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

                                 _______________

                                    FORM 10-K

                                 _______________
 (MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934

          FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

[_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934

     FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 000-31825

                     HERITAGE FINANCIAL HOLDING CORPORATION
               (Exact name of registrant specified in its charter)


             DELAWARE                               63-1259533
   (State or other jurisdiction of              (I.R.S. Employer
    incorporation or organization)            Identification No.)

        211 LEE STREET NE                             35601
        DECATUR,  ALABAMA                          (Zip Code)
(Address of principal executive offices)


       Registrant's telephone number, including area code: (256) 355-9500
        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 $0.01 PER SHARE
                                (Title of Class)

     Indicate by a check mark whether 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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

     Indicate by a 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 the 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. [ ]

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

     State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. Common Stock, par value $0.01 per share- $24,640,575.

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 24, 2003. Common Stock, par value $0.01 per
share - 10,510,791 shares

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the annual proxy statement for the annual meeting of
stockholders on May 18, 2004 incorporated by reference into Part III.

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                        HERITAGE FINANCIAL HOLDING CORPORATION

                             2003 FORM 10-K ANNUAL REPORT


                                  Table of Contents

<S>                                                                                <C>
PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

  CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . .   1
  RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
      ITEM 1.  BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
      ITEM 2.  PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
      ITEM 3.  LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . .  12
      ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . .  12

PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

      ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . .  12
      ITEM 6.  SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . .  15
      ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND. .  16
               RESULTS OF OPERATIONS
      ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . .  37
      ITEM 8.  FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .  37
      ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE.. . . . . . . . . . . . . . . . . . . . . . .  68
      ITEM 9A.  CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . .  68

PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  69

      ITEM 10, 11, 12, 13 AND 14.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
               REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
               BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
               MATTERS; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND
               PRINCIPAL ACCOUNTANT FEES AND SERVICES.. . . . . . . . . . . . . .  69

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  70

      ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.  70
      EXHIBIT 16 - LETTER FROM SCHAUER TAYLOR COX VICE MORGAN & FOWLER, P.C.. . .  74
      EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT . . . . . . . . . . . . . . . .  75
      EXHIBIT 23.1 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. . . . .  76
      EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS. . . . . . . . . . . . . . .  77
      EXHIBIT 24 - POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . .  78
      EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER . . . . . . . . .  80
      EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER . . . . . . . . .  81
      EXHIBIT 32.1 CHIEF EXECUTIVE OFFICER CERTIFICATION UNDER 18 USC 1350. . . .  82
      EXHIBIT 32.2 CHIEF FINANCIAL OFFICER CERTIFICATION UNDER 18 USC 1350. . . .  83
</TABLE>


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                                     PART I

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     This  Annual  Report  and  documents  incorporated by reference herein, may
contain  certain  statements relating to our future results based on information
currently  available. The presentations, and certain of the other disclosures in
this  Annual  Report, including any statements preceded by, followed by or which
include  the  words,  "may,"  "could,"  "should,"  "will,"  "would,"  "believe,"
"expect,"  "anticipate,"  "estimate,"  "intend,"  "plan,"  "assume,"  or similar
expressions, constitute forward-looking statements within the meaning of Section
21E  of  the  Securities Exchange Act of 1934, as amended. These forward looking
statements,  implicitly  and  explicitly, include the assumptions underlying the
statements and other information with respect to our beliefs, plans, objectives,
goals,  expectations, anticipations, estimates, intentions, financial condition,
results  of  operations,  future  performance  and  business,  including  our
expectations  and  estimates  with  respect to our revenues, expenses, return on
equity,  return  on  assets, efficiency ratio, asset quality and other financial
data  and  capital  and  performance  ratios.

     Although  we believe that the expectations reflected in our forward-looking
statements  are  reasonable,  these  statements  involve risks and uncertainties
which  are  subject  to change based on various important factors (some of which
are  beyond  our  control). The following factors, among others, could cause our
financial  performance  to  differ materially from our goals, plans, objectives,
intentions,  expectations,  and other forward-looking statements: (1) the extent
to  which  we  are  able  to  achieve and maintain certain capital ratios at the
Company  and  the  Bank,  as  well as the effects of the inability or failure to
achieve  such  ratios;  (2) the effects of certain operating restrictions on the
Company  and  the Bank, including, without limitation, the ability to declare or
pay  dividends without prior regulatory approval; (3) the strength of the United
States  economy  in general and the strength of the regional and local economics
in  which  we  conduct  operations;  (4)  the effects of, and changes in, trade,
monetary  and  fiscal policies and laws, including interest rate policies of the
Board  of Governors of the Federal Reserve System; (5) inflation, interest rate,
market and monetary fluctuations; (6) our timely development of new products and
services  to a changing environment, including the features, pricing and quality
compared to the products and services of our competitors; (7) the willingness of
users  to  substitute  competitors'  products  and services for our products and
services;  (8)  the  impact  of changes in financial services policies, laws and
regulations, including laws, regulations and policies concerning taxes, banking,
securities  and insurance, and the application thereof by regulatory bodies; (9)
technological  changes;  (10)  changes  in consumer spending and savings habits;
(11) regulatory or judicial proceedings; and (12) the declaration of war and the
commencement of hostilities in Iraq and elsewhere. We also direct your attention
to  the  Risk  Factors  discussed  immediately  following this section under the
heading  "Risk  Factors."

     If one or more of the factors affecting our forward-looking information and
statements  proves  incorrect,  then  our  actual  results,  performance  or
achievements  could  differ  materially  from  those expressed in, or implied by
forward-looking  information  and statements contained in this Annual Report. We
do  not  intend  to  update  or  revise  our  forward-looking  information  and
statements, whether written or oral, to reflect any changes. All forward-looking
statements  attributable  to  us  are  expressly  qualified  by these cautionary
statements.


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                                  RISK FACTORS

THE  COMPANY  AND  THE  BANK  ARE  RESTRICTED  FROM CERTAIN ACTIVITIES INCLUDING
PAYMENT  OF  DIVIDENDS  TO  STOCKHOLDERS.

     During 2002, management of the Company identified significant operational
and asset quality deficiencies at the Bank. These deficiencies resulted in
material increases to the Bank's loan loss reserves, resulting in material
reductions in the capital levels of the Company and the Bank. As a result, the
Board of Directors and management of the Company and the Bank identified
specific corrective steps and actions to address capital deficiencies, improve
asset quality, and enhance operational controls and procedures. The Bank,
without the prior written approval of its regulators, may not declare or pay any
cash dividends. In addition, the Bank determined to hire and retain certain
personnel who were given specific written authority by the Board of Directors to
implement sound lending, recordkeeping and accounting practices. The Bank also
took steps to develop an educational program for board members and to create a
written review of the Bank's staffing requirements. During 2003, management's
actions to improve asset quality and enhance operational controls and procedures
resulted in the Bank's Tier 1 leverage ratio reaching 8.58% as of December 31,
2003. Additionally, both the Company and the Bank were considered "well
capitalized" as of December 31, 2003.

     If the quality of the Company's assets does not continue to improve, or if
there is additional deterioration in the Bank's loan portfolio, the Company and
the Bank may be required to take additional remedial action that may further
restrict the Company's and the Bank's operations in future periods.

THE COMPANY AND THE BANK HAVE MADE SIGNIFICANT CHANGES TO THE BANK'S LOAN LOSS
RESERVES AS A RESULT OF REVIEWS OF THE BANK'S LOAN PORTFOLIO, AND THE BANK MAY
BE REQUIRED TO FURTHER INCREASE THE ALLOWANCE FOR LOAN AND LEASE LOSSES.

     During the course of a targeted, limited scope review of the loan portfolio
of the Bank conducted in 2002, management identified certain assets in the
Bank's loan portfolio that management believed should be classified. Due to the
erosion in asset quality identified by the review, the Company increased the
allowance for loan losses by $2,000,000 during the quarterly period ended June
30, 2002. Additional review of the Bank's loan portfolio subsequently identified
additional asset quality problems, which resulted in the Company's increasing
the allowance for loan losses net of charge offs and recoveries by a total of
$20,916,364 for the year ending December 31, 2002.

     Management of the Company and the Bank have taken corrective action to
improve asset quality and enhance operational controls and procedures.
Management, acting in concert with the Board of Directors, determined to charge
off $11,388,509 in loans during the course of 2003. As a result of management's
ongoing evaluation of the adequacy of the allowance for loan losses, a decline
in problem credits brought about by the implementation of new loan policies and
procedures and continued recoveries of loans previously charged off, management
decided to reduce the allowance for loan losses during 2003 to $14,562,283 at
December 31, 2003, compared to $26,990,594 at December 31, 2002.

     Management continues to review the Bank's loan policies and procedures, as
well as the credit review process. Additional classifications of assets may
result in increases in the Bank's allowance for loan losses, and such increases
could have a material adverse effect on the Company's and the Bank's financial
condition and results of operations.

ITEM 1.   BUSINESS

GENERAL

     We  are a Delaware-chartered bank holding company headquartered in Decatur,
Alabama.  We offer a broad range of banking and related products and services in
ten  locations  in  Northern  Alabama  through Heritage Bank, an Alabama banking
corporation  and  our  principal subsidiary. We had assets of approximately $522
million,  loans  of  approximately  $386 million, deposits of approximately $416
million  and  stockholders'  equity of approximately $30 million at December 31,
2003. Our principal executive offices are located at 211 Lee Street NE, Decatur,
Alabama  35601,  and  the  telephone  number  is  (256)  355-9500.

     The Company's business is conducted primarily through the Bank. Although we
have  no  immediate  plans to conduct any other business, the Company may engage
directly  or  indirectly  in  a  number  of  activities  which  the


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Federal  Reserve  has determined to be so closely related to banking or managing
or  controlling  banks  as  to  be  a  proper  incident  thereto.

SUBSIDIARY BANK

     At December 31, 2003, the Bank conducted business through nine locations in
Morgan, Madison, Marshall and Jefferson counties, Alabama. We offer a wide range
of  commercial  and  retail banking services, including savings and time deposit
accounts,  personal  and  commercial  loans and personal and commercial checking
accounts.  We  seek to provide superior service to our customers and to become a
vital  component  of  each  of  the  communities  that  we  serve.

SERVICES

     We  focus  on  commercial,  consumer,  residential mortgage and real estate
construction lending to customers in our local markets. Our retail loan products
include  mortgage banking services, home equity lines of credit, consumer loans,
including  automobile  loans,  and  loans secured by certificates of deposit and
savings  accounts. Our commercial loan products include working capital lines of
credit,  term  loans  for  both real estate and equipment, letters of credit and
Small Business Administration loans. We also offer a variety of deposit programs
to  individuals  and  businesses and other organizations, including a variety of
personal  checking,  savings, money market and NOW accounts, as well as business
checking  and  saving  accounts.  In  addition,  we  offer individual retirement
accounts,  safe  deposit and night depository facilities and additional services
such  as  internet  banking  and the sale of traveler's checks, money orders and
cashier's  checks.

MARKET AREAS

     The  Company  conducts  its banking activities in Morgan, Madison, Marshall
and  Jefferson  counties  in  Alabama  and in the surrounding vicinities. Within
those  areas,  the Company has banking offices located in the cities of Decatur,
Huntsville,  Madison,  Birmingham  and  Trussville,  Alabama.

LENDING ACTIVITIES

     We  offer  a range of lending services, including real estate, consumer and
commercial  loans,  primarily  to  individuals  and  businesses  and  other
organizations  that  are  located  in  or conduct a substantial portion of their
business  in  our market areas. Our total loans at December 31, 2003 were $385.9
million, or 78.0% of total earning assets. The interest rates we charge on loans
vary  with  the  risk,  maturity  and  amount  of  the  loan  and are subject to
competitive  pressures, money market rates, availability of funds and government
regulations.  We  do  not  have  any  foreign  loans.

LOAN PORTFOLIO

     Real  Estate  Loans  -  Loans  secured  by  real  estate  are a significant
component  of our loan portfolio, constituting $257.1 million, or 66.7% of total
loans  at  December  31,  2003.  Our  primary  type  of  real  estate  loan  is
single-family  first  mortgage  loans,  construction  loans  and acquisition and
development loans, typically structured with fixed or adjustable interest rates,
based on market conditions. Fixed rate loans usually have terms of five years or
less,  with  payments through the date of maturity generally based on a 15 to 30
year  amortization schedule. Adjustable rate loans generally have a term of 5 to
30  years.  We  typically  charge  an  origination  fee on these mortgage loans.

     Our  nonresidential  mortgage loans include commercial, industrial and land
loans.  The commercial real estate loans are typically used to provide financing
for  retail  establishments,  offices and manufacturing facilities. We generally
require  nonresidential  mortgage  loans  to have an 80% loan-to-value ratio and
usually underwrite commercial loans on the basis of the borrower's cash flow and
ability  to  service the debt from earnings, more than on the basis of the value
of  the collateral. Terms are typically five years and may have payments through
the  date  of  maturity  based  on  a  15  to  30  year  amortization  schedule.
Construction  loans  usually  have a term of twelve months and generally require
personal  guarantees.

     Commercial, Financial and Agricultural Loans - At December 31, 2003, we had
general  commercial,  financial  and  agricultural  loans  of  $116.2  million,
comprising 30.1% of the total loan portfolio. Commercial loans consist primarily
of  operating  loans  made to manufacturers, wholesalers and retailers of goods,
service  companies


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and  other  industries.  We concentrate on making loans to small and medium size
companies. The primary repayment risk for commercial loans is the failure of the
borrower  due  to economic or financial factors. Although we typically look to a
commercial  borrower's  cash  flow  as  the  principal source of repayment, many
commercial  loans  are  secured by inventory, equipment, accounts receivable and
other  assets. These loans are typically made on terms up to five years at fixed
or  variable  rates and are secured by accounts receivable, inventory or, in the
case of equipment loans, the financed equipment. We attempt to reduce our credit
risk  on  commercial  loans  by limiting the loan to value ratio to 65% on loans
secured  by  accounts  receivable  or  inventory  and  75%  on  equipment loans.
Agricultural  loans  are  comprised of loans to finance agricultural production,
loans  to farmers and loans secured by farmland. We are able to manage the risks
inherent  in these types of loans due to our small number of agricultural loans.

     Consumer  Loans  -  At December 31, 2003, loans to individuals for personal
expenditures  totaled $12.5 million, comprising some 3.2% of our loan portfolio.
These  consumer  loans  include  loans  to  purchase  automobiles,  recreational
vehicles,  mobile  homes, appliances and boats, and the Bank continues to hold a
small  amount of credit card loans. Consumer loans are underwritten based on the
borrower's  income, current debt, credit history and collateral. Terms generally
range  from  four  to  five  years on automobile loans and one to three years on
other  consumer  loans.

CREDIT PROCEDURES AND REVIEW

     During  2002,  we  identified  significant  weaknesses  in our loan policy,
including  our loan approval process, credit analysis, loan review and other key
lending  support  functions.  As  part  of our response to these issues, we have
revised  the  Bank's  loan policy to address areas we believed to be inadequate,
and  have  hired  additional personnel to upgrade our compliance in these areas.

     Loan  Approval  -  We attempt to minimize loan losses through various means
and  use  generally  recognized  underwriting criteria. In particular, on larger
credits,  we  generally  rely  on  the  cash  flow  of a debtor as the source of
repayment  and  secondarily  on  the  value  of  the  underlying  collateral. In
addition,  we  attempt to utilize shorter loan terms in order to reduce the risk
of  a  decline  in  the  value of such collateral. We have reduced the unsecured
lending  authority  of  our officers and have reduced the overdraft authority of
our officers in order to address certain loan portfolio issues.

     We  address  repayment  risks  by  adhering to internal credit policies and
procedures  that  include  officer  and customer lending limits, a multi-layered
loan  approval  process for larger loans, periodic documentation examination and
follow-up  procedures  for  any  exceptions to credit policies. The point in our
loan  approval  process  at  which a loan is approved depends on the size of the
borrower's  credit  relationship with the Bank. We require approval by the Board
of  Directors of the Bank for new advances of credit to any borrowers with loans
classified  Substandard  and  prohibit  the  advance of additional credit to any
borrower  with  loans  classified  Doubtful  or  Loss.

     Loan  Review - The Bank has a loan review process designed to promote early
identification of credit quality problems. All lending officers are charged with
the  responsibility  of  reviewing  all  past  due  loans  in  their  respective
portfolios.  Lending  officers establish a watch list of loans to be reviewed by
management  and  the Board of Directors. Lending officers also conduct a regular
centralized  internal  review  which  tests  compliance  with  loan  policy  and
documentation for all loans over $250,000 and a sampling of smaller loans.

     The  entire loan portfolio undergoes close scrutiny to maintain its quality
and diversity and to assure proper documentation. This policy also requires that
each  loan  have  an agreed upon repayment schedule and gives individual lending
officers  the  responsibility  of  obtaining,  and  analyzing  current  credit
information.  Maximum  loan  to  value  ratios  and terms are established in the
policy  for the various types of loans. The criteria outlined in the Bank's loan
policy  follows  guidelines  provided  by banking regulators. Through the Bank's
credit  policy and credit review procedures, management believes that it is able
to identify areas of concern in the loan portfolio and to take corrective action
when  necessary.

DEPOSITS

     Core deposits are our principal source of funds, constituting approximately
80.3%  of  our  total deposits as of December 31, 2003. Core deposits consist of
demand  deposits,  interest-bearing  transaction  accounts, savings deposits and
certificates  of  deposit  (excluding  certificates  of  deposit  and other time
deposits over $100,000). Transaction accounts include checking, money market and
NOW  accounts  that  provide  the  Bank  with  a  source  of  fee  income  and
cross-marketing  opportunities,  as well as a low-cost source of funds. Time and
savings  accounts  also


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provide  a  relatively stable and low-cost source of funding. The largest source
of  funds  for  the  Bank is certificates of deposit. Certificates of deposit in
excess  of $100,000 are held primarily by customers outside of our market areas.

     Deposit  rates  are  reviewed  weekly  by senior management. We believe our
rates are competitive with those offered by competing institutions in our market
areas;  however,  we  focus  on customer service, not high rates, to attract and
retain  deposits.

COMPETITION

     The  banking  industry  in  Alabama  is  highly  competitive,  and  our
profitability depends principally on our ability to compete in our market areas.
The area is dominated by a number of major banks and bank holding companies that
have  substantially  greater  resources,  and  numerous  offices  and affiliates
operating  over  wide  geographic areas. We encounter strong competition both in
making  loans  and attracting deposits. Competition among financial institutions
is based upon interest rates offered on deposit accounts, interest rates charged
on  loans  and  other  credit  and  service charges. Customers also consider the
quality  and  scope  of  the  services  rendered,  the  convenience  of  banking
facilities  and,  in the case of loans to commercial borrowers, relative lending
limits,  and  may  also  consider  the  fact  that  other  banks offer different
services.  Many  of  the  large  regional  banks  against  which we compete have
significantly greater lending limits and may offer additional products; however,
we  believe  we  have  been  able  to  compete  effectively with other financial
institutions,  regardless  of their size, by emphasizing customer service and by
providing  a  wide  array  of  services.  In  addition,  most  of  our  non-bank
competitors  are  not  subject  to  the  same extensive federal regulations that
govern  bank holding companies and federally insured banks. See "Supervision and
Regulation."  Competition may further intensify if additional financial services
companies  enter  markets  in  which  we  conduct  business.

EMPLOYEES

     As of December 31, 2003, the Company employed approximately 162 individuals
of  which  approximately 150 were full-time employees. The Company believes that
its  relations  with  these  employees  are  generally  good.

SUPERVISION AND REGULATION

     The  Company,  as a bank holding company under the Bank Holding Company Act
of  1956,  as  amended  ("BHCA"), is subject to the supervision, examination and
reporting  requirements  of the Federal Reserve Board and the BHCA. The BHCA and
other  federal laws subject bank holding companies to particular restrictions on
the  types  of activities in which they may engage and to a range of supervisory
requirements  and  activities,  including  regulatory  enforcement  actions  for
violations  of  laws  and  regulations. The Company is required to file with the
Federal  Reserve  periodic  reports  and  such  other information as the Federal
Reserve  may  request. The Federal Reserve conducts examinations of the Company,
and  also  may  examine its subsidiaries. The State of Alabama does not regulate
bank  holding  companies.

     In  November  1999,  Congress  enacted the Gramm-Leach-Bliley Act ("GLBA"),
which  made  substantial  revisions  to  the  statutory  restrictions separating
banking activities from certain other financial activities. Under the GLBA, bank
holding  companies  that  are  "well-capitalized"  and  "well-managed" and whose
subsidiary  banks  have  satisfactory  or  better  ratings  under  the Community
Reinvestment  Act  of  1977,  as  amended  (the  "CRA"),  and meet certain other
conditions  can elect to become "financial holding companies." Financial holding
companies  and  their  subsidiaries  are  permitted  to  acquire  or  engage  in
previously  impermissible  activities,  such  as  insurance underwriting, travel
agency  activities,  broad  insurance  agency  activities, merchant banking, and
other  activities  that the Federal Reserve determines to be financial in nature
or  complimentary  to  financial  activities.  In  addition,  under the merchant
banking  authority  added by the GLBA and Federal Reserve regulations, financial
holding  companies  are  authorized  to  invest  in  companies  that  engage  in
activities  that  are  not financial in nature, as long as the financial holding
company  makes  its  investment  with the intention of limiting the terms of its
investment,  does not manage the company on a day-to-day basis, and the investee
company  does  not  cross-market  with  any  of  the financial holding company's
controlled  depository  institutions. Financial holding companies continue to be
subject  to  the overall oversight and supervision of the Federal Reserve. While
the  Company  has not elected to become a financial holding company, and may not
do so at the present time, it may elect to do so in the future.

     The  supervision  and  regulation  of  bank  holding  companies  and  their
subsidiaries  are  intended  primarily  for  the  protection  of depositors, the
deposit  insurance  funds  of  the  Federal  Deposit  Insurance Corporation (the
"FDIC")  and  the  banking  system  as  a  whole, not for the protection of bank
holding  company  stockholders  or  creditors.  The


                                        5
<PAGE>
banking  agencies  have  broad enforcement power over bank holding companies and
banks,  including  the power to impose substantial fines and other penalties for
violation  of laws and regulations. The following description summarizes some of
the  laws  to which we are subject. References herein to applicable statutes and
regulations  are  brief summaries thereof, do not purport to be complete and are
qualified  in  their  entirety  by  reference  to such statutes and regulations.

     The  Bank  is  subject  to  regulation,  supervision and examination by the
Federal  Reserve,  the  Federal  Deposit  Insurance Corporation ("FDIC") and the
Alabama  Banking  Department.  As  a member of the FDIC, the Bank's deposits are
insured  to  the  maximum  extent  provided  by  law.

     Regulatory  Restrictions  on  Dividends  -  The payment of dividends to the
Company  by  the  Bank  is  subject to certain restrictions imposed by state and
federal  banking  laws,  regulations  and authorities. The Federal Reserve Board
requires  that  bank holding companies should pay cash dividends on common stock
only out of income available over the past year and only if prospective earnings
retention  is  consistent  with the bank holding company's expected future needs
and financial condition. This policy provides that bank holding companies should
not  maintain  a  level  of  cash  dividends  that  undermines  the bank holding
company's ability to serve as a source of strength for its banking subsidiaries.
The  prior  approval  of  the  Federal  Reserve  is required if the total of all
dividends declared by the state member bank in any calendar year will exceed the
sum of such bank's net profits for the year and its retained net profits for the
preceding  two  calendar  years, less any required transfers to surplus. Federal
law  also  prohibits  any  state member bank from paying dividends that would be
greater  than  such  bank's undivided profits after deducting statutory bad debt
reserves  in  excess  of  such  bank's  allowance  for  loan losses. The Bank is
currently  prohibited from paying a cash dividend to the Company without seeking
prior  written  approval  from  federal  banking  authorities.

     Under  Alabama  law,  a bank may not pay a dividend in excess of 90% of its
net  earnings  until the bank's surplus is equal to at least 20% of its capital.
The  Bank  is  also  required by Alabama law to obtain the prior approval of the
Superintendent  of  the  State  Banking Department of Alabama for its payment of
dividends  if  the  total  of all dividends declared by the Bank in any calendar
year  will  exceed  the  total  of  (1)  the  Bank's net earnings (as defined by
statute) for that year, plus (2) its retained net earnings for the preceding two
years, less any required transfers to surplus. No dividends may be paid from the
Bank's  surplus  without  the  prior written approval of the Superintendent. The
Bank  is  currently  prohibited from paying dividends to the Company without the
prior approval of the Superintendent of the State Banking Department.

     In addition, federal bank regulatory authorities have authority to prohibit
the  payment  of dividends by bank holding companies if their actions constitute
unsafe  or  unsound  practices.  The  Federal  Reserve Board has issued a policy
statement  on  the  payment  of  cash dividends by bank holding companies, which
expresses  the  Federal  Reserve  Board's  view  that  a  bank  holding  company
experiencing  earnings  weaknesses should not pay cash dividends that exceed its
net  income  or  that  could only be funded in ways that weaken the bank holding
company's  financial  health,  such  as by borrowing. Our ability and the Bank's
ability  to  pay  dividends  in  the  future is currently, and could be further,
influenced  by  bank  regulatory  policies  and  capital  guidelines.

     Source  of  Strength  -  Under Federal Reserve Board policy, a bank holding
company  is  expected  to  act  as  a  source of financial strength for its bank
subsidiary  and commit resources to its support. This support may be required by
the  Federal  Reserve  Board  at  times  when,  absent  this  policy, additional
investments  in  a  troubled bank may not otherwise be warranted. A bank holding
company,  in  certain  circumstances, could be required to guarantee the capital
plan  of  an undercapitalized banking subsidiary. In addition, any capital loans
by  a  bank  holding  company  to any of its depository institution subsidiaries
likely  will be unsecured and subordinate in right of payment to deposits and to
certain  other  indebtedness  of  the  banks.

     Under  the  Federal  Deposit  Insurance  Act  ("FDIA"),  an  FDIC-insured
depository  institution  can  be  held  liable  for  any  loss  incurred  by, or
reasonably  expected  to  be  incurred  by,  the FDIC in connection with (1) the
default  of  a  common controlled FDIC-insured depository institution or (2) any
assistance  provided  by  the  FDIC  to  any  commonly  controlled  FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the  appointment  of  a  conservator  or receiver, and "in danger of default" is
defined  generally  as  the  existence  of  certain conditions indicating that a
default  is  likely to occur in the absence of regulatory assistance. The FDIC's
claim  for  damages  is  superior  to  claims  of  stockholders  of  the insured
depository  institution  or  its holding company but is subordinate to claims of
depositors,  secured  creditors  and  holders  of  subordinated debt (other than
affiliates)  of  the  commonly  controlled  FDIC-insured depository institution.
Common  controlled  FDIC-insured  depository


                                        6
<PAGE>
institutions  are  liable to the FDIC for any losses incurred in connection with
the  failure  of  a  commonly  controlled  institution.

     Safe and Sound Banking Practices - Bank holding companies are not permitted
to  engage in unsafe or unsound banking practices. The Federal Reserve Board has
broad  authority  to  prohibit  activities  of  bank holding companies and their
non-banking  subsidiaries which represent unsafe or unsound banking practices or
which  constitute  violations of laws or regulations, and can assess civil money
penalties  for  certain  activities conducted on a knowing or reckless basis, if
those  activities  caused  a  substantial  loss to a depository institution. The
penalties can be as high as $1,000,000 for each day the activity continues.

     The  Federal Reserve adopted the Federal Financial Institutions Examination
Council's  ("FFIEC")  updated  rating  system  which  assigns  each  financial
institution  a confidential composite "CAMELS" rating based on an evaluation and
rating  of  six essential components of an institution's financial condition and
operations  including  capital  adequacy,  asset  quality, management, earnings,
liquidity  and  sensitivity to market risk. For most institutions, the FFIEC has
indicated  that  market  risk  is  rated  based  upon,  but  not  limited to, an
assessment  of  the  sensitivity  of the financial institution's earnings or the
economic  value  of  its  capital  to adverse changes in interest rates, foreign
exchange  rates,  commodity  prices,  or  equity prices; management's ability to
identify,  measure,  monitor and control exposure to market risk; and the nature
and complexity of interest rate risk exposure arising from nontrading positions.

