                 Credit card processing                                         1,036         1,004         1,025
                 Intangible assets and goodwill amortization                      954           914           229
                 Net costs of other real estate owned                             145           125            83
                 Other operating expenses                                       3,592         3,767         2,933
                                                                           ------------ ------------- -------------
                         Total noninterest expense                             17,427        16,953        12,876
                                                                           ------------ ------------- -------------
                 Income before income taxes                                    13,017         9,599        10,072
                 Income tax expense                                             3,003         2,285         2,763
                                                                           ------------ ------------- -------------
                         Net income                                          $ 10,014         7,314         7,309
                                                                           ============ ============= =============
                         Basic and diluted net income per share              $   2.85          2.08          2.08
                                                                           ============ ============= =============

The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

                                       15
                                     <PAGE>


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

$ In thousands, except per share data.
                                                                Accumulated Other
                                      Common      Retained     Comprehensive Income     Comprehensive
                                       Stock      Earnings             (Loss)               Income        Total
                                    -----------  -----------    --------------------   ---------------  -----------
<S>                                 <C>          <C>            <C>                    <C>              <C>
Balance at December 31, 1999           $ 8,792       47,384           (3,453)                              52,723
Net income                                 ---        7,309              ---                 7,309          7,309
Other comprehensive income:
  Unrealized holding gains on
    available for sale securities net
    of deferred taxes of $1,486            ---          ---              ---                 2,884            ---
  Less: reclassification adjustment,
    net of income taxes of $3              ---          ---              ---                    (6)           ---
                                                                                       ---------------
  Other comprehensive income, net of
    tax of $1,483                          ---          ---            2,878                 2,878          2,878
                                                                                       ---------------
Total comprehensive income net of
  tax of $4,246                            ---          ---              ---                10,187            ---
                                                                                       ===============
Common stock repurchased                   (12)         (77)             ---                                  (89)
Cash dividends ($0.85 per share)           ---       (2,987)             ---                               (2,987)
                                    -----------   -----------  --------------------                    ------------
- -------------------------------------------------------------------------------------------------------------------

Balance at Decemeber 31,2000           $ 8,780       51,629             (575)                              59,834
Net Income                                 ---        7,314              ---                 7,314          7,314
Other comprehensive income:
  Unrealized holding gains on
    available for sale securities net
    of deferred taxes of $588              ---          ---              ---                 1,144            ---
  Less: reclassification adjustment,
    net of income taxes of $1              ---          ---              ---                    (3)           ---
                                                                                       ---------------
  Other comprehensive income, net of
    tax of $587                            ---          ---            1,141                 1,141          1,141
                                                                                       ---------------
Total comprehensive income, net of
tax of $2,872                              ---          ---              ---                 8,455            ---
                                                                                       ===============
Common stock repurchased                    (2)          (6)             ---                                   (8)
Cash dividends ($0.86 per share)           ---       (3,020)             ---                               (3,020)
                                    -----------   -----------  --------------------                    ------------
- -------------------------------------------------------------------------------------------------------------------

Balance at December 31, 2001           $ 8,778       55,917              566                               65,261
Net income                                 ---       10,014              ---                10,014         10,014
Other comprehensive income:
  Unrealized holding gains on
    available for sale securities net
    of deferred, taxes of $948             ---          ---              ---                 1,841            ---
  Less: reclassification adjustment,
    net of income taxes of $118            ---          ---              ---                  (228)           ---
  Minimum pension liability
    adjustment, net of deferred taxes
    of $235                                ---          ---              ---                  (381)           ---
  Other comprehensive income, net of
    tax of $596                            ---          ---            1,232                 1,232          1,232
                                                                                       ---------------
Total comprehensive income                 ---          ---              ---                11,246            ---
                                                                                       ===============
Cash dividend ($0.97 per share)            ---       (3,406)             ---                               (3,406)
                                                  -----------                                          ------------
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002           $ 8,778       62,525            1,798                               73,101
                                    ===========   ===========  ====================                    ============

 The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

                                       16
                                     <PAGE>


National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands.  Years Ended December 31, 2002, 2001 and 2000.
<TABLE>
<CAPTION>
                                                                          2002        2001        2000
                                                                        ----------  ---------  ----------
<S>                                                                      <C>           <C>         <C>
Cash               Net income                                            $ 10,014      7,314       7,309
Flows              Adjustment to reconcile net income to net cash
from                 provided by operating activities:
Operating                Provision for loan losses                          2,251      1,408       1,329
Activities               (Benefit) from deferred income taxes                (551)      (166)       (253)
                         Depreciation of premises and equipment               977      1,106       1,015
                         Amortization of intangibles                          954        914         229
                         Amortization of premiums and accretion of
                           discounts, net                                     392        367         132
                         (Gains) losses on sale and calls of
                           securities available for sale, net                (331)        (4)          4
                         (Gains) on calls of securities held to
                           maturity, net                                      (15)       ---         (13)
                         Losses and writedowns on other real estate
                           owned                                               87         62          26
                         Originations of mortgage loans held for sale     (36,915)   (28,247)    (20,129)
                         Sales of mortgage loans held for sale             37,214     27,102      20,358
                         (Gains) losses on sale of fixed assets               (11)        (2)         (4)
                         Net change in:
                            Accured interest receivable                       627        132      (1,035)
                            Other assets                                      (34)       235        (258)
                            Accured interest payable                         (401)      (437)        887
                            Other liabilities                                 (14)       233          94
                                                                        ----------  ---------  ----------
                            Net cash provided by operating activities      14,244     10,017       9,691
                                                                        ----------  ---------  ----------

Cash               Net change in federal funds sold                          (644)    28,010     (26,290)
Flows              Net change in interest-bearing deposits                 (3,308)    (1,931)     (4,360)
from               Proceeds from repayments of mortgage-backed
Investing          securities available for sale                              813      3,482       1,558
Activities         Proceeds from sales of securities available for sale    11,042        ---         935
                   Proceeds from calls, maturities, and principal
                     repayments of securities available for sale            4,656     58,403       7,732
                   Proceeds from calls, maturities, and principal
                     repayments of securities held to maturity             20,017     24,160       3,192
                   Purchases of securities available for sale             (44,995)   (25,209)    (15,914)
                   Purchases of securities held to maturity               (16,953)   (94,602)    (12,117)
                   Purchases of loan participations                       (19,440)    (4,296)      2,759)
                   Collections of loan participations                       3,981      4,702       3,768
                   Loans purchased, including premium                         ---     (9,255)    (42,187)
                   Loan originations and principal collections, net         2,190    (31,740)    (24,869)
                   Proceeds from disposal of other real estate owned          255      1,095         271
                   Recoveries on loans charged off                            145        106          95
                   Additions to premises and equipment                       (805)      (921)     (2,839)
                   Proceeds from sale of premises and equipment                33          9          10
                                                                        ----------  ---------  ----------
                         Net cash used by investing activities            (43,013)   (47,987)   (113,774)
                                                                        ----------  ---------  ----------
Cash               Deposits acquired, net of premium                          ---     29,862      85,944
Flows              Net change in time deposits                             (1,743)   (38,460)     40,031
from               Net change in other deposits                            33,396     50,826     (10,807)
Financing          Net change in other borrowed funds                         545        (67)    (10,190)
Activities         Cash dividends paid                                     (3,406)    (3,020)     (2,987)
                   Common stock repurchased on                                ---         (8)        (89)
                                                                        ----------  ---------  ----------
                         Net cash provided by financing activities         28,792     39,133     101,902
                                                                        ----------  ---------  ----------
                   Net change in cash and due from banks                       23      1,163      (2,181)
                   Cash and due from banks at beginning of year            12,293     11,130      13,311
                                                                        ----------  ---------  ----------
                           Cash and due from banks at end of year        $ 12,316     12,293      11,130
                                                                        ==========  =========  ==========
Supplemental       Interest paid on deposits and borrowed funds          $ 16,165     23,208      17,276
Disclosures of     Income taxes paid                                        3,414      2,383       2,958
Cash Flow
Information

Supplemental       Loans charged against the allowance for loan losses      1,576      1,129         770
Disclosures        Loans transferred to other real estate owned               668        828         390
of Noncash         Unrealized gain on securities available for sale         2,444      1,728       4,361
Activities         Minimum pension liability adjustment                       689        ---         ---

The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>

                                       17
                                     <PAGE>


Notes to Consolidated Financial Statements

$ In thousands, except share data and per share data.

Note 1: Summary of Significant Accounting Policies
    The consolidated financial statements include the accounts 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 (NBFS), (the Company). All significant intercompany balances
and transactions have been eliminated in consolidation.
    The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. The following is a summary of the more
significant accounting policies.

    Cash and Cash Equivalents
        For purposes of the consolidated statements of cash flows, cash and cash
    equivalents include cash and due from banks.

    Securities
        Debt securities that management has the positive intent and ability to
    hold to maturity are classified as "held to maturity" and recorded at
    amortized cost. Securities not classified as held to maturity or trading,
    including equity securities with readily determinable fair values, are
    classified as "available for sale" and recorded at fair value, with
    unrealized gains and losses excluded from earnings and reported in other
    comprehensive income. The Company has no securities classified as trading
    securities at December 31, 2002 or 2001.
        Purchase premiums and discounts are recognized in interest income using
    the interest method over the terms of the securities. Declines in the fair
    value of held to maturity and available for sale securities below their cost
    that are deemed to be other than temporary are reflected in earnings as
    realized losses. Gains and losses on the sale of securities are recorded on
    the trade date and are determined using the specific identification method.

    Loans Held for Sale
        Loans originated and intended for sale in the secondary market are
    carried at the lower of cost or estimated fair value on an individual loan
    basis. Net unrealized losses, if any, are recognized through a valuation
    allowance by charges to income.

    Loans
        The Company, through its banking subsidiaries, grants mortgage,
    commercial, and consumer loans to customers. A substantial portion of the
    loan portfolio is represented by mortgage loans. The ability of the
    Company's debtors to honor their contracts is dependent upon the real estate
    and general economic conditions in the Company's market area.
        Loans that management has the intent and ability to hold for the
    foreseeable future, or until maturity or payoff, generally are reported at
    their outstanding unpaid principal balances adjusted for the allowance for
    loan losses and any deferred fees or costs on originated loans. Interest
    income is accrued on the unpaid principal balance. Loan origination fees,
    net of certain direct origination costs, are deferred and recognized as an
    adjustment of the related loan yield using the interest method.
        The accrual of interest on mortgage and commercial loans is discontinued
    at the time the loan is 90 days delinquent unless the credit is well-secured
    and in process of collection. Credit card loans and other personal loans are
    typically charged off no later than 180 days past due. In all cases, loans
    are placed on nonaccrual or chargedoff at an earlier date if collection of
    principal or interest is considered doubtful.
        All interest accrued but not collected for loans that are placed on
    nonaccrual or charged off is reversed against interest income. The interest
    on these loans is accounted for on the cash-basis or cost-recovery method
    until qualifying for return to accrual. Loans are returned to accrual status
    when all the principal and interest amounts contractually due are brought
    current and future payments are reasonably assured.

    Allowance for Loan Losses
        The allowance for loan losses is established as losses are estimated to
    have occurred through a provision for loan losses charged to earnings. Loan
    losses are charged against the allowance when management believes the
    uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
    any, are credited to the allowance.