     Capital  Adequacy Requirements - We are required to comply with the capital
adequacy  standards  established  by  the Federal Reserve Board, and the Bank is
subject  to  additional  requirements  of  the  FDIC  and  the  Alabama  Banking
Department.  The Federal Reserve Board has adopted two basic measures of capital
adequacy  for bank holding companies: a risk-based measure and leverage measure.
All applicable capital standards must be satisfied for a bank holding company to
be  in  compliance.

     The  risk-based  capital  standards  are  designed  to  make  regulatory
requirements more sensitive to differences in risk profiles among banks and bank
holding  companies,  to  account for off-balance-sheet exposure, and to minimize
disincentives  for  holding  liquid capital assets. Assets and off-balance-sheet
items  are assigned to broad risk categories, each with appropriate weights. The
resulting  capital  ratios  represent  capital  as  a  percentage  of  total
risk-weighted  assets  and  off-balance-sheet  items.

     The  minimum guidelines for the ratio ("Total Risk-Based Capital Ratio") of
total  capital  ("Total  Capital")  to risked-weighted assets (including certain
off-balance sheet items, such as standby letters of credit) is 8%. At least half
of  Total  Capital  must be comprised of common stock, minority interests in the
equity  accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock,  and  a  limited  amount  of  cumulative  perpetual preferred stock, less
goodwill  and  other  intangible  assets  ("Tier  1 Capital"). The remainder may
consist  of  subordinated  debt,  other preferred stock, and a limited amount of
loan  loss  reserves  ("Tier  2  Capital").

     In  addition,  the  Federal  Reserve Board has established minimum leverage
ratio  guidelines  for  bank  holding  companies  and  state member banks. These
guidelines  provide for a minimum ratio (the "Leverage Ratio") of Tier 1 Capital
to  average assets, less goodwill and certain other intangible assets, of 3% for
bank  holding  companies  that meet certain specified criteria, including having
the  highest  regulatory  rating. All other bank holding companies generally are
required to maintain a Leverage Ratio of at least 3%, plus an additional cushion
of  1% - 2%, if the institution has less than the highest regulatory rating. The
guidelines also provide that bank holding companies 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. Furthermore, the Federal Reserve Board has indicated that
it  will  consider  a  tangible  Tier  1  Capital  Leverage Ratio (deducting all
intangibles)  and  other indicia of capital strength in evaluating proposals for
expansion  or  new  activities.

     The  Federal  Deposit  Insurance  Corporation  Improvement  Act  of  1991
("FDICIA"),  among  other  things, requires the federal banking agencies to take
"prompt  corrective  action"  regarding depository institutions that do not meet
minimum  capital  requirements.  FDICIA  establishes  five  capital tiers: "well
capitalized,"  "adequately  capitalized,"  "undercapitalized,"  "significantly
undercapitalized," and "critically undercapitalized." A bank's capital tier will
depend  upon how its capital levels compare to various relevant capital measures
and  certain  other  factors,  as  established  by  regulations.

     All  of  the federal banking agencies have adopted regulations establishing
relevant  capital  measures  and  relevant  capital levels. The relevant capital
measures  are  the  Total  Capital ratio, Tier 1 capital ratio, and the leverage


                                        7
<PAGE>
ratio.  Under  the regulations, a state member bank will be (i) well capitalized
if  it has a Total Capital ratio of 10% or greater, a Tier 1 capital ratio of 6%
or  greater,  a Tier 1 leverage ratio of 5% or greater and is not subject to any
written  agreement,  order,  capital  directive  or  prompt  corrective  action
directive  by  a  federal bank regulatory agency to meet and maintain a specific
capital  level  for any capital measure, (ii) adequately capitalized if it has a
Total  Capital  ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater,
and  a  leverage  ratio  of  4%  or greater (3% in certain circumstances), (iii)
undercapitalized  if  it  has  a  Total  Capital ratio of less than 8%, a Tier 1
capital  ratio  of  less  than  4% (3% in certain circumstances), and a leverage
ratio  of  less  than  4%, (iv) significantly undercapitalized if it has a Total
Capital  ratio  of  less  than  6%, a Tier 1 capital ratio of less than 3% and a
leverage  ratio  of  less  than  3%  or  (v)  critically undercapitalized if its
tangible  equity  is  equal  to  or  less  than 2% of average quarterly tangible
assets.

     As of December 31, 2003, the consolidated capital ratios of the Company and
the  Bank  were  as  follows:

<TABLE>
<CAPTION>
                                     REGULATORY
                                       MINIMUM        COMPANY        BANK
                                     -----------      --------      ------
<S>                                  <C>              <C>           <C>
Tier 1 leverage ratio                   3.0-5.0%         6.31%       8.64%
Tier 1 Risk-based capital ratio            4%            8.63%      10.71%
Total Risk-based capital ratio             8%           10.28%      11.99%
</TABLE>

     As of December 31, 2003, the Company and the Bank were "well capitalized."

     Acquisitions  by  Bank  Holding  Companies  -  The BHCA requires every bank
holding  company to obtain prior approval of the Federal Reserve Board before it
(1)  may  acquire  all  or  substantially all of the assets of any bank; (2) may
acquire  direct  or  indirect  ownership  or control of any voting shares of any
bank, if after such acquisition it would own or control, directly or indirectly,
more  than 5% of the voting shares of such bank; or (3) may merge or consolidate
with  any  other  bank  holding  company. In approving bank acquisitions by bank
holding  companies,  the  Federal  Reserve  Board  is  required  to consider the
financial  and  managerial  resources  and  future prospects of the bank holding
company and the banks concerned, the convenience and needs of the communities to
be  served  and  various  other  factors.

     The  BHCA  further  provides that the Federal Reserve Board may not approve
any  transaction  that  would result in a monopoly or would be in furtherance of
any  combination  or  conspiracy  to  monopolize  or  attempt  to monopolize the
business  of banking in any section of the United States, or the effect of which
may  be  substantially  to lessen competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade,  unless  the  anti-competitive  effects  of  the proposed transaction are
clearly  outweighed  by the public interest in meeting the convenience and needs
of  the  communities  to  be  served.  The  Federal Reserve Board is required to
consider the financial and managerial resources and future prospects of the bank
holding  companies  and  banks  concerned,  including  capital adequacy, and the
convenience  of  the  community  to be served including the parties' performance
under  the  Community  Reinvestment  Act.

     Control Acquisitions - The Change in Bank Control Act prohibits a person or
group  of  persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under  a  rebuttable  presumption  established by the Federal Reserve Board, the
acquisition  of 10% or more of a class of voting stock of a bank holding company
with  a  class  of  securities  registered under Section 12 of the Exchange Act,
would,  under  the  circumstances  set  forth  in  the  presumption,  constitute
acquisition  of  control  of  that  bank  holding  company.

     In  addition,  under  the BHCA, any company is required to obtain the prior
approval  of  the  Federal  Reserve Board before acquiring 25% (and bank holding
companies  are  required to obtain prior approval from the Federal Reserve Board
before  acquiring  5%) or more of the outstanding common stock of a bank holding
company,  or otherwise obtain control or a "controlling influence" over the bank
holding  company.

     Branching  -  The  BHCA, as amended by the interstate banking provisions of
the  Riegle-Neal  Interstate  Banking  and Branching Efficiency Act of 1994 (the
"Interstate  Banking  Act")  repealed prior statutory restrictions on interstate
banking,  such  that  a  bank  holding company may acquire a bank located in any
other  state,  and any bank holding company located outside Alabama may lawfully
acquire  any  Alabama-based  bank  regardless  of  state  law  to


                                        8
<PAGE>
the  contrary,  in  either  case  subject  to  certain deposit-percentage, aging
requirements  and  other  restrictions.  In addition, the Interstate Banking Act
generally  provided  that after June 1, 1997, national state-chartered banks may
branch  interstate  through  acquisition  of banks in other states. The State of
Alabama  has  laws  relating  specifically to acquisition of banks, bank holding
companies  and other types of financial institutions in each state, by financial
institutions  that are based in, and not based in, those states. Alabama law has
set  five  years  as  the  minimum  age  of  banks  which  may  be  acquired.

     Restrictions  on Transactions With Affiliates and Insiders - The Company is
a  legal  entity  separate  and distinct from the Bank. Transactions between the
Bank  and its affiliates, including the Company, are subject to Sections 23A and
23B  of  the  Federal  Reserve  Act. Section 23A defines "covered transactions,"
which  include  extensions  of  credit, and limits a bank's covered transactions
with  any  affiliate  to 10% of such bank's capital and surplus. All covered and
exempt  transactions  between  a  bank  and  its affiliates must be on terms and
conditions consistent with safe and sound banking practices, and banks and their
subsidiaries  are  prohibited from purchasing low-quality assets from the bank's
affiliates.  Finally,  Section  23A  requires that all of a bank's extensions of
credit  to  an  affiliate  be  appropriately  secured  by acceptable collateral,
generally  United  States  government  or  agency securities. Section 23B of the
Federal  Reserve Act generally requires that certain transactions between a bank
and its respective affiliates be on terms substantially the same, or at least as
favorable  to  such  bank,  as  those  prevailing  at  the  time  for comparable
transactions  with  or  involving  other  nonaffiliated  persons.

     The  restrictions  on  loans  to  directors,  executive officers, principal
stockholders  and  their  related  interests (collectively referred to herein as
"insiders")  contained  in the Federal Reserve Act and Regulation O apply to all
insured  institutions  and  their subsidiaries and bank holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans  to  insiders  and  their related interests. These loans cannot exceed the
institution's  total  unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for  knowingly  accepting  loans  in violation of applicable restrictions. State
banking  laws  also  have  similar  provisions.

     FDIC  Insurance Assessments - Each financial institution is assigned to one
of  three  capital  groups  -  well  capitalized,  adequately  capitalized  or
undercapitalized  -  and  further  assigned  to  one of three subgroups within a
capital  group,  on  the  basis  of supervisory evaluations by the institution's
primary  federal  and,  if  applicable,  state  regulators and other information
relevant  to  the  institution's  financial  condition and the risk posed to the
applicable insurance fund. The actual assessment rate applicable to a particular
bank  will, therefore, depend in part upon the risk assessment classification so
assigned  to  the  bank  by  the  FDIC.

     Under  the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding  that the institution has engaged in unsafe and unsound practices, is in
an  unsafe  or  unsound  condition  to  continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.

     Community  Reinvestment  Act  - The Company and the Bank are subject to the
Community  Reinvestment  Act  ("CRA").  The  CRA  and  the  regulations  issued
thereunder  are  intended  to  encourage  banks to help meet the credit needs of
their  service area, including low and moderate income neighborhoods, consistent
with  the  safe  and  sound  operations of the banks. The CRA does not establish
specific  lending  requirements or programs for financial institutions, nor does
it  limit  an  institution's  discretion  to  develop  the types of products and
services  that  it  believes  are  best  suited  to  its  particular  community,
consistent with the CRA. The CRA requires a bank's primary federal regulator, in
connection  with its examination of the institution, to assess the institution's
record of assessing and meeting the credit needs of the community served by that
institution,  including low- and moderate-income neighborhoods. These regulatory
assessments are utilized by the Federal Reserve when considering applications to
establish  branches,  merger applications and applications to acquire the assets
and  assume  the liabilities of another bank. The Financial Institutions Reform,
Recovery  and  Enforcement  Act  of  1989  ("FIRREA")  requires  federal banking
agencies  to  make public a rating of a bank's performance under the CRA. In the
case of a bank holding company, the CRA performance record of the banks involved
in  the  transaction are reviewed by federal banking agencies in connection with
the filing of an application to acquire ownership or control of shares or assets
of  a  bank  or  thrift  or  to  merge  with  any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction. The Bank
has received a satisfactory CRA rating from federal banking agencies.

     Current  CRA  Regulations  rate  banks based on their actual performance in
meeting  community  credit  needs.  CRA  performance is evaluated by the Federal
Reserve,  the  Bank's  primary  federal  regulator,  using  a  lending  test, or
investment test, and a service test. The Federal Reserve also will consider: (i)
demographic  data  about  the


                                        9
<PAGE>
community;  (ii)  the  bank's capacity and constraints; (iii) the bank's product
offerings  and  business strategy; and (iv) data on the prior performance of the
bank  and  similarly  situated  lenders. As a result of the GLBA, CRA agreements
with  private parties must be disclosed and annual CRA reports must be made to a
bank's  primary  federal regulator. A bank holding company will not be permitted
to  become  a  financial  holding company and no new activities authorized under
GLBA  may be commenced by a holding company or by a bank financial subsidiary if
any  of  its bank subsidiaries received less than a "satisfactory" CRA rating in
its  latest  CRA  examination.

     USA  Patriot  Act - On October 26, 2001, President Bush signed into law the
Uniting  and  Strengthening  America  by Providing Appropriate Tools Required to
Intercept  and  Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), which is
designed  to  deny  terrorists  and  others  the ability to obtain access to the
United  States  financial  system.  Title  III  of  the  USA  Patriot Act is the
International  Money  Laundering  Abatement  and Anti-Terrorist Financing Act of
2001.  Among  its  provisions,  the  USA  Patriot  Act  mandates or will require
financial  institutions  to  implement  additional  policies  and  procedures,
including additional due diligence and record keeping with respect to any or all
of  the following matters, among others: money laundering; suspicious activities
and  currency transaction reporting; and currency crimes. The U.S. Department of
the  Treasury  in  consultation with the Federal Reserve Board and other federal
financial  institution  regulators  has  promulgated  rules  and  regulations
implementing the USA Patriot Act which (i) prohibits U.S. correspondent accounts
with  foreign  banks  that  have  no physical presence in any jurisdiction; (ii)
require  financial  institutions  to  maintain certain records for correspondent
accounts  of  foreign  banks;  (iii)  require  financial institutions to produce
certain records relating to anti-money laundering compliance upon request of the
appropriate  federal  banking agency; (iv) require due diligence with respect to
private  banking  and correspondent banking accounts; (v) facilitate information
sharing  between  the  government,  federal  law  enforcement  and  financial
institutions; (vi) require financial institutions to have in place an anti-money
laundering  program; and (vii) require financial institutions to have in place a
Customer  Identification  Program, including risk-based procedures to verify the
identity  of  each  customer.  The  Company has implemented and will continue to
implement  the  provisions  of  the  USA  Patriot  Act as such provisions become
effective.  The  Company  currently  maintains  and  will  continue  to maintain
policies and procedures to comply with the USA Patriot Act requirements. At this
time,  the  Company  does  not  expect  that  the  USA  Patriot  Act will have a
significant  impact  on  the  financial  position  of  the  Company.

     Consumer  Laws  and  Regulations  - In addition to the laws and regulations
discussed  herein,  the  Bank  is  also  subject  to  certain  consumer laws and
regulations  that  are designed to protect consumers in transactions with banks.
While  the  list  set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act  and  the Fair Housing Act, among others. These laws and regulations mandate
certain  disclosure  requirements  and  regulate  the  manner in which financial
institutions  must  deal with customers when taking deposits, making loans to or
engaging  in  other  types  of  transactions  with  such  customers.

LEGISLATIVE AND REGULATORY CHANGES

     Various  bills  are  routinely introduced in the United States Congress and
the  Alabama  legislature  with  respect  to  the  regulation  of  financial
institutions. Certain of these proposals, if adopted, could significantly change
the  regulation  of banks and the financial services industry. We cannot predict
whether  any  of  these  proposals  will  be  adopted  or, if adopted, how these
proposals  would  affect  us.

EFFECT ON ECONOMIC ENVIRONMENT

     The  policies  of regulatory authorities, especially the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank  holding companies and their subsidiaries. Among the means available to the
Federal  Reserve  Board to affect the money supply are open market operations in
U.S.  Government  securities,  changes  in  the  discount  rate  on  member bank
borrowings  and  changes  in  reserve requirements against member bank deposits.
These  means  are  used  in varying combinations to influence overall growth and
distribution  of  bank loans, investments and deposits, and their use may affect
interest  rates  charged  on  loans  or  paid  for  deposits.

     Federal  Reserve  Board  monetary  policies  have  materially  affected the
operating  results  of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such  policies  on  our  business  and  earnings  cannot  be  predicted.


                                       10
<PAGE>
STATISTICAL DISCLOSURE

Statistical and other information regarding the following items are set forth in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the pages indicated below.

<TABLE>
<CAPTION>
                                                                         Page(s)
<S>                                                                      <C>
Loan Portfolio                                                                19

Selected Loan Maturity and Interest Rate Sensitivity . . . . . . . . . . . .  19

Securities Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20

Securities Portfolio Maturity Schedule . . . . . . . . . . . . . . . . . . .  20

Maturities of Large Time Deposits  . . . . . . . . . . . . . . . . . . . . .  21

Return on Equity and Assets  . . . . . . . . . . . . . . . . . . . . . . . .  22

Capital Adequacy Ratios  . . . . . . . . . . . . . . . . . . . . . . . . . .  23

Interest Rate Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . .  25

Average Balances, Interest Income/Expense and Yields/Rates . . . . . . . . .  28

Rate/Volume Variance Analysis  . . . . . . . . . . . . . . . . . . . . . . .  29

Summary of Loan Loss Experience  . . . . . . . . . . . . . . . . . . . . . .  31

Allocation of Loan Loss Reserve  . . . . . . . . . . . . . . . . . . . . . .  32

Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33

Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33

Noninterest Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34

Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36
</TABLE>


                                       11
<PAGE>
ITEM 2.   PROPERTIES

     Our  headquarters are located at 211 Lee Street NE, Decatur, Morgan County,
Alabama.  We  operate  eight  banking  offices  throughout Northern Alabama, one
mortgage  origination  office  and  two operations centers. We own two and lease
nine  of  these  offices.  Rental  expense  on  the  leased  properties  totaled
approximately  $753,119  in  2003.

ITEM 3.   LEGAL PROCEEDINGS

     The  Bank  received  demand letters from two former directors, officers and
employees  of  the  Bank. The Bank terminated such officers in November 2002 for
cause,  as  such  term  is defined by their respective employment contracts. One
officer  has  claimed  monetary compensation, stock options and attorneys' fees,
while  the  second  officer  has claimed monetary compensation, as well as stock
options and payment of country club dues for two years following the date of his
termination.  The  Bank  maintains that it terminated each of these officers for
"cause"  and  that  it  is  under  no  obligation  to  pay  them  any additional
compensation.  On  March 14, 2003, one of these officers filed a lawsuit against
the  Bank  in  the  Circuit Court for Morgan County, Alabama, alleging breach of
contract  and  demanding  certain  payments and benefits allegedly due under his
employment agreement. The Bank subsequently received notice that a suit had been
filed  by a second former officer and director in the Circuit Court of Jefferson
County,  Alabama,  alleging  similar causes of action against the Bank. The Bank
successfully removed each of these cases to the United States District Court for
the  Northern  District of Alabama. On March 9, 2004, the Bank reached agreement
on  the settlement of the claims of one of the former officers. The Bank intends
to vigorously defend the remaining action brought against the Bank, and does not
believe  that  the  final outcome will have a material impact on the Bank or the
Company.

     While  we  may  from  time-to-time  be a party to various legal proceedings
arising  from  the  ordinary  course  of  business,  we  believe  that there are
currently  no  other  proceedings  threatened or pending against us at this time
that  will, individually or in the aggregate, materially or adversely affect our
business,  financial  condition  or  results  of  operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No  matters  were submitted to a vote of stockholders of the Company during
the fourth quarter of the fiscal year covered by this report.

                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

     The Company is not listed on any exchange and there is no organized trading
market  for  the  shares  of  its common stock. When shares are traded, they are
traded  in privately negotiated transactions. Therefore, no reliable information
is  available as to trades of the Company's common stock, or as to the prices at
which  such  common  stock  has  traded.

     Management has reviewed the limited information available to the Company as
to  the  ranges at which shares of the Company's common stock has been sold. The
following  table sets forth, on a per share basis for the periods indicated, the
high  and  low  sale  prices  of the Company's common stock based solely on such
limited  available  information.

<TABLE>
<CAPTION>
                      Fiscal  2003    Fiscal  2002
                     --------------  ---------------
                      High     Low    High     Low
                     -------  -----  -------  ------
<S>                  <C>      <C>    <C>      <C>
     First Quarter   $  8.00  $7.00  $ 12.50  $ 8.00
     Second Quarter  $  6.00  $3.50  $ 12.00  $10.00
     Third Quarter   $  4.50  $4.00  $ 10.50  $ 9.50
     Fourth Quarter  $  8.00  $4.00  $  9.50  $ 9.50
</TABLE>

     As of December 31, 2003 the Company had approximately 1,156 stockholders of
record.


                                       12
<PAGE>
     Holders  of our common stock are entitled to receive dividends when, as and
if  declared  by  our  board  of  directors. We have never paid dividends on our
common  stock.  We  conduct  our  principal  business  through our subsidiaries,
primarily  the Bank. We derive cash available to pay dividends primarily, if not
entirely,  from  dividends  paid  by  our  subsidiaries.  There  are  certain
restrictions  that  limit  the  Bank's ability to pay dividends to us and on our
ability  to  pay  dividends.  In addition, the Bank is currently prohibited from
paying dividends to the Company without the prior approval of the Superintendent
of  the  State  Banking  Department.  Our  ability  to  pay  dividends  to  our
stockholders  will depend on our earnings and financial condition, liquidity and
capital  requirements,  the general economic and regulatory climate, our ability
to  service  any equity or debt obligations senior to our common stock and other
factors deemed relevant by our board of directors. We currently intend to retain
any  future  earnings  to  fund  the  development  and  growth  of our business.
Therefore, we do not at the present time anticipate paying any cash dividends on
our  common  stock  in  the  foreseeable  future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The  following table provides information as of December 31, 2003 regarding
compensation  plans (including individual compensation arrangements) under which
common  stock  of  the  Company  is  authorized  for  issuance.

<TABLE>
<CAPTION>
                                   EQUITY COMPENSATION PLAN INFORMATION


                                                                                   Number of securities
                                                                                 remaining available for
                       Number of Securities to be   Weighted-average exercise     future issuance under
                         issued upon exercise of       price of outstanding     equity compensation plans
                          outstanding options,        options, warrants and       (excluding securities
                           warrants and rights                rights             reflected in column (a))
     Plan Category                 (a)                         (b)                         (c)
----------------------------------------------------------------------------------------------------------
<S>                    <C>                          <C>                         <C>
Equity Compensation
Plans Approved by                        1,876,000                        3.36                          --
Security Holders

Equity Compensation
Plans not Approved by                           --                          --                          --
Security Holders
Total                                    1,876,000                        3.36
</TABLE>

See  Note  13 to the Consolidated Financial Statements for information regarding
the  material features of the above plans. Each of the above plans provides that
the  number  of  shares  with  respect  to which options may be granted, and the
number of shares of Company common stock subject to an outstanding option, shall
be  proportionately  adjusted  in the event of a subdivision or consolidation of
shares  or  the  payment  of  a  stock dividend on Company common stock, and the
purchase  price  per  share  of  outstanding  options  shall  be proportionately
revised.


                                       13
<PAGE>
                            MANAGEMENT'S STATEMENT ON
                     RESPONSIBILITY FOR FINANCIAL REPORTING
                     HERITAGE FINANCIAL HOLDING CORPORATION

     The management of Heritage Financial Holding Corporation is responsible for
the content and integrity of the consolidated financial statements and all other
financial  information  included in this annual report. Management believes that
the  financial  statements  have  been  prepared  in  conformity  with generally
accepted  accounting principles applied on a consistent basis to reflect, in all
material  respects,  the  substance  of  events  and transactions that should be
included,  and  that  the  other  financial  information in the annual report is
consistent with those financial statements. The financial statements necessarily
include amounts that are based on management's best estimates and judgments.

     Management  maintains  and  depends  upon  Heritage  Financial  Holding
Corporation's  accounting  systems and related systems of internal controls. The
internal  control  systems are designed to ensure that transactions are properly
authorized  and  recorded in the Company's financial record and to safeguard the
Company's assets from material loss or misuse. The Company maintains an internal
audit  staff  which  monitors  compliance with the Company's systems of internal
controls  and  reports  to management and to the audit committee of the board of
directors.

     The  audit  committee of the board of directors, composed solely of outside
directors,  has  responsibility  for  recommending to the board of directors the
appointment  of  the  independent  auditors  for  Heritage  Financial  Holding
Corporation. The committee meets periodically with the internal auditors and the
independent  auditors  to  review  the  scope  and  findings of their respective
audits.  The  internal  auditors,  independent auditors and management each have
full and free access to meet privately as well as together with the committee to
discuss  internal  controls,  accounting, auditing, or other financial reporting
matters.

     The  consolidated  financial  statements  of  Heritage  Financial  Holding
Corporation  have  been  audited  by  Porter,  Keadle,  Moore,  LLP, independent
auditors,  who  were  engaged  to  express  an  opinion  as  to  the fairness of
presentation  of  such  financial  statements.


/s/ William M. Foshee                /s/ Larry R. Mathews
------------------------------       -------------------------------------
William M. Foshee                    Larry R. Mathews
Chief Financial Officer              President and Chief Executive Officer


                                       14
<PAGE>
ITEM 6.   SELECTED FINANCIAL DATA

     The  following  table sets forth selected financial data and ratios for the
Company  and  should  be  read  in  conjunction  with our consolidated financial
statements including the related notes and "Management's Discussion and Analysis
of  Financial  Condition  and  Results  of  Operations."  See  "Item 8. Heritage
Financial Holding Corporation and Subsidiaries Financial Statements."

<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                        -----------------------------------------------------
                                                          2003       2002       2001       2000       1999
                                                        ---------  ---------  ---------  ---------  ---------
<S>                                                     <C>        <C>        <C>        <C>        <C>
                                                             (Dollars in thousands except per share data)
EARNINGS SUMMARY:
  Interest income                                       $ 30,343   $ 40,465   $ 42,966   $ 35,660   $ 17,248
  Interest expense                                        15,389     21,742     28,594     22,018      9,874
  Net interest income                                     14,954     18,723     14,371     13,642      7,374
  Provision for loan losses                               (1,646)    29,469      3,602      3,389      1,808
  Net interest income (loss) after
   provision for loan losses                              16,600    (10,746)    10,769     10,253      5,566
  Noninterest income                                       4,987      3,825      2,844      1,039        642
  Noninterest expense                                     19,795     15,380     10,023      8,113      4,952
  Income (loss) before income taxes                        1,793    (22,300)     3,590      3,179      1,256
  Income taxes (benefit)                                     664     (7,887)     1,224        991        395
  Net income (loss)                                        1,129    (14,413)     2,366      2,188        861

PER COMMON SHARE DATA:
  (Retroactively adjusted for effects of stock splits)
  Net income (loss) - basic                             $   0.11      (1.65)  $   0.28   $   0.26   $   0.12
  Net income (loss) - diluted                           $   0.11      (1.65)      0.23       0.22       0.11

  Cash dividends declared per common share              $   0.00       0.00       0.00       0.00       0.00
  SELECTED AVERAGE BALANCES:
  Total assets                                          $537,065   $617,255   $559,921   $401,615   $213,101
  Total loans                                            455,672    544,079    489,897    333,340    172,418
  Securities                                              51,564     39,961     26,662     23,183     19,405
  Earning assets                                         523,986    605,723    546,517    389,795    204,643
  Deposits                                               461,371    544,598    496,283    348,819    180,072
  Stockholders' equity                                    28,213     35,296     34,178     29,910     19,062
  Shares outstanding (thousands) (split adjusted)         10,048      8,717      8,485      8,317      7,226

SELECTED PERIOD-END BALANCES:
  Total assets                                          $522,426   $592,942   $568,291   $471,458   $297,952
  Total loans                                            385,887    523,850    505,381    422,135    244,620
  Securities                                             101,935     36,762     25,894     26,846     19,969
  Earnings assets                                        494,565    587,734    550,865    458,478    287,307
  Deposits                                               415,615    525,631    504,310    421,244    249,032
  Stockholders' equity                                    30,106     23,703     36,124     33,499     21,920
  Shares outstanding (thousands) (split adjusted)         10,511      8,821      8,515      8,476      7,581

SELECTED RATIOS:
  Return on average equity                                  4.00%    (4.08)%      6.92%      7.32%      4.52%
  Return on average assets                                  0.21%    (2.34)%      0.42%      0.54%      0.40%
  Net interest margin (taxable equivalent)                  2.86%      3.11%      2.65%      3.52%      3.63%
  Allowance for loan losses to loans                        3.77%      5.15%      1.20%      1.20%      1.24%
  Net charge-offs to average loans                          2.37%      1.57%      0.53%      0.41%      0.10%
  Average equity to average assets                          5.25%      5.72%      6.10%      7.45%      8.95%
</TABLE>


                                       15
<PAGE>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

GENERAL

     The following is a narrative discussion and analysis of significant changes
in  our  results of operations and financial condition. The principal purpose of
this  review  is  to provide the reader of the attached financial statements and
accompanying  footnotes with a detailed analysis of our financial results. Among
other  things,  this  discussion  provides commentary on our critical accounting
policies,  strategy,  operating  philosophies,  the  components  of net interest
margin  and  balance  sheet  strength  as measured by the quality of assets, the
composition  of  the  loan  portfolio  and  capital  adequacy.

     Like  most  community  banks, we derive most of our income from interest we
receive  on  our  loans  and investments. Our primary source of funds for making
these  loans  and  investments  is  our  deposits,  on  which  we  pay interest.
Consequently,  one  of  the  key  measures  of  our success is our amount of net
interest  income,  or  the difference between the income on our interest earning
assets,  such  as loans and investments, and the expense on our interest-bearing
liabilities  such  as  deposits.  Another  key measure is the spread between the
yield  we  earn  on  these  interest-earning  assets  and the rate we pay on our
interest-bearing  liabilities.

     We  have  included  a number of tables in the following discussion which we
believe  assist  our  description  of  our  results  of operations and financial
condition.  However, our financial statements present a complete picture of such
results  of  operations  and  financial  condition,  and  you  should  read this
discussion  in  conjunction  with  the  consolidated  financial  statements  and
selected  financial  data  included  elsewhere  in  this  Annual  Report.

     Our  principal  subsidiary  is  Heritage  Bank  (the  "Bank"),  a financial
institution  organized  and existing under the laws of Alabama and headquartered
in  Decatur, Alabama. The Bank operates ten offices throughout Northern Alabama.
The  Company  also  has  another  wholly  owned  subsidiary,  Heritage Financial
Statutory  Trust  I  ("Heritage Trust"), a Connecticut statutory trust. Heritage
Trust is a consolidated special purpose entity formed solely to issue cumulative
trust  preferred  securities.

     The  Company  was  established  in  the  year 2000 in order to facilitate a
reorganization  and  merger  of  the  Company  and  the Bank into a bank holding
company  structure.  The  reorganization  was  effective  on  August 31, 2000.

RESTRICTIONS ON OPERATIONS

     As previously reported, a targeted, limited scope review of the Bank's loan
portfolio  identified  certain assets of the Bank that management and regulatory
authorities  believed  should be classified. In connection with such review, the
Company  and the Bank took steps to charge off or establish additional loan loss
reserves  for  specified  assets  and  to  adjust the Bank's levels of loan loss
provisions.

     Management  has  taken certain corrective actions to address concerns about
the Bank's asset quality. The Bank may not declare or pay cash dividends without
seeking  the prior approval of the regulatory authorities. During 2002 and 2003,
the  Company  and  the  Bank  hired  certain management personnel who were given
specific written authority by the Board of Directors to implement sound lending,
recordkeeping and accounting practices. Management also developed an educational
program  for  the  Board of Directors and completed a written review of staffing
requirements  for  the  Bank.

     Management's  focus  on addressing asset quality, loan and audit issues has
resulted  in  a  substantial  decrease  in loan loss reserves during 2003 and in
increase  in  the Bank's Tier I leverage ratio to 8.58% as of December 31, 2003.
Management  continues to be vigilant in its review of the Bank's loan portfolio,
as  an  increase in classified loans and other loan-related issues could trigger
additional  restrictions  on  the  Bank's  operations.

CRITICAL ACCOUNTING POLICIES

     The  accounting  and financial 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. Following is a description of the
accounting  policies  applied  by  the  Company  which are deemed "critical." In
determining  which accounting policies are "critical" in nature, the Company has
identified  the  policies  that  require  significant  judgment


                                       16
<PAGE>
or  involve  complex  estimates.  The  application  of  these  policies  has  a
significant  impact  on  the  Company's  financial statements. Financial results
could  differ  significantly  if  different  judgments or estimates are applied.

Allowance for Loan Losses

     The  allowance  for  loan losses is established through provisions for loan
losses  charged  to operations. Loans are charged against the allowance for loan
losses  when  management  believes that the collection of principal is unlikely.
Subsequent  recoveries,  if  any,  are  credited  to the allowance. Management's
evaluation of the adequacy of the allowance for loan losses is based on a formal
analysis  which  assesses  the  risk  within  the  loan portfolio. This analysis
includes  consideration  of historical performance, current economic conditions,
level  of  nonperforming  loans,  loan  concentrations,  and  review  of certain
individual loans. Actual losses for these loans can vary significantly from this
estimate. Management continually reviews the methodology and assumptions used to
calculate  the  allowance  for  appropriateness  given  the  most  recent losses
realized  and  other  factors  that influence the estimation process. Management
believes  that  the allowance for loan losses is adequate. While management uses
available  information  to  recognize  losses  on loans, future additions to the
allowance  for  loan  losses  may  be  necessary  based  on  changes in economic
conditions and the results of management's ongoing review of the loan portfolio.
In  addition,  various  regulatory  agencies,  as  an  integral  part  of  their
examination  process, periodically review the bank's allowances for loan losses.
Such  agencies  may require the bank to recognize additions to the allowance for
loan  losses  based  on  their  judgments.

EXECUTIVE SUMMARY

     The  Bank  is  a  $535 million financial institution with community banking
offices,  operations  and  team  members located principally in Morgan, Madison,
Marshall  and  Jefferson  County,  Alabama.  We  gather substantially all of our
deposits  in  these  market  areas.  We  use  these  deposits,  as well as other
financing  sources, to fund our loan and investment portfolios. We earn interest
income on our loans and investments. In addition, we generate noninterest income
from  a  number  of  sources  including  deposit  and  loan  services,  mortgage
originations,  and  investment  securities.  Our  principal noninterest expenses
include  employee  compensation  and  benefits,  occupancy and equipment related
costs,  data processing and other administrative expenses. Our financial results
are affected by our credit quality, the economic environment, including interest
rates, consumer and business confidence and spending, as well as the competitive
conditions  within  our  industry.

EARNINGS  OVERVIEW

     The  Company  recorded  net income of $1,129,000 for the year ended 2003, a
107.8% increase over the same period in 2002. The Company experienced a net loss
of ($14,413,000) in 2002, a 709.2% decrease from 2001. The Company also recorded
earnings per share (basic and diluted) for the year ended 2003 of $0.11, a 106.7
%  increase  over the loss of ($1.65) for 2002, which was a 689.3% decrease from
basic earnings per share for the year ended 2001 of $0.28.

     The  increase in the Company's net income in 2003 is primarily attributable
to  the  $31,115,000  decrease  in  the  provision  for loan losses. The Company
experienced  a  20%  decrease in net interest income due to decreases in average
loans  of  16.3%,  decreases in average earning assets of 13.5% and decreases in
average  total  assets  of  13.0%.

     Interest  expense  decreased by $6,353,000, or 29.2% in 2003. This decrease
is  due  both to a decrease in interest rates payable on deposits and a decrease
in  average  total  deposits  of  $83,227,000  in  2003.

     Noninterest  income  increased  $1,162,000,  or  30.4%  for  the year ended
December 31, 2003. The increase is due primarily to a large increase in mortgage
banking  income  and service fees. While mortgage origination growth helped fuel
the  Company's  return  to  profitability, rising mortgage interest rates in the
last half of 2003 caused mortgage originations to decrease. Mortgage origination
income  may  not  return  to  the  high  level experienced in 2003 during 2004.

     Noninterest expense increased by $4,415,000, or 28.7%, in 2003 versus 2002.
Increases  in  noninterest  expense  were  primarily  fueled  by  an increase in
occupancy  and  equipment expense, an increase in data processing expense and an
increase  in advertising expense. The Company attributed these expense increases
to  growth  of  the Company's infrastructure and its requirements for additional
technology  to  monitor  its  loan  portfolio.


                                       17
<PAGE>
HIGHLIGHTS

     During 2003, we worked diligently to resolve issues with the credit quality
of  our  loan portfolio, revise our lending and loan review policies and address
any substandard loans remaining on our books. As a result, we have significantly
reduced  our  nonperforming  assets,  from  $29,782,000  at December 31, 2002 to
$17,594,000  at  December 31, 2003. We have also worked to return our regulatory
capital  ratios to levels in excess of regulatory requirements and, as a result,
the  Company  and  the  Bank  were considered "well capitalized" at December 31,
2003.

CHALLENGES

     While  we  made  great  strides during 2003, we faced, and will continue to
face,  challenges to our continued growth. We will work to increase net interest
income  following the $3.8 million decrease, or 20%, we experienced during 2003.
Additionally,  while  the  increase  in  noninterest  income  of  $1,162,000 was
helpful, we will continue to search for alternative income sources as we believe
mortgage  banking  revenues  may  decrease  or  remain at 2003 levels during the
coming  year.  We also experienced a decrease of $110 million in deposits during
2003,  although  much of this decrease was in brokered and out of area deposits.
We  will  continue to strive toward a greater share of the deposit market in our
areas.

EARNING ASSETS

     Our  total  assets  were  $522,426,000  at December 31, 2003, a decrease of
$70,516,000,  or  11.9%  from December 31, 2002. The decrease primarily resulted
from  a  decrease in gross loans of $137,963,000. Total assets were $592,942,000
at  December  31, 2002, an increase of $24,651,000, or 4.3% from $568,291,000 as
of  December 31, 2001. The increase in total assets in 2002 primarily related to
an  increase  in  securities available for sale of $10,868,000 and other assets,
primarily  deferred  tax assets, of $9,169,000. The increase in total assets was
funded  primarily  by  an  increase  in  deposits.

     Our  average  earning  assets  were  $523,986,000  in  2003, representing a
decrease  of  $81,737,000  or  13.5%  from 2002. The decrease in average earning
assets  was  mainly  due  to  the  decease  in  average  loans  outstanding  of
$88,407,000.  This  decrease in average loans was due to an effort by management
to  increase  the  quality  of  our  loan  portfolio.

     Management  considers  many  criteria  in  managing  assets,  including
creditworthiness,  diversification  and structural characteristics, maturity and
interest  rate  sensitivity.  The  following  table  sets  forth  the  Bank's
interest-earning  assets  by  category at December 31, in each of the last three
years.

<TABLE>
<CAPTION>
                                           Years Ended December 31,
                                       -------------------------------
                                          2003       2002      2001
                                       ----------  --------  ---------
                                                (In thousands)
<S>                                    <C>         <C>       <C>
Interest-bearing deposits with banks   $      116  $     98  $     326
Securities                                101,935    36,762     25,894
Federal funds sold                            632    14,681      6,716
Mortgage loans held-for-sale                5,996    12,343     12,548

Loans:
  Real estate                             257,210   371,714    344,749
  Commercial and other                    128,676   152,136    160,632
                                       ----------  --------  ---------
Total loans                               385,886   523,850    505,381
                                       ----------  --------  ---------
Interest-earning assets                $  494,565  $587,734  $ 550,865
                                       ==========  ========  =========
</TABLE>

LOAN PORTFOLIO

     Loans  are  the largest category of interest-earning assets, accounting for
87.0%  of  average interest earning assets at December 31, 2003. Loans typically
provide higher yields than other types of interest-earning assets. Loans involve
inherent  risk  and  liquidity  risks  which  management attempts to control and
mitigate.  Our average  loans, net of unearned income, totaled $455.7 million at
December  31,  2003,  a  decrease of $88,407,000, or 16.3% from the December 31,
2002  average  loans  of  $544.1 million. This decrease resulted from lower loan
volume  as  a  result  of  credit policies and procedures initiated in the first
quarter  of  2003  in  response  to  the  Bank's  previous  asset  quality


                                       18
<PAGE>
issues.  Due  to  these  same  credit  quality  issues, net charge-offs of $10.8
million  and  foreclosures  of $13.2 million in 2003 also affected the balances.
Average  loans  increased  $54,182,000  or 11.1% from year-end 2001 to 2002. The
increase  in  loans  was  a  result  of strong loan demand, primarily due to the
increase  in  refinancing.  Loan  growth  for  2002 was funded primarily through
deposits.  The  most  significant  loan  increase came from real estate mortgage
loans, which increased approximately $36,832,000 or 13.4% over the 2001 year-end
amount.

     The  Loan  Portfolio  table  presents the classifications of loans by major
category  at  December  31,  2003,  and  for  each  of the preceding four years.

<TABLE>
<CAPTION>
                                                           December 31,
                      ------------------------------------------------------------------------------------------------------------
                              2003                  2002                  2001                  2000                  1999
                      --------------------  --------------------  --------------------  --------------------  --------------------
                                  Percent               Percent               Percent               Percent               Percent
                       Amount    of Total    Amount    of Total    Amount    of Total    Amount    of Total    Amount    of Total
                      ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                      (Dollars in Thousands)
<S>                   <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Commercial,
  financial and
  agricultural        $116,202      30.11%  $132,237      25.24%  $138,344      26.71%  $105,393      24.97%  $ 66,144      27.04%
Real estate -
  construction          26,583       6.89     60,206      11.49     70,073      13.53     90,603      21.46     49,432      20.21
Real estate-mortgage   230,626      59.77    311,508      59.47    274,676      55.46    205,422      48.66    112,643      46.05
Consumer                12,475       3.23     19,899       3.80     22,288       4.30     20,717       4.91     16,410       6.70
                      ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
                       385,886      100.0%   523,850      100.0%   505,381      100.0%   422,135      100.0%   244,629      100.0%
                                 =========             =========             =========             =========             =========

Allowance for loan
  losses               (14,562)              (26,991)               (6,074)               (5,065)               (3,036)
Unearned income              -                     -                     -                     -                    (9)
                      ---------             ---------             ---------             ---------             ---------
Net loans             $371,324              $496,859              $499,307              $417,070              $241,584
                      =========             =========             =========             =========             =========
</TABLE>

     The  following  table  sets  forth maturities of selected categories of the
loan  portfolio  and  the  related  sensitivity  to  interest  rate  changes.

<TABLE>
<CAPTION>
              SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

                                                                        Rate Structure for Loans
                                              Maturity                   Maturing Over One Year
                             ---------------------------------------  -----------------------------
                                        Over One
                               One        Year       Over             Predetermined    Floating or
                             Year or     Through     Five                Interest      Adjustable
                               Less    Five Years   Years    Total         Rate           Rate
                             --------  -----------  ------  --------  --------------  -------------
<S>                          <C>       <C>          <C>     <C>       <C>             <C>
                                                 (Amounts in thousands)

Commercial, financial
  and agricultural           $ 59,440  $    51,583  $5,179  $116,202  $       29,432  $      27,330
Real estate - construction     24,867        1,520     196    26,583             883            833
                             --------  -----------  ------  --------  --------------  -------------

    Total                    $ 84,307  $    53,103  $5,375  $142,785  $       30,315  $      28,163
                             ========  ===========  ======  ========  ==============  =============
</TABLE>

SECURITIES PORTFOLIO

     Our  portfolio  of securities classified as available for sale increased by
$63,912,000  or 182.0% from the year 2002 to 2003. The increase in the portfolio
in 2003 was the result of market opportunities that allowed us to make purchases
with  an  acceptable interest rate spread. The securities portfolio increased by
$10,868,000  or  42.0% from the year 2001 to 2002. The balance in the securities
portfolio  increased  as  a  result  of  deposit  growth  in  2002.

     We  maintain  an  investment  strategy  of  seeking portfolio yields within
acceptable  risk  levels, as well as providing liquidity. The Bank maintains one
classification  of  securities:  "Available-for-Sale."  The  classification  of
securities as Available-for-Sale is consistent with our investment philosophy of
maintaining  flexibility  to  manage  the  portfolio.  The  Available-for-Sale
securities  are carried at fair market value and represent all of our securities
at  year-end  2003  and 2002. At year-end 2003 and 2002, unrealized gains in the
Available-for-Sale  portfolio  amounted  to  $342,000 and $95,000, respectively.

     At  year-end  2003 and 2002, obligations of the United States Government or
its  agencies  and  obligations of states and political subdivisions represented
approximately  32.2%  and  63.1%,  respectively,  of  our  securities portfolio.


                                       19
<PAGE>
     The  following  table  presents  the  carrying  amounts  of  our securities
portfolio  at  December  31,  in  each  of  the  last  three  years.

<TABLE>
<CAPTION>
                                                              December 31,
                                                       -------------------------
                                                        2003     2002     2001
                                                       -------  -------  -------
                                                            (In thousands)
<S>                                                    <C>      <C>      <C>
AVAILABLE-FOR-SALE
  U.S. government and agencies  . . . . . . . . . . .  $30,593  $     -  $15,697
  Mortgage-backed securities  . . . . . . . . . . . .   61,640   23,208      617
  Asset-backed securities . . . . . . . . . . . . . .        -        -    4,474
  State and municipal . . . . . . . . . . . . . . . .    1,336    1,330    2,590
  Corporate debt  . . . . . . . . . . . . . . . . . .    5,469   10,588    1,190
                                                       -------  -------  -------

    Total . . . . . . . . . . . . . . . . . . . . . .  $99,038  $35,126  $24,568
                                                       =======  =======  =======
</TABLE>

     The maturities and weighted average yields of the investments in the 2003
portfolio of securities are presented below.  Amounts are presented at amortized
cost.

<TABLE>
<CAPTION>
                                       SECURITY PORTFOLIO MATURITY SCHEDULE

                                                                         Maturing
                                  -----------------------------------------------------------------------------
                                       Within         After One But         After Five But          After
                                      One Year      Within Five Years       Within Ten Years       Ten Years
                                  --------------  ---------------------  ---------------------  ---------------
                                  Amount   Yield   Amount      Yield      Amount      Yield     Amount   Yield
                                  -------  -----  ---------  ----------  ---------  ----------  -------  ------
<S>                               <C>      <C>    <C>        <C>         <C>        <C>         <C>      <C>
                                                                  (Amounts in thousands)
SECURITIES AVAILABLE-FOR-SALE
  U. S. Government and agencies   $     -      -  $   7,100       2.05%  $  23,388       2.50%        -      -%
  Mortgage-backed securities . .        -      -        368       4.52%      9,522       4.12%   51,553   4.35%
  State and municipal (1)  . . .        -      -          -          -         185       3.65%    1,109   5.53%
  Corporate debt . . . . . . . .        -      -          -          -           -          -     5,470   8.63%
                                  -------  -----  ---------  ----------  ---------  ----------  -------  ------

                                  $     -      -  $   7,468       2.17%  $  33,095       2.97%  $58,132   4.71%
                                  =======         =========              =========              =======
<FN>
(1)  The  weighted  average  yields  are calculated on the basis of the cost and
     effective  yield  weighted for the scheduled maturity of each security. The
     weighted  average  yields on tax-exempt obligations have been computed on a
     fully  taxable  equivalent  basis  using  a  tax  rate  of  34%.
</TABLE>

     We did not hold any securities of which the aggregate value on December 31,
2003,  2002  and 2001 exceeded ten percent of stockholders' equity at that date.
(Securities  which are payable from and secured by the same source of revenue or
taxing  authority are considered to be securities of a single issuer. Securities
of  the  U.S.  Government  and U.S. Government agencies and corporations are not
included.)

DEPOSITS AND BORROWED FUNDS

     Our  average  deposits decreased by $83,226,000 or 15.3% from 2002 to 2003.
The  decrease primarily resulted from a decrease of $88.7 million in certificate
of  deposits  as  we decreased our reliance on brokered and out of market funds.
Brokered  funds  decreased  by  $19.9  million  in  2003 and out of market funds
decreased  by  $35.3  million  in 2003. Our average deposits rose $48,315,000 or
9.7%  from  the  year  2001  to  2002. The largest area of growth in 2002 was in
interest bearing demand accounts, which increased $7,417,000 or 13.8%. From 2001
to 2002, other time deposits of more than $100,000 increased $4,990,000 or 3.5%.
Savings  deposits  increased  $3,582,000 or 7.4%, and time deposits of less than
$100,000  increased  $4,616,000  or  1.9%.  From year-end 2001 to year-end 2002,
total  non-interest  bearing deposits increased $716,000 or 3.4%. Deposit growth
has  been  generated  primarily  outside  of  our  local  markets.


                                       20
<PAGE>
     The  following  table  sets  forth our deposit structure at December 31, of
each  of  the  last  three  years.

<TABLE>
<CAPTION>
                                                                  December 31,
                                                          ----------------------------
                                                            2003      2002      2001
                                                          --------  --------  --------
<S>                                                       <C>       <C>       <C>
                                                                (In thousands)
Noninterest-bearing deposits:
  Individuals, partnerships and corporations . . . . . .  $ 22,992  $ 21,961  $ 21,296
  U.S. Government and states and political subdivisions        624        --        --
  Certified and official checks  . . . . . . . . . . . .     4,526        --        --
                                                          --------  --------  --------
    Total noninterest-bearing deposits . . . . . . . . .    28,142    21,961    21,296
                                                          --------  --------  --------

Interest-bearing deposits:
  Interest-bearing demand accounts . . . . . . . . . . .    77,141    61,244    53,776
  Saving accounts  . . . . . . . . . . . . . . . . . . .    48,558    51,769    48,187
  Certificates of deposit, less than $100,000  . . . . .   167,404   244,448   239,831
  Certificates of deposit, more than $100,000  . . . . .    94,370   146,209   141,220
                                                          --------  --------  --------
    Total interest-bearing deposits  . . . . . . . . . .   387,473   503,670   483,014
                                                          --------  --------  --------

    Total deposits . . . . . . . . . . . . . . . . . . .  $415,615  $525,631   504,310
                                                          ========  ========  ========
</TABLE>

     The  following table presents a breakdown by category of the average amount
of  deposits  and  the  average rate paid on deposits for the periods indicated:

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                   ---------------------------------------------------
                                         2003             2002             2001
                                   ---------------  ---------------  -----------------
                                    Amount   Rate    Amount   Rate    Amount    Rate
                                   --------  -----  --------  -----  --------  -------
                                                  (Dollars in thousands)
<S>                                <C>       <C>    <C>       <C>    <C>       <C>
Noninterest-bearing deposits  . .  $ 25,897     -%  $ 21,832     -%  $ 16,975       -%
Interest-bearing demand deposits     63,161  1.22     50,622  1.61     39,299    3.10
Savings deposits  . . . . . . . .    54,125  1.16     64,773  1.92     43,079    3.17
Time deposits . . . . . . . . . .   318,188  3.64    407,370  4.33    396,930    6.09
                                   --------  -----  --------  -----  --------  -------
  Total deposits  . . . . . . . .  $461,371  2.98%  $544,597  3.62%  $496,283    5.39%
                                   ========         ========         ========
</TABLE>

     At  December  31,  2003,  time  deposits  greater  than $100,000 aggregated
approximately  $94,370,000. Maturities of time certificates of deposit and other
time  deposits  of  $100,000  or  more  outstanding  at  December  31, 2003, are
summarized  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                        MATURITIES OF LARGE TIME DEPOSITS

                                 (In thousands)

<S>                                                                 <C>
     Three months or less  . . . . . . . . . . . . . . . . . . . .  $ 8,556
     Over three through six months . . . . . . . . . . . . . . . .   12,169
     Over six through twelve months  . . . . . . . . . . . . . . .   36,269
     Over twelve months  . . . . . . . . . . . . . . . . . . . . .   37,376
                                                                    -------

       Total . . . . . . . . . . . . . . . . . . . . . . . . . . .  $94,370
                                                                    =======
</TABLE>

     Borrowed funds of $74,308,000 as of December 31, 2003, consist of long-term
Federal  Home  Loan  Bank  advances,  an  advance  from a pooled trust preferred
private  placement  for  subordinated  debentures, a short-term borrowing from a
commercial  bank  and  federal  funds purchased. We have $12,500,000 in lines to
purchase  Federal  Funds,  on  an  unsecured  basis,  from  commercial banks. At
December 31, 2003, we had $406,000 advanced against these lines. At December 31,
2002  and  2001,  we  had  no  funds  advanced  against these lines. We are also
approved  to  borrow  up  to  $88,733,000 under various short-term and long-term
programs  offered by the Federal Home Loan Bank of Atlanta. These borrowings are
secured  under  a  blanket  lien  agreement  on  certain  qualifying  mortgage
instruments  in  loan  and investment security portfolios. The unused portion of
these  available  funds amounted to $32,311,000, $42,223,000, and $46,000,000 at
year-end  2003,  2002  and  2001,  respectively.


                                       21
<PAGE>
CAPITAL RESOURCES

     Stockholders'  equity  increased  $6,402,000  or 27.0% to $30,106,000 as of
December  31,  2003  compared  to 2002. The increase in stockholders' equity was
attributable  to  the  net  income  for  the  year  of $1,129,000, $2,300,000 in
proceeds  from a private placement in March 2003 and $2,801,000 in proceeds from
the  exercise  of  stock  options. Stockholders' equity decreased $12,421,000 or
34.4%  to $23,703,000 as of December 31, 2002 compared to 2001. This decease was
primarily  attributable  to  a  net  loss  of $14,413,000 in 2002. Stockholders'
equity increased $2,625,000 or 7.8% to $36,124,000 as of December 31, 2001. This
increase was attributable to net income and the issuance of stock through exempt
offerings,  employee  stock  purchase  plan  purchases and the exercise of stock
options.

     On  February  22,  2001,  Heritage  Financial  Statutory Trust I ("Heritage
Trust"),  a  Connecticut  statutory  trust  established by the Company, received
$10,000,000 in proceeds in exchange for $10,000,000 principal amount of Heritage
Trust's  10.20%  cumulative  trust  preferred  securities  (the  "preferred
securities") in a pooled trust preferred private placement. The proceeds of that
transaction  were then used by Heritage Trust to purchase an equal amount of our
10.20%  subordinated  debentures  (the  "subordinated  debentures").

     Under  the  terms  of  the  indenture,  we  may  elect to defer payments of
interest  for  up  to  ten  semiannual payment periods. For the duration of such
deferral  period,  we  are  restricted  from paying dividends to shareholders or
paying  debt  that  is  junior  to  the  debentures.

     We  have  fully  and unconditionally guaranteed all obligations of Heritage
Trust  on  a  subordinated  basis  with  respect to the preferred securities. We
account  for  the  Heritage  Trust  preferred securities as a minority interest.
Subject  to  certain  limitations,  the  preferred  securities qualify as Tier 1
capital  and are presented in the Consolidated Statements of Financial Condition
as  "Guaranteed  preferred  beneficial  interests  in the Company's subordinated
debentures."  The  sole  asset  of Heritage Trust is the subordinated debentures
issued  by  us.  Both  the  preferred  securities  of  Heritage  Trust  and  our
subordinated  debentures  each have 30-year lives. However, both the Company and
Heritage  Trust have a call option of ten years, subject to regulatory approval,
or earlier, depending upon certain changes in tax or investment company laws, or
regulatory  capital  requirements.