                                       18
                                     <PAGE>

        The allowance for loan losses is evaluated on a regular basis by
    management and is based upon management's periodic review of the
    collectibility of the loans in light of historical experience; the nature,
    volume, and risk characteristics of the loan portfolio; adverse situations
    that may affect the borrower's ability to repay; estimated value of any
    underlying collateral; and prevailing economic conditions. This evaluation
    is inherently subjective as it requires estimates that are susceptible to
    significant revision as more information becomes available.
        A loan is considered impaired when, based on current information and
    events, it is probable that the Company will be unable to collect the
    scheduled payments of principal or interest when due according to the
    contractual terms of the loan agreement. Factors considered by management in
    determining impairment include payment status, collateral value, and the
    probability of collecting scheduled principal and interest payments when
    due. Loans that experience insignificant payment delays and payment
    shortfalls generally are not classified as impaired. Management determines
    the significance of payment delays and payment shortfalls on a case-by-case
    basis, taking into consideration all of the circumstances surrounding the
    loan and the borrower, including the length of the delay, the reasons for
    the delay, the borrower's prior payment record, and the amount of the
    shortfall in relation to the principal and interest owed. Impairment is
    measured on a loan by loan basis for commercial and construction loans by
    either the present value of expected future cash flows discounted at the
    loan's effective interest rate, the loan's obtainable market price, or the
    fair value of the collateral if the loan is collateral dependent.
        Large groups of smaller balance homogeneous loans are collectively
    evaluated for impairment. Accordingly, the Company does not separately
    identify individual consumer and residential loans for impairment
    disclosures.

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

    Other Real Estate
        Real estate acquired through, or in lieu of, foreclosure is held for
    sale and is initially recorded at fair value at the date of foreclosure,
    establishing a new cost basis. Subsequent to foreclosure, valuations are
    periodically performed by management and the assets are carried at the lower
    of carrying amount or fair value less cost to sell. Revenue and expenses
    from operations and changes in the valuation allowance are included in other
    operating expenses.


    Intangible Assets
        Included in other assets are deposit intangibles of $10,642 and $11,559
    at December 31, 2002 and 2001, respectively, and goodwill of $270 and $307
    at December 31, 2002 and 2001, respectively. Deposit intangibles are being
    amortized on a straight-line basis over a ten or fifteen-year period and
    goodwill is being amortized on a straight-line basis over a fifteen-year
    period.

    Stock-Based Compensation
        At December 31, 2002, the Company had a stock-based employee
    compensation plan which is described more fully in Note 9. The company
    accounts for this plan under the recognition and measurement principles of
    APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
    Interpretations. No stock-based employee compensation cost is reflected in
    net income, as all options granted under the plan had an exercise price
    equal to the market value of the underlying common stock on the date of
    grant. The following table illustrates the effect on net income and earnings
    per share if the company had applied the fair value recognition provisions
    of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
    stock-based employee compensation.

                                       19
                                     <PAGE>
<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                ----------------------------------------------
                                                    2002            2001            2000
(In thousands, except per share data)
<S>                                             <C>                <C>            <C>
Net income, as reported                         $ 10,014           $7,314         $7,309
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards.                                        (23)             (10)            (2)
                                                -------------- ---------------- --------------
Pro forma net income                            $  9,991           $7,304         $7,307
                                                ============== ================ ==============
Earnings per share:

   Basic-as reported                            $   2.85            $2.08          $2.08
                                                ============== ================ ==============
   Basic-pro forma                              $   2.85            $2.08          $2.08
                                                ============== ================ ==============
   Diluted-as reported                          $   2.85            $2.08          $2.08
                                                ============== ================ ==============
   Diluted-pro forma                            $   2.84            $2.08          $2.08
                                                ============== ================ ==============
</TABLE>

    Pension Plan
        The Company sponsors a defined benefit pension plan, which covers
    substantially all full-time officers and employees. The benefits are based
    upon length of service and a percentage of the employee's compensation
    during the final years of employment. Pension costs are computed based upon
    the provisions of SFAS No. 87. The Company contributes to the pension plan
    amounts deductible for federal income tax purposes.

    Income Taxes
        Deferred income tax assets and liabilities are determined using the
    balance sheet method. Under this method, the net deferred tax asset or
    liability is determined based on the tax effects of the temporary
    differences between the book and tax bases of the various balance sheet
    assets and liabilities and gives current recognition to changes in tax rates
    and laws.




    Trust Assets and Income
        Assets (other than cash deposits) held by the Trust Departments in a
    fiduciary or agency capacity for customers are not included in the
    consolidated financial statements since such items are not assets of the
    Company. Trust income is recognized on the accrual basis.

    Earnings Per Share
        Basic earnings per share represents income available to common
    stockholders divided by the weighted-average number of common shares
    outstanding during the period. Diluted earnings per share reflects
    additional common shares that would have been outstanding if dilutive
    potential common shares had been issued, as well as any adjustment to income
    that would result from the assumed issuance. Potential common shares that
    may be issued by the Company relate solely to outstanding stock options, and
    are determined using the treasury stock method.
        The following shows the weighted average number of shares used in
    computing earnings per share and the effect on the weighted average number
    of shares of dilutive potential common stock. Potential dilutive common
    stock had no effect on income available to common shareholders.
<TABLE>
<CAPTION>

                                                       2002               2001              2000
                                                ------------------ ------------------ -----------------
<S>                                             <C>                <C>               <C>
Average number of common shares outstanding            3,511,377          3,511,380         3,514,586
Effect of dilutive options                                 5,712              1,216               ---
                                                ------------------ ------------------ -----------------
Average number of common shares outstanding
  used  to calculate diluted earnings per share        3,517,089          3,512,596         3,514,586
                                                ================== ================== =================
</TABLE>

                                       20
                                     <PAGE>

        In 2002, 2001 and 2000, stock options representing 9,750, 4,125 and
    8,265 shares, respectively, were not included in the computation of diluted
    net income per share because to do so would have been anti-dilutive.

    Advertising
        The Company practices the policy of charging advertising costs to
    expenses as incurred.

    Use of Estimates
        In preparing consolidated financial statements in conformity with
    accounting principles generally accepted in the United States of America,
    management is required to make estimates and assumptions that affect the
    reported amounts of assets and liabilities as of the date of the balance
    sheet and reported amounts of revenues and expenses during the reporting
    period. Actual results could differ from those estimates. Material estimates
    that are particularly susceptible to significant change in the near term
    relate to the determination of the allowance for loan losses and the
    valuation of foreclosed real estate and deferred tax assets.
        Changing economic conditions, adverse economic prospects for borrowers,
    as well as regulatory agency action as a result of examination, could cause
    NBB and BTC to recognize additions to the allowance for loan losses and may
    also affect the valuation of real estate acquired in connection with
    foreclosures or in satisfaction of loans.

    Comprehensive Income
        Effective January 1, 2001, the Company changed its method of
    presentation concerning comprehensive income. Prior to 2001, comprehensive
    income was reflected as part of the consolidated statement of income.
    Comprehensive income is now presented as a separate component of the
    Company's consolidated statement of changes in stockholders' equity.

    Recent Accounting Pronouncements
        In December 2001, the American Institute of Certified Public Accountants
    ("AICPA") issued Statement of Position 01-6, Accounting by Certain Entities
    (Including Entities with Trade Receivables) That Lend to or Finance the
    Activities of Others, to reconcile and conform the accounting and financial
    reporting provisions established by various AICPA industry guides. This
    Statement is effective for annual and interim financial statements issued
    for fiscal years beginning after December 15, 2001, and did not have a
    material impact on the Corporation's consolidated financial statements.
        On March 13, 2002, the Financial Accounting Standard Board determined
    that commitments for the origination of mortgage loans that will be held for
    sale must be accounted for as derivatives instruments, effective for fiscal
    quarters beginning after April 10, 2002. The Company enters into commitments
    to originate loans whereby the interest rate on the loan is determined prior
    to funding. Such rate lock commitments on mortgage loans to be sold in the
    secondary market are considered derivatives. Accordingly, these commitments,
    including any fees received from the potential borrower, are recorded at
    fair value in derivative assets or liabilities, with changes in fair value
    recorded in the net gain or loss on sale of mortgage loans. Fair value is
    based on fees currently charged to enter into similar agreements, and for
    fixed-rate commitments fair value also takes into consideration the
    difference between current levels of interest rates and the committed rates.
    The cumulative effect of adopting Statement No. 133 for rate lock
    commitments as of December 31, 2002, was not material. The Corporation
    originally adopted Statement No. 133, Accounting for Derivative Instruments
    and Hedging Activities on January 1, 2001.
        In April 2002, the Financial Accounting Standards Board issued Statement
    145, Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement No.
    13, and Technical Corrections. The amendment to Statement 13 eliminates an
    inconsistency between the required accounting for sale-leaseback
    transactions and the required accounting for certain lease modifications
    that have economic effects that are similar to sale-leaseback transactions.
    This Statement also amends other existing authoritative pronouncements to
    make various technical corrections, clarify meanings, or describe their
    applicability under changed conditions. The provisions of this Statement
    related to the recission of Statement 4 shall be applied in fiscal years
    beginning after May 15, 2002. The provisions of this Statement related to
    Statement 13 are effective for transactions occurring after May 15, 2002,
    with early application encouraged.
        In June 2002, the Financial Accounting Standards Board issued Statement
    146, Accounting for Costs Associated with Exit or Disposal Activities. This
    Statement requires recognition of a liability, when incurred, for costs
    associated with an exit or disposal activity. The liability should be
    measured at fair value. The provisions of the Statement are effective for
    exit or disposal activities initiated after December 31, 2002.

                                       21
                                     <PAGE>

        The adoption of Statement No. 145 and 146 did not have a material impact
    on the Company's consolidated financial statements.
        Effective January 1, 2002, the Corporation adopted Financial Accounting
    Standards Board Statement No. 142, Goodwill and Other Intangible Assets.
    Accordingly, goodwill is no longer subject to amortization over its
    estimated useful life, but is subject to at least an annual assessment for
    impairment by applying a fair value based test. Additionally, Statement 142
    requires that acquired intangible assets (such as core deposit intangibles)
    be separately recognized if the benefit of the asset can be sold,
    transferred, licensed, rented, or exchanged, and amortized over its
    estimated useful life. Branch acquisition transactions were outside the
    scope of the Statement and therefore any intangible asset arising from such
    transactions remained subject to amortization over their estimated useful
    life.
        In October 2002, the Financial Accounting Standards Board issued
    Statement No. 147, Acquisitions of Certain Financial Institutions. The
    Statement amends previous interpretive guidance on the application of the
    purchase method of accounting to acquisitions of financial institutions, and
    requires the application of Statement No. 141, Business Combinations, and
    Statement No. 142 to branch acquisitions if such transactions meet the
    definition of a business combination. The provisions of the Statement do not
    apply to transactions between two or more mutual enterprises. In addition,
    the Statement amends Statement No. 144, Accounting for the Impairment of
    Long-Lived Assets, to include in its scope core deposit intangibles of
    financial institutions. Accordingly, such intangibles are subject to a
    recoverability test based on undiscounted cash flows, and to the impairment
    recognition and measurement provisions required for other long-lived assets
    held and used. The Company has determined that the acquisitions that
    generated the intangible assets and goodwill on the consolidated balance
    sheets in the amounts of $10,912 and $11,866 at December 31, 2002 and 2001,
    respectively, did not constitute the acquisition of a business, and
    therefore will continue to be amortized.
        The Financial Accounting Standards Board issued Statement No. 148,
    Accounting for Stock-Based Compensation - Transition and Disclosure, an
    amendment of Statement No. 123, in December 2002. The Statement amends
    Statement No. 123 to provide alternative methods of transition for a
    voluntary change to the fair value based method of accounting for
    stock-based employee compensation. In addition, the Statement amends the
    disclosure requirements of Statement 123 to require prominent disclosures in
    both annual and interim financial statements about the method of accounting
    for stock-based employee compensation and the effect of the method used on
    reported results. Finally, this Statement amends APB Opinion No. 28, Interim
    Financial Reporting, to require disclosure about the effects of stock
    options in interim financial information. The amendments to Statement No.
    123 are effective for financial statements for fiscal years ending December
    15, 2002. The amendment to APB No. 28 is effective for financial reports
    containing condensed financial statements for interim periods beginning
    after December 15, 2002. Early application is encouraged for both
    amendments. The Company continues to record stock options under APB Opinion
    No. 25, Accounting for Stock Issued to Employees, and has not adopted the
    alternative methods allowable under Statement No. 148.

Note 2: Restriction on Cash
    As members of the Federal Reserve System, the Company's subsidiary banks are
required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 2002 and 2001, the aggregate
amounts of daily average required balances approximated $2,092 and $2,458,
respectively.

                                       22
                                     <PAGE>


Note 3: Securities
    The amortized cost and fair value of securities available for sale, with
gross unrealized gains and losses, follows:

<TABLE>
<CAPTION>

                                                                 December 31, 2002

                                                                 Gross        Gross
Available for sale:                              Amortized     Unrealized   Unrealized
                                                   Costs         Gains        Losses     Fair Value
                                                ------------- ------------ ------------- -----------
<S>                                                  <C>       <C>           <C>           <C>
U.S. Treasury                                        $ 3,748          214         -----       3,962
U.S. Government agencies and corporations              7,038           94          ----       7,132
States and political subdivisions                     68,876        1,928           112      70,692
Mortgage-backed securities                            16,244          565          ----      16,809
Corporate debt securities                             16,993          485            67      17,411
Federal Home Loan Bank stock-restricted                1,655         ----          ----       1,655
Federal Reserve Bank stock-restricted                    209         ----          ----         209
Other securities                                       1,670          194          ----       1,864
                                                ------------- ------------ ------------- -----------
        Total securities available for sale         $116,433        3,480           179     119,734
                                                ============= ============ ============= ===========
</TABLE>

<TABLE>
<CAPTION>

                                                                December 31, 2001
                                                                  Gross        Gross
Available for sale:                              Amortized     Unrealized   Unrealized
                                                   Costs          Gains       Losses      Fair Value
                                                ------------- ------------ ------------- -----------
<S>                                                <C>          <C>           <C>         <C>
U.S. Treasury                                       $ 6,248         242           ---       6,490
U.S. Government agencies and corporations             5,340          43             8       5,375
States and political subdivisions                    51,030         605           446      51,189
Mortgage-backed securities                           13,178         306            69      13,415
Corporate debt securities                             9,066         143           116       9,093
Federal Home Loan Bank stock-restricted               1,411         ---           ---       1,411
Federal Reserve Bank stock-restricted                   209         ---           ---         209
Other securities                                      1,328         157           ---       1,485
                                                ------------- ------------ ------------- -----------
        Total securities available for sale         $87,810       1,496           639      88,667
                                                ============= ============ ============= ===========
</TABLE>

    The amortized cost and fair value of single maturity securities available
for sale at December 31, 2002, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2002.


                                        Amortized Costs     Fair Values
                                        ---------------   ---------------
Due in one year or less                       $  6,615           $ 6,727
Due after one year through five years           16,709            17,396
Due after five years through ten years          42,828            44,022
Due after ten years                             47,382            48,496
No maturity                                      2,899             3,093
                                        ---------------   ---------------
                                             $ 116,433         $ 119,734
                                        ===============   ===============

                                       23
                                     <PAGE>


    The amortized cost and fair value of securities held to maturity, with gross
unrealized gains and losses, follows:
<TABLE>
<CAPTION>

                                                                         December 31, 2002
                                                                   Gross
Held to maturity:                                  Amortized     Unrealized     Gross Unrealized
                                                     Costs         Gains             Losses           Fair Value
                                                ------------- ---------------- ------------------- -----------------
<S>                                              <C>               <C>              <C>                <C>
U.S. Government agencies and corporations        $    10,013              193                ----            10,206
States and political subdivisions                     52,610            1,693                  48            54,255
Mortgage-backed securities                             8,989              399                 ---             9,388
Corporate debt securities                             27,948            1,473                  83            29,338
                                                ------------- ---------------- ------------------- -----------------
        Total securities held to maturity        $    99,560            3,758                 131           103,187
                                                ============= ================ =================== =================
</TABLE>

<TABLE>
<CAPTION>
                                                                         December 31, 2001
                                                                   Gross
Held to maturity:                                  Amortized     Unrealized     Gross Unrealized
                                                     Costs         Gains             Losses           Fair Value
                                                ------------- ---------------- ------------------- -----------------
<S>                                               <C>            <C>              <C>                <C>
U.S. Government agencies and corporations         $   17,025             95                29             17,091
States and political subdivisions                     49,230            319               381             49,168
Mortgage-backed securities                            13,723            123               150             13,696
Corporate debt securities                             22,831            579               131             23,279
                                                ------------- ---------------- ------------------- -----------------
        Total securities held to maturity         $  102,809          1,116               691            103,234
                                                ============= ================ =================== =================
</TABLE>


    The amortized cost and fair value of single maturity securities held to
maturity at December 31, 2002, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2002.

                                            Amortized          Fair
                                              Costs           Values
                                         ---------------- -------------
Due in one year or less                          $ 4,153       $ 4,229
Due after one year through five years             27,442        28,572
Due after five years through ten years            39,250        40,840
Due after ten years                               28,715        29,546
                                                $ 99,560      $103,187
                                         ================ =============

    At December 31, 2002 and 2001, securities with a carrying value of $31,170
and $30,800, respectively, were pledged to secure trust deposits and for other
purposes as required or permitted by law.
    As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, NBB and BTC are required to maintain certain minimum investments in the
common stock of those entities. Required levels of investment are based upon NBB
and BTC's capital and a percentage of qualifying assets. In addition, NBB and
BTC are eligible to borrow from the FHLB with borrowings collateralized by
qualifying assets, primarily residential mortgage loans totaling approximately
$97,769, and NBB and BTC's capital stock investment in the FHLB.

                                       24
                                     <PAGE>


Note 4: Loans to Officers and Directors
    In the ordinary course of business, the Company, through its banking
subsidiaries, has granted loans to executive officers and directors of
Bankshares and its subsidiaries amounting to $5,505 at December 31, 2002 and
$5,782 at December 31, 2001. During the year ended December 31, 2002 total
principal additions were $4,769 and principal payments were $5,046.

Note 5: Allowance for Loan Losses
    An analysis of the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                                       Years ended December 31,
                                                    2002         2001         2000
                                                ------------ ------------ ------------
<S>                                                <C>            <C>          <C>
Balance at beginning of year                       $ 4,272        3,886        3,231
Provision for loan losses                            2,251        1,408        1,329
Loans charged-off                                   (1,571)      (1,128)        (770)
Recoveries of loans previously charged-off             140          106           96
                                                ------------ ------------ ------------
Balance at end of year                             $ 5,092        4,272        3,886
                                                ============ ============ ============
</TABLE>

The following is a summary of information pertaining to impaired loans:

                                                     December 31,
                                                   2002       2001
                                                 ---------- ----------
Impaired loans without a valuation allowance       $  46        275
Impaired loans with a valuation allowance             93         65
                                                 ---------- ----------
Total impaired loans                               $ 139        340
                                                 ========== ==========
Valuation allowance related to impaired loans
                                                   $  33         39
                                                 ========== ==========


                                                  Years ended December 31,
                                                2002        2001       2000
                                              ---------- ----------- ----------
Average investment in impaired loans             $ 397         671        657
Interest income recognized on impaired loans        11          57         43
Interest income recognized on a cash basis on
impaired loans                                     ---         ---        ---
                                              ---------- ----------- ----------

    No additional funds are committed to be advanced in connection with impaired
loans. Nonaccrual loans excluded from impaired loan disclosure under FASB 114 at
December 31, 2002 and 2001 were $166 and $59, respectively. If interest on these
loans had been accrued, such income would have been $16 and $4 respectively. No
nonaccrual loans were excluded from impaired loans, disclosed under FASB 114, at
December 31, 2000. Loans past due greater than 90 days which continue to accrue
interest totaled $977 and $980 at December 31, 2002 and 2001, respectively.

                                       25
                                     <PAGE>


Note 6: Premises and Equipment
    A summary of the cost and accumulated depreciation of premises and equipment
follows:

                                               December 31,
                                           2002           2001
                                       -------------- --------------
Premises                                   $ 11,193         11,051
Furniture and equipment                       7,772          7,435
Construction-in-progress                        254             13
                                       -------------- --------------
                                             19,219         18,499
Accumulated depreciation                     (9,281)        (8,367)
                                       -------------- --------------
                                           $  9,938         10,132
                                       ============== ==============


    Depreciation expense for the years ended December 2002, 2001 and 2000
amounted to $977, $1,106 and $1,015, respectively.
    The Company leases branch facilities under noncancellable operating leases.
The future minimum lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 2002 are as follows: $282
in 2003, $282 in 2004, $277 in 2005, $272 in 2006, $274 in 2007, and $1,269
thereafter.

Note 7: Deposits
    The aggregate amount of time deposits in denominations of $100 or more at
December 31, 2002 and 2001 was $89,261 and $77,214, respectively.
    At December 31, 2002 the scheduled maturities of time deposits are as
follows:

           -------------------------- ------------------------------
           For the year
                     2003                                 $ 208,990
                     2004                                    52,483
                     2005                                    21,140
                     2006                                     7,452
                     2007                                    29,441
                  Thereafter                                    561
                                      ------------------------------
                                                          $ 320,067
                                      ==============================

    At December 31, 2002 and 2001, overdraft demand deposits reclassified to
loans totaled $407 and $703, respectively.

Note 8: Employee Benefit Plans
    Pension Plans
        Effective January 1, 2002, the NBB plan was amended, restated, and
    renamed The National Bankshares, Inc. Retirement Income Plan. At the same
    time, the BTC plan was merged into it, and National Bankshares, Inc. and
    National Bankshares Financial Services, Inc. were added as participating
    employers in the pension plan. The merged NBI plan did not alter the
    eligibility standards of the bank plans, and substantially all employees are
    covered. The merged NBI plan benefit formula is still based upon the length
    of service of retired employees and a percentage of qualified W-2
    compensation during their final years of employment. The pension plan's
    assets are invested principally in U.S. Government agency obligations (21%),
    mutual funds (24%), corporate bonds (24%), equity securities (23%) and cash
    (8%). Information pertaining to activity in the plans is as follows:

                                       26
                                     <PAGE>
<TABLE>
<CAPTION>

                                                                  December 31,

                                                        2002         2001          2000
                                                    ------------- ------------ --------------
<S>                                                 <C>           <C>           <C>
Change in benefit obligation:
Benefit obligation at beginning of year               $   6,014       5,668          5,694
Service cost                                                353         422            354
Interest cost                                               429         422            425
Actuarial (gain) loss                                       593         (53)          (142)
(Gain) due to plan amendment                                (89)        ---            ---
Benefits paid                                              (222)       (445)          (663)
                                                    ------------- ------------ --------------
    Benefit obligation at end of year                     7,078       6,014          5,668
                                                    ============= ============ ==============
Change in plan assets:
Fair value of plan assets at beginning of year            4,650       4,692          4,877
Actual return on plan assets                               (239)         55            202
Employer contribution                                       315         348            276
Benefits paid                                              (222)       (445)          (663)
                                                    ------------- ------------ --------------
    Fair value of plan assets at end of year              4,504       4,650          4,692
                                                    ------------- ------------ --------------
Funded status:                                           (2,574)     (1,364)          (976)
Unrecognized net actuarial loss                           2,177         931            610
Unrecognized prior service cost                              73         171            186
Unrecognized transition asset                              (100)       (114)          (137)
                                                    ------------- ------------ --------------
    Net accrued pension cost (includes accrued)       $    (424)       (376)          (317)
                                                    ============= ============ ==============
</TABLE>



Amounts recognized in the consolidated balance sheets:
<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                                  2002            2001            2000
                                              -------------- --------------- ----------------
<S>                                           <C>                 <C>           <C>
Accrued benefit liabilities                      $  (1,113)          (376)         (317)
Intangible asset                                        73            ---           ---
Deferred tax asset                                     235            ---           ---
Accumulated other comprehensive income                 381            ---           ---
                                              -------------- --------------- ----------------
Net amount recognized                            $    (424)          (376)         (317)
                                              ============== =============== ================
</TABLE>


    The components of net periodic cost are as follows:
<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                          2002            2001            2000
                                      -------------- --------------- ---------------
<S>                                     <C>              <C>              <C>
Service cost                               $ 353            422              354
Interest cost                                429            422              424
Expected return on plan assets              (427)          (434)            (441)
Amortization of prior service cost             9             15               15
Recognized net actuarial loss                 12              5                8
Amortization of transition asset             (13)           (23)             (23)
                                      -------------- --------------- ---------------
      Net periodic benefit cost            $ 363            407              337
                                      ============== =============== ===============
</TABLE>

                                       27
                                     <PAGE>


    The actuarial assumptions are as follows:

                                                   2002      2001      2000
                                                 --------- --------- ---------
Weighted average assumptions as of December 31
Weighted average discount rate                      7.00%     7.50%     7.50%
Expected return on plan assets                      9.00%     9.00%     9.00%
Rate of compensation increase                       4.00%     5.00%     5.00%


    401(k) Plan
        The Company has a Retirement Accumulation Plan qualifying under IRS Code
    Section 401(k), in which Bankshares, NBB, BTC, and NSFS are participating
    employers. Eligible participants in the plan can contribute up to 100% of
    their total annual compensation to the plan. Employee contributions are
    matched by the employer based on a percentage of an employee's total annual
    compensation contributed to the plan. For the years ended December 31, 2002,
    2001 and 2000 NBB and BTC contributed $227, $196 and $156 respectively to
    the plan.