     A  strong  capital position, which is vital to our continued profitability,
also  promotes depositor and investor confidence and provides a solid foundation
for  the  future  growth  of the organization. The objective of management is to
maintain  a  level  of  capitalization  that  is sufficient to take advantage of
profitable  growth  opportunities while meeting regulatory requirements. This is
achieved  by improving profitability through effectively allocating resources to
more  profitable  businesses,  improving  asset  quality,  strengthening service
quality,  and  streamlining  costs.  The  primary measures used by management to
monitor the results of these efforts are the ratios of return on average assets,
return  on  average  common  equity  and  average  equity  to  average  assets.

     The  table  below  summarizes these and other key ratios for us for each of
the  last  three  years.

<TABLE>
<CAPTION>
                           RETURN ON EQUITY AND ASSETS

                                                     2003          2002    2001
                                                     -----        -------  -----
<S>                                                  <C>          <C>      <C>
Return on average assets  . . . . . . . . . . . . .  0.21%        (2.34)%  0.42%
Return on average common equity . . . . . . . . . .  4.00          (4.08)  6.92
Dividend payout ratio . . . . . . . . . . . . . . .  0.00           0.00   0.00
Average common shareholders' equity to average
  assets ratio  . . . . . . . . . . . . . . . . . .  5.25           5.72   6.10
</TABLE>

     In  addition,  banks  and  bank  holding companies are required to maintain
capital  to  support,  on  a  risk-adjusted  basis,  certain  off-balance  sheet
activities  such  as  loan  commitments.  The  Federal Reserve Board has adopted
capital  guidelines  governing  the  activities of bank holding companies. These
guidelines  require  the  maintenance  of  an  amount  of  capital  based  on
risk-adjusted assets so that categories of assets with potentially higher credit
risk  will  require  more  capital  than  assets  with  lower  risk.

     The capital guidelines classify capital into two tiers, referred to as Tier
1  and  Tier 2. Under risk-based capital requirements, Total Capital consists of
Tier  1  capital  which  is  generally  common  stockholders'  equity  less


                                       22
<PAGE>
goodwill  and  Tier  2 capital which is primarily a portion of the allowance for
loan  losses  and certain qualifying debt instruments. In determining risk-based
capital  requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily  on the regulatory assigned levels of credit risk associated with such
assets.  Off-balance  sheet  items  are  considered  in  the  calculation  of
risk-adjusted  assets  through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies  to  meet the regulatory minimums of 4% Tier 1 and 8% total risk-based
capital.  In  1990  regulators  added  a  leverage  computation  to  the capital
requirements,  comparing  Tier  1 capital to total average assets less goodwill.

     The  table  below  illustrates  our regulatory capital ratios under federal
guidelines  at  December  31,  2003,  2002  and  2001:

<TABLE>
<CAPTION>
                               CAPITAL ADEQUACY RATIOS

                                                         Years ended December 31,
                                         Statutory  ----------------------------------
                                         Minimum       2003        2002        2001
                                        ----------  -----------  ---------  ----------
                                                            (Amounts in thousands)
<S>                                     <C>         <C>          <C>        <C>
Tier 1 Capital                                      $   35,113     30,749   $  46,180
Tier 2 Capital                                           6,732      8,687       6,074
                                                    -----------  ---------  ----------
Total Qualifying Capital                            $   41,845     39,436   $  52,254
                                                    ===========  =========  ==========
Risk Adjusted Total Assets (including
  off-balance-sheet exposures)                      $  407,053   $505,129   $ 488,824
                                                    ===========  =========  ==========

Adjusted quarterly average assets                   $  556,466   $650,604   $ 587,901
                                                    ===========  =========  ==========
Tier 1 Capital Ratio                         4.00%        8.63%      6.09%       9.45%
Total Capital Ratio                          8.00%       10.28%      7.81%      10.69%
Leverage Ratio                               4.00%        6.31%      4.94%       7.86%
</TABLE>

     On December 31, 2003, the Company and the Bank each exceeded the regulatory
minimums  and  together  qualified  as  a well capitalized institution under the
regulations.  On  December  31,  2002,  the  Bank  qualified  as  an  adequately
capitalized  institution  under  the regulations. We have worked aggressively to
improve  regulatory  capital  ratios  which  previously  had deteriorated due to
issues  with  the  Bank's  credit  quality.

LIQUIDITY MANAGEMENT

     We  focus  on maintaining and managing adequate liquidity. Liquidity refers
to  the  ability of the Company to meet its cash flow requirements in the normal
course  of  business, including loan commitments, deposit withdrawals, liability
maturities  and  ensuring that the Company is in a position to take advantage of
investment  opportunities  in  a timely and cost-efficient manner. Management of
liquidity  also  includes  management  of  funding sources and their utilization
based on current, future and contingency needs. Additionally, management strives
to  maximize  our  earnings  by  investing  our  excess  funds  in  securities.

     Historically,  we  have  maintained  a  high  loan-to-deposit ratio. Retail
deposit growth is a primary focus of our funding and liquidity strategy. To meet
our  short-term  liquidity  needs,  we maintain core deposits and have borrowing
capacity through the FHLB and federal funds lines. Long-term liquidity needs are
met  primarily  through  these  sources,  time deposits, the repayment of loans,
sales  of  loans  and  the  maturity or sale of investment securities, including
short-term investments. We have entered into certain contractual obligations and
commercial  commitments  that arise in the normal course of business and involve
elements  of  credit  risk,  interest  rate  risk  and  liquidity  risk.

     The  liability  portion  of  the  balance  sheet provides liquidity through
various  interest-bearing  and  noninterest-bearing  deposit  accounts.  We also
utilize  a  variety of funding sources to meet the needs of funding loan growth,
securities  acquisitions  and deposit fluctuations. Fed Funds lines and our line
of  credit  are  sources of short-term borrowings, and we also utilize Fed Funds
lines  and  our  credit facilities with the Federal Home Loan Bank for long-term
borrowings.  At  December 31, 2003 we had $12,094,000 of federal funds available
and credit of approximately $88,733,000 from The Federal Home Loan Bank of which
approximately  $32,311,000  was  available


                                       23
<PAGE>
and unused. At December 31, 2002, we had $13,500,000 of federal funds available,
$850,000  available  under  the  short-term  borrowing  and  a line of credit of
approximately $65,223,000 from The Federal Home Loan Bank of which approximately
$42,223,000  was  available  and  unused.

     The  primary  source  of  funds  available  to  the  Company  is payment of
dividends  from the Bank. Banking laws and other regulations limit the amount of
dividends  a bank subsidiary may pay without prior regulatory approval. Our Bank
may  not  pay  any  dividends  to  the Company without the prior approval of the
regulatory  authorities.

     The  Company  has  no  off-balance  sheet arrangements that are expected to
materially affect liquidity. The Company believes that the level of liquidity is
sufficient  to  meet  current  and  future  liquidity  requirements.

CONTRACTUAL  OBLIGATIONS  AND  COMMERCIAL  COMMITMENTS

The  following  table  illustrates  the  Company's contractual obligations as of
December  31,  2003

<TABLE>
<CAPTION>
                                          Payments Due By Period
                                          ----------------------
                                          (amounts in thousands)

                                       Less than                            After
Contractual obligations       Total      1 year    1-3 Years   3-5 Years   5 Years
---------------------------  --------  ----------  ----------  ----------  --------
<S>                          <C>       <C>         <C>         <C>         <C>
Note payable                 $  7,480  $    7,480  $        -  $        -  $      -
Trust preferred securities     10,000           -           -           -    10,000
Operating lease obligations     6,423         859       1,740       1,393     2,431
FHLB advances                  56,422      11,422      12,000       7,000    26,000
Time deposits                 261,730     175,069      68,572      18,089         -
                             --------  ----------  ----------  ----------  --------
Total                        $342,055  $  194,830  $   82,312  $   26,482  $ 38,431
                             ========  ==========  ==========  ==========  ========
</TABLE>

INTEREST RATE SENSITIVITY MANAGEMENT

     Interest rate sensitivity is a function of the repricing characteristics of
our portfolio of assets and liabilities. These repricing characteristics are the
time frames within which the interest-bearing assets and liabilities are subject
to change in interest rates either at replacement or maturity during the life of
the instruments. Sensitivity is measured as the difference between the volume of
assets  and liabilities in our current portfolio that is subject to repricing in
future  time periods. The differences are known as interest sensitivity gaps and
are  usually  calculated  separately  for  segments of time ranging from zero to
thirty days, thirty-one to ninety days, ninety-one days to one year, one to five
years,  over  five  years  and  on  a  cumulative  basis.


                                       24
<PAGE>
     The following table shows interest sensitivity gaps for different intervals
as  of  December  31,  2003.

<TABLE>
<CAPTION>
                                  INTEREST RATE SENSITIVITY ANALYSIS

                                        (Amounts in thousands)
                                         --------------------

                                          0-30      31-90      91-365       1-5     Over 5
                                          Days      Days        Days       Years     Years    Total
                                        --------  ---------  ----------  ---------  -------  --------
<S>                                     <C>       <C>        <C>         <C>        <C>      <C>
Interest-earning assets (1)
  Loans                                 $189,245  $  9,818   $  29,564   $139,724   $ 5,013  $373,364
  Mortgage loans held-for-sale             5,996         -           -          -         -     5,996
  Securities available-for-sale              983       920       2,898     30,967    66,167   101,935
  Time deposits in other banks               116        --          --         --        --       116
  Federal funds sold                         632        --          --         --        --       632
                                        --------  ---------  ----------  ---------  -------  --------
                                         196,972    10,738      32,462    170,691    71,180   482,043
Interest-bearing liabilities (2)
  Demand deposits (3)                     25,714    25,714      25,713          -         -    77,141
  Savings deposits (3)                    16,186    16,186      16,186          -         -    48,558
  Time deposits                           14,790    11,832     148,744     86,408         -   261,774
  Federal funds purchased                    406         -           -          -         -       406
  Federal Home Loan Bank advances         10,422         -       1,000     19,000    26,000    56,422
  Trust preferred securities                   -         -           -          -    10,000    10,000
  Other debt                               7,480         -           -          -         -     7,480
                                        --------  ---------  ----------  ---------  -------  --------
                                          74,998    53,732     191,643    105,408    36,000   461,781
                                        --------  ---------  ----------  ---------  -------  --------
  Interest sensitivity gap              $121,974  $(42,994)  $(159,181)  $ 65,283   $35,180  $ 20,262
                                        ========  =========  ==========  =========  =======  ========

  Cumulative interest sensitivity gap   $121,974  $ 78,980   $ (80,201)  $(14,918)  $20,262
                                        ========  =========  ==========  =========  =======

Ratio of interest-earning assets to
  interest-bearing liabilities              2.63       .20         .17       1.62      1.98

Cumulative ratio                            2.63      1.61         .75        .96      1.04

Ratio of cumulative gap to total
  interest-earning assets                    .25       .16        (.17)      (.03)      .04
<FN>
---------------
(1)  Excludes  nonaccrual  loans

(2)  Excludes  matured certificates which have not been redeemed by the customer
     and  on  which  no  interest  is  accruing.

(3)  Demand  and  savings  deposits  are  assumed to be subject to movement into
     other  deposit instruments in equal amounts during the 0-30 day period, the
     31-90  day  period,  and  the  91-365  day  period.
</TABLE>

     The  above  table  indicates that in a rising interest rate environment our
earnings  may  be positively affected in the short-term because 43.1% of earning
assets  reprice  within  90  days and only 27.9% of interest-bearing liabilities
reprice  during  the same period.  As seen in the preceding table, for the first
90  days  of repricing opportunity there is an excess of interest earning assets
over  interest-bearing  liabilities  of approximately $79.0 million. However, in
the  longer-term,  the  table  reflects  that  our  earnings  will be negatively
impacted  by  rising  interest  rates.  For the first 365 days, interest-bearing
liabilities  exceed  earning assets by $80.2 million.  During this one-year time
frame,  69.4% of all interest-bearing liabilities will reprice compared to 49.8%
of  all  interest-earning  assets.  Changes  in  the  mix  of  earning assets or
supporting  liabilities  can either increase or decrease the net interest margin
without  affecting  interest  rate  sensitivity.  Due  to management's continued
emphasis  on  profitability, many of the higher-yielding assets presented in the
table  above  have  call or prepayment features, which may result in such assets
having  a  shorter  effective  life.  This  in turn may reduce the interest rate
sensitivity  gap  presented above. It should be noted, therefore, that a matched
interest-sensitive  position  by  itself  would  not ensure maximum net interest
income.

     Management  continually evaluates the condition of the economy, the pattern
of  market  interest  rates,  and  other economic data to determine the types of
investments  that  should  be  made and at what maturities. Using this analysis,
management  from  time  to  time  assumes  calculated  interest  sensitivity gap
positions  to  maximize  net interest income based upon anticipated movements in
the  general  level  of  interest  rates.


                                       25
<PAGE>
OFF-BALANCE  SHEET  ARRANGEMENTS

     In  the  normal  course  of  business,  the Company engages in a variety of
financial  transactions  that,  under  generally accepted accounting principles,
either  are  not  recorded  on  the balance sheet or are recorded on the balance
sheet  in  amounts that differ from the full contract or notional amounts. These
transactions  involve  financial instruments that are initiated by our customers
in  order  to  meet  their  financing needs or risk management objectives. These
financial  instruments  include commitments to extend credit, standby letters of
credit and financial guarantees. Standby letters of credit carry the possibility
that  the  customer  will  fail  to  perform  under  the  terms of the contract.
Commitments  to  extend  credit  and  standby  letters of credit also involve an
element  of  liquidity risk as a result of the uncertainty around the timing and
ultimate  amount  of  funding  under  these  financial instruments. The contract
amounts  of  these instruments reflect the extent of involvement the Company has
in  particular  classes  of  financial  instruments.

     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  to  extend  credit  generally  have fixed expiration dates or other
termination  clauses  that  may  require  payment  of  a  fee  by  the customer.
Collateral,  if  deemed necessary, is based on Management's credit evaluation of
the  customer and may include business assets of commercial borrowers as well as
personal  property  and  real  estate  of  individual  borrowers and guarantors.
Unfunded  commitments  under  commercial lines of credit, revolving credit lines
and  overdraft  protection  agreements  are  commitments  for  possible  future
extensions  of  credit  to  existing  customers.  These  lines  of  credit  are
uncollateralized  and  usually  do not contain a specified maturity date and may
not  be  drawn  upon  to the total extent to which the Company is committed. The
Company's exposure to credit risk in the event of nonperformance by the customer
is  the  contract  amount.  Fixed-rate  commitments  are  subject to market risk
resulting  from  fluctuations  in  interest  rates and the Company's exposure is
limited  to the replacement value of those commitments. The Company's subsidiary
bank had outstanding commitments to extend credit of approximately $34.9 million
at  December  31, 2003 and $75.6 million at December 31, 2002. Since many of the
commitments  are  expected  to  expire  without  being  drawn  upon,  the  total
commitment  amounts  do  not  necessarily  represent  future  cash requirements.

     Standby  letters  of credit are conditional commitments issued to guarantee
the  performance  of a customer to a third party. These guarantees are primarily
issued  to  businesses  in  the Company's delineated trade area. The majority of
letters  of  credit  issued have expiration dates within one year. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by  the  other  party  is the contract amount. The Company's subsidiary bank had
standby  letters of credit outstanding of approximately $3.3 million at December
31,  2003  and $3.3 million at December 31, 2002. The Company holds real estate,
equipment,  automobiles  and  customer  deposits  as collateral supporting those
commitments  for  which  collateral  is  deemed  necessary.

                              RESULTS OF OPERATIONS

SUMMARY

     We  reported  net income of $1.1 million or $0.11 per diluted share for the
year  ended  December  31,  2003,  compared  to a net loss of $(14.4) million or
($1.65)  per  diluted  share for the year ended December 31, 2002. Net income in
2001  was  $2.4  million  or $0.23 per diluted share. Net earnings resulted in a
return  on  average assets of 0.21%, (2.34)% and 0.42% for the three years ended
December  31, 2003, respectively. The return on average stockholders' equity for
the  three  years  ended  December  31,  2003  was  4.00%,  (4.08)%  and  6.92%,
respectively.

NET INTEREST INCOME

     The  largest  component  of our net income is net interest income, which is
the  difference  between  the  revenue  generated on interest-earning assets and
interest  paid  on deposits and borrowings. Net interest income is determined by
the  rates  earned  on  our  interest-earning  assets,  rates  paid  on  our
interest-bearing  liabilities,  the  relative amounts of interest-earning assets
and  interest-bearing  liabilities, the degree of mismatch, and the maturity and
repricing  characteristics  of  our interest-earning assets and interest-bearing
liabilities.  Net  interest  income  divided  by average interest-earning assets
represents  our  net interest margin. For purposes of discussion, income that is
either exempt from federal income taxes or taxed at a preferential rate has been
adjusted to fully taxable equivalent amounts, using a statutory federal tax rate
of  34%.

     Our  net  interest  income  decreased  $3,829,000  or  20.4%  in 2003. This
decrease  primarily  resulted  from  a decrease in average loans of $88,407,000.
Net  interest  income  increased  $4,356,000  or  30.1%  to  $18,813,000  from


                                       26
<PAGE>
2001  to  2002.  This  increase  in  net  interest  income is due primarily to a
decrease in interest paid on deposits.  Interest income was $30,373,000 in 2003,
a decrease of $10,181,000 or 25.1% from 2002. Interest income was $40,554,000 in
2002,  which  represented  a decrease of $2,498,000 or 5.8% over 2001.  Interest
and fee income produced by the loan portfolio decreased by $10,039,000, or 26.1%
in  2003.  Interest  and  fee  income  produced  by the loan portfolio decreased
$1,899,000  or  4.7%  in 2002 from 2001.  Interest income on securities remained
the same in 2003 from 2002.  Interest income on securities increased $156,000 or
9.5% in 2002 from 2001.  This change is primarily due to an increase in the size
of  the  investment  portfolio.  Interest income other than loans and securities
decreased  $142,000, or 43.6%, from 2002 to 2003 and decreased $755,000 or 69.8%
from  2001  to  2002.

     Total  interest expense decreased by $6,352,000 or 29.2% in 2003 from 2002.
This  reduction  is due to a decrease in the rates paid on deposits along with a
decrease  in average interest-bearing deposits of $87,292,000 in 2003 from 2002.
Total interest expense decreased by $6,854,000 or 24.0% in 2002 from 2001.  This
reduction  is primarily due to a decline in the rates paid on deposits. Interest
expense  on  deposits  decreased  $7,035,000  or  26.3%  in  2002  from  2001.

     The  trend in net interest income is commonly evaluated in terms of average
rates  using  the  net  interest  margin  and  the interest rate spread. The net
interest margin or the net yield on earning assets is computed by dividing fully
taxable  equivalent  net  interest  income by average earning assets. This ratio
represents  the  difference  between the average yield on average earning assets
and  the  average  rate paid for all funds used to support those earning assets.
Our  net interest margin decreased by 25 basis points in 2003.  Our net interest
margin increased 46 basis points in 2002 from 2.65% at year-end 2001 to 3.11% at
year-end  2002.  The  yield on earning assets decreased 90 basis points to 5.80%
in 2003 from 2002, and decreased 118 basis points to 6.70% in 2002 from 7.88% in
2001. Our cost of funds decreased 70 basis points to 3.21% at year-end 2003 from
2002  and  decreased  177  basis  points to 3.91% at year-end 2002 from 5.68% at
year-end  2001.

     The  interest rate spread measures the difference between the average yield
on  earning  assets  and  the  average  rate paid on interest bearing sources of
funds.  The  interest  rate  spread eliminates the impact of noninterest bearing
funds  and  gives  a  direct  perspective  on the effect of market interest rate
movements.  During  recent  years,  the  net  interest margins and interest rate
spreads  have  been under intense pressure to maintain historical levels, due in
part  to  tax  laws  that  discouraged  investment  in tax-exempt securities and
intense  competition  for  funds  with  non-bank institutions. Our interest rate
spread  decreased by 20 basis points in 2003. Our interest rate spread increased
59  basis  points  to  2.79%  from  2001  to  2002.

     The  economic  conditions  during  2003 and the prolonged low interest rate
environment  presented  a  challenge  to  the  Company  and  the Bank. Since the
beginning  of  2001, the Federal Reserve has lowered short-term interest rates a
total  of  500  basis  points.  These  factors  contributed  to historically low
interest  rates,  leading  to  higher  prepayments  of  mortgage loans and other
fixed-rate  interest-earning  assets  tied  to treasury yields. Prepayments from
these  assets were being reinvested at lower rates, while liability costs, which
are tied to other indices, were not declining at the same place as asset yields.
These  factors help to explain the decreases in net interest margin and interest
rate  spread  during  2003.


                                       27
<PAGE>
     The  tables  that follow show, for the periods indicated, the daily average
balances  outstanding  for  the  major categories of interest-bearing assets and
interest-bearing liabilities, and the average interest rate earned or paid by us
thereon. Such yields are calculated by dividing income or expense by the average
balance  of  the corresponding assets or liabilities. Also shown are the changes
in  income  attributable  to  changes  in  volume  and  changes  in  rate.

<TABLE>
<CAPTION>
                                    AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES

                                                     Taxable Equivalent Basis

                                                                      YEARS ENDED DECEMBER 31,
                                                                      ------------------------
                                                 2003                            2002                            2001
                                    ------------------------------  ------------------------------  ------------------------------
                                               INTEREST   AVERAGE              INTEREST   AVERAGE              INTEREST   AVERAGE
                                     AVERAGE    INCOME/   YIELDS/    AVERAGE    INCOME/   YIELDS/    AVERAGE    INCOME/   YIELDS/
                                     BALANCE    EXPENSE     RATE     BALANCE    EXPENSE     RATE     BALANCE    EXPENSE     RATE
                                    ------------------------------  ------------------------------  ------------------------------
<S>                                 <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>        <C>
ASSETS
Earning assets:
  Loans, net of unearned
    income (1)                      $455,672      28,384     6.23%  $544,079      38,423     7.06%  $489,897      40,322     8.23%

Securities:
  Taxable                             50,271       1,714     3.41%    37,513       1,603     4.27%    24,308       1,460     6.01%
  Tax-exempt                           1,293          91     7.04%     2,448         202     8.25%     2,354         189     8.03%
                                    ---------  ---------            ---------  ---------            ---------  ---------
    Total securities                  51,564       1,805     3.50%    39,961       1,805     4.52%    26,662       1,649     6.18%

Time deposits in other banks             117           4     3.42%       161           6     3.73%       446          25     5.61%
 Federal funds sold                   16,633         180     1.08%    21,522         320     1.49%    29,512       1,056     3.58%
                                    ---------  ---------            ---------  ---------            ---------  ---------

    Total interest earning
      assets (2)                     523,986      30,373     5.80%   605,723      40,554     6.70%   546,517      43,052     7.88%

Noninterest earning assets:
Cash and due from banks                7,256                           4,452                           5,410
Premises and equipment                 7,260                           6,753                           6,220
Accrued interest and other
  assets                              20,512                           8,915                           7,541
Allowance for loan losses            (21,949)                         (8,588)                         (5,767)
                                    ---------                       ---------                       ---------

    Total assets                    $537,065                        $617,255                        $559,921
                                    =========                       =========                       =========

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  Demand deposits                   $ 63,161         773     1.22%  $ 50,622         854     1.69%  $ 39,299       1,219     3.10%
  Savings deposits                    54,125         626     1.16%    64,773       1,245     1.92%    43,079       1,367     3.17%
  Time deposits                      318,188      11,595     3.64%   407,371      17,618     4.32%   396,930      24,166     6.09%
                                    ---------  ---------            ---------  ---------            ---------  ---------
    Total deposits                   435,474      12,994     2.98%   522,766      19,717     3.77%   479,308      26,752     5.58%

Other short term borrowings               95           1     1.05%       928          36     3.88%        53           2     3.77%
Other                                 44,576       2,394     5.37%    32,520       1,988     6.11%    24,271       1,841     7.59%
                                    ---------  ---------            ---------  ---------            ---------  ---------
     Total interest-bearing
        liabilities                  480,145      15,389     3.21%   556,214      21,741     3.91%   503,632      28,595     5.68%
                                               ---------                       ---------                       ---------

Non-interest bearing liabilities:
Demand deposits                       25,897                          21,832                          16,975
Accrued interest and
  other liabilities                    2,810                           3,913                           5,136
Stockholders' equity                  28,213                          35,296                          34,178
                                    ---------                       ---------                       ---------

    Total liabilities and
       stockholders' equity         $537,065                        $617,255                        $559,921
                                    =========                       =========                       =========

Net interest income/
  net interest spread                             14,984     2.59%                18,813     2.79%                14,457     2.20%
                                                          ========                        ========                        ========
Net yield on earning
  assets                                                     2.86%                           3.11%                           2.65%
                                                          ========                        ========                        ========

Taxable equivalent
  adjustment:
Loans                                                  7                              21                              22
Investment securities                                 23                              69                              64
                                               ---------                       ---------                       ---------
    Total taxable equivalent
      adjustment                                      30                              90                              86
                                               ---------                       ---------                       ---------

Net interest income                            $  14,954                       $  18,723                       $  14,371
                                               =========                       =========                       =========
<FN>
(1)  Average  loans  include  nonaccrual  loans.  All  loans  and  deposits  are
     domestic.
(2)  Tax  equivalent  adjustments  have  been based on an assumed tax rate of 34
     percent,  and do not give effect to the disallowance for federal income tax
     purposes  of  net  interest  expense  related to certain tax-exempt earning
     assets.
</TABLE>


                                       28
<PAGE>
                          RATE/VOLUME VARIANCE ANALYSIS

                            Taxable Equivalent Basis

     The  following  table  shows the change in net interest income from 2003 to
2002  and  from  2002  to 2001 due to changes in volumes and rates.  (Dollars in
thousands)

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                          -----------------------
                                                2003 Compared to 2002     2002 Compared to 2001
                                                ---------------------     ---------------------
                                                   Rate/     Net               Rate/     Net
                                         Volume    Yield    Change   Volume    Yield   Change
                                        --------  -------  --------  -------  -------  -------
<S>                                     <C>       <C>      <C>       <C>      <C>      <C>
Earning assets:
  Loans, net of unearned income         $(3,557)  (6,482)  (10,039)   4,182   (6,081)  (1,899)

Securities:
  Taxable                                   476     (365)      111      644     (501)     143
  Tax exempt                                (75)     (36)     (111)       8        5       13
Time deposits in other banks                 (1)      (1)       (2)      (5)     (14)     (19)
Federal funds sold                         (173)      33      (140)    (430)    (306)    (736)
                                        --------  -------  --------  -------  -------  -------

    Total interest earning assets        (3,330)  (6,851)  (10,181)   4,399   (6,897)  (2,498)
                                        --------  -------  --------  -------  -------  -------

Interest-bearing liabilities:
  Demand deposits                           184     (265)      (81)     289     (654)    (365)
  Savings deposits                         (262)    (357)     (619)     536     (658)    (122)
  Time deposits                          (1,697)  (4,326)   (6,023)     620   (7,168)  (6,548)
  Other short term borrowings                93     (128)      (35)      34        -       34
  Other                                     670     (264)      406      548     (401)     147
                                        --------  -------  --------  -------  -------  -------

    Total interest-bearing liabilities   (1,012)  (5,340)   (6,352)   2,027   (8,881)  (6,854)
                                        --------  -------  --------  -------  -------  -------

Net interest income                     $(2,318)  (1,511)   (3,829)   2,372    1,984    4,356
                                        ========  =======  ========  =======  =======  =======
</TABLE>

ALLOWANCE FOR LOAN LOSSES

     The  Bank's  lending  officers  are  responsible for the ongoing review and
administration of each loan. They make the initial identification of loans which
present  some  difficulty in collection or where there is an indication that the
probability  of loss exists. Lending officers are responsible for the collection
effort  on  a  delinquent  loan.  Senior management is informed of the status of
delinquent  and  problem  loans  on  a  monthly  basis.