    Employee Stock Ownership Plan
        Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees of Bankshares and its subsidiaries who have one year of
service and who have attained the age of 21 prior to the plan's January 1 and
July 1 enrollment dates to own Bankshares common stock. Contributions to the
ESOP are determined annually by the Board of Directors. Contribution expense
amounted to $227, $179 and $162 for the years ended December 31, 2002, 2001 and
2000, respectively. Dividends on ESOP shares are charged to retained earnings.
As of December 31, 2002, the number of allocated shares held by the ESOP was
89,098 and the number of unallocated shares was 8,468. All shares held by the
ESOP are treated as outstanding in computing the Company's basic net income per
share. Upon reaching age 55 with ten years of plan participation, a vested
participant has the right to diversify 50% of his or her allocated ESOP shares
and Bankshares or the ESOP, with the agreement of the Trustee, would be
obligated to purchase those shares. The ESOP contains a put option which allows
a withdrawing participant to require Bankshares or the ESOP, if the plan
administrator agrees, to purchase his or her allocated shares if the shares are
not readily tradable on an established market at the time of its distribution.


Note 9: Stock Option Plan
    The Company has adopted the National Bankshares, Inc. 1999 Stock Option Plan
to give key employees of Bankshares and its subsidiaries an opportunity to
acquire shares of National Bankshares, Inc. common stock. The purpose of the
1999 Stock Option Plan is to promote the success of Bankshares and its
subsidiaries by providing an incentive to key employees that enhances the
identification of their personal interest with the long term financial success
of the Company and with growth in stockholder value. Under the 1999 Stock Option
Plan, up to 250,000 shares of Bankshares common stock may be granted. The 1999
Stock Option Plan is administered by the Stock Option Committee, which is made
up of all of the non-employee, outside directors of National Bankshares, Inc.
The Stock Option Committee may determine whether options are incentive stock
options or nonqualified stock options and may determine the other terms of
grants, such as number of shares, term, a vesting schedule, and the exercise
price. The 1999 Stock Option Plan limits the maximum term of any option granted
to ten years, states that options may be granted at not less than fair market
value on the date of the grant and contains certain other limitations on the
exercisability of incentive stock options. The options vest 25% after one year,
50% after two years, 75% after three years and 100% after four years. At the
discretion of the Stock Option Committee, options may be awarded with the
provision that they may be accelerated upon a change of control, merger,
consolidation, sale or dissolution of National Bankshares, Inc. At December 31,
2002, there were 198,500 additional shares available for grant under the Plan.


                                       28
                                     <PAGE>


A summary of the status of the Company's stock option plan is presented below:
<TABLE>
<CAPTION>
                                                 2002                       2001                    2000
                                                      Weighted                   Weighted               Weighted
                                                       Average                   Average                 Average
                                        Number of      Exercise     Number of    Exercise   Number of    Exercise
                                          Shares        Price        Shares       Price       Shares      Price
                                      -------------- ------------ ------------ ------------ ---------- -----------
<S>                                    <C>           <C>           <C>           <C>         <C>        <C>
Outstanding, beginning of year               34,000      $ 21.18       18,000    $   19.57      5,500     $ 22.00
Granted                                      17,500        29.65       16,000        23.00     12,500       18,50
Exercised                                       ---          ---          ---          ---        ---         ---
Forfeited                                       ---          ---          ---          ---        ---         ---
Expired                                         ---          ---          ---          ---        ---         ---
                                      -------------- ------------ ------------ ------------ ---------- -----------
Outstanding, end of year                     51,500      $ 24.06       34,000    $   21.18     18,000     $ 19.57
                                      ============== ============ ============ ============ ========== ===========
Options exercisable at year-end              14,375      $ 20.76        5,875    $   20.14      1,375     $ 22.00

Weighted-average fair value of
  options granted during the year                        $  5.97                 $    4.89                $  3.90
                                      -------------- ------------ ------------ ------------ ---------- -----------
</TABLE>


The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
                                             Years Ended December 31

                                 2002              2001              2000
                           ----------------- ----------------- -----------------
Dividend yield                        1.88%             1.86%             1.79%
Expected life                      10 years          10 years          10 years
Expected volatility                  22.14%            22.77%            19.52%
Risk-free interest rate               4.31%             4.48%             5.12%


    Information pertaining to options outstanding at December 31, 2002 is as
follows:
<TABLE>
<CAPTION>
                                               Options Outstanding                  Options Exercisable

     Remaining           Range of           Number        Weighted Average       Number        Weighted Average
 Contractual Life     Exercise Price      Outstanding      Exercise Price      Exercisable      Exercise Price
- ------------------ ----------------- ----------------- ------------------  ------------------ -----------------
<S> <C>                  <C>                 <C>              <C>            <C>                 <C>
    9.83 years           $ 29.65             17,500           $ 29.65               ---             $  ---
    8.83 years             23.00             16,000             23.00             4,000              23.00
    7.83 years             18.50             12,500             18.50             6,250              18.50
    6.83 years             22.00              5,500             22.00             4,125              22.00
- ------------------ ----------------- ----------------- ------------------  ------------------ -----------------
</TABLE>


Note 10: Income Taxes
    Allocation of income tax expense between current and deferred portions is as
follows:

                            Years ended December 31,
                                         2002        2001        2000
                                      ----------- ----------- -----------
Current                                 $ 3,554     $ 2,451       3,016
Deferred                                   (551)       (166)       (253)
                                      ----------- ----------- -----------
  Total income tax expense              $ 3,003     $ 2,285       2,763
                                      =========== =========== ===========


                                       29
                                     <PAGE>



    The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:

                                             Years ended December 31,
                                            2002        2001       2000
                                         ------------ ---------- ----------
Computed "expected" income tax expense      $ 4,426    $ 3,264     $3,424
Tax-exempt interest income                   (1,652)    (1,239)      (862)
Nondeductible interest expense                  191        220        168
Other, net                                       38         40        33
                                         ------------ ---------- ----------
        Reported income tax expense         $ 3,003     $2,285      2,763
                                         ============ ========== ==========

    The components of the net deferred tax asset, included in other assets, are
as follows:
<TABLE>
<CAPTION>
                                                                               December 31,
                                                                           2002           2001
                                                                      -------------- --------------
<S>                                                                     <C>            <C>
Deferred tax assets:
  Allowance for loan losses and unearned fee income                        $ 1,514        $ 1,155
  Valuation allowance on other real estate owned                                14             21
  Deferred compensation and other liabilities                                  349            119
  Deposit intangibles and goodwill                                              87             78
  Community development corporation related tax credit                           8             11
  Other                                                                        ---              9
                                                                             1,972          1,393
Deferred tax liabilities:
  Net unrealized losses on securities available for sale                    (1,122)          (292)
  Fixed assets                                                                 (71)           (71)
  Discount accretion on securities                                             (94)           (72)
  Accrued late fee income                                                      ---            (24)
  Other                                                                        (94)           (64)
                                                                      -------------- --------------
                                                                            (1,381)          (523)
                                                                      -------------- --------------
Net deferred tax asset                                                    $    591          $ 870
                                                                      ============== ==============
</TABLE>


        The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary at December 31, 2002 and 2001 due to the
fact that the realization of the entire gross deferred tax assets can be
supported by the amount of taxes paid during the carryback period available
under current tax laws.

Note 11: Restrictions on Dividends
    Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 2002, 2001,
and 2000, dividends received from subsidiary banks were $3,406, $3,761 and
$2,987, respectively.
    Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
regulations administered by federal and state bank regulatory agencies. Bank
regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
2002, retained net income, which was free of such restriction, amounted to
approximately $14,410.

                                       30
                                     <PAGE>


Note 12: Minimum Regulatory Capital Requirements
    The Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.
    Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002 and 2001, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
    As of December 31, 2002, the most recent notifications from the appropriate
regulatory authorities categorized the Company and the Banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, an institution must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since these notifications that management
believes have changed the Company's and the Banks' category. The Company's and
the Banks' actual capital amounts and ratios as of December 31, 2002 and 2001
are also presented in the following tables.

<TABLE>
<CAPTION>

                                                                                  To Be Well Capitalized
                                                                                       Under Prompt
                                                              Minimum Capital        Corrective Action
                                            Actual              Requirement             Provisions
                                     ---------------------- --------------------- ------------------------
                                       Amount      Ratio     Amount      Ratio      Amount       Ratio
                                     ----------- ---------- ---------- ---------- ----------- ------------
December 31, 2002
Total capital (to risk weighted assets)
<S>                                     <C>          <C>       <C>          <C>       <C>       <C>
Bankshares consolidated                 $65,525      13.8%     37,980       8.0%       N/A           N/A
NBB                                      36,370      13.5%     21,518       8.0%      26,897        10.0%
BTC                                      25,808      12.8%     16,183       8.0%      20,229        10.0%

Tier 1 capital (to risk weighted assets)

Bankshares consolidated                 $60,433      12.7%     18,990       4.0%       N/A           N/A
NBB                                      33,398      12.4%     10,759       4.0%      16,138         6.0%
BTC                                      23,688      11.7%      8,092       4.0%      12,138         6.0%

Tier 1 capital (to average assets)

Bankshares consolidated                 $60,433       9.0%     26,791       4.0%       N/A           N/A
NBB                                      33,398       8.9%     14,924       4.0%      18,655         5.0%
BTC                                      23,688       8.1%     11,632       4.0%      14,541         5.0%
                                     ----------- ---------- ---------- ---------- ----------- ------------
</TABLE>

                                       31
                                     <PAGE>

<TABLE>
<CAPTION>

                                                                                  To Be Well Capitalized
                                                                                       Under Prompt
                                                              Minimum Capital        Corrective Action
                                            Actual              Requirement             Provisions
                                     ---------------------- --------------------- ------------------------
                                       Amount      Ratio     Amount      Ratio      Amount       Ratio
                                     ----------- ---------- ---------- ---------- ----------- ------------
December 31, 2001
Total capital (to risk weighted assets)
<S>                                     <C>          <C>       <C>          <C>      <C>        <C>
Bankshares consolidated                 $57,231      12.9%     35,511       8.0%       N/A         N/A
NBB                                      31,383      12.5%     20,150       8.0%      25,188      10.0%
BTC                                      22,567      11.9%     15,105       8.0%      18,881      10.0%

Tier 1 capital (to risk weighted assets)

Bankshares consolidated                 $52,959      11.9%     17,756       4.0%       N/A         N/A
NBB                                      28,781      11.4%     10,075       4.0%      15,113       6.0%
BTC                                      20,897      11.1%      7,553       4.0%      11,329       6.0%

Tier 1 capital (to average assets)

Bankshares consolidated                 $52,959       8.4%     25,160       4.0%       N/A         N/A
NBB                                      28,781       8.3%     13,927       4.0%      17,409       5.0%
BTC                                      20,897       7.5%     11,079       4.0%      13,849       5.0%
                                     ----------- ---------- ---------- ---------- ----------- ------------
</TABLE>


Note 13: Condensed Financial Statements of Parent Company
    Financial information pertaining only to Bankshares (Parent) is as follows:


Consolidated Balance Sheets
                                                         December 31,
                                                      2002         2001
                                                -------------- -------------
Assets:
Cash due from subsidiaries                         $      40            76
Securities available for sale                          2,913         2,879
Investment in subsidiaries, at equity                 70,298        62,428
Refundable income taxes due from subsidiaries            ---            29
Other assets                                              59            29
                                                -------------- -------------
        Total assets                                  73,310        65,457
                                                ============== =============
Liabilities and Stockholders'Equity:
Other liabilities                                  $     209           196
Stockholders' equity                                  73,101        65,261
                                                -------------- -------------
    Total liabilities and stockholders' equity     $  73,310        65,457
                                                ============== =============

                                       32
                                     <PAGE>
<TABLE>
<CAPTION>

Condensed Statements of Income
                                                          Years Ended December 31,
                                                        2002         2001        2000
                                                    ------------- ----------- ------------
<S>                                                    <C>           <C>          <C>
Income:
Dividends from subsidiaries                           $  3,406       3,761        2,987
Interest on securities - taxable                            27          12           11
Interest on securities - nontaxable                         86          91           99
Other income                                               462         ---           40
Securities gains (losses)                                  319         (13)          (3)
                                                    ------------- ----------- ------------
                                                         4,300       3,851        3,134
Expenses:
Other expenses                                             798         207          157
                                                    ------------- ----------- ------------
Income before income tax benefit (expense) and
  equity in undistributed net income of subsidiaries     3,502       3,644        2,977
Applicable income tax benefit (expense)                     (1)         69           36
                                                    ------------- ----------- ------------
Income before equity in undistributed net income
  of subsidiaries                                        3,501       3,713        3,013
Equity in undistributed net income of
  subsidiaries                                           6,513       3,601        4,296
                                                    ------------- ----------- ------------
        Net income                                    $ 10,014       7,314        7,309
                                                    ============= =========== ============
</TABLE>


Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
                                                              Years ended December 31,
                                                          2002           2001          2000
                                                     --------------- ------------- --------------
<S>                                                    <C>            <C>              <C>
Cash Flows from Operating Activities:
Net income                                              $ 10,014       $ 7,314          7,309
Adjustments to reconcile net income to net cash
 provided by operating activities:
    Equity in undistributed net income of
    subsidiaries                                          (6,513)       (3,601)        (4,296)
    Amortization of premiums and accretion of
           discounts, net                                      5             5              6
      Securities (gains) losses                             (319)           13              3
      Net change in refundable income taxes
       due from subsidiaries                                 ---           (18)            48
      Net change in other assets                             (29)            3            (34)
      Net change in other liabilities                         12           102             10
                                                     --------------- ------------- --------------
      Net cash provided by operating activities            3,170         3,818          3,046
                                                     --------------- ------------- --------------
Cash Flows from Investing Activities:
Purchases of securities available for sale                  (730)         (777)          (529)
Proceeds from sales of securities available for sale         827           ---             30
Calls of securities available for sale                       103            25            562
                                                     --------------- ------------- --------------
      Net cash provided by (used in) investing
            activities                                       200          (752)            63
                                                     --------------- ------------- --------------

Cash Flows from Financing Activities:
Cash dividends paid                                       (3,406)       (3,020)        (2,987)
Common stock repurchase                                      ---            (8)           (89)
                                                     --------------- ------------- --------------
        Net cash used in financing activities             (3,406)       (3,028)        (3,076)
                                                     --------------- ------------- --------------
Net change in cash                                           (36)           38             33
Cash due from subsidiaries at beginning of year               76            38              5
                                                     --------------- ------------- --------------
Cash due from subsidiaries at end of year               $     40            76             38
                                                     =============== ============= ==============
</TABLE>

                                       33
                                     <PAGE>



Note 14: Financial Instruments with Off-Balance Sheet Risk
    The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
    The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The Company
may require collateral or other security to support the following financial
instruments with credit risk.
        At December 31, 2002, and 2001, financial instruments were outstanding
whose contract amounts represent credit risk:

                                                          December 31,
                                                     2002            2001
                                                --------------- ---------------
Financial instruments whose contract amounts
  represent credit risk:
    Commitments to extend credit                    $ 64,788          78,749
    Standby letters of credit                          7,153           6,045
    Mortgage loans sold with potential recourse       37,214          27,102


Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.
    Unfunded commitments under commercial lines of credit, revolving credit
lines, and overdraft protection agreements are commitments for possible future
extensions of credit. Some of these commitments are uncollateralized and do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.
    Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
    The Company originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. In 2002, the
Company originated $36,915 and sold $37,214 to investors, compared to $28,247
originated and $27,102 sold in 2001. Every contract with each investor contains
certain recourse language. In general, the Company may be required to repurchase
a previously sold mortgage loan if there is major noncompliance with defined
loan origination or documentation standards, including fraud, negligence or
material misstatement in the loan documents. Repurchase may also be required if
necessary governmental loan guarantees are canceled or never issued, or if an
investor is forced to buy back a loan after it has been resold as a part of a
loan pool. In addition, the Company may have an obligation to repurchase a loan
if the mortgagor has defaulted early in the loan term. This potential default
period is approximately twelve months after sale of a loan to the investor.
    The Company maintains cash accounts in other commercial banks. The amount on
deposit with correspondent institutions at December 31, 2002 that exceeded the
insurance limits of the Federal Deposit Insurance Corporation was $47.

Note 15: Concentrations of Credit Risk
    The Company does a general banking business, serving the commercial and
personal banking needs of its customers. NBB's market area, commonly referred to
as Virginia's New River Valley and Mountain Empire, consists of Montgomery,
Giles and Pulaski Counties and the cities of Radford and Galax, together with
portions of adjacent counties. BTC's market area adjoins NBB's and includes the
counties of Tazewell, Wythe, Smyth and Washington in Virginia, as well as
contiguous portions of McDowell and Mercer Counties in West Virginia.
Substantially all of NBB's and BTC's loans are made within their market area.

                                       34
                                     <PAGE>

The ultimate collectibility of the banks' loan portfolios and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely correlated with the economic trends within this area.
    At December 31, 2002 and 2001, approximately $201,639 and $176,667,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 49% and 44% of the loan portfolio at December 31,
2002 and 2001, respectively. Included in commercial real estate at December 31,
2002 and 2001 was approximately $96,674 and $100,640, respectively, in loans for
college housing and professional office buildings. Loans secured by residential
real estate were approximately $116,337 and $119,437 at December 31, 2002 and
2001, respectively. This represents approximately 28% and 30% of the loan
portfolio at December 31, 2002 and 2001 respectively. Loans secured by
automobiles were approximately $23,526 and $32,373 at December 31, 2002 and
2001, respectively. This represents approximately 6% of the loan portfolio at
December 31, 2002 and 8 % at December 31, 2001.
    The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property and with loan
amounts established based on certain percentage limitations of the property's
total stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual borrower
or project based on available financial information. Management considers the
concentration of credit risk to be minimal.

Note 16: Fair Value of Financial Instruments and Interest Rate Risk
    The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
fair discount rate and estimates of future cash flows. Accordingly, the fair
value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.
    Loan commitments on which the committed interest rate is less than the
current market rate are insignificant at December 31, 2002 and 2001.
    The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment. Conversely, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less
likely to do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest rate risk
by adjusting terms of new loans and deposits.
    The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:

    Cash and Due from Banks, Interest-Bearing Deposits, and Federal Funds Sold
        The carrying amounts approximate fair value.

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

    Loans Held for Sale
        Fair values of loans held for sale are based on commitments on hand from
    investors or prevailing market prices.

    Loans
        Fair values are estimated for portfolios of loans with similar financial
    characteristics. Loans are segregated by type such as commercial, real
    estate - commercial, real estate - construction, real estate - mortgage,
    credit card and other consumer loans. Each loan category is further

                                       35
                                     <PAGE>

    segmented into fixed and adjustable rate interest terms and by performing
    and nonperforming categories.
        The fair value of performing loans is calculated by discounting
    scheduled cash flows through the estimated maturity using estimated market
    discount rates that reflect the credit and interest rate risk inherent in
    the loan, as well as estimates for prepayments. The estimate of maturity is
    based on the Company's historical experience with repayments for loan
    classification, modified, as required, by an estimate of the effect of
    economic conditions on lending.
        Fair value for significant nonperforming loans is based on estimated
    cash flows which are discounted using a rate commensurate with the risk
    associated with the estimated cash flows. Assumptions regarding credit risk,
    cash flows and discount rates are judgmentally determined using available
    market information and specific borrower information.

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

    Accrued Interest
        The carrying amounts of accrued interest approximate fair value.

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

    Commitments to Extend Credit and Standby Letters of Credit
        The only amounts recorded for commitments to extend credit, standby
    letters of credit and financial guarantees written are the deferred fees
    arising from these unrecognized financial instruments. These deferred fees
    are not deemed significant at December 31, 2002 and 2001, and as such, the
    related fair values have not been estimated.


The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>

                                                            December 31,
                                                  2002                         2001
                                      ----------------------------- ----------------------------
                                        Carrying       Estimated      Carrying      Estimated
                                         Amount       Fair Value       Amount       Fair Value
                                      -------------- -------------- -------------- -------------
<S>                                      <C>              <C>            <C>         <C>
Financial assets:
    Cash and due from banks                $ 12,316         12,316        12,293        12,293
    Interest-bearing deposits                18,818         18,818        15,510        15,510
    Federal funds sold                        1,724          1,724         1,080         1,080
    Securities                              219,294        222,921       191,476       191,901
    Mortgage loans held for sale                846            846         1,145         1,145
    Loans, net                              404,247        406,844       394,042       457,965
    Accrued interest receivable               4,290          4,290         4,917         4,917

Financial liabilities:
    Deposits                              $ 608,271        611,448       576,618       577,612
    Other borrowed funds                        748            748           203           203
      Accrued interest payable                  700            700         1,101         1,101
</TABLE>




Note 17: Branch Acquisitions
        In a move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it would acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition involved the purchase of
approximately $34,000 in deposits and $9,200 in loans. The acquisition was
completed in the first quarter of 2001.