     Management  makes  recommendations  monthly  to  the  Board of Directors as
to-charge-offs.  Management  reviews  the allowance for loan losses on a monthly
basis.  Our  policy is to discontinue interest accrual when payment of principal
and  interest  is  90  days  or  more  in  arrears.

     The  allowance  for  loan  losses represents management's assessment of the
risks  associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of  the  allowance  for  loan  losses and the appropriate provisions required to
maintain  a  level  considered  adequate  to  absorb anticipated loan losses. In
assessing  the  adequacy  of the allowance, management reviews the size, quality
and  risk  of  loans in the portfolio. Management also considers such factors as
loan  loss  experience, the amount of past due and nonperforming loans, specific
known  risks,  the  status  and  amount  of  nonperforming  assets,  underlying
collateral  values  securing  loans, current and anticipated economic conditions
and  other  factors  which  affect  the  allowance  for  loan  losses.

     While  it  is  our  policy to charge off in the current period the loans in
which a loss is considered probable, there are additional risks of future losses
which  cannot  be  quantified  precisely  or  attributed  to particular loans or
classes  of  loans.  Because  these  risks  include  the  state  of the economy,
management's  judgment  as  to  the  adequacy  of  the  allowance is necessarily
approximate  and  imprecise.


                                       29
<PAGE>
     During 2003, the allowance for loan losses was approximately $14.6 million.
This  compares  to  an approximate allowance for loan losses of $27.0 million at
the  end  of  2002 and $6.1 million at the end of 2001. At December 31, 2003 and
2002,  the  recorded investment in loans that were considered to be impaired was
approximately  $13,047,000 and $24,354,000, respectively, of which approximately
$12,523,000  and  $15,794,000,  respectively,  were on nonaccrual.  For the year
ended  December  31,  2003,  the  Company  recognized  approximately $748,000 of
interest  income  on  nonaccrual  loans.  If loans on nonaccrual at December 31,
2003  had  performed  in accordance with their original terms, the Company would
have  reported  approximately  $882,000  in  interest  income.

     As  a result of its ongoing evaluation of the adequacy of the allowance for
loan  losses,  a  decline  in  problem credits and continued recoveries of loans
previously  charged  off,  management  decided  to reduce the allowance for loan
losses  during  2003.  Management  considers  the  allowance  for loan losses at
December  31,  2003  and  December  31,  2002  to  be  adequate.

     During  2003,  the  Company sold multifamily and commercial mortgage loans,
both  performing  and  non-performing,  totaling  approximately $13,800,000 to a
third party at a net price of 93.7% of the outstanding balance.  Under the terms
of  the  purchase  agreement,  the  Company  was  required  to  repurchase  any
non-performing  loan for which the first monthly payment was not received by the
purchaser.  No  loans  have  been repurchased by the Company.  In recording this
transaction,  the  allowance  allocated  to the loans sold was reversed from the
allowance  for  loan  losses  resulting in a negative provision of approximately
$665,000.

     The primary reason for the decrease in the allowance for loan losses during
2003  was  the charge-off of approximately $11 million in loans during 2003 as a
result  of  credit  quality  issues  identified  during 2002. These charge-offs,
coupled  with  management's aggressive efforts to increase credit quality during
2003,  led  to  the  $12.4  million  reduction in the allowance for loan losses.
Conversely, the large increase in the allowance for loan losses between December
31,  2001  and  December  31,  2002  was  due  to the same credit quality issues
discovered  in 2002. The allowance was increased by $2 million during the second
quarter  of  2002,  and by an additional $20.9 million by the end of 2002 as the
full  extent  of  the  asset  quality  issues  were  discovered.

     The  following  table  sets  forth  certain information with respect to our
loans,  net  of  unearned income, and the allowance for loan losses for the five
years  ended  December  31,  2003.


                                       30
<PAGE>
<TABLE>
<CAPTION>
                                    SUMMARY OF LOAN LOSS EXPERIENCE

                                                    2003       2002       2001       2000       1999
                                                  ---------  ---------  ---------  ---------  ---------
<S>                                               <C>        <C>        <C>        <C>        <C>
                                                                   (Dollars in thousands)

Allowance for loan losses at beginning of year    $ 26,991   $  6,074   $  5,065   $  3,036   $  1,402

Loans charged off:
    Commercial, financial and agricultural           4,405      4,274      1,262      1,039         --
    Real Estate - mortgage                           6,076      3,847      1,046         --         --
    Consumer                                           838        704        387        416        195
                                                  ---------  ---------  ---------  ---------  ---------

    Total loans charged off                         11,319      8,825      2,695      1,455        195
                                                  ---------  ---------  ---------  ---------  ---------

Recoveries on loans previously charged off:
    Commercial, financial and agricultural             200        201         33         66         --
    Real Estate - mortgage                             223          3         28         --         --
    Consumer                                           113         69         41         29         21
                                                  ---------  ---------  ---------  ---------  ---------

    Total recoveries                                   536        273        102         95         21
                                                  ---------  ---------  ---------  ---------  ---------

Net loans charged off                               10,783      8,552      2,593      1,360        174

Provision for loan losses                           (1,646)    29,469      3,602      3,389      1,808
                                                  ---------  ---------  ---------  ---------  ---------

Allowance for loan losses at end of period        $ 14,562   $ 26,991   $  6,074   $  5,065   $  3,036
                                                  =========  =========  =========  =========  =========

Loans, net of unearned income, at end of period   $385,887   $523,850   $505,381   $422,135   $244,620

Average loans, net of unearned income,
    outstanding for the period                     455,672    544,079    489,897    333,340    172,418

Ratio of net charge-offs to net average loans         2.37%      1.57%      0.53%      0.41%      0.10%
</TABLE>

     In  evaluating the allowance, management also considers our historical loan
loss  experience,  the  amount  of past due and nonperforming loans, current and
anticipated  economic  conditions,  lender  requirements  and  other appropriate
information.  We  allocate  the  allowance  for  loan  losses  to  specific loan
categories  based  on  an  average of the previous two years net losses for each
loan type and management's judgment as to potential losses and significant areas
of  risk  in  the  portfolio.


                                       31
<PAGE>
     Management allocated the allowance for loan losses to specific loan classes
as follows:

<TABLE>
<CAPTION>
                                                            ALLOCATION OF LOAN LOSS RESERVE

                                                                       December 31
                        --------------------------------------------------------------------------------------------------
                               2003                2002                2001                2000                1999
                        ------------------  ------------------  ------------------  ------------------  ------------------
                                  Percent             Percent             Percent             Percent             Percent
                                 of Loans            of Loans            of Loans            of Loans            of Loans
                                  in Each             in Each             in Each             in Each             in Each
                                 Category            Category            Category            Category            Category
                                 to Total            to Total            to Total            to Total            to Total
                        Amount     Loans    Amount     Loans    Amount     Loans    Amount     Loans    Amount     Loans
                        -------  ---------  -------  ---------  -------  ---------  -------  ---------  -------  ---------
<S>                     <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
                                                              (Dollars in Thousands)
DOMESTIC LOANS
Commercial, financial
  and agricultural      $ 6,745      46.3%  $ 9,593      24.5%  $ 1,622      26.7%  $ 1,265      25.0%  $   821      27.0%
Real estate               7,661      52.6    16,881      71.8     4,191      69.0     3,552      70.1     2,012      66.3
Consumer                    156       1.1       517       3.7       261       4.3       248       4.9       203       6.7
                        -------  ---------  -------  ---------  -------  ---------  -------  ---------  -------  ---------

                        $14,562     100.0%  $26,991     100.0%  $ 6,074     100.0%  $ 5,065     100.0%  $ 3,036     100.0%
                        =======  =========  =======  =========  =======  =========  =======  =========  =======  =========
</TABLE>

NONPERFORMING ASSETS

     Nonperforming assets include nonperforming loans and foreclosed real estate
held  for  sale.  Nonperforming  loans include loans classified as nonaccrual or
renegotiated.  A  delinquent loan is placed on nonaccrual status when it becomes
90 days or more past due and management believes, after considering economic and
business  conditions  and  collection  efforts,  that  the  borrower's financial
condition  is  such  that the collection of interest is doubtful. When a loan is
placed on nonaccrual status, all interest which has been accrued on the loan but
remains unpaid is reversed and deducted from earnings as a reduction of reported
interest  income.  No  additional interest income is accrued on the loan balance
until  the collection of both principal and interest becomes reasonably certain.
When  a  problem  loan  is  finally  resolved, there may ultimately be an actual
write-down  or  charge-off of the principal balance of the loan to the allowance
for  loan  losses.  The accrual of interest on loans is discontinued at the time
the  loan  is  90  days delinquent unless the loan is well collateralized and in
process  of collection. Recognition of any interest after a loan has been placed
on  nonaccrual  is  accounted  for  on  a  cash  basis.

     We  had  nonperforming  assets  at  December  31,  2003,  of  approximately
$17,594,000,  $29,782,000  as  of 2002, $12,415,000 as of 2001, $6,188,000 as of
2000,  and  $1,170,000  as  of  December  31,  1999.


                                       32
<PAGE>
     The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 2003, 2002, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                               NONPERFORMING ASSETS

                                                                           December 31,
                                                         -----------------------------------------------
                                                           2003      2002      2001     2000      1999
                                                         --------  --------  --------  -------  --------
<S>                                                      <C>       <C>       <C>       <C>      <C>
                                                                      (Dollars in thousands)
Nonaccruing loans . . . . . . . . . . . . . . . . . . .  $12,523   $15,794   $ 4,062   $  617   $    43
Loans past due 90 days or more  . . . . . . . . . . . .      524     8,560     4,125    5,358       914
Restructured loans  . . . . . . . . . . . . . . . . . .       --        --        --       --        --
                                                         --------  --------  --------  -------  --------

    Total nonperforming loans . . . . . . . . . . . . .   13,047    24,354     8,187    5,975       957
Other real estate . . . . . . . . . . . . . . . . . . .    4,547     5,428     4,228      213       213
                                                         --------  --------  --------  -------  --------

    Total . . . . . . . . . . . . . . . . . . . . . . .  $17,594   $29,782   $12,415   $6,188   $ 1,170
                                                         ========  ========  ========  =======  ========

Percentages:
    Loans loss allowance to total nonperforming assets     82.77%    90.63%    48.92%   81.85%   259.49%

Total nonperforming loans to total loans
    (net of unearned interest) . . . . . . . . . . . . .    3.38%     4.65      1.62     1.42      0.39
Total nonperforming assets to total assets . . . . . . .    3.37      5.02      2.18     1.31      0.39
</TABLE>

     The  above  nonperforming  loans  represent  all material credits for which
management  has serious doubts as to the ability of the borrowers to comply with
the  loan  repayment  terms.

NONINTEREST INCOME

     Noninterest  income  consists  of  revenues generated from a broad range of
financial  services  and activities including fee-based services and profits and
commissions  earned through credit life insurance sales and other activities. In
addition,  gains  or  losses  realized  from  the  sale  of investment portfolio
securities  are included in noninterest income. One of the Bank's strategies has
been  to increase non-interest income. The Bank continues to emphasize growth in
mortgage  origination  income  and  service  fees in order to provide additional
revenue  generation  capabilities,  however,  continued  growth  in the mortgage
origination  area  may  not  be  possible. Total noninterest income increased by
$1,162,000  or  30.4%  for  the year ended December 31, 2003, as compared to the
year  2002.  This  increase  was primarily due to increased mortgage origination
fees,  as  refinancing  and  home  purchases  continued  at a record pace. Total
noninterest  income  increased  by $981,000 or 34.5% for the year ended December
31,  2002,  as  compared  to  the  year  2001.

     The table below sets forth the components of our noninterest income for the
periods  indicated.

<TABLE>
<CAPTION>
                                 NONINTEREST INCOME

                                Years Ended December 31,           Percent Change
                              -------------------------------  ----------------------
                                2003       2002       2001     2003/2002   2002/2001
                              ---------  ---------  ---------  ----------  ----------
<S>                           <C>        <C>        <C>        <C>         <C>
                                                (Dollars in thousands)
Service charges on deposits   $   1,137      1,018        867      11.69%      17.42%
Mortgage banking income           3,342      2,455      1,918      36.13       28.00
Securities gains                    206        233         24     (11.59)     870.83
Other                               303        119         35     154.62       240.0
                              ---------  ---------  ---------  ----------  ----------

    Total                     $   4,988  $   3,825  $   2,844      30.41%      34.49%
                              =========  =========  =========  ==========  ==========
</TABLE>

NONINTEREST EXPENSES

     Noninterest  expense to average assets was 3.69% in 2003, 2.49% in 2002 and
1.79%  in  2001.

     Noninterest  expense  increased  $4,415,000  or 28.7% from the year 2002 to
2003.  Losses  on  foreclosed real estate increased $953,000 or 1,254% from year
2002  to  2003.  Salaries  and  employee  benefits  increased  $668,000  or


                                       33
<PAGE>
7.96%  from year 2002 to 2003. Noninterest expense increased $5,356,000 or 53.4%
from  the year 2001 to 2002. Salaries and employee benefits increased $2,928,000
or  53.6%. These increases are attributed to the overall growth and expansion of
the  Company.  Due  to its growth, the Company recognized the need for increased
depth  and  experience  in  management and operational control. The Company also
needed  assistance  in  responding  to  the  asset  and  credit  quality  issues
discovered  during 2002. During each of 2003 and 2002, the Company hired members
of  a new management team to assist the Company's growth and to address previous
credit  quality  issues. Also included in salary increases for 2003 and 2002 are
normal  salary  increases  and  increased  health  benefit  costs.

     Occupancy  and equipment expense increased $877,000 or 54.0% from year 2002
to 2003, and $392,000 or 31.9% from the year 2001 to 2002.  The increase in 2003
was  mainly  due to relocating the Company's operations to a new leased facility
in  Birmingham,  Alabama,  as well as improvements to existing facilities.  Data
processing increased due to additions in Company infrastructure to monitor loans
and  credit  quality.

     The  table  below  sets  forth  our  noninterest  expenses  for the periods
indicated.

<TABLE>
<CAPTION>
                                   NONINTEREST EXPENSES

                                       Years Ended December 31,
                                    -------------------------------  2003/2002   2002/2001
                                                                      Percent     Percent
                                      2003       2002       2001       Change      Change
                                    ---------  ---------  ---------  ----------  ----------
<S>                                 <C>        <C>        <C>        <C>         <C>
                                         (Dollars in thousands)
Salaries and employee benefits      $   9,056  $   8,388  $   5,460       7.96%      53.63%
Occupancy and equipment expense         2,502      1,625      1,233      53.97       31.79
Loss on foreclosed real estate          1,028         76          -   1,252.63           -
Professional fees                       1,734      1,275        583      36.00      118.70
Charge off and collection expense          55        533        139     -89.68      283.45
Loan fees and services                    612        453        303      35.10       49.51
Data processing                           607        421        190      44.18      121.58
Advertising                               592        401        336      47.63       19.35
Supplies                                  382        399        262      -4.26       52.29
Other                                   3,227      1,809      1,517      78.39       19.25
                                    ---------  ---------  ---------  ----------  ----------
Total                               $  19,795  $  15,380  $  10,023      28.71%      53.45%
                                    =========  =========  =========  ==========  ==========
</TABLE>

INCOME TAXES

     Income  tax  expense  increased  $8,551,000  or  108.4% in 2003. Income tax
expense increased due to the Company recording income in 2003, as opposed to the
loss  recorded  in  2002.  Income  tax expense decreased $9,111,000 or 744.4% to
($7,887,000)  for  the year-end December 31, 2002. The decrease is the result of
the  net  loss from operations. The effective tax rate as a percentage of pretax
income  was  37.0% in 2003, 35.4% in 2002 and 34.1% in 2001. There is no current
or  pending  tax  legislation  of which management is aware that if passed would
have  any  material effect on the consolidated financial statements. For further
information  concerning  the provision for income taxes, refer to Note 9, Income
Taxes,  of  the  "Notes  to  Financial  Statements."

IMPACT OF INFLATION AND CHANGING PRICES

     A bank's asset and liability structure is substantially different from that
of  an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on financial
results  depends  upon  our ability to react to changes in interest rates and by
such  reaction  to reduce the inflationary impact on performance. Interest rates
do  not necessarily move in the same direction, or at the same magnitude, as the
prices of other goods and services. As discussed previously, management seeks to
manage  the  relationship  between  interest-sensitive assets and liabilities in
order  to  protect  against  wide  interest  rate  fluctuations, including those
resulting  from  inflation.


                                       34
<PAGE>
MARKET RISK

     Market  risk  is the risk arising from adverse changes in the fair value of
financial  instruments  due  to  a  change in interest rates, exchange rates and
equity  prices. The Company's primary market risk is interest rate variations in
the short-term time horizons also known as interest rate risk.

     The  primary  objective  of  our  Asset/Liability  Management  is to manage
interest  rate  risk  and  achieve  reasonable  stability in net interest income
throughout  interest  rate  cycles.  This  is achieved by maintaining the proper
balance  of  rate  sensitive  earning assets and rate sensitive liabilities. The
relationship  of  rate sensitive earning assets to rate sensitive liabilities is
the  principal  factor  in projecting the effect that fluctuating interest rates
will  have  on  future  net  interest  income. Rate sensitive earning assets and
interest-bearing  liabilities  are  those that can be repriced to current market
rates  within  a  relatively  short  time  period.  Management monitors the rate
sensitivity of interest-earning assets and interest-bearing liabilities over the
entire  life  of  the  instruments,  but places particular emphasis on the first
year.  An Asset/Liability Management policy requires risk assessment relative to
interest  pricing  and  related  terms.

     We  use  additional  tools to monitor and manage interest rate sensitivity.
One  of  the  primary  tools  is simulation analysis. Simulation analysis is the
primary  method of estimating earnings at risk and capital at risk under varying
interest rate conditions. Simulation analysis is used to test the sensitivity of
our  net  interest income and stockholders' equity to both the level of interest
rates  and  the  slope  of the yield curve. Simulation analysis accounts for the
expected timing and magnitude of assets and liability cash flows, as well as the
expected  timing  and magnitude of deposits that do not reprice on a contractual
basis. In addition, simulation analysis includes adjustments for the lag between
movements in market interest rates on loans and interest-bearing deposits. These
adjustments  are  made  to  reflect  more accurately possible future cash flows,
repricing  behavior  and  ultimately  net  interest  income.

     As  of  December  31,  2003,  our  simulation  analysis  reflected that our
earnings are at greatest risk in a declining interest rate environment.


                                       35
<PAGE>
     The  following  table  below depicts the results of the simulation assuming
one  and  two  percent  decreases and increases in the prime interest rates in a
one-year  time  horizon.

<TABLE>
<CAPTION>
                               INTEREST RATE RISK

                                                One Year Time Horizon
                                              Estimated Repricing Amounts
                                    ------------------------------------------------
                                       Down         Up          Down         Up
                                    1 Percent    1 percent   2 Percent    2 Percent
                                    ----------  -----------  ----------  -----------
<S>                                 <C>         <C>          <C>         <C>
RATE SENSITIVE ASSETS:
  Loans                             $  324,667  $  300,923   $  338,413  $  299,665
  Deposits in banks                        116         116          116         116
  Federal funds sold                       632         632          632         632
  Securities                            35,704      16,765       44,784      15,797
                                    ----------  -----------  ----------  -----------

  TOTAL RATE SENSITIVE ASSETS          361,119     318,436      383,945     316,210
                                    ----------  -----------  ----------  -----------

RATE SENSITIVE LIABILITIES
  Deposits - Demand                    125,822     125,822      125,822     125,822
  Deposits - Time                      175,367     175,367      175,367     175,367
  Other Borrowed Money                  19,308      31,308       19,308      39,308
                                    ----------  -----------  ----------  -----------

  TOTAL RATE SENSITIVE LIABILITIES     320,497     332,497      320,497     340,497
                                    ----------  -----------  ----------  -----------

RATE SENSITIVITY GAP                $   40,622  $  (14,061)  $   63,448  $  (24,287)
                                    ==========  ===========  ==========  ===========
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In  January  2003, the Financial Accounting Standards Board ("FASB") issued
FASB  Interpretation  No.  46  "Consolidation of Variable Interest Entities - An
Interpretation  of  ARB  No.  51"  ("FIN  46") which provides guidance on how to
identify  a  variable  interest  entity  (VIE)  and  determine  when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE are to
be included in an entity's consolidated financial statements.  A VIE exists when
either  the  total  equity  investment  at  risk is not sufficient to permit the
entity  to finance its activities by itself, or the equity investors lack one of
three  characteristics  associated with owning a controlling financial interest.
Those  characteristics  include the direct or indirect ability to make decisions
about  an  entity's  activities  through  voting  rights  or similar rights, the
obligation  to  absorb  the  expected  losses of an entity if they occur, or the
right to receive the expected residual returns of the entity if they occur.  FIN
46  will  be effective for the Company for financial statements in periods after
December  31,  2003.

     Beginning  January 1, 2004, the Company will apply the provisions of FIN 46
to  its  wholly  owned  subsidiary  trust  that  issued  capital  securities  to
third-party  investors.  The  application  of  FIN  46  will  result  in  the
deconsolidation  of the wholly owned subsidiary trust.  Deconsolidation will not
have  a  significant impact on the operations of the Company, but will result in
increases  in  other  assets  and  trust  preferred  securities of $310,000 each
beginning  in  the  first  quarter  of  2004.


     Other  accounting  standards  that  have  been  issued  or  proposed by the
Financial Accounting Standards Board and other standard setting entities that do
not  require  adoption  until  a future date are not expected to have a material
impact  on  the  Company's  consolidated  financial  statements  upon  adoption.


                                       36
<PAGE>
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Please  refer to "Item 7. Management's Discussion and Analysis of Financial
Condition  and  Results  of  Operations  --  Market Risk," which is incorporated
herein  by  reference.

ITEM 8.   FINANCIAL STATEMENTS

     The  financial  statements and supplemental data required by Regulation S-X
and  by  Item  302  of  Regulation  S-K are set forth in the pages listed below.


              [The remainder of this page intentionally left blank]



                                       37
<PAGE>
<TABLE>
<CAPTION>
             HERITAGE FINANCIAL HOLDING CORPORATION AND SUBSIDIARIES

                              FINANCIAL STATEMENTS

                                                                         Page(s)
<S>                                                                      <C>
Report of Independent Certified Public Accountants                         39

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . .   40

Consolidated Balance Sheets

 as of December 31, 2003 and 2002  . . . . . . . . . . . . . . . . . . .   41

Consolidated Statements of Operations

 for the Years Ended December 31, 2003, 2002 and 2001  . . . . . . . . .   42

Consolidated Statements of Changes in Stockholders' Equity

 for the Years Ended December 31, 2003, 2002 and 2001  . . . . . . . . .   43

Consolidated Statements of Comprehensive Income

 for the Years Ended December 31, 2003, 2002 and 2001  . . . . . . . . .   44

Consolidated Statements of Cash Flows

 for the Years Ended December 31, 2003, 2002 and 2001  . . . . . . . . .   45

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .   47
</TABLE>


                                       38
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders
Heritage Financial Holding Corporation and Subsidiaries
Decatur, Alabama


We  have  audited  the  accompanying  consolidated  balance  sheet  of  Heritage
Financial  Holding Corporation and subsidiaries as of December 31, 2003, and the
related  consolidated statements of operations, changes in shareholders' equity,
comprehensive  income  and  cash flows for the year then ended.  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  audit.  The  consolidated financial statements for the years ended December
31,  2002  and  2001 were audited by other auditors whose report, dated February
25,  2003,  expressed  an  unqualified  opinion  on  those  statements.

We  conducted our audit 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  audit  provides  a
reasonable  basis  for  our  opinion.

In  our  opinion,  the  2003 consolidated financial statements referred to above
present  fairly,  in  all  material respects, the financial position of Heritage
Financial  Holding Corporation and subsidiaries as of December 31, 2003, and the
results  of  their  operations  and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.


                                                /s/ PORTER KEADLE MOORE, LLP


Atlanta, Georgia
February 6, 2004, except for note 12 as to which the date is March 9, 2004


                                       39
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders
Heritage Financial Holding Corporation
Decatur, Alabama


We  have  audited  the  accompanying  consolidated  balance  sheet  of  Heritage
Financial  Holding  Corporation  (a Delaware corporation) and subsidiaries as of
December  31,  2002,  and  the  related  consolidated  statements of operations,
changes in shareholders' equity, comprehensive income and cash flows for each of
the  two  years  in  the  period  ended  December  31, 2002.  These consolidated
financial  statements  are  the responsibility of the Company's management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements  based  on  our  audits.

We conducted our audits in accordance with 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 consolidated
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 Heritage Financial
Holding Corporation and subsidiaries as of December 31, 2002, and the results of
their  operations  and  their cash flows for each of the two years in the period
ended  December  31,2002,  in  conformity  with  accounting principles generally
accepted  in  the  United  States  of  America.


                               /S/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.