                                       36
                                     <PAGE>


Selected Quarterly Data (Unaudited)

    The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2002 and 2001:
<TABLE>
<CAPTION>

                                                              2002
                                                            --------
                                       First           Second           Third        Fourth
                                      Quarter          Quarter         Quarter       Quarter
                                   --------------- --------------- -------------- -------------
<S>                                     <C>               <C>            <C>           <C>
Income Statement Data:
Interest income                         $  10,594         10,645         10,760        10,748
Interest expense                            4,266          3,960          3,783         3,755
                                   --------------- --------------- -------------- -------------
Net interest income                         6,328          6,685          6,977         6,993
Provision for loan losses                     646            546            519           540
Noninterest income                          1,369          1,546          1,482         1,315
Noninterest expense                         4,389          4,348          4,380         4,310
Income taxes                                  558            790            848           807
                                   --------------- --------------- -------------- -------------
    Net income                          $   2,104          2,547          2,712         2,651
                                   =============== =============== ============== =============

Per Share Data:
Basic net income per share              $    0.60           0.72           0.78          0.75
Cash dividends per share                     ---            0.46            ---          0.51
Book value per share                    $   19.20          19.79          20.80         20.82

Selected Ratios:
Return on average assets                     1.33%          1.58%          1.65%         1.56%
Return on average equity                    12.90%         14.92%         15.30%        14.54%
Average equity to average assets            10.47%         10.53%         10.63%        10.66%

</TABLE>

<TABLE>
<CAPTION>
                                                              2001
                                                            --------
                                       First           Second         Third         Fourth
                                      Quarter          Quarter       Quarter        Quarter
                                   --------------- --------------- -------------- -------------
<S>                                     <C>                <C>            <C>           <C>
Income Statement Data:
Interest income                         $  11,381          11,682         11,446        11,018
Interest expense                            5,998           6,185          5,695         4,893
                                   --------------- --------------- -------------- -------------
Net interest income                         5,383           5,497          5,751         6,125
Provision for loan losses                     332             332            377           367
Noninterest income                          1,195           1,296          1,312         1,401
Noninterest expense                         4,061           4,285          4,176         4,431
Income taxes                                  569             495            600           621
                                   --------------- --------------- -------------- -------------
    Net income                          $   1,616           1,681          1,910         2,107
                                   =============== =============== ============== =============

Per Share Data:
Basic net income per share             $   0.46              0.48           0.54          0.60
Cash dividends per share                    ---              0.43            ---          0.43
Book value per share                   $  17.91             17.94          18.70         18.59

Selected Ratios:
Return on average assets                   1.06%             1.04%          1.18%         1.30%
Return on average equity                  10.54%            10.83%         11.84%        12.69%
Average equity to average assets          10.09%             9.63%          9.94%         9.97%
</TABLE>


                                       37
                                     <PAGE>


Board of Directors

National Bankshares, Inc. Board of Directors

Picture of "National Bankshares Board of Directors"

From left: James G. Rakes,  Chairman of the Board,  President,  Chief Executive
Officer,  National  Bankshares, Inc., President and Chief Executive Officer,
The National Bank;  President and Treasurer,  National Bankshares Financial
Services,  Inc.; L. Allen Bowman,  Vice-Chairman of the Board,  Retired;
William T. Perry,  Retired; Jeffery R. Stewart,  Educational Consultant; Paul A.
Duncan, President,  Holiday Motor Corp.; James A. Deskins, Sr., Retired; James
M. Shuler,  Delegate,  Virginia House of Representatives;  Alonzo A. Crouse,
Executive Vice President,  Secretary,  Bank of Tazewell County;  Cameron L.
Forrester,  President and Chief Executive  Officer Executive Officer, Bank of
Tazewell County.


The National Bank Board of Directors

Picture of "National Bank Board of Directors"

From left: Jeffery R. Stewart,  Chairman of the Board, Educational Consultant;
L. Allen Bowman,  Vice-Chairman of the Board,  Retired; Paul A. Duncan,
President,  Holiday Motor Corp.; James G. Rakes,  Chairman,  President and Chief
Executive Officer,  National  Bankshares,  Inc.,  President and Chief Executive
Officer, The National Bank;  President and Treasurer,  National  Bankshares
Financial  Services,  Inc.;  James M. Shuler,  Delegate, Virginia House of
Representatives;  J. Lewis Webb, Jr., Dentist;  Ellen G. Burnop,  Co-Owner,
New River Office Supply; F. Brad Denardo, Executive Vice President/Chief
Operating Officer, The National Bank.

                                       38
                                     <PAGE>

Bank of Tazewell County Board of Directors

Picture of "Bank of Tazewell County Board of Directors

Upper row,  from left:  William T. Perry,  Chairman of the Board,  Retired;
E.P.  Greever,  Retired;  James G. Rakes,  Chairman,  President  and Chief
Executive  Officer,  National  Bankshares,  Inc.,  President and Chief
Executive Officer,  The National Bank; President and Treasurer,  National
Bankshares Financial Services,  Inc.; Jack Harry, President,  Harry's
Enterprises,  Inc.; James G. Gillespie, Jr., President, Jim Sam Gillespie Farm.
Lower row, from left: Cameron L. Forrester,  President and Chief Executive
Officer Executive  Officer,  Bank of Tazewell County;  William H. VanDyke,  Vice
President,  Secretary,  Bank of Tazewell County;  Charles E. Green, III,
Financial Planner, AXA Advisors, L.L.C.


The National Bank Adivisory Boards:

Montgomery County Advisory Board
Dan A. Dodson, W. Clinton Graves,  Mary G. Miller,  James J. Owens,  Robert L.
Pack, Arlene A. Saari,  James C. Stewart, T. Cooper Via

Giles County Adivsory Board
Paul B.  Collins,  John H. Givens,  Jr.,  Robert C.  McCracken,  Ross E. Martin,
Kenneth L. Rakes,  Scarlet B. Ratcliffe, Morris D. Reece, H.M. Scanland, Jr.

Galax Advisory Board
William T. Green, Sr., Jerry R. Mink, Kathy J. Price, James A. Williams, Jr.,
David F. Wilson

Radford/Pulaski County Advisory Board
William K. Cunningham, Gary C. Elander, Jack M. Lewis, Jack D. Nunley,
Laura B. Turk

Bank Of Tazewell County Advisory Boards:

Bluefield Advisory Board
Michael E. Dye, William H. King, Constance M. Saunders

Richlands Advisory Board
Steven R. Davis, Marvin D. Harman, Peter M. Mulkey

Interstate Advisory Board
David P. Carpenter,  Andrew J. Hargroves,  Keith A. Hungate,  A. Susan Keen,
David S. Saliba,  Steve A. Lester, II, Jimmy A. Stewart


                                       39
                                     <PAGE>


Corporate Information

National Bankshares, Inc. Executive Officers

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

J. Robert Buchanan                                        Cameron L. Forrester
Treasurer                                                 Corporate Officer

Marilyn B. Buhyoff
Secretary and Counsel

Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 8, 2003 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.

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

Financial Information
Investors and analysts seeking financial information about National Bankshares,
Inc. should contact:

     James G. Rakes
     Chairman, President and Chief Executive Officer
     (540) 951-6300 or (800) 552-4123
     jrakes@nbbank.com

Or   J. Robert Buchanan
     Treasurer
     (540) 951-6300 or (800) 552-4123
     bbuchanan@nbbank.com

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

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

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

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

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

Corpporate Office
        National Bankshares, Inc.
        101 Hubbard Street
        Blacksburg, Virginia 24060
        P.O. Box 90002 Blacksburg, Virginia 24062-9002
        www.nationalbankshares.com (540) 951-6300



                                       40



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>ex21.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
                                                           Exhibit 21 (i)

                                 SUBSIDIARIES OF
                            NATIONAL BANKSHARES, INC.

1.   The National Bank of Blacksburg a national banking association, with
     headquarters in Blacksburg, Virginia

2.   Bank of Tazewell County Incorporated in Virginia

3.   National Bankshares Financial Services, Inc. Incorporated in Virginia d/b/a
     National Bankshares Investment Services d/b/a National Bankshares Insurance
     Services

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>ex23.txt
<DESCRIPTION>CONSENT OF EXTERNAL AUDITORS
<TEXT>
                                                                      Exhibit 23




                          INDEPENDENT AUDITOR'S CONSENT




    We consent to the incorporation by reference in Registration Statement No.
    333-79979 of National Bankshares, Inc. on Form S-8 of our report, dated
    January 23, 2003, relating to the consolidated balance sheets of National
    Bankshares, Inc and subsidiaries as of December 31, 2002 and 2001, and the
    related consolidated statements of income, changes in stockholders' equity
    and cash flows for the years ended December 31, 2002, 2001 and 2000
    appearing in this Annual Report on Form 10-K of National Bankshares, Inc.
    for the year ended December 31, 2002.


    /s/ Yount, Hyde & Barbour, P.C.

    Winchester, Virginia
    March 31, 2003

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>6
<FILENAME>ex99b.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-K of National Bankshares, Inc. for the
year ended December 31, 2002, I, J. Robert Buchanan, Treasurer (Chief Financial
Officer) of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge and belief, that:

(1) such Form 10-K for the year ended December 31, 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-K for the year ended
December 31, 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
(Chief Financial Officer)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>7
<FILENAME>ex99a.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-K of National Bankshares, Inc. for the
year ended December 31, 2002, I, James G. Rakes, President and Chief Executive
Officer of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge and belief, that:

(1) such Form 10-K for the year ended December 31, 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-K for the year ended
December 31, 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-10
<SEQUENCE>8
<FILENAME>ex10denardo.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT DENARDO
<TEXT>
                           CHANGE IN CONTROL AGREEMENT

        THIS CHANGE IN CONTROL AGREEMENT (the "Agreement") is entered into as of
the 8th day of January, 2003 (the "Effective Date"), by and between National
Bankshares, Inc. ("NBI") and F. Brad Denardo ("Employee").

                              W I T N E S S E T H:

        WHEREAS, Employee heretofore has been employed as Corporate Officer of
NBI and Executive Vice President and Chief Operating Officer of its wholly owned
subsidiary, the National Bank of Blacksburg (the "Employer"), and in such
position he or she has provided leadership and guidance in the growth and
development of the business of NBI and its subsidiaries; and,

        WHEREAS, Employee's experience and knowledge of Employer's operations,
customers and affairs is a benefit to the continuation and growth of Employer's
business; and, for that reason, NBI desires to retain Employee's services as an
employee of the Employer; and,

        WHEREAS, as an inducement to Employee's continued employment, NBI has
agreed to provide for certain payments to Employee in the event of a termination
of Employee's employment with the Employer under certain circumstances in
conjunction with a change in control of NBI, and, to set forth the terms and
conditions of that arrangement, NBI and Employee desire to enter into this
Agreement.

        NOW, THEREFORE, in consideration of the premises and mutual promises,
covenants and conditions hereinafter set forth, and for other good and valuable
considerations, the receipt and sufficiency of which hereby are acknowledged,
NBI and Employee hereby agree as follows:

        1. Effective Date of Agreement. This Agreement shall be effective on the
Effective Date set out above and shall remain in effect until terminated as
provided herein.

        2. Payment in Certain Events. If at the effective time of a "Change in
Control" (as defined below) or any time within two years and 60 days following a
Change in Control (A) Employer terminates Employee's employment other than for
"Cause" (as defined below), or, (B) a "Termination Event" (as defined below)
occurs and, thereafter, Employee voluntarily terminates his or her own
employment with Employer in the manner described below, then (subject to the
limitations set forth herein) Employee shall be entitled to receive from NBI,
and NBI shall be obligated to pay or cause to be paid to Employee, an amount
equal to two times the Employee's average annual compensation includable in the

                                       58
                                     <PAGE>


Employee'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. If Employee's employment is terminated by Employer Without Cause (as
defined below) prior to the effective time of a Change in Control but following
the date on which NBI's board of directors takes action to approve an agreement
(including any definitive agreement or an agreement in principle) relating to a
Change in Control, then for purposes of this Agreement, such termination of
employment shall be deemed to occur at the effective time of the Change in
Control. Otherwise, if Employee's employment is terminated prior to the
effective time of a Change in Control, Employee shall have no rights hereunder.
Amounts payable under this Section 2 shall be paid, at Employee's option, either
in (a) a lump sum within 45 days following the Termination Date (as defined
below) or (b) up to six (6) equal monthly installments without interest which
shall commence on the 45th day following the Termination Date and on the same
day of each consecutive month thereafter, until fully paid.

        3. Definitions. For purposes of this Agreement:

               (A) a "Change in Control" shall be deemed to have occurred and be
effective at the time:

                      (i) of 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 NBI 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:

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

                             (b) any acquisition by NBI;

                             (c) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by NBI or any corporation controlled
by NBI; or

                             (d) any acquisition pursuant to a reorganization,
merger or consolidation by any corporation owned or proposed to be owned,
directly or indirectly, by NBI's shareholders if NBI's 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

                                       59
                                     <PAGE>


                      (ii) when individuals who, as of the inception of this
Agreement, constitute the board of directors of NBI (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 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 NBI board of directors; or

                                 (iii) NBI consummates,

                             (a) a merger, statutory share exchange, or
consolidation of NBI with any other corporation, except as provided in
Subsection 3(A)(i)(d), or

                             (b) the sale or other disposition of all or
substantially all of the assets of NBI.