Birmingham, Alabama
February 25, 2003


                                       40
<PAGE>
<TABLE>
<CAPTION>
                             HERITAGE FINANCIAL HOLDING CORPORATION
                                        AND SUBSIDIARIES

                                   CONSOLIDATED BALANCE SHEETS

                                   DECEMBER 31, 2003 AND 2002

                                             Assets
                                             ------

                                                                         2003           2002
                                                                     -------------  ------------
<S>                                                                  <C>            <C>
Cash and due from banks, including reserve requirements
    of $7,267,000 and $3,467,000                                     $  8,663,330     4,759,310
Interest-bearing deposits with other banks                                115,551        97,707
Federal funds sold                                                        632,000    14,681,498
                                                                     -------------  ------------

        Cash and cash equivalents                                       9,410,881    19,538,515

Investment securities available-for-sale                               99,037,992    35,125,841
Other investments                                                       2,897,061     1,635,961
Mortgage loans held-for-sale                                            5,995,929    12,343,440
Loans, net                                                            371,324,621   496,858,908
Premises and equipment, net                                             7,223,966     7,105,706
Accrued interest receivable                                             2,391,861     3,404,344
Cash surrender value of life insurance                                 11,015,000             -
Foreclosed real estate                                                  4,546,740     5,428,047
Other assets                                                            8,581,753    11,501,035
                                                                     -------------  ------------

                                                                     $522,425,804   592,941,797
                                                                     =============  ============

                               Liabilities and Shareholders' Equity
                               ------------------------------------

Deposits:
    Noninterest-bearing                                              $ 28,141,627    21,961,197
    Interest-bearing                                                  387,473,302   503,669,662
                                                                     -------------  ------------

        Total deposits                                                415,614,929   525,630,859

Federal funds purchased                                                   406,073             -
Note payable                                                            7,480,000     6,650,000
Federal Home Loan Bank advances                                        56,422,156    23,000,000
Trust preferred securities                                             10,000,000    10,000,000
Accrued interest payable                                                1,899,628     3,288,749
Other liabilities                                                         497,626       669,143
                                                                     -------------  ------------

        Total liabilities                                             492,320,412   569,238,751
                                                                     -------------  ------------

Commitments and contingencies

Shareholders' equity:
    Preferred stock, par value $0.01; authorized 10,000,000 shares;
        no shares issued and outstanding                                        -             -
    Common stock, par value $0.01; authorized 40,000,000 shares;
        10,510,791 and 8,821,144 shares issued and outstanding            105,108        88,211
    Additional paid-in capital                                         37,322,707    32,234,654
    Accumulated deficit                                                (7,548,144)   (8,676,524)
    Accumulated other comprehensive income                                225,721        56,705
                                                                     -------------  ------------

        Total shareholders' equity                                     30,105,392    23,703,046
                                                                     -------------  ------------

                                                                     $522,425,804   592,941,797
                                                                     =============  ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>


                                       41
<PAGE>
<TABLE>
<CAPTION>
                                      HERITAGE FINANCIAL HOLDING CORPORATION
                                                 AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF OPERATIONS

                               FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


                                                                           2003             2002         2001
                                                                     -----------------  ------------  -----------
<S>                                                                  <C>                <C>           <C>
Interest income:
    Interest and fees on loans                                       $     28,377,963    38,402,218   40,300,281
    Interest and dividends on securities:
        Taxable                                                             1,651,624     1,603,251    1,460,386
        Tax-exempt                                                             68,242       133,119      124,585
    Interest on federal funds sold                                            180,301       320,016    1,055,690
    Other                                                                      65,041         6,264       24,905
                                                                     -----------------  ------------  -----------

        Total interest income                                              30,343,171    40,464,868   42,965,847
                                                                     -----------------  ------------  -----------

Interest expense:
    Deposits                                                               12,993,846    19,716,658   26,751,607
    Federal Home Loan Bank advances                                         1,088,025       977,348      962,690
    Other                                                                   1,306,916     1,047,729      880,222
                                                                     -----------------  ------------  -----------

        Total interest expense                                             15,388,787    21,741,735   28,594,519
                                                                     -----------------  ------------  -----------

        Net interest income                                                14,954,384    18,723,133   14,371,328

Provision for loan losses                                                  (1,645,878)   29,468,734    3,602,047
                                                                     -----------------  ------------  -----------

        Net interest income (loss) after provision for loan losses         16,600,262   (10,745,601)  10,769,281
                                                                     -----------------  ------------  -----------

Other income:
    Service charges                                                         1,137,434     1,018,421      867,323
    Gain on sales of securities, net                                          205,801       233,372       23,926
    Mortgage banking income                                                 3,341,481     2,454,626    1,917,456
    Miscellaneous                                                             302,734       118,864       35,197
                                                                     -----------------  ------------  -----------

        Total other income                                                  4,987,450     3,825,283    2,843,902
                                                                     -----------------  ------------  -----------

Other expenses:
    Salaries and employee benefits                                          9,056,110     8,388,132    5,460,426
    Occupancy                                                               2,501,840     1,625,162    1,232,525
    Losses on foreclosed real estate                                        1,028,550        76,035            -
    Other operating                                                         7,208,602     5,290,357    3,330,345
                                                                     -----------------  ------------  -----------

        Total other expenses                                               19,795,102    15,379,686   10,023,296
                                                                     -----------------  ------------  -----------

        Earnings (loss) before income taxes                                 1,792,610   (22,300,004)   3,589,887

Income tax (expense) benefit                                                 (664,230)    7,887,221   (1,223,966)
                                                                     -----------------  ------------  -----------

        Net earnings (loss)                                          $      1,128,380   (14,412,783)   2,365,921
                                                                     =================  ============  ===========

        Basic earnings (loss) per share                              $           0.11         (1.65)        0.28
                                                                     =================  ============  ===========
        Diluted earnings (loss) per share                            $           0.11         (1.65)        0.23
                                                                     =================  ============  ===========

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


                                       42
<PAGE>
<TABLE>
<CAPTION>
                                       HERITAGE FINANCIAL HOLDING CORPORATION
                                                  AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                                                                           Retained      Accumulated
                                                            Additional     Earnings         Other
                                      Common       Stock      Paid-in    (Accumulated   Comprehensive
                                      Shares      Amount      Capital      Deficit)     Income (Loss)      Total
                                    -----------  ---------  -----------  -------------  --------------  ------------
<S>                                 <C>          <C>        <C>          <C>            <C>             <C>

Balance, December 31, 2000           8,475,822   $ 84,758   30,203,113      3,370,338        (158,907)   33,499,302

Exercise of stock options               36,000        360       86,850              -               -        87,210
Issuance of shares under employee
     stock purchase plan                 3,325         33       31,412              -               -        31,445
Issuance of compensatory options             -          -       37,843              -               -        37,843
Change in accumulated other
    comprehensive income (loss),
    net of tax                               -          -            -              -         102,159       102,159
Net earnings                                 -          -            -      2,365,921               -     2,365,921
                                    -----------  ---------  -----------  -------------  --------------  ------------

Balance, December 31, 2001           8,515,147     85,151   30,359,218      5,736,259         (56,748)   36,123,880

Exercise of stock options              303,700      3,037       20,534              -               -        23,571
Issuance of shares under employee
    stock purchase plan                  2,297         23       25,171              -               -        25,194
Tax benefit of nonqualified
    stock options                            -          -      702,817              -               -       702,817
Issuance of compensatory options             -          -    1,126,914              -               -     1,126,914
Change in accumulated other
    comprehensive income (loss),
    net of tax                               -          -            -              -         113,453       113,453
Net loss                                     -          -            -    (14,412,783)              -   (14,412,783)
                                    -----------  ---------  -----------  -------------  --------------  ------------

Balance, December 31, 2002           8,821,144     88,211   32,234,654     (8,676,524)         56,705    23,703,046

Issuance of common stock               693,035      6,930    2,287,678              -               -     2,294,608
Exercise of stock options            1,140,430     11,404    3,762,691              -               -     3,774,095
Retirement of common stock
    related to exercise of options    (146,968)    (1,469)    (971,227)             -               -      (972,696)
Issuance of common stock under
    employee stock purchase plan         3,150         32        8,911              -               -         8,943
Change in accumulated other
    comprehensive income (loss),
    net of tax                               -          -            -              -         169,016       169,016
Net earnings                                 -          -            -      1,128,380               -     1,128,380
                                    -----------  ---------  -----------  -------------  --------------  ------------

Balance, December 31, 2003          10,510,791   $105,108   37,322,707     (7,548,144)        225,721    30,105,392
                                    ===========  =========  ===========  =============  ==============  ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>


                                       43
<PAGE>
<TABLE>
<CAPTION>
                                   HERITAGE FINANCIAL HOLDING CORPORATION
                                              AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                            FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001


                                                                         2003           2002         2001
                                                                    --------------  ------------  ----------
<S>                                                                 <C>             <C>           <C>
Net earnings (loss)                                                 $   1,128,380   (14,412,783)  2,365,921
                                                                    --------------  ------------  ----------
Other comprehensive income:
    Unrealized holding gains on securities available-for-sale             453,294       422,461     194,189
    Reclassification adjustment for gains on sales
        of securities available-for-sale                                 (205,801)     (233,372)    (23,926)
                                                                    --------------  ------------  ----------

            Total other comprehensive income, before income taxes         247,493       189,089     170,263
                                                                    --------------  ------------  ----------

Income tax expense related to other comprehensive income:
    Unrealized holding gains on securities available-for-sale             148,449       168,984      77,676
    Reclassification adjustment for gains on sales of
        securities available-for-sale                                     (69,972)      (93,348)     (9,572)
                                                                    --------------  ------------  ----------

                Total income tax expense related to other
                    comprehensive income                                   78,477        75,636      68,104
                                                                    --------------  ------------  ----------

                Total other comprehensive income, net of tax              169,016       113,453     102,159
                                                                    --------------  ------------  ----------

                Comprehensive income (loss)                         $   1,297,396   (14,299,330)  2,468,080
                                                                    ==============  ============  ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>


                                       44
<PAGE>
<TABLE>
<CAPTION>
                                     HERITAGE FINANCIAL HOLDING CORPORATION
                                                AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                                                                         2003            2002           2001
                                                                    ---------------  -------------  ------------
<S>                                                                 <C>              <C>            <C>
Cash flows from operating activities:
  Net earnings (loss)                                               $    1,128,380    (14,412,783)    2,365,921
  Adjustments to reconcile net earnings (loss) to net
    cash provided (used) by operating activities:
      Depreciation, amortization and accretion                           1,636,918        790,839       437,999
      Provision for loan losses                                         (1,645,878)    29,468,734     3,602,047
      Deferred income tax expense (benefit)                              2,194,873     (6,700,257)     (264,948)
      Gains on sale of securities, net                                    (205,801)      (261,671)      (23,926)
      (Gain) loss on sale of premises and equipment                         (9,440)         2,250         1,786
      Compensatory options                                                       -      1,126,914        37,843
      Losses on foreclosed real estate                                   1,028,550        249,491        23,926
      Change in:
        Accrued interest receivable and other assets                     1,643,415     (1,363,330)      334,876
        Accrued interest payable and other liabilities                  (1,560,638)      (915,766)       52,267
        Mortgage loans held-for-sale                                     6,347,511        204,882   (12,548,322)
        Other, net                                                               -          7,381      (154,965)
                                                                    ---------------  -------------  ------------

                Net cash provided (used) by operating activities        10,557,890      8,196,684    (6,135,496)
                                                                    ---------------  -------------  ------------
Cash flows from investing activities:
  Purchases of investment securities available-for-sale               (162,950,031)  (101,267,892)  (18,774,196)
  Proceeds from calls and maturities of investment securities
    available-for-sale                                                  82,579,687     55,317,503    19,399,714
  Proceeds from sales of investment securities available-for-sale       16,508,898     35,340,361       520,493
  Purchases of other investments                                        (1,261,100)             -             -
  Net change in loans                                                  116,221,233    (31,020,203)  (89,959,157)
  Purchases of premises and equipment                                   (1,421,475)    (1,343,238)   (1,287,676)
  Proceeds from sale of premises and equipment                              78,326         44,315         7,665
  Purchase of bank owned life insurance                                (11,000,000)             -             -
  Proceeds from sales of other real estate                              10,811,689      2,549,330       106,250
                                                                    ---------------  -------------  ------------

                Net cash provided (used) by investing activities        49,567,227    (40,379,824)  (89,986,907)
                                                                    ---------------  -------------  ------------

Cash flows from financing activities:
  Net change in deposits                                              (110,015,930)    21,321,121    83,065,500
  Net change in Federal funds purchased                                    406,073              -             -
  Proceeds from note payable                                               830,000      6,650,000             -
  Proceeds from FHLB borrowings                                         33,422,156     10,000,000     1,000,000
  Proceeds from issuance of stock                                        2,303,551         25,195        31,445
  Issuance of trust preferred securities                                         -              -    10,000,000
  Proceeds from exercise of stock options                                2,801,399         23,571        87,210
                                                                    ---------------  -------------  ------------

                Net cash provided (used) by financing activities       (70,252,751)    38,019,887    94,184,155
                                                                    ---------------  -------------  ------------
Net change in cash and cash equivalents                                (10,127,634)     5,836,747    (1,938,248)
Cash and cash equivalents at beginning of year                          19,538,515     13,701,768    15,640,016
                                                                    ---------------  -------------  ------------
Cash and cash equivalents at end of year                            $    9,410,881     19,538,515    13,701,768
                                                                    ===============  =============  ============
</TABLE>


                                       45
<PAGE>
<TABLE>
<CAPTION>
                             HERITAGE FINANCIAL HOLDING CORPORATION
                                        AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

                      FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                                                                2003         2002        2001
                                                            ------------  ----------  ----------
<S>                                                         <C>           <C>         <C>
Supplemental disclosures of cash flow information:
   Cash paid (refunded) during the year for:
    Interest                                                $16,777,908   22,657,501  28,542,252
    Income taxes                                            $  (682,526)     645,436   1,670,781

Noncash investing and financing activities:
  Change in other comprehensive income, net of tax          $   169,016      113,453     102,159
  Transfer of loans to other real estate and repossessions  $13,266,567    5,029,426   4,920,288
<FN>

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


                                       46
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Organization  and  Basis  of  Presentation
     ------------------------------------------
     Heritage  Financial  Holding  Corporation (the "Company") is a bank holding
     company  whose  business  is  conducted  by  its wholly-owned Subsidiaries:
     Heritage  Bank  (the  "Bank")  and  Heritage  Financial  Statutory  Trust I
     ("Heritage Trust"), created by the Company for the purpose of issuing trust
     preferred  securities.  The  consolidated  financial statements include the
     accounts  of  the  Company,  the  Bank  and Heritage Trust. All significant
     intercompany  balances  and  transactions  have  been  eliminated  in
     consolidation.

     As  a  bank  holding  company,  the Company is subject to regulation by the
     Federal  Reserve  Bank.  The  Bank  is  primarily regulated by the State of
     Alabama  State  Banking  Department  and  the  Federal  Deposit  Insurance
     Corporation  and  undergoes  periodic  examinations  by  these  regulatory
     agencies.  The  Bank,  whose  main  offices  are in Birmingham and Decatur,
     Alabama,  provides a full range of commercial and consumer banking services
     primarily  in  Morgan,  Madison and Jefferson counties in north and central
     Alabama.

     During  2002,  management of the Company identified significant operational
     and  asset  quality  deficiencies  at  the  Bank  as  the result of its own
     investigation  and  examinations  performed  by  certain  bank  regulatory
     agencies.  The  results  of  the examinations by regulatory authorities are
     confidential. The asset quality deficiencies resulted in material increases
     to  the  Bank's  allowance  for  loan  losses, and correspondingly material
     reductions  in  the  capital levels of the Company and the Bank. In concert
     with  the  regulators, the Board of Directors and management of the Company
     and  the  Bank  have  identified  specific  corrective steps and actions to
     address  capital  deficiencies,  improve  asset  quality,  and  enhance
     operational  controls  and  procedures. The Bank, without the prior written
     approval  of  its regulators, may not declare or pay any cash dividends. In
     addition,  the Bank has determined to hire and retain certain personnel who
     have  been  given  specific  written authority by the Board of Directors to
     implement  sound  lending, recordkeeping and accounting practices. The Bank
     also  has  taken  steps to develop an educational program for board members
     and  to  create  a  written review of the Bank's staffing requirements. The
     Board  of  Directors  of  the  Company  intends  to cause management of the
     Company and the Bank to take steps to attain and maintain a Tier 1 leverage
     ratio  of  8  percent  and  maintain  other  capital  ratios  so  as  to be
     "well-capitalized" as defined by the FDIC. Should the Tier 1 leverage ratio
     fail  to  meet  the  specified  Tier  1  leverage  ratio  of  8  percent or
     subsequently  fall  below  such  level, the Bank must notify the regulatory
     authorities  and  take  steps  to  increase  capital sufficient to meet the
     required  ratios  within  30  days.  Management  believes  that the Bank is
     generally in compliance with the corrective steps identified above. Failure
     to  accomplish  these  objectives could subject the Company and the Bank to
     onerous  regulatory  actions.

     The  accounting  principles  followed  by  the  Company, and the methods of
     applying  these  principles,  conform  with accounting principles generally
     accepted  in  the  United  States  of  America  ("GAAP")  and  with general
     practices in the banking industry. In preparing the financial statements in
     conformity  with  GAAP,  management  is  required  to  make  estimates  and
     assumptions  that  affect the reported amounts of assets and liabilities as
     of  the  dates  of the balance sheet and revenue and expenses for the years
     then ended. Actual results could differ significantly from those estimates.
     Material  estimates  common  to  the banking industry that are particularly
     susceptible  to  significant  change  in the near term include, but are not
     limited  to,  the  determination  of  the allowance for loan losses and the
     valuation  of  real  estate  acquired in connection with foreclosures or in
     satisfaction  of  loans.

     Cash  and  Cash  Equivalents
     ----------------------------
     Cash and due from banks and federal funds sold are considered cash and cash
     equivalents  for cash flow reporting purposes. Generally, federal funds are
     sold  for  one-day  periods.

     Investment  Securities
     ----------------------
     The  Company classifies its securities in one of three categories: trading,
     available-for-sale,  or held-to-maturity. Trading securities are bought and
     held principally for sale in the near term. Held-to-maturity securities are
     those  securities  for which the Company has the ability and intent to hold
     until  maturity.  All  other  securities  not  included  in  trading  or
     held-to-maturity are classified as available-for-sale. At December 31, 2003
     and  2002,  the  Company had classified all of its investment securities as
     available-for-sale.


                                       47
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES,  CONTINUED
     Available-for-sale  securities  are  recorded  at  fair  value.  Unrealized
     holding  gains and losses, net of the related tax effect, are excluded from
     earnings  and  are reported as a separate component of shareholders' equity
     until  realized.

     Investment  Securities,  continued
     ----------------------------------
     A  decline  in  the market value of any available-for-sale investment below
     cost  that  is  deemed  other  than  temporary  is  charged to earnings and
     establishes  a  new  cost  basis  for  the  security.

     Premiums  and  discounts  are  amortized  or  accreted over the life of the
     related  security  as an adjustment to the yield. Realized gains and losses
     for  securities  classified  as available-for-sale are included in earnings
     and  are  derived  using the specific identification method for determining
     the  cost  of  securities  sold.

     Other  Investments
     ------------------
     Other  investments  include  equity securities with no readily determinable
     fair  value. These investments are carried at cost and include Federal Home
     Loan  Bank  ("FHLB")  stock  and  Community  Financial  Services  stock.

     Mortgage  Loans  Held-for-sale
     ------------------------------
     Mortgage  loans held-for-sale are carried at the lower of aggregate cost or
     market  value.  At  December  31, 2003 and 2002, the cost of mortgage loans
     held-for-sale  approximates  the  market  value.

     Loans  and  Allowance  for  Loan  Losses
     ----------------------------------------
     Loans  are stated at the principal amount outstanding, net of the allowance
     for  loan  losses.  Interest  on  loans  is  calculated by using the simple
     interest  method  on  daily  balances  of the principal amount outstanding.

     The  accrual  of  interest is discontinued on a loan when a loan becomes 90
     days  past  due  and  is not both well collateralized and in the process of
     collection,  or  when  management  believes, after considering economic and
     business  conditions and collection efforts, that the principal or interest
     will  not  be  collectible in the normal course of business. When a loan is
     placed on nonaccrual status, previously accrued and uncollected interest is
     charged  against  interest income on loans. Generally, payments received on
     nonaccrual  loans  are  applied  to  principal.

     A  loan  is  impaired  when, based on current information and events, it is
     probable  that  all  amounts  due according to the contractual terms of the
     loan  will  not  be  collected.  Impaired  loans  are measured based on the
     present  value  of  expected  future  cash  flows, discounted at the loan's
     effective  interest  rate, or at the loan's observable market price, or the
     fair  value  of  the  collateral  if  the  loan  is  collateral  dependent.

     The  allowance  for loan losses is established through a provision for loan
     losses  charged  to  earnings.  Loans are charged against the allowance for
     loan  losses  when  management  believes  that  the  collectibility  of the
     principal  is  unlikely.  The  allowance  represents  an  amount, which, in
     management's  judgment,  will  be  adequate  to  absorb  probable losses on
     existing  loans  that  may  become  uncollectible.

     Management's judgment in determining the adequacy of the allowance is based
     on  evaluations of the collectibility of loans. These evaluations take into
     consideration  such factors as changes in the nature and volume of the loan
     portfolio,  current  economic  conditions  that  may  affect the borrower's
     ability  to  pay, overall portfolio quality, and review of specific problem
     loans.  In  determining  the  adequacy  of  the  allowance for loan losses,
     management uses a loan grading system that rates individual loans into risk
     classifications.  These  risk  categories  are assigned allocations of loss
     based  on  management's estimate of potential loss which is generally based
     on  an analysis of historical loss experience, current economic conditions,
     performance trends, and discounted collateral deficiencies. The combination
     of  these  results  is  compared monthly to the recorded allowance for loan
     losses  and  material  differences are adjusted by increasing or decreasing
     the  provision  for  loan  losses.  Management  has an internal loan review
     department  that  is  independent  of the lending function to challenge and
     corroborate  the  loan  grading  system  and provide additional analysis in
     determining  the  adequacy  of  the  allowance  for  loan  losses.


                                       48
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES,  CONTINUED
     Management  believes  the allowance for loan losses is adequate at December
     31, 2003 and 2002. While management uses available information to recognize
     losses  on  loans, future additions to the allowance may be necessary based
     on  changes  in  economic  conditions.  In  addition,  various  regulatory
     agencies,  as  an  integral part of their examination process, periodically
     review  the Bank's allowance for loan losses. Such agencies may require the
     Bank  to  recognize additions to the allowance based on judgments different
     than  those  of  management.

     Mortgage  Banking  Activities
     -----------------------------
     Mortgage  banking  income  represents  net  gains from the sale of mortgage
     loans  and  fees  received from borrowers and loan investors related to the
     Company's  origination  of  single-family  residential  mortgage  loans.

     Premises  and  Equipment
     ------------------------
     Premises  and  equipment  are stated at cost less accumulated depreciation.
     Depreciation  is computed primarily using the straight-line method over the
     estimated  useful lives of the assets. When assets are retired or otherwise
     disposed,  the  cost  and related accumulated depreciation are removed from
     the accounts, and any gain or loss is reflected in earnings for the period.
     The  cost  of  maintenance  and  repairs which do not improve or extend the
     useful  life  of  the  respective asset is charged to earnings as incurred,
     whereas significant renewals and improvements are capitalized. The range of
     estimated  useful  lives  for buildings and improvements is 10 to 40 years,
     and  for furniture and equipment, 3 to 10 years. Leasehold improvements are
     depreciated  over the remaining lease term, or the estimated useful life of
     the  improvement,  whichever  is  shorter  (ranging  from  5  to 15 years).

     Foreclosed  Real  Estate
     ------------------------
     Foreclosed  real  estate  includes  real estate received in full or partial
     satisfaction  of  a  loan.  Foreclosed  assets are reported at the lower of
     carrying  amount  of  the  related  loan  or  net  realizable  value.

     Income  Taxes
     -------------
     Deferred  tax  assets  and  liabilities  are  recognized for the future tax
     consequences  attributable  to  differences between the financial statement
     carrying  amounts  of  existing assets and liabilities and their respective
     tax  bases.  Additionally,  the recognition of future tax benefits, such as
     net  operating  loss  carryforwards,  is  required  to  the  extent  that
     realization  of  such benefits is more likely than not. Deferred tax assets
     and  liabilities  are measured using enacted tax rates expected to apply to
     taxable  income  in  the  years  in  which  the  assets and liabilities are
     expected  to be recovered or settled. The effect on deferred tax assets and
     liabilities of a change in tax rates is recognized in income tax expense in
     the  period  that  includes  the  enactment  date.

     In  the  event  the  future  tax  consequences  of  differences between the
     financial  reporting  bases  and  the tax bases of the Company's assets and
     liabilities  results  in  deferred  tax  assets,  an  evaluation  of  the
     probability  of being able to realize the future benefits indicated by such
     asset is required. A valuation allowance is provided for the portion of the
     deferred tax asset when it is more likely than not that some portion or all
     of  the  deferred  tax  asset  will  not  be  realized.  In  assessing  the
     realizability  of  the  deferred  tax  assets,  management  considers  the
     scheduled  reversals  of deferred tax liabilities, projected future taxable
     income,  and  tax  planning  strategies.

     Advertising  Costs
     ------------------
     The  Company's  policy  is  to  expense  advertising  costs  as  incurred.
     Advertising  expense  for  the years ended December 31, 2003, 2002 and 2001
     amounted  to  approximately  $542,000, $401,000 and $336,000, respectively.

     Accumulated  Other  Comprehensive  Income
     -----------------------------------------
     At  December  31,  2003  and  2002,  accumulated other comprehensive income
     consisted  of  the net of tax effects of net unrealized gains on securities
     available-for-sale  of  $225,721  and  $56,705,  respectively.


                                       49
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
     Stock-Based  Compensation
     -------------------------
     The  Company's  stock-based  compensation  plans  described  in note 13 are
     accounted  for  based on the intrinsic value method set forth in Accounting
     Principles  Board  (APB)  Opinion  25,  Accounting  for  Stock  Issued  to
     Employees,  and  related interpretations. Compensation expense for employee
     stock  options is not recognized if the exercise price of the option equals
     or  exceeds  the fair value of the stock on the date of grant. Compensation
     expense  for  restricted share awards is ratably recognized over the period
     of  service,  usually the restricted period, based on the fair value of the
     stock  on  the  date of grant. Had compensation costs been determined based
     upon  the  fair value of the options at the grant dates consistent with the
     method  of  Statement  of  Financial  Accounting  Standards  No.  123,  the
     Company's  net  earnings  (loss) and earnings (loss) per common share would
     have  reflected  the  pro forma amounts below. For disclosure purposes, the
     Company  immediately  recognized  the  expense  associated  with the option
     grants  assuming  that  all  awards  vest  upon  grant.

<TABLE>
<CAPTION>
                                                                           December 31,
                                                               ------------------------------------
                                                                  2003          2002         2001
                                                               -----------  ------------  ----------
<S>                                                            <C>          <C>           <C>
          Net earnings (loss) as reported                      $1,128,380   (14,412,783)  2,365,921
          Deduct: Total stock-based employee compensation
            expense determined under fair-value based method
            for all awards                                       (270,907)     (116,621)   (563,962)
                                                               -----------  ------------  ----------
          Pro forma net earnings (loss)                        $  857,473   (14,529,404)  1,801,959
                                                               ===========  ============  ==========

          Basic earnings (loss) per share:
            As reported                                        $     0.11         (1.65)       0.28
                                                               ===========  ============  ==========
            Pro forma                                          $     0.09         (1.67)       0.21
                                                               ===========  ============  ==========

          Diluted earnings (loss) per share:
            As reported                                        $     0.11         (1.65)       0.23
                                                               ===========  ============  ==========
            Pro forma                                          $     0.08         (1.67)       0.17
                                                               ===========  ============  ==========
</TABLE>

     Stock-Based  Compensation
     -------------------------
     The weighted average grant-date fair value of options granted in 2003, 2002
     and  2001  was  $0.89,  $1.52,  and  $3.43, respectively. The fair value of
     options granted in 2003 is estimated on the date of grant using the Minimum
     Value  options-pricing  model  with  a  risk-free  interest  rate  of 4%, a
     dividend yield of 0% and an expected life of eight years. The fair value of
     each  option  granted  in  2002  and 2001 is estimated on the date of grant
     using  the  Black-Scholes options-pricing model with the following weighted
     average  assumptions  used  for  grants  in  2002  and 2001, respectively -
     dividend  yield  of  0% and 0%, respectively; risk free interest rate of 4%
     and  5%,  respectively;  expected volatility of .26 and .217, respectively;
     and  an  expected  life  of  one  year  and  five  years,  respectively.

     Net  Earnings  Per  Share
     -------------------------
     Net  earnings  per  share is based on the weighted average number of common
     shares  outstanding during the period while the effects of potential common
     shares  outstanding  during the period are included in diluted earnings per
     share.  The  average  market  price  during  the  year  is  used to compute
     equivalent  shares.  For 2002, basic earnings per share is calculated based
     on  weighted  average  shares  outstanding  of  8,717,303 and the potential
     effect  of  outstanding  options would be antidilutive and therefore is not
     presented.  The  reconciliations  of the amounts used in the computation of
     both  "basic  earnings  per share" and "diluted earnings per share" for the
     years  ended  December  31,  2003  and  2001  are  as  follows:


                                       50
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     Net Earnings Per Share, continued
     ---------------------------------

<TABLE>
<CAPTION>
                                                Net        Common     Per Share
                                              Earnings     Shares      Amount
                                             ----------  ----------  -----------
<S>                                          <C>         <C>         <C>
       FOR THE YEAR ENDED DECEMBER 31, 2003
       Basic earnings per share              $1,128,380  10,048,167  $     0.11
       Effect of dilutive securities:
           Stock options                              -     110,257           -
                                             ----------  ----------  -----------

       Diluted earnings per share            $1,128,380  10,158,424  $     0.11
                                             ==========  ==========  ===========

       FOR THE YEAR ENDED DECEMBER 31, 2001
       Basic earnings per share              $2,365,921   8,484,624  $     0.28
       Effect of dilutive securities:
           Stock options                              -   2,002,342       (0.05)
                                             ----------  ----------  -----------

       Diluted earnings per share            $2,365,921  10,486,966  $     0.23
                                             ==========  ==========  ===========
</TABLE>

     At  December  31,  2003  and  2002,  a  total  of  3,000  and  3,239,016,
     respectively,  potential  common  shares  related to stock options were not
     included  in  the  computation  of  diluted earnings per share because they
     would  have  been  antidilutive.