               (B) All references to "NBI" shall include any "Successor" to NBI
which shall have assumed and become liable for NBI's obligations hereunder
(whether such assumption is by agreement, operation of law or otherwise).
"Successor" refers to any person or entity (corporate or otherwise) into which
NBI (or any such Successor) shall be merged or consolidated or to which all or
substantially all of NBI's (or any such Successor's) assets shall be transferred
in any manner.

               (C) For purposes of this Agreement, a "Termination Event" shall
be deemed to have occurred if, within two years and 60 days following a Change
in Control Employee terminates his or her employment with Employer for Good
Reason (as defined below).

               (D) "Without Cause" shall mean the termination of Employee's
employment which does not occur by virtue of Employee's death, Retirement or
pursuant to a Determination of Long Term Incapacity, or by Employer With Cause
or by Employee for Good Reason or for Other than Good Reason;

               (E) "Cause" or "with Cause" shall mean:

                      (i) continual or deliberate neglect by Employee in the
performance of his material duties and responsibilities or the Employee's
willful failure to follow reasonable instructions or policies of Employer after

                                       60
                                     <PAGE>


being notified of such failure and being given a reasonable opportunity and
period (as determined by Employer) to remedy such failure;

                                 (ii) with respect to Employee, 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;

                      (iii) any breach or violation by Employee in any material
respect of any code or standard of behavior generally applicable to employees of
Employer, after being advised in writing of such breach or violation and being
given a reasonable opportunity and period (as determined by Employer) to remedy
such breach or violation;

                      (iv) dishonesty of Employee in any aspect of his or her
employment, or breach of a fiduciary duty to Employer or to Employer's parent or
any of its subsidiaries or affiliates;

                      (v) the willful engaging by Employee in conduct that is
reasonably likely to result, in the good faith judgment of Employer, in material
injury to Employer or Employer's parent, or any of its subsidiaries or
affiliates, monetarily or otherwise;

                      (vi) the violation by Employee of any applicable federal
or state law, or any applicable rule, regulation, order or statement of policy
promulgated by any governmental agency or authority having jurisdiction over
Employer, its parent or any of its affiliates or subsidiaries (a "Regulatory
Authority," including without limitation the Federal Deposit Insurance
Corporation, the Virginia Bureau of Financial Institutions, Office of the
Comptroller of the Currency, the Federal Reserve Board, the Securities and
Exchange Commission or any other regulatory agency), which results from
Employee's negligence, willful misconduct or intentional disregard of such law,
rule, regulation, order or policy statement and results in any substantial
damage, monetary or otherwise, to Employer, its parent or any of its affiliates
or subsidiaries or to their reputation;

                      (vii) the conviction of Employee of any felony or any
criminal offense involving dishonesty or breach of trust, or the occurrence of
any event described in Section 19 of the Federal Deposit Insurance Act or any
other event or circumstance which disqualifies Employee from serving as an
employee or executive officer of, or a party affiliated with, Employer, its
parent or any of its affiliates or subsidiaries; or, in the event Employee
becomes unacceptableto, or is removed, suspended or prohibited from
participating in the conduct of the affairs of Employer, its parent or any of
its affiliates or subsidiaries (or if proceedings for that purpose are
commenced) by, any Regulatory Authority; or

                                       61
                                     <PAGE>

        (viii) the exclusion of Employee by the carrier or underwriter from
coverage under Employer's then current "blanket bond" or other fidelity bond or
insurance policy covering its or their directors, officers or employees, or the
occurrence of any event which Employer believes, in good faith, will result in
Employee being excluded from such coverage, or having coverage limited as to
Employee as compared to other covered officers or employees, pursuant to the
terms and conditions of such "blanket bond" or other fidelity bond or insurance
policy.

               (F) "Good Reason" shall mean the following occurrences after the
effective time of a Change in Control:

                      (i) the continued assignment to the Employee of duties
inconsistent with the Employee's position, authority, duties or responsibilities
immediately prior to the Change in Control;

                      (ii) a substantial reduction in the status of the
Employee, 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 Employer
promptly after receipt of notice thereof given by the Employee;

                      (iii) the relocation of Employee to a principal place of
employment located more than 50 miles from Employee's principal place of
employment immediately preceding the Change in Control, without Employee's
express written consent to such relocation;

                      (iv) any failure by a Successor expressly to assume all of
NBI's liabilities, duties and obligations hereunder;

                      (v) a reduction in the Employee's annual base salary rate
below the annual rate in effect immediately preceding the effective time of the
Change in Control or as the same shall have been increased from time to time
following such effective time;

                      (vi) a reduction in the level, scope or coverage of
Employee's life
insurance, medical or hospitalization insurance, disability insurance or similar
plans or benefits (including any retirement plan) from that being provided by
Employer to Employee immediately preceding the effective time of the Change in
Control or any such insurance, plans or benefits are eliminated without being
replaced with substantially similar plans or benefits, unless such reduction or
elimination applies proportionately to all salaried employees of Employer who
participated in such plans or benefits immediately prior to such Change in
Control; or

                                       62
                                     <PAGE>


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

                                Any good faith (meaning honesty-in-fact)
determination of Good Reason, based on one or more of the foregoing, made by the
Employee shall be conclusive.

               (G) "Other than Good Reason" shall mean any termination by the
Employee which is not for Good Reason or Retirement shall be deemed a
termination for Other than Good Reason.

               (H) "Retirement" shall mean the Employee's retirement on or after
the Employee's normal retirement date under the terms of the National Bankshares
Retirement Income Plan (or any successor or substitute plan or plans of NBI).

               (I) "Determination of Long Term Incapacity" shall mean a good
faith determination by Employer that, as a result of mental or physical illness
or injury the Employee has failed to perform his assigned duties with Employer
on a full time basis for a period exceeding twelve (12) consecutive months.

               (J) "Termination Date" means the effective date as of which the
Employee's employment with Employer is terminated, giving rise to a payment
obligation under Section 2.

        4. Possible Reduction in Payment and Benefits. Following any Change in
Control, to the extent that any amount of pay or benefits provided under to
Employee under this Agreement would cause Employee 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
Employee under other NBI or Employer 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. Employee 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.

        5. Legal Fees and Costs. Except as otherwise provided herein, NBI will
pay or reimburse Employee for all costs and expenses, including without
limitation court costs and reasonable attorneys' fees and expert witness fees
and expenses, incurred by Employee in seeking to obtain or enforce by legal
proceeding any right or benefit provided by this Agreement, in each case
provided Employee's claim is substantially upheld by a court of competent
jurisdiction.

                                       63
                                     <PAGE>


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

        7. Regulatory Requirements. Notwithstanding anything contained in this
Agreement to the contrary, it is understood and agreed that NBI (or any of its
Successors) shall not be required to make any payment or take any action under
this Agreement if:

               (A) NBI or Employer is declared by any Regulatory Authority to be
insolvent, in default or operating in an unsafe or unsound manner, or if

               (B) in the opinion of counsel to NBI or Employer such payment or
action (i) would be prohibited by or would violate any provision of state or
federal law applicable to NBI or Employer, including without limitation the
Federal Deposit Insurance Act, as now in effect or hereafter amended, (ii) would
be prohibited by or would violate any applicable rules, regulations, orders or
formal statements of policy, whether now existing or hereafter promulgated, of
any Regulatory Authority, or (iii) otherwise is prohibited by any Regulatory
Authority.

        8. Termination of Agreement. This Agreement automatically shall
terminate and become null and void upon any termination of Employee's employment
with Employer other than a termination of employment which results in NBI's
payment obligation provided for under Section 2 above. Following any such
termination of this Agreement, it shall be of no further force or effect and
Employee shall have no further rights hereunder.

        9. 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.

        10. 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.

                                       64
                                     <PAGE>


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

        12. 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.

        13. 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.

        14. Binding Effect. This Agreement shall be binding upon Employee and on
NBI, its Successors and assigns effective on the date first above written.

        15. No Construction Against Any Party. This Agreement is the product of
informed negotiations between the Employee and NBI. 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 Employee and NBI agree that neither
party was in a superior bargaining position regarding the substantive terms of
this Agreement.

        16. 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.

        17. Exclusions. Notwithstanding anything contained herein to the
contrary, it is expressly understood and agreed by Employee that:

               (a) Employee shall not be entitled to any payments under this
Agreement if no Change in Control occurs or in the event (i) Employer terminates
Employee's employment for Cause, or (ii) Employee voluntarily terminates his or
employment with Employer for Other than Good Reason, or (iii) Employee's
employment with Employer terminates or is terminated due to his death,
Retirement or pursuant to a Determination of Long Term Disability,

               (b) Employee's employment with Employer is on an "at will" basis
and this Agreement does not constitute an employment contract or an agreement by
Employer to employ Employee for any particular period of time or in any
particular capacity. Nothing in this Agreement is intended or should be

                                       65
                                     <PAGE>


interpreted to confer upon Employee the right to continue in the employ of
Employer or to interfere with or restrict in any way the right of Employer to
discharge Employee or terminate his or her employment at any time or for any
reason whatsoever, with or without Cause, and without any obligation or
liability to Employee except as herein provided, it being the intent of the
parties hereto only to provide for payment of the severance benefits specified
herein in the event of the termination of Employee's employment with Employer
under the circumstances described in Section 2.

        18. Confidentiality. The Employee recognizes that as an employee of
Employer, Employee will have access to and may participate in the origination of
non-public, proprietary and confidential information and that Employee owes a
fiduciary duty to the Employer. 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 Employer or its customers that is not generally
known to the public or in the banking industry. The Employee 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 Employer
and its affiliates.

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

                                            National Bankshares, Inc.


                                            By: /s/       JAMES G. RAKES
                                                --------------------------------
                                                            President

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


                                            /s/        F. BRAD DENARDO
                                            ------------------------------------
                                                           Employee

                                            Address: 3009 Lancaster Drive
                                                     Blacksburg, VA  24060


                                       66

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>ex10buhyoff.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT BUHYOFF
<TEXT>
                           CHANGE IN CONTROL AGREEMENT

        THIS CHANGE IN CONTROL AGREEMENT (the "Agreement") is entered into as of
the 8th day of January, 2003 (the "Effective Date"), by and between National
Bankshares, Inc. ("NBI") and Marilyn B. Buhyoff ("Employee").

                              W I T N E S S E T H:

        WHEREAS, Employee heretofore has been employed as Secretary and Counsel
of NBI, Senior Vice President, Secretary & Counsel of its wholly owned
subsidiary, the National Bank of Blacksburg, and Secretary of its wholly owned
subsidiary, National Bankshares Financial Services, Inc. (the "Employer"), and
in such position he or she has provided leadership and guidance in the growth
and development of the business of NBI and its subsidiaries; and,

        WHEREAS, Employee's experience and knowledge of Employer's operations,
customers and affairs is a benefit to the continuation and growth of Employer's
business; and, for that reason, NBI desires to retain Employee's services as an
employee of the Employer; and,

        WHEREAS, as an inducement to Employee's continued employment, NBI has
agreed to provide for certain payments to Employee in the event of a termination
of Employee's employment with the Employer under certain circumstances in
conjunction with a change in control of NBI, and, to set forth the terms and
conditions of that arrangement, NBI and Employee desire to enter into this
Agreement.

        NOW, THEREFORE, in consideration of the premises and mutual promises,
covenants and conditions hereinafter set forth, and for other good and valuable
considerations, the receipt and sufficiency of which hereby are acknowledged,
NBI and Employee hereby agree as follows:

        1. Effective Date of Agreement. This Agreement shall be effective on the
Effective Date set out above and shall remain in effect until terminated as
provided herein.

        2. Payment in Certain Events. If at the effective time of a "Change in
Control" (as defined below) or any time within two years and 60 days following a
Change in Control (A) Employer terminates Employee's employment other than for
"Cause" (as defined below), or, (B) a "Termination Event" (as defined below)
occurs and, thereafter, Employee voluntarily terminates his or her own
employment with Employer in the manner described below, then (subject to the
limitations set forth herein) Employee shall be entitled to receive from NBI,
and NBI shall be obligated to pay or cause to be paid to Employee, an amount

                                       49
                                     <PAGE>


equal to two times the Employee's average annual compensation includable in the
Employee'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. If Employee's employment is terminated by Employer Without Cause (as
defined below) prior to the effective time of a Change in Control but following
the date on which NBI's board of directors takes action to approve an agreement
(including any definitive agreement or an agreement in principle) relating to a
Change in Control, then for purposes of this Agreement, such termination of
employment shall be deemed to occur at the effective time of the Change in
Control. Otherwise, if Employee's employment is terminated prior to the
effective time of a Change in Control, Employee shall have no rights hereunder.
Amounts payable under this Section 2 shall be paid, at Employee's option, either
in (a) a lump sum within 45 days following the Termination Date (as defined
below) or (b) up to six (6) equal monthly installments without interest which
shall commence on the 45th day following the Termination Date and on the same
day of each consecutive month thereafter, until fully paid.

        3. Definitions. For purposes of this Agreement:

               (A) a "Change in Control" shall be deemed to have occurred and be
effective at the time:

                      (i) of 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 NBI 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:

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

                             (b) any acquisition by NBI;

                             (c) any acquisition by any employee benefit plan
(or related trust) sponsored
or maintained by NBI or any corporation controlled by NBI; or

                             (d) any acquisition pursuant to a reorganization,
merger or consolidation by
any corporation owned or proposed to be owned, directly or indirectly, by NBI's
shareholders if NBI's 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

                                       50
                                     <PAGE>


                      (ii) when individuals who, as of the inception of this
Agreement, constitute the
board of directors of NBI (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 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
NBI board of directors; or

                                 (iii) NBI consummates,

                             (a) a merger, statutory share exchange, or
consolidation of NBI with any
other corporation, except as provided in Subsection 3(A)(i)(d), or

                             (b) the sale or other disposition of all or
substantially all of the assets
of NBI.

               (B) All references to "NBI" shall include any "Successor" to NBI
which shall have assumed and become liable for NBI's obligations hereunder
(whether such assumption is by agreement, operation of law or otherwise).
"Successor" refers to any person or entity (corporate or otherwise) into which
NBI (or any such Successor) shall be merged or consolidated or to which all or
substantially all of NBI's (or any such Successor's) assets shall be transferred
in any manner.

               (C) For purposes of this Agreement, a "Termination Event" shall
be deemed to have occurred if, within two years and 60 days following a Change
in Control Employee terminates his or her employment with Employer for Good
Reason (as defined below).

               (D) "Without Cause" shall mean the termination of Employee's
employment which does not occur by virtue of Employee's death, Retirement or
pursuant to a Determination of Long Term Incapacity, or by Employer With Cause
or by Employee for Good Reason or for Other than Good Reason;

               (E) "Cause" or "with Cause" shall mean:

                      (i) continual or deliberate neglect by Employee in the
performance of his material duties and responsibilities or the Employee's

                                       51
                                     <PAGE>


willful failure to follow reasonable instructions or policies of Employer after
being notified of such failure and being given a reasonable opportunity and
period (as determined by Employer) to remedy such failure;

                                 (ii) with respect to Employee, 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;

                      (iii) any breach or violation by Employee in any material
respect of any code or standard of behavior generally applicable to employees of
Employer, after being advised in writing of such breach or violation and being
given a reasonable opportunity and period (as determined by Employer) to remedy
such breach or violation;

                      (iv) dishonesty of Employee in any aspect of his or her
employment, or breach of a fiduciary duty to Employer or to Employer's parent
or any of its subsidiaries or affiliates;

                      (v) the willful engaging by Employee in conduct that is
reasonably likely to result, in the good faith judgment of Employer, in material
injury to Employer or Employer's parent, or any of its subsidiaries or
affiliates, monetarily or otherwise;

                      (vi) the violation by Employee of any applicable federal
or state law, or any applicable rule, regulation, order or statement of policy
promulgated by any governmental agency or authority having jurisdiction over
Employer, its parent or any of its affiliates or subsidiaries (a "Regulatory
Authority," including without limitation the Federal Deposit Insurance
Corporation, the Virginia Bureau of Financial Institutions, Office of the
Comptroller of the Currency, the Federal Reserve Board, the Securities and
Exchange Commission or any other regulatory agency), which results from
Employee's negligence, willful misconduct or intentional disregard of such law,
rule, regulation, order or policy statement and results in any substantial
damage, monetary or otherwise, to Employer, its parent or any of its affiliates
or subsidiaries or to their reputation;

                      (vii) the conviction of Employee of any felony or any
criminal offense involving dishonesty or breach of trust, or the occurrence of
any event described in Section 19 of the Federal Deposit Insurance Act or any
other event or circumstance which disqualifies Employee from serving as an
employee or executive officer of, or a party affiliated with, Employer, its
parent or any of its affiliates or subsidiaries; or, in the event Employee
becomes unacceptable to, or is removed, suspended or prohibited from
participating in the conduct of the affairs of Employer, its parent or any of
its affiliates or subsidiaries (or if proceedings for that purpose are
commenced) by, any Regulatory Authority; or

                                       52
                                     <PAGE>


                      (viii) the exclusion of Employee by the carrier or
underwriter from coverage under Employer's then current "blanket bond" or other
fidelity bond or insurance policy covering its or their directors, officers or
employees, or the occurrence of any event which Employer believes, in good
faith, will result in Employee being excluded from such coverage, or having
coverage limited as to Employee as compared to other covered officers or
employees, pursuant to the terms and conditions of such "blanket bond" or other
fidelity bond or insurance policy.

               (F) "Good Reason" shall mean the following occurrences after the
effective time of a Change in Control:

                      (i) the continued assignment to the Employee of duties
inconsistent with the Employee's position, authority, duties or responsibilities
immediately prior to the Change in Control;

                      (ii) a substantial reduction in the status of the
Employee, 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 Employer
promptly after receipt of notice thereof given by the Employee;

                      (iii) the relocation of Employee to a principal place of
employment located more than 50 miles from Employee's principal place of
employment immediately preceding the Change in Control, without Employee's
express written consent to such relocation;

                      (iv) any failure by a Successor expressly to assume all of
NBI's liabilities, duties and obligations hereunder;

                      (v) a reduction in the Employee's annual base salary rate
below the annual rate in effect immediately preceding the effective time of the
Change in Control or as the same shall have been increased from time to time
following such effective time;

                      (vi) a reduction in the level, scope or coverage of
Employee's life insurance, medical or hospitalization insurance, disability
insurance or similar plans or benefits (including any retirement plan) from that
being provided by Employer to Employee immediately preceding the effective time
of the Change in Control or any such insurance, plans or benefits are eliminated
without being replaced with substantially similar plans or benefits, unless such
reduction or elimination applies proportionately to all salaried employees of
Employer who participated in such plans or benefits immediately prior to such
Change in Control; or

                                       53
                                     <PAGE>

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

                                Any good faith (meaning honesty-in-fact)
determination of Good Reason, based on one or more of the foregoing, made by the
Employee shall be conclusive.

               (G) "Other than Good Reason" shall mean any termination by the
Employee which is not for Good Reason or Retirement shall be deemed a
termination for Other than Good Reason.

               (H) "Retirement" shall mean the Employee's retirement on or after
the Employee's normal retirement date under the terms of the National Bankshares
Retirement Income Plan (or any successor or substitute plan or plans of NBI).

               (I) "Determination of Long Term Incapacity" shall mean a good
faith determination by Employer that, as a result of mental or physical illness
or injury the Employee has failed to perform his assigned duties with Employer
on a full time basis for a period exceeding twelve (12) consecutive months.

               (J) "Termination Date" means the effective date as of which the
Employee's employment with Employer is terminated, giving rise to a payment
obligation under Section 2.

        4. Possible Reduction in Payment and Benefits. Following any Change in
Control, to the extent that any amount of pay or benefits provided under to
Employee under this Agreement would cause Employee 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
Employee under other NBI or Employer 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. Employee 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.

        5. Legal Fees and Costs. Except as otherwise provided herein, NBI will
pay or reimburse Employee for all costs and expenses, including without
limitation court costs and reasonable attorneys' fees and expert witness fees
and expenses, incurred by Employee in seeking to obtain or enforce by legal
proceeding any right or benefit provided by this Agreement, in each case

                                       54
                                     <PAGE>


provided Employee's claim is substantially upheld by a court of competent
jurisdiction.

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

        7. Regulatory Requirements. Notwithstanding anything contained in this
Agreement to the contrary, it is understood and agreed that NBI (or any of its
Successors) shall not be required to make any payment or take any action under
this Agreement if:

               (A) NBI or Employer is declared by any Regulatory Authority to be
insolvent, in default or operating in an unsafe or unsound manner, or if

               (B) in the opinion of counsel to NBI or Employer such payment or
action (i) would be prohibited by or would violate any provision of state or
federal law applicable to NBI or Employer, including without limitation the
Federal Deposit Insurance Act, as now in effect or hereafter amended, (ii) would
be prohibited by or would violate any applicable rules, regulations, orders or
formal statements of policy, whether now existing or hereafter promulgated, of
any Regulatory Authority, or (iii) otherwise is prohibited by any Regulatory
Authority.

        8. Termination of Agreement. This Agreement automatically shall
terminate and become null and void upon any termination of Employee's employment
with Employer other than a termination of employment which results in NBI's
payment obligation provided for under Section 2 above. Following any such
termination of this Agreement, it shall be of no further force or effect and
Employee shall have no further rights hereunder.

        9. 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.

        10. 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.

                                       55
                                     <PAGE>


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

        12. 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.

        13. 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.

        14. Binding Effect. This Agreement shall be binding upon Employee and on
NBI, its Successors and assigns effective on the date first above written.

        15. No Construction Against Any Party. This Agreement is the product of
informed negotiations between the Employee and NBI. 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 Employee and NBI agree that neither
party was in a superior bargaining position regarding the substantive terms of
this Agreement.

        16. 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.

        17. Exclusions. Notwithstanding anything contained herein to the
contrary, it is expressly understood and agreed by Employee that:

               (a) Employee shall not be entitled to any payments under this
Agreement if no Change in Control occurs or in the event (i) Employer terminates
Employee's employment for Cause, or (ii) Employee voluntarily terminates his or
employment with Employer for Other than Good Reason, or (iii) Employee's
employment with Employer terminates or is terminated due to his death,
Retirement or pursuant to a Determination of Long Term Disability,

               (b) Employee's employment with Employer is on an "at will" basis
and this Agreement does not constitute an employment contract or an agreement by

                                       56
                                     <PAGE>


Employer to employ Employee for any particular period of time or in any
particular capacity. Nothing in this Agreement is intended or should be
interpreted to confer upon Employee the right to continue in the employ of
Employer or to interfere with or restrict in any way the right of Employer to
discharge Employee or terminate his or her employment at any time or for any
reason whatsoever, with or without Cause, and without any obligation or
liability to Employee except as herein provided, it being the intent of the
parties hereto only to provide for payment of the severance benefits specified
herein in the event of the termination of Employee's employment with Employer
under the circumstances described in Section 2.

        18. Confidentiality. The Employee recognizes that as an employee of
Employer, Employee will have access to and may participate in the origination of
non-public, proprietary and confidential information and that Employee owes a
fiduciary duty to the Employer. 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 Employer or its customers that is not generally
known to the public or in the banking industry. The Employee 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 Employer
and its affiliates.

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

                            National Bankshares, Inc.


                                            By: /s/       JAMES G. RAKES
                                                --------------------------------
                                                                       President

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



                                             /s/   MARILYN B. BUHYOFF
                                            ------------------------------------
                                                        Employee

                                            Address: 1302 Greendale Drive
                                                     Blacksburg, VA  24060

                                       57

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