     Recent  Accounting  Pronouncements
     ----------------------------------
     In  January  2003, the Financial Accounting Standards Board ("FASB") issued
     FASB  Interpretation  No. 46 "Consolidation of Variable Interest Entities -
     An  Interpretation of ARB No. 51" ("FIN 46") which provides guidance on how
     to identify a variable interest entity (VIE) and determine when the assets,
     liabilities,  noncontrolling  interests, and results of operations of a VIE
     are  to be included in an entity's consolidated financial statements. A VIE
     exists when either the total equity investment at risk is not sufficient to
     permit  the  entity  to  finance  its  activities  by itself, or the equity
     investors  lack  one  of  three  characteristics  associated  with owning a
     controlling financial interest. Those characteristics include the direct or
     indirect  ability  to  make  decisions about an entity's activities through
     voting  rights  or  similar  rights,  the obligation to absorb the expected
     losses  of  an  entity  if they occur, or the right to receive the expected
     residual  returns of the entity if they occur. FIN 46 will be effective for
     the  Company  for  financial statements in periods after December 31, 2003.

     Beginning  January 1, 2004, the Company will apply the provisions of FIN 46
     to  its  wholly  owned  subsidiary  trust that issued capital securities to
     third-party  investors.  The  application  of  FIN  46  will  result in the
     deconsolidation  of the wholly owned subsidiary trust. Deconsolidation will
     not  have  a  significant impact on the operations of the Company, but will
     result  in  increases  in  other  assets  and trust preferred securities of
     $310,000  each  beginning  in  the  first  quarter  of  2004.

     Reclassifications
     -----------------
     Reclassifications  of  certain  amounts  in  the  2002  and  2001 financial
     statements  have  been  made  to  conform  with  the  financial  statement
     presentation  for 2003. The reclassifications had no effect on net earnings
     or  shareholders'  equity  as  previously  reported.


                                       51
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)  INVESTMENT SECURITIES
     Investment  securities available-for-sale at December 31, 2003 and 2002 are
     as  follows:

<TABLE>
<CAPTION>
                                                        December 31, 2003
                                         -----------------------------------------------
                                                        Gross       Gross     Estimated
                                          Amortized   Unrealized  Unrealized     Fair
                                            Cost        Gains       Losses      Value
                                         -----------  ----------  ----------  ----------
<S>                                      <C>          <C>         <C>         <C>
       U. S. government agencies         $30,489,233     130,797      26,740  30,593,290
       Mortgage-backed securities         61,443,132     237,116      40,382  61,639,866
       State and political subdivisions    1,294,011      41,928           -   1,335,939
       Corporate debt                      5,469,615           -         718   5,468,897
                                         -----------  ----------  ----------  ----------

                                         $98,695,991     409,841      67,840  99,037,992
                                         ===========  ==========  ==========  ==========

                                                        December 31, 2002
                                         -----------------------------------------------
                                                        Gross       Gross     Estimated
                                          Amortized   Unrealized  Unrealized     Fair
                                            Cost        Gains       Losses      Value
                                         -----------  ----------  ----------  ----------

       Mortgage-backed securities        $22,832,366     375,515           -  23,207,881
       State and political subdivisions    1,294,471      39,543       4,433   1,329,581
       Corporate debt                     10,904,495           -     316,116  10,588,379
                                         -----------  ----------  ----------  ----------

                                         $35,031,332     415,058     320,549  35,125,841
                                         ===========  ==========  ==========  ==========
</TABLE>


                                       52
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)  INVESTMENT SECURITIES, CONTINUED

     Unrealized  losses  and  fair  value, aggregated by investment category and
     length  of  time  that  individual  securities  have  been  in a continuous
     unrealized  loss  position,  as  of  December  31,  2003  are summarized as
     follows:

<TABLE>
<CAPTION>
                                   Less than 12 Months     12 Months or More             Total
                                 -----------------------  ---------------------  ----------------------
                                    Fair      Unrealized    Fair     Unrealized     Fair     Unrealized
                                    Value       Losses      Value      Losses      Value       Losses
                                 -----------  ----------  ---------  ----------  ----------  ----------
<S>                              <C>          <C>         <C>        <C>         <C>         <C>
     U. S. government agencies   $ 7,257,190      26,740          -           -   7,257,190      26,740
     Mortgage-backed securities    6,477,646      40,382                          6,477,646      40,382
     Corporate debt                5,468,897         718          -           -   5,468,897         718
                                 -----------  ----------  ---------  ----------  ----------  ----------

                                 $19,203,733      67,840          -           -  19,203,733      67,840
                                 ===========  ==========  =========  ==========  ==========  ==========
</TABLE>

     At  December  31,  2003,  unrealized  losses  in  the investment securities
     portfolio related to debt securities totaled $67,840. The unrealized losses
     on  these  debt  securities  arose  due  to changing interest rates and are
     considered  to  be  temporary.  These  unrealized  losses  are  considered
     temporary  because of acceptable investment grades on each security and the
     repayment  sources of principal and interest are largely government backed.

     The  amortized  cost  and  estimated  fair  value  of investment securities
     available-for-sale at December 31, 2003, by contractual maturity, are shown
     below.  Expected maturities will differ from contractual maturities because
     borrowers have the right to call or prepay obligations with or without call
     or  prepayment  penalties.

<TABLE>
<CAPTION>
                                                          Amortized   Estimated
                                                            Cost      Fair Value
                                                         -----------  ----------
<S>                                                      <C>          <C>
     Due from one to five years                          $30,489,233  30,593,290
     Due from five to ten years                              185,000     185,844
     Due after ten years                                   6,578,626   6,618,992
     Mortgage-backed securities                           61,443,132  61,639,866
                                                         -----------  ----------

                                                         $98,695,991  99,037,992
                                                         ===========  ==========
</TABLE>

     Proceeds  from sales of securities available-for-sale during 2003, 2002 and
     2001  were $16,508,898, $35,340,361 and $520,493, respectively. Gross gains
     of  $229,551,  $350,233  and $23,926 for 2003, 2002 and 2001, respectively,
     along  with  gross  losses  of  $23,750  and  $116,861  for  2003 and 2002,
     respectively,  were  realized on those sales. There were no losses on sales
     of  securities  available-for-sale  in  2001.

     Securities  with  a  carrying  value  of  approximately  $26,976,000  and
     $20,873,000  at  December  31, 2003 and 2002, respectively, were pledged to
     secure  public  deposits  and  for  other  purposes  as  required  by  law.


                                       53
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)  LOANS
     Major classifications of loans at December 31, 2003 and 2002 are summarized
     as  follows:

<TABLE>
<CAPTION>
                                                           2003         2002
                                                       ------------  -----------
<S>                                                    <C>           <C>
       Commercial                                      $116,202,517  132,236,338
       Real estate - mortgage                           230,626,217  311,508,055
       Real estate - construction                        26,583,296   60,205,855
       Consumer                                          12,474,874   19,899,254
                                                       ------------  -----------
             Total loans                                385,886,904  523,849,502
       Less: allowance for loan losses                   14,562,283   26,990,594
                                                       ------------  -----------

                                                       $371,324,621  496,858,908
                                                       ============  ===========
</TABLE>

     The  Company  grants  loans  and  extensions of credit primarily within the
     northern  and central region of Alabama, which encompasses Morgan, Madison,
     and Jefferson counties. Although the Bank has a diversified loan portfolio,
     a  substantial  portion  of the portfolio is collateralized by improved and
     unimproved  real  estate  which  is  dependent upon the real estate market.

     At  December  31, 2003 and 2002, the recorded investment in loans that were
     considered  to  be  impaired was approximately $13,047,000 and $24,354,000,
     respectively,  of  which  approximately  $12,523,000  and  $15,794,000,
     respectively,  were  on  non-accural  status. The Company had approximately
     $524,000  and  $8,560,000 in loans past due more than ninety days and still
     accruing  interest at December 31, 2003 and 2002, respectively. The related
     allowance  for  loan  losses on impaired loans was approximately $4,229,000
     and  $2,991,000  at  December  31, 2003 and 2002, respectively. The average
     recorded investment in impaired loans for the years ended December 31, 2003
     and  2002  was approximately $13,309,000 and $10,324,000, respectively. For
     the  years  ended  December 31, 2003, 2002 and 2001, the Company recognized
     approximately  $748,000,  $561,000  and $519,000, respectively, of interest
     income  on impaired loans for cash payments received in excess of principal
     amounts  due.

     Changes in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                       2003          2002         2001
                                                   -------------  -----------  -----------
<S>                                                <C>            <C>          <C>
     Balance at beginning of year                  $ 26,990,594    6,074,230    5,064,889
     Amounts charged off                            (11,318,747)  (8,825,046)  (2,695,237)
     Recoveries on amounts previously charged off       536,314      272,676      102,531
     Provision for loan losses                       (1,645,878)  29,468,734    3,602,047
                                                   -------------  -----------  -----------
     Balance at end of year                        $ 14,562,283   26,990,594    6,074,230
                                                   =============  ===========  ===========
</TABLE>

     As  a result of its ongoing evaluation of the adequacy of the allowance for
     loan losses, a decline in problem credits and continued recoveries of loans
     previously charged off, management decided to reduce the allowance for loan
     losses  during  2003.

     During  2003,  the  Company sold multifamily and commercial mortgage loans,
     both performing and non-performing, totaling approximately $13,800,000 to a
     third  party  at a net price of 93.7% of the outstanding balance. Under the
     terms of the purchase agreement, the Company was required to repurchase any
     non-performing loan for which the first monthly payment was not received by
     the  purchaser. No loans have been repurchased by the Company. In recording
     this  transaction,  the  allowance allocated to the loans sold was reversed
     from  the  allowance  for  loan losses resulting in a negative provision of
     approximately  $665,000.


                                       54
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)  PREMISES AND EQUIPMENT
     Major  classifications of premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                             2003        2002
                                                         ------------  ---------
<S>                                                      <C>           <C>

          Land                                           $  1,147,055  1,152,443
          Leasehold improvements                            2,376,156  1,761,777
          Buildings and improvements                        1,621,299  1,565,225
          Furniture and equipment                           5,067,916  4,116,105
                                                         ------------  ---------
                                                           10,212,426  8,595,550
          Less accumulated depreciation                     2,988,460  1,804,581
                                                         ------------  ---------
                                                            7,223,966  6,790,969
          Construction in progress                                  -    314,737
                                                         ------------  ---------
                                                         $  7,223,966  7,105,706
                                                         ============  =========
</TABLE>

     Depreciation  expense  was approximately $1,241,000, $598,000 and $437,000,
     for  the  years  ended  December  31,  2003,  2002  and 2001, respectively.

(5)  TIME  DEPOSITS
     The  aggregate  amount of time deposit accounts with a minimum denomination
     of $100,000 was $94,370,000 and $146,208,880 at December 31, 2003 and 2002,
     respectively.

     At  December  31,  2003,  the  scheduled maturities of time deposits are as
     follows:

<TABLE>
<CAPTION>
<S>                                  <C>
       2004                          $175,069,441
       2005                            52,935,099
       2006                            15,636,631
       2007                             8,745,778
       2008                             9,343,240
                                     ------------
                                     $261,730,189
                                     ============
</TABLE>

     At December 31, 2003 and 2002, the Company had approximately $5,168,000 and
     $25,100,000,  respectively,  in time deposits purchased through third party
     brokers.  The  weighted average cost of these deposits during 2003 and 2002
     was  4.03%  and  3.62%,  respectively. These deposits have various maturity
     dates  and  are  included  in  the  schedule  above.

(6)  NOTE PAYABLE
     On  October  30,  2002, the Company entered into a line of credit agreement
     with  a  commercial  bank,  whereby the Company can borrow up to $7,500,000
     bearing  interest at LIBOR plus 2.5%. The note matures on March 1, 2004 and
     is  secured  by  the  stock  of  the  Bank  and  guaranteed by the Board of
     Directors  of  the Company. The loan agreement contains certain restrictive
     covenants  that  the  Company is either in compliance with or has requested
     waivers  for  violations.  At  December  31, 2003 and 2002, the Company had
     $7,480,000  and  $6,650,000,  respectively,  outstanding under this line of
     credit  agreement.


                                       55
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7)  FEDERAL HOME LOAN BANK ADVANCES
     The  Bank  has  advances  from  the  FHLB with monthly interest payments at
     various  maturity  dates  and interest rates ranging from 1.15% to 4.97% at
     December  31,  2003.  The  FHLB  advances  are  collateralized by a blanket
     assignment  on all residential first mortgage loans and selected investment
     securities.

     Advances from the FHLB outstanding at December 31, 2003 and 2002 consist of
     the  following:

<TABLE>
<CAPTION>
                                                                           OUTSTANDING  DECEMBER 31,
                                                                          --------------------------
       Maturity Date            Conversion Date         Rate   Rate Type      2003          2002
       -----------------  ----------------------------  -----  ---------  ------------  ------------
<S>                       <C>                           <C>    <C>        <C>           <C>
       March 29, 2004     N/A                           1.15%  Variable   $ 10,422,156             -
       February 9, 2011   February 9, 2004 and every
                            three months thereafter     4.97%  Fixed         5,000,000     5,000,000
       February 23, 2011  May 23, 2001 and every three
                               months thereafter        4.16%  Fixed         8,000,000     8,000,000
       January 17, 2012   January 17,2005 and every
                            three months thereafter     3.85%  Fixed        10,000,000    10,000,000
       October 20, 2004   N/A                           1.72%  Fixed         1,000,000             -
       October 20, 2005   N/A                           2.42%  Fixed         1,500,000             -
       October 20, 2006   N/A                           2.99%  Fixed         2,000,000             -
       October 22, 2007   N/A                           3.62%  Fixed         2,000,000             -
       April 20, 2005     N/A                           2.07%  Fixed         1,500,000             -
       November 22, 2010  November 22, 2004 and every                                              -
                          three months thereafter       3.45%  Fixed         3,000,000             -
       November 24, 2008  November 22, 2004 and every                                              -
                          three months thereafter       3.12%  Fixed         5,000,000             -
       May 24, 2005       N/A                           2.06%  Fixed         2,000,000             -
       November 24, 2006  N/A                           2.99%  Fixed         3,000,000             -
       November 25, 2005  N/A                           2.37%  Fixed         2,000,000             -
                                                                          ------------  ------------

                                                                          $ 56,422,156    23,000,000
                                                                          ============  ============
</TABLE>

     The  FHLB  has  the  option  to  convert  $31,000,000 of the total advances
     outstanding  into  three  month  LIBOR-based floating rate advances. If the
     FHLB elects to convert the advances, the Bank may terminate the transaction
     without  payment  of  a  prepayment  fee.

     The  Bank is required to purchase and hold certain amounts of FHLB stock in
     order to obtain FHLB borrowings. No ready market exists for the FHLB stock,
     and  it  has  no  quoted  market value. The stock is redeemable at $100 per
     share  subject to certain limitations set by the FHLB. At December 31, 2003
     and 2002 the Bank owned FHLB stock amounting to $ 2,821,200 and $1,560,100,
     respectively,  which  is  pledged  as  collateral for outstanding advances.

     (8)  TRUST PREFERRED SECURITIES
     In  February  2001  the Company formed a wholly-owned Connecticut statutory
     trust,  Heritage  Trust,  which  issued  $10  million  of  trust  preferred
     securities  that  qualify  as  Tier  I  capital under Federal Reserve Board
     guidelines.  The  Company  owns  all  of  the common securities of Heritage
     Trust.  The  proceeds  from  the  issuance of the common securities and the
     trust  preferred  securities  were used by Heritage Trust to purchase $10.3
     million  of  junior  subordinated  debentures  of  the  Company,  which pay
     interest  at  10.20%. The proceeds received by the Company from the sale of
     the  junior  subordinated  debentures  were  used  for  general  purposes,
     primarily  to  provide  capital  to  the  Bank.


                                       56
<PAGE>

                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8)  TRUST  PREFERRED  SECURITIES,  CONTINUED
     Under  the  terms of the indenture, the Company may elect to defer payments
     of  interest on the junior subordinated debentures for up to ten semiannual
     payment  periods.  For the duration of such deferral period, the Company is
     restricted  from paying dividends to shareholders and from paying debt that
     is  junior to the debentures. The Company anticipates that certain interest
     payments  may  need  to  be  deferred  during  2004.

     The  trust preferred securities are mandatorily redeemable upon maturity of
     the debentures on December 31, 2031, or upon earlier redemption as provided
     in  the  indenture.  The  Company  has  the  right to redeem the debentures
     purchased  by Heritage Trust, in whole or in part, on or after December 31,
     2011.  As  specified in the indenture, if the debentures are redeemed prior
     to  maturity,  the  redemption  price  will be the principal amount and any
     accrued  but  unpaid  interest.

(9)  INCOME TAXES
     The provision for income taxes is summarized as follows:

<TABLE>
<CAPTION>
                                               2003         2002         2001
                                           ------------  -----------  ----------
<S>                                        <C>           <C>          <C>
       Current                             $(1,530,643)  (1,186,964)  1,488,914
       Deferred                              2,283,721   (7,019,729)   (264,948)
       Change in valuation allowance           (88,848)     319,472           -
                                           ------------  -----------  ----------

                                           $   664,230   (7,877,221)  1,223,966
                                           ============  ===========  ==========
</TABLE>

     The  differences  between  the  provision  for  income taxes and the amount
     computed  by  applying  the  statutory  federal income tax rate to earnings
     (loss)  before  income  taxes  are  as  follows:

<TABLE>
<CAPTION>
                                                                      2003       2002         2001
                                                                   ---------  -----------  ----------
<S>                                                                <C>        <C>          <C>
       Pre-tax income (loss) at statutory rates (34%)              $609,487   (7,582,001)  1,220,562
       Differences:
         State taxes, net of federal benefit                         55,583     (713,600)     43,079
         Tax exempt interest income                                 (29,726)     (66,900)    (57,438)
         Change in valuation allowance                              (88,848)     319,472           -
         Compensation expense related to stock options exercised    189,888            -           -
         Other, net                                                 (72,154)     155,808      17,763
                                                                   ---------  -----------  ----------

                                                                   $664,230   (7,887,221)  1,223,966
                                                                   =========  ===========  ==========
</TABLE>


                                       57
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(9)  INCOME TAXES, CONTINUED
     The following summarizes the tax effects of temporary differences that give
     rise  to  significant  portions of the deferred tax assets and deferred tax
     liabilities. The net deferred tax asset is included as a component of other
     assets  at  December  31,  2003  and  2002.

<TABLE>
<CAPTION>
                                                             2003         2002
                                                          -----------  ----------
<S>                                                       <C>          <C>
     Deferred tax assets:
       Allowance for loan losses                          $3,875,795   8,437,534
       Deferred compensation on stock options                 85,729     297,373
       Foreclosed real estate                                303,118           -
       Net operating loss carryforward                     2,842,378     778,114
       Other                                                 180,687      47,869
                                                          -----------  ----------
         Total gross deferred tax assets                   7,287,707   9,560,890
       Valuation allowance                                  (230,624)   (319,472)
                                                          -----------  ----------
         Total net deferred tax assets                     7,057,083   9,241,418
                                                          -----------  ----------
     Deferred tax liabilities:
       Unrealized gains on available-for-sale securities     116,281      37,803
       Premises and equipment                                484,742     474,204
                                                          -----------  ----------
         Total gross deferred tax liabilities                601,023     512,007
                                                          -----------  ----------
         Net deferred tax asset                           $6,456,060   8,729,411
                                                          ===========  ==========
</TABLE>

     The  future  tax  consequences  of  the  differences  between the financial
     reporting and tax basis of the Company's assets and liabilities resulted in
     a  net  deferred  tax  asset.  A  valuation allowance was established for a
     portion  of  the  net deferred tax asset associated with the parent company
     state  net operating loss carryforwards, as the realization of this portion
     of  the  deferred  tax asset is dependent on future state taxable income of
     the  parent  company  only.  As  of  December 31, 2003, the Company has net
     operating  loss carryforwards totaling approximately $7,405,000 for federal
     income  tax  purposes  and  approximately  $10,143,000 for state income tax
     purposes  that  will  begin  to  expire in 2023 unless previously utilized.

(10) RELATED  PARTY  TRANSACTIONS
     The  Company  conducts  transactions  with  its  directors  and  executive
     officers,  including  companies in which they have beneficial interests, in
     the  normal  course  of business. It is the policy of the Company that loan
     transactions  with directors and officers be made on substantially the same
     terms  as  those  prevailing at the time made for comparable loans to other
     persons. The following is a summary of activity for related party loans for
     2003:

<TABLE>
<CAPTION>
<S>                                       <C>
          Beginning balance               $15,812,000
          New loans                         9,237,000
          Repayments                       (9,019,000)
          Charged-off                          (8,000)
                                          ------------
          Ending balance                  $16,022,000
                                          ============
</TABLE>

     At  December  31, 2003 and 2002, the Company had deposit relationships with
     related  parties  of approximately $1,552,000 and $3,512,000, respectively.


                                       58
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11) COMMITMENTS
     The  Company  leases  various  office  space  for  banking  and operational
     facilities  under  operating  lease  arrangements.  Future  minimum  lease
     payments  required  for  all  operating  leases  having a remaining term in
     excess  of  one  year  at  December  31,  2003  are  as  follows:

<TABLE>
<CAPTION>
          Year Ending December 31,                 Amount
          ------------------------               ----------
<S>                                              <C>
          2004                                   $  859,142
          2005                                      868,381
          2006                                      871,881
          2007                                      742,988
          2008                                      649,751
          Thereafter                              2,430,782
                                                 ----------

          Total minimum obligation               $6,422,925
                                                 ==========
</TABLE>

     Total  rent  expense was approximately $780,000, $636,000 and $458,000, for
     2003,  2002  and  2001,  respectively.

     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,  standby  letters  of  credit  and  financial  guarantees.  Those
     instruments  involve, to varying degrees, elements of credit risk in excess
     of  the  amount  recognized  in  the balance sheet. The contract amounts of
     those  instruments  reflect  the  extent  of involvement the Company has in
     particular  classes  of  financial  instruments.

     The  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 and financial guarantees written 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.

     In most cases, the Company requires collateral or other security to support
     financial  instruments  with  credit  risk.

<TABLE>
<CAPTION>
                                                                               Contractual Amount
                                                                            -----------------------
                                                                               2003         2002
                                                                            -----------  ----------
<S>                                                                         <C>          <C>
       Financial instruments whose contract amounts represent credit risk:

            Commitments to extend credit                                    $34,936,000  75,574,000
            Standby letters of credit and financial guarantees written      $ 3,303,000   3,259,000
</TABLE>

     Commitments  to  extend credit are agreements to lend to a customer as long
     as  there  is  no  violation  of any condition established in the contract.
     Commitments  generally  have  fixed  expiration  dates or other termination
     clauses and may require payment of a fee. Since many of the commitments may
     expire  without  being  drawn  upon,  the  total  commitment amounts do not
     necessarily  represent future cash requirements. The Company evaluates each
     customer's  creditworthiness  on  a  case-by-case  basis.  The  amount  of
     collateral  obtained, if deemed necessary by the Company, upon extension of
     credit  is  based on management's credit evaluation. Collateral held varies
     but  may  include  unimproved  and  improved  real  estate, certificates of
     deposit,  or  personal  property.

     Standby  letters of credit and financial guarantees written are conditional
     commitments  issued  by  the  Company  to  guarantee  the  performance of a
     customer  to  a  third  party.  Those  guarantees  are  primarily issued to
     businesses in the Company's delineated trade area. The credit risk involved
     in  issuing  letters  of credit is essentially the same as that involved in
     extending  loan  facilities  to  customers.  The Company holds real estate,
     equipment,


                                       59
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11) COMMITMENTS,  CONTINUED
     automobiles  and  customer  deposits  as  collateral  supporting  those
     commitments  for  which  collateral  is  deemed  necessary.

     The  Company  has  employment  agreements  with  certain key employees. The
     agreements,  among  other  things,  include  salary, bonus, incentive stock
     option,  and  change  in  control  provisions.

     The Company has $12,094,000 available for the purchase of overnight federal
     funds  from  three  correspondent  financial  institutions.

(12) CONTINGENCIES
     The  Bank  received demand letters from two former directors, officers, and
     employees  of  the Bank. The Bank terminated such officers in November 2002
     for  cause,  as  such  term  is  defined  by  their  respective  employment
     contracts. One officer has claimed monetary compensation, stock options and
     attorneys'  fees,  while  the  second  officer  has  claimed  monetary
     compensation, as well as stock options and payment of country club dues for
     two years following the date of his termination. The Bank maintains that it
     terminated  each  of  these  officers  for  "cause" and that it is under no
     obligation  to pay them any additional compensation. On March 14, 2003, one
     of these officers filed a lawsuit against the Bank in the Circuit Court for
     Morgan  County,  Alabama,  alleging  breach  of  contract and demanding the
     benefits due under his employment agreement. The Bank subsequently received
     notice  that  a suit had been filed by a second former officer and director
     in  the Circuit Court of Jefferson County, Alabama, alleging similar causes
     of  action  against  the  Bank. The Bank successfully removed each of these
     cases  to  the  United  States  District Court for the Northern District of
     Alabama.  On March 9, 2004, the Bank reached agreement on the settlement of
     the  claims  of  one of the former officers. The Bank intends to vigorously
     defend  the remaining action brought against the Bank, and does not believe
     that  the  final  outcome  will  have  a material impact on the Bank or the
     Company.

(13) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS
     The  Company  has  a  profit  sharing  and  401(k)  plan for the benefit of
     substantially  all  employees  subject  to  certain minimum age and service
     requirements.  Under  this  plan,  the  employees  may  defer up to fifteen
     percent  of  their  compensation  with  a  fifty  percent matching employer
     contribution  of  up  to  six  percent  of  compensation.  The  Company's
     contribution  pursuant  to this formula was approximately $275,000, $92,000
     and $66,000 for the years of 2003, 2002 and 2001, respectively. The vesting
     schedule  for  the  plan  begins at 20% after three years of employment and
     graduates to 50% in year 4 and reaches 100% after five years of employment.

     The  Bank also adopted an Employee Stock Purchase Plan (the "ESPP") on June
     20,1995. The Company assumed the ESPP in its holding company reorganization
     that  was  finalized  in  August  2000.  The  ESPP covers substantially all
     employees,  subject  to eligibility requirements. Under the ESPP, employees
     are  given the opportunity to subscribe to purchase shares of the Company's
     common stock at a purchase price equivalent to 85% of the stated fair value
     of  the  common  stock,  as  determined  by  the  board of directors of the
     Company.  Employee  contributions  to  the  ESPP  are  made through payroll
     deduction.  The  maximum number of shares available-for-sale under the ESPP
     is 100,000. The Board approved and ratified modification of the ESPP on May
     8,  2001.


                                       60
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) EMPLOYEE  AND  DIRECTOR  BENEFIT  PROGRAMS,  CONTINUED
     The  Company  has  an  Incentive Stock Compensation Plan (the "Compensation
     Plan")  whereby  the  Company may grant stock options to eligible directors
     and  key  employees.  Under  the Compensation Plan, the Company has entered
     into  incentive  stock option agreements and nonqualified option agreements
     (together  the  "Agreements")  which  provide  for  these directors and key
     employees  to  purchase shares of Company's $0.01 par value common stock at
     the  fair  market  value  at the dates of grant. The following summary sets
     forth  activity  under  the  Agreements  for years ended December 31, 2003,
     2002,  and  2001:

<TABLE>
<CAPTION>
                                               2003                       2002                       2001
                                     --------------------------  -------------------------  -------------------------
                                                    Weighted                   Weighted                   Weighted
                                                     Average                    Average                    Average
                                                  Option Price               Option Price               Option Price
                                       Shares       Per Share      Shares      Per Share      Shares      Per Share
                                     -----------  -------------  ----------  -------------  ----------  -------------
<S>                                  <C>          <C>            <C>         <C>            <C>         <C>
     Outstanding, beginning of year   3,239,016   $        3.75  3,957,032   $        3.77  3,970,032   $        3.72
     Granted during the year            462,000   $        3.41    120,000   $        3.34     23,000   $       11.50
     Forfeited during the year         (684,586)  $        4.47   (387,000)  $        3.70          -   $           -
     Exercised during the year       (1,140,430)  $        3.31   (451,016)  $        3.89    (36,000)  $       2.42
                                     -----------  -------------  ----------  -------------  ----------  -------------

     Outstanding, end of year         1,876,000   $        3.67  3,239,016   $        3.75  3,957,032   $        3.77
                                     ===========  =============  ==========  =============  ==========  =============

     Number of shares exercisable       960,367   $        3.35  1,559,816   $        3.92  1,630,232   $        4.03
                                     ===========  =============  ==========  =============  ==========  =============
</TABLE>

     Options  outstanding  at December 31, 2003 are exercisable at option prices
     ranging from $3.34 to $11.50, as presented in the table below. Such options
     have  a  weighted average remaining contractual life of approximately eight
     years.

             Options   Exercise Price     Expiration Date  Exercisable
            ---------  ---------------  -----------------  -----------
            1,410,000  $          3.34  August, 2008           846,000
              275,000  $          3.34  December, 2012         107,000
               35,000  $          3.34  January, 2013                -
               25,000  $          3.34  May, 2013                4,167
               49,500  $          3.34  June, 2013                   -
                1,000  $          3.75  March, 2006                600
               15,000  $          3.75  July, 2013                   -
               23,000  $          3.75  August, 2013                 -
               15,000  $          3.75  September, 2013              -
               10,000  $          3.75  October, 2013                -
                4,000  $          3.75  November, 2013               -
                7,500  $          3.75  November, 2013               -
                3,000  $          3.75  November, 2013               -
                2,000  $          6.50  July, 2004               2,000
                1,000  $         11.50  March, 2006                600
            ---------  ---------------                     -----------
            1,876,000  $          3.67                         960,367
            =========  ===============                     ===========

     At  December  31,  2003,  the  shares  under  option  include  1,410,000
     nonqualified  options  issued  primarily  to  Company directors and 466,000
     incentive  stock  options  issued  to certain key employees of the Company.


                                       61
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) REGULATORY MATTERS
     The  Company  is  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 financial statements. Under capital
     adequacy  guidelines  and  the  regulatory  framework for prompt corrective
     action,  the  Company  must  meet  specific capital guidelines that involve
     quantitative  measures  of  the  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 the regulators about components, risk weightings,
     and  other  factors.

     Quantitative  measures established by regulation to ensure capital adequacy
     require  the  Company  to maintain minimum amounts and ratios (set forth in
     the  table  below)  of  total  and  Tier  1  capital  (as  defined  in  the
     regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
     average  assets (as defined). Management believes, as of December 31, 2003,
     that  the  Company  and  the Bank meet all capital adequacy requirements to
     which  they  are  subject.

     As  of  December  31,  2003,  the  most  recent  notification from the FDIC
     categorized the Bank as well capitalized under the regulatory framework for
     prompt  corrective  action.  As  of  December  31,  2002,  the  most recent
     notification  from  the FDIC categorized the Bank as adequately capitalized
     under  the  regulatory  framework  for  prompt  corrective  action.  To  be
     categorized  as  well  capitalized and adequately capitalized the Bank must
     maintain  minimum  total  risk-based, Tier 1 risk-based and Tier 1 leverage
     ratios  as  set forth in the table. There are no conditions or events since
     that  notification  that  management  believes  have  changed  the  Bank's
     category.

     The  Company's  and  the  Bank's  actual  capital  amounts  and  ratios are
     presented  below.

<TABLE>
<CAPTION>
                                                                                            To Be Well
                                                                                         Capitalized Under
                                                                    For Capital          Prompt Corrective
                                                    Actual       Adequacy Purposes       Action Provisions
                                               ---------------  --------------------  -----------------------
                                               Amount   Ratio    Amount      Ratio      Amount       Ratio
                                               -------  ------  ---------  ---------  ----------  -----------
<S>                                            <C>      <C>     <C>        <C>        <C>         <C>
                                                               (dollars in thousands)
     AS OF DECEMBER 31, 2003:
     Total Capital (to Risk-Weighted Assets)
       Consolidated                            $41,845  10.28%  $  32,561      8.00%       N/A         N/A
       Bank                                    $49,246  11.99%  $  32,866      8.00%  $   41,082       10.00%
     Tier 1 Capital (to Risk-Weighted Assets)
       Consolidated                            $35,113   8.63%  $  16,280      4.00%       N/A         N/A
       Bank                                    $43,994  10.71%  $  16,433      4.00%  $   24,649        6.00%
     Tier 1 Capital (to Average Assets)
       Consolidated                            $35,113   6.31%  $  22,257      4.00%       N/A         N/A
       Bank                                    $43,994   8.64%  $  20,372      4.00%  $   25,465        5.00%
     AS OF DECEMBER 31, 2002:
     Total Capital (to Risk-Weighted Assets)
       Consolidated                            $39,436   7.81%  $  40,410      8.00%       N/A         N/A
       Bank                                    $45,182   8.98%  $  40,233      8.00%  $   50,292       10.00%
     Tier 1 Capital (to Risk-Weighted Assets)
       Consolidated                            $30,479   6.09%  $  20,205      4.00%       N/A         N/A
       Bank                                    $38,640   7.68%  $  20,117      4.00%  $   30,175        6.00%
     Tier 1 Capital (to Average Assets)
       Consolidated                            $30,749   4.94%  $  24,923      4.00%       N/A         N/A
       Bank                                    $38,640   5.99%  $  25,794      4.00%  $   32,243        5.00%
</TABLE>


                                       62
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15) SHAREHOLDERS' EQUITY
     Dividends paid by the Bank are the primary source of funds available to the
     Company. Banking regulations limit the amount of dividends that may be paid
     without  prior  approval  of the regulatory authorities. These restrictions
     for  the Bank are based on the level of regulatory classified assets, prior
     year's  earnings, and the ratio of equity capital to total assets. Pursuant
     to the regulatory restrictions discussed in note 1, the Bank cannot pay any
     cash  dividends  without  prior  approval  of  the  regulatory authorities.

     During  2003,  the  Company  sold  693,035 shares of common stock through a
     private  placement at a price of $3.34 per share. The private placement was
     completed  on  April  14,  2003  and  resulted  in  total  net  proceeds of
     $2,294,608.  As  shares  were offered and sold pursuant to an exemption for
     the  registration  requirements  of  the  applicable  Federal  and  state
     securities  laws,  none  of  the offered and sold shares will be registered
     with  the  United  States  Securities  and Exchange Commission or any state
     securities  commission. The proceeds of this offering were used to increase
     the  Bank's  regulatory  capital ratios and for general corporate purposes.

     The  Board  of  Directors, at its discretion, can issue shares of preferred
     stock  up  to  a  maximum  of 10,000,000 shares. The Board is authorized to
     determine  the  number of shares, voting powers, designations, preferences,
     limitations  and  relative  rights.


(16) OTHER OPERATING EXPENSES
     Other  operating  expenses  for  the years ended December 31 2003, 2002 and
     2001  included  the  following  items  that  exceeded  one percent of total
     revenues:

<TABLE>
<CAPTION>
                                                     2003       2002      2001
                                                  ----------  ---------  -------
<S>                                               <C>         <C>        <C>
     Professional fees                            $1,733,948  1,275,308  582,783
     Charge off and collection expense                54,873    532,782  139,469
     FDIC insurance                                  426,532    102,000   86,000
     Data processing                                 675,592    420,998  190,300
     Advertising                                     541,803    401,505  336,017
     Supplies                                        357,914    398,449  262,024
</TABLE>

(17) FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS
     The  Company is required to disclose fair value information about financial
     instruments,  whether  or  not recognized on the face of the balance sheet,
     for which it is practicable to estimate that value. The assumptions used in
     the estimation of the fair value of the Company's financial instruments are
     detailed  below.  Where  quoted  prices  are not available, fair values are
     based  on  estimates  using  discounted  cash  flows  and  other  valuation
     techniques.  The use of discounted cash flows can be significantly affected
     by  the  assumptions  used,  including  the  discount rate and estimates of
     future  cash  flows.  The  following disclosures should not be considered a
     surrogate  of the liquidation value of the Company, but rather a good faith
     estimate of the increase or decrease in value of financial instruments held
     by  the  Company  since  purchase,  origination,  or  issuance.

          Cash  and  Cash  Equivalents
          ----------------------------
          For  cash, due from banks, interest-bearing deposits with other banks,
          and  federal  funds sold, the carrying amount is a reasonable estimate
          of  fair  value.

          Investment  Securities  Available-for-sale
          ------------------------------------------
          Fair  values  for  investment  securities  are  based on quoted market
          prices.

          Other  Investments
          ------------------
          The  carrying  amount  of  other  investments approximates fair value.


                                       63
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17) FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS,  CONTINUED
          Loans  and  Mortgage  Loans  Held-for-sale
          ------------------------------------------
          The  fair  value  of  fixed rate loans is estimated by discounting the
          future cash flows using the current rates at which similar loans would
          be  made  to  borrowers with similar credit ratings. For variable rate
          loans,  the  carrying  amount  is a reasonable estimate of fair value.
          Mortgage  loans held-for-sale are valued based on the current price at
          which  these  loans  could  be  sold  into  the  secondary  market.

          Cash  Surrender  Value  of  Life  Insurance
          -------------------------------------------
          For  cash  surrender  value of life insurance, the carrying value is a
          reasonable  estimate  of  fair  value.

          Deposits
          --------
          The  fair  value of demand deposits, interest-bearing demand deposits,
          and  savings,  is  the amount payable on demand at the reporting date.
          The  fair value of fixed maturity certificates of deposit is estimated
          by discounting the future cash flows using the rates currently offered
          for  deposits  of  similar  remaining  maturities.

          Federal  Funds  Purchased
          -------------------------
          Because  federal  funds  purchased are acquired at variable rates that
          reset  frequently and are generally short-term in nature, the carrying
          value  is  a  reasonable  estimate  of  fair  value.

          Note  Payable
          -------------
          Because  the  Company's note payable bears interest at a floating rate
          that  resets  frequently, the carrying amount is a reasonable estimate
          of  fair  value.

          FHLB  Advances
          --------------
          The  fair  value  of  FHLB advances is estimated based upon discounted
          future  cash  flows  using  a  discount rate comparable to the current
          market  rate  for  such  borrowings.

          Trust  Preferred  Securities
          ----------------------------
          The  fair  value  of the trust preferred securities is estimated based
          upon  discounted future cash flows using a discount rate comparable to
          the  current  market  rate  for  such  borrowings.

          Commitments  to  Extend  Credit  and  Standby  Letters  of  Credit
          ------------------------------------------------------------------
          Commitments  to  extend  credit  and  standby  letters  of  credit are
          generally  short-term  and at variable interest rates. Therefore, both
          the  carrying  value  and  estimated  fair value associated with these
          instruments  are  immaterial.

          Limitations
          -----------
          Fair  value  estimates  are made at a specific point in time, based on
          relevant  market  information  and  information  about  the  financial
          instrument.  These  estimates  do  not reflect any premium or discount
          that  could  result  from  offering for sale at one time the Company's
          entire  holdings  of  a  particular  financial  instrument. Because no
          market  exists  for  a  significant portion of the Company's financial
          instruments,  fair  value estimates are based on many judgments. These
          estimates  are  subjective  in  nature  and  involve uncertainties and
          matters  of  significant  judgment  and therefore cannot be determined
          with  precision. Changes in assumptions could significantly affect the
          estimates.

          Fair  value  estimates  are based on existing on and off-balance sheet
          financial  instruments  without  attempting  to  estimate the value of
          anticipated  future  business  and the value of assets and liabilities
          that  are not considered financial instruments. Significant assets and
          liabilities  that are not considered financial instruments include the
          deferred income taxes and premises and equipment. In addition, the tax
          ramifications  related  to the realization of the unrealized gains and
          losses  can have a significant effect on fair value estimates and have
          not  been  considered  in  the  estimates.


                                       64
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17) FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS,  CONTINUED
     The  carrying  amount  and estimated fair values of the Company's financial
     instruments  at  December  31,  2003  and  2002  are  as  follows:

<TABLE>
<CAPTION>
                                                     2003                  2002
                                             ---------------------  --------------------
                                             Carrying   Estimated   Carrying  Estimated
                                              Amount    Fair Value   Amount   Fair Value
                                             ---------  ----------  --------  ----------
<S>                                          <C>        <C>         <C>       <C>
                                                            (In thousands)
     Assets:
       Cash and cash equivalents             $   9,411       9,411    19,539      19,539
       Investment securities                 $  99,038      99,038    35,126      35,126
       Other investments                     $   2,897       2,897     1,636       1,636
       Mortgage loans held-for-sale          $   5,996       5,996    12,343      12,343
       Loans, net                            $ 371,325     366,334   496,859     527,056
       Cash surrender value life insurance   $  11,015      11,015         -           -

     Liabilities:
       Deposits                              $ 415,615     419,981   525,631     527,869
       Federal funds purchased               $     406         406         -           -
       Note payable                          $   7,480       7,480     6,650       6,650
       Trust Preferred Securities            $  10,000      13,639    10,000      10,000
       FHLB advances                         $  56,422      54,990    23,000      30,829
</TABLE>


                                       65
<PAGE>
                     HERITAGE FINANCIAL HOLDING CORPORATION
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(18) HERITAGE FINANCIAL HOLDING COMPANY (PARENT COMPANY ONLY) CONDENSED
     FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                      BALANCE SHEETS

                                DECEMBER 31, 2003 AND 2002

                                                            2003         2002
                                                         -----------  ----------
<S>                                                      <C>          <C>
                                Assets
                                ------
     Cash                                                $   928,966      15,853
     Investment in subsidiaries                           46,279,649  39,017,232
     Other assets                                          1,091,079   2,530,043
                                                         -----------  ----------

                                                         $48,299,694  41,563,128
                                                         ===========  ==========

                  Liabilities and Shareholders' Equity
                  ------------------------------------

     Note payable                                        $ 7,480,000   6,650,000
     Junior subordinated debentures                       10,310,000  10,310,000
     Other liabilities                         404,302     900,082
     Shareholders' equity                                 30,105,392  23,703,046
                                                         -----------  ----------

                                                         $48,299,694  41,563,128
                                                         ===========  ==========
</TABLE>

<TABLE>
<CAPTION>
                                        STATEMENTS OF EARNINGS

                         FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                                                                         2003          2002        2001
                                                                     ------------  ------------  ---------
<S>                                                                  <C>           <C>           <C>
     Dividends from subsidiaries                                     $    31,620       720,000   2,115,710
     Interest income                                                           -        31,357      27,228
     Management fees                                                           -             -     218,000
                                                                     ------------  ------------  ---------

               Total income                                               31,620       751,357   2,360,938
                                                                     ------------  ------------  ---------

     Expenses:
       Interest                                                        1,305,928     1,099,886     905,562
         Salaries and benefits                                                 -     2,119,946     394,734
         Other operating expenses                                        334,019       538,525     471,462
                                                                     ------------  ------------  ---------

           Total expenses                                              1,639,947     3,758,357   1,771,758
                                                                     ------------  ------------  ---------

           Earnings (loss) before income tax benefit and equity in
             undistributed earnings (loss) of subsidiaries            (1,608,327)   (3,007,000)    589,180

     Income tax benefit                                                  609,252     1,279,879     583,857
                                                                     ------------  ------------  ---------

           Earnings (loss) before equity in undistributed
             earnings (loss) of subsidiaries                            (999,075)   (1,727,121)  1,173,037

     Equity in undistributed earnings (loss) of subsidiaries           2,127,455   (12,685,662)  1,192,884
                                                                     ------------  ------------  ---------

           Net earnings (loss)                                       $ 1,128,380   (14,412,783)  2,365,921
                                                                     ============  ============  =========
</TABLE>


                                       66
<PAGE>
                                 HERITAGE FINANCIAL HOLDING CORPORATION
                                            AND SUBSIDIARIES
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(18) HERITAGE FINANCIAL HOLDING COMPANY (PARENT COMPANY ONLY) CONDENSED
     FINANCIAL STATEMENTS CONTINUED

<TABLE>
<CAPTION>
                                             STATEMENTS OF CASH FLOWS

                               FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                                                                         2003          2002          2001
                                                                     ------------  ------------  ------------
<S>                                                                  <C>           <C>           <C>
     Cash flows from operating activities:
       Net earnings (loss)                                           $ 1,128,380   (14,412,783)    2,365,921
       Adjustments to reconcile net earnings (loss) to net
         cash provided (used) by operating activities:
           Equity in undistributed (earnings) loss of subsidiaries    (2,127,455)   12,685,662    (1,192,884)
           Compensatory options                                                -     1,126,914        37,843
           Change in:
             Other assets                                              1,438,964      (112,244)     (792,886)
             Other liabilities                                          (495,780)            -             -
                                                                     ------------  ------------  ------------

                 Net cash provided (used) by operating activities        (55,891)     (712,451)      417,994
                                                                     ------------  ------------  ------------

     Cash flows from investing activities consisting of
       capital contributions to subsidiaries                          (4,965,946)   (6,500,000)  (10,320,200)
                                                                     ------------  ------------  ------------

     Cash flows from financing activities:
       Proceeds from note payable                                        830,000     6,650,000             -
       Issuance of junior subordinated debentures                              -             -    10,310,000
       Proceeds from exercise of stock options                         2,801,399        23,571        87,210
       Proceeds from issuance of stock                                 2,303,551        25,195        31,445
                                                                     ------------  ------------  ------------

               Net cash provided by financing activities               5,934,950     6,698,766    10,428,655
                                                                     ------------  ------------  ------------

     Net change in cash                                                  913,113      (513,685)      526,449

     Cash at beginning of year                                            15,853       529,538         3,089
                                                                     ------------  ------------  ------------

     Cash at end of year                                             $   928,966        15,853       529,538
                                                                     ============  ============  ============
</TABLE>


                                       67
<PAGE>
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

     On  July  18, 2003, the Company filed a Form 8-K regarding the dismissal of
Schauer  Taylor  Cox  Vise  Morgan  &  Fowler,  P.C.  ("Schauer Taylor"), as its
independent  accountants.  The  Company dismissed Schauer Taylor on July 9, 2003
and  appointed  Porter  Keadle  Moore,  LLP  ("PKM")  as  its  new  independent
accountants on the same date, effective immediately. This determination followed
the  Company's  decision to seek proposals from independent accountants to audit
the Company's financial statements for the fiscal year ending December 31, 2003.
The  decision  to  dismiss  Schauer Taylor and to retain PKM was approved by the
Company's  Audit  Committee  on  July  9,  2003.  Schauer Taylor's report on the
Company's  2002  financial  statements  was issued earlier in February, 2003, in
conjunction  with the filing of the Company's Annual Report on Form 10-K for the
year  ended  December  31,  2002.

     During  the Company's two most recent fiscal years ended December 31, 2002,
and  the  subsequent  interim  period  through  July  8,  2003,  there  were  no
disagreements between the Company and Schauer Taylor on any matter of accounting
principles  or  practices,  financial statement disclosure, or auditing scope or
procedure,  which  disagreements,  if  not  resolved  to  Schauer  Taylor's
satisfaction,  would have caused Schauer Taylor to make reference to the subject
matter  of  the  disagreement  in  connection  with  its  reports.

     The  audit  reports  of  Schauer  Taylor  on  the  consolidated  financial
statements  of the Company and subsidiaries as of and for the fiscal years ended
December  31, 2002 and 2001 did not contain any adverse opinion or disclaimer of
opinion,  nor were they qualified or modified as to uncertainty, audit scope, or
accounting  principles.

     As  required by Securities and Exchange Commission regulations, the Company
provided  Schauer  Taylor  with  a  copy  of these disclosures and required that
Schauer  Taylor  furnish  the  Company with a letter addressed to the Commission
stating  whether  it  agrees  with  the  statements  by the Company and, if not,
stating the respects in which it does not agree. A letter from Schauer Taylor is
attached  as  Exhibit  16.

     None  of  the  reportable  events  described  under  Item  304(a)(1)(v)  of
Regulation  S-K  occurred  within the Company's two most recent fiscal years and
the  subsequent  interim  period  through  July  8,  2003.

     During  the Company's most recent fiscal years ended December 31, 2002, and
the  subsequent interim period through July 8, 2003, the Company did not consult
with  PKM  regarding any of the matters or events set forth in Item 304(a)(2)(i)
and  (ii)  of  Regulation  S-K.

ITEM 9A.  CONTROLS AND PROCEDURES

(a)  The  Company  carried  out  an  evaluation,  under  the  supervision  and
participation  of  its management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in pursuant to Exchange
Act  Rules  13a-15(c) and 15d-15(e)) as of the end of the period covered by this
Annual  report  on  Form  10-Q.  Based  on  that evaluation, the Chief Executive
Officer  and the Chief Financial Officer concluded that the Company's disclosure
controls  and  procedures  are  effective  in  timely  alerting them to material
information  relating  to  the Company (including its consolidated subsidiaries)
required  to  be  included  in  the Company's periodic SEC filings. However, the
Company  recently  has  experienced  several  changes in top management, and the
effectiveness  of  such  disclosure  controls and procedures is dependent on the
Company's  personnel to report any issues or matters required to be disclosed in
the  Company's  SEC  filings to the appropriate management personnel on a timely
basis.

(b)  Management has previously conducted a comprehensive review of the Company's
internal  control  over  financial  reporting  which  identified  significant
weaknesses  in  the  Company's  and  the  Bank's internal control over financial
reporting.  While  management continues to review and modify the Bank's internal
control  over financial reporting to remediate those weaknesses, there have been
no  significant  changes  in either the Company's or the Bank's internal control
over  financial reporting during the fourth quarter of 2003 that have materially
affected,  or are reasonably likely to materially affect, the Company's internal
control  over  financial  reporting.



                                       68
<PAGE>
                                    PART III

ITEM 10, 11, 12, 13 AND 14.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
          EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS; AND PRINCIPAL ACCOUNTANT FEES
          AND SERVICES.

     The  information  set  forth  under  the  captions "Directors and Executive
Officers,"  "Executive  Compensation," "Security Ownership of Certain Beneficial
Owners  and  Management and Related Stockholder Matters," "Certain Relationships
and  Related Transactions" and "Principal Accounting Fees and Services" included
in  the Company's definitive proxy statement to be filed no later than April 30,
2004,  in  connection  with the Company's 2004 Annual Meeting of Stockholders is
incorporated  herein  by  reference.


                                       69
<PAGE>
                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  Financial  Statements,  Financial  Schedules  and  Exhibits.

     (1)  The  consolidated  financial  statements of Heritage Financial Holding
          Corporation and its subsidiaries filed as a part of this Annual Report
          on  Form 10-K are listed in Item 8 of this Annual Report on Form 10-K,
          which  is  hereby  incorporated  by  reference  herein.

     (2)  All  schedules  to  the  consolidated financial statements of Heritage
          Financial  Holding  Corporation and its subsidiaries have been omitted
          because  they  are  not required under the related instructions or are
          inapplicable, or because the required information has been provided in
          the  consolidated  financial  statements  or  the  notes  thereto.

     (3)  The exhibits required by Regulation S-K are set forth in the following
          list  and are filed either by incorporation by reference from previous
          filings  with  the Securities and Exchange Commission or by attachment
          to  this  Annual  Report  on  Form  10-K  as  indicated  below.

<TABLE>
<CAPTION>
EXHIBIT
   NO.                                              EXHIBIT
<S>      <C>
(3)-1    Certificate of Incorporation of Heritage Financial Holding Corporation, filed as Exhibit 1 to
         the Company's Registration Statement on Form 8-A, is hereby incorporated herein by
         reference.

(3)-2    Bylaws of Heritage Financial Holding Corporation, filed as Exhibit 2 to the Company's
         Registration Statement on Form 8-A, is hereby incorporated herein by reference.

(4)-1    Indenture, dated as of February 22, 2001, between Heritage Financial Holding Corporation
         and State Street Bank and Trust Company, filed as Exhibit 4-1 to the Company's annual
         report on Form 10-KSB filed March 31, 2001, is hereby incorporated by reference.

(4)-2    Guarantee Agreement, dated as of February 22, 2001, between Heritage Financial Holding
         Corporation and State Street Bank and Trust Company, filed as Exhibit 4-2 to the
         Company's annual report on Form 10-KSB filed March 31, 2001, is hereby incorporated by
         reference.

(4)-3    Placement Agreement, dated as of February 9, 2001, by and among First Tennessee Capital
         Markets, Keefe, Bruyette & Woods, Inc., Heritage Financial Holding Corporation and
         Heritage Financial Statutory Trust I, filed as Exhibit 4-3 to the Company's annual report on
         Form 10-KSB filed March 31, 2001, is hereby incorporated by reference.

(10)-1   Heritage Financial Holding Corporation Employee Stock Purchase Plan, filed as Exhibit (4)-
         2 to the Company's Registration Statement on Form S-8 (Registration No. 333-55942), is
         hereby incorporated herein by reference.

(10)-2   Heritage Financial Holding Corporation Incentive Stock Compensation Plan, filed as
         Exhibit (4)-3 to the Company's Registration Statement on Form S-8 (Registration No. 333-
         55942), is hereby incorporated herein by reference.


                                       70
<PAGE>
EXHIBIT
   NO.                                              EXHIBIT

(10)-3   Employment Agreement dated as of January 23, 2003, effective as of October 23, 2002, by
         and between Heritage Bank and Larry R. Mathews filed as Exhibit (10) - 5 to the
         Company's Annual Report on Form 10-K for the year ended December 31, 2002, is hereby
         incorporated by reference.
         Employment Agreement dated as of February, 2003, effective as of October 25, 2002, by

(10)-4   and between Heritage Bank and Don H. Pruett filed as Exhibit (10) - 1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, is hereby
         incorporated by reference.

(10)-5   Employment Agreement dated as of January, 2003, by and between Heritage Bank and
         Robert F. Harwell Jr. filed as Exhibit (10) - 2 to the Company's Quarterly Report on Form
         10-Q for the quarter ended March 31, 2004, is hereby incorporated by reference.

(10)-6   Employment Agreement dated as of June 10, 2003, effective as of May 23, 2003, by and
         between Heritage Bank and William M. Foshee filed as Exhibit (10) - 1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 is hereby
         incorporated by reference.

(10)-7   Loan Agreement dated as of October 30, 2002, by and between Heritage Financial Holding
         Corporation and First Tennessee Bank National Association, filed as Exhibit 99.2 to the
         Company's Current Report on Form 8-K on November 5, 2002.

16       Letter from Schauer Taylor Cox Vice Morgan & Fowler, P.C.

21       Subsidiaries of the Registrant

23.1     Consent of Independent Certified Public Accountants

23.2     Consent of Independent Auditors

24       Powers of Attorney.

31.1     Certification of principal executive officer pursuant to Exchange Act Rule 13a - 14(a) or
         15d -14(a)

31.2     Certification of principal financial officer pursuant to Exchange Act Rule 13a - 14(a) or
         15d -14(a)

32.1     Chief Executive Officer - Certification required by Exchange act Rule 13a - 14(b) or Rule
         15d - 14(b) and 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002

32.2     Chief Financial Officer - Certification required by Exchange act Rule 13a - 14(b) or Rule
         15d - 14(b) and 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002
</TABLE>


                                       71
<PAGE>
(b)  Reports on Form 8-K

     Form 8-K furnished November 7, 2003 to disclose under Item 12 the Company's
     earnings  for  the  quarter  ended  September  30,  2003

(c)  Exhibits

The exhibits required to be filed with this Annual Report on Form 10-K pursuant
to Item 601 of Regulation S-K are listed under "Exhibits" in Part IV, Item 15(a)
(3) of this Annual Report on Form 10-K, and are incorporated herein by
reference.


                                       72
<PAGE>
                                   SIGNATURES


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


                                          HERITAGE FINANCIAL HOLDING CORPORATION



Date: March 29, 2004                          By /s/ Larry R. Matthews
                                                --------------------------------
                                              Larry R. Matthews
                                              Interim Chief Executive Officer


Date: March 29, 2004                          By /s/ William M. Foshee
                                                --------------------------------
                                              William M. Foshee
                                              Chief Financial Officer


                                       73
<PAGE>