1

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

                                   FORM 10-KSB

(Mark one)

[XXX] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934 (Fee required)

      For the fiscal year ended December 31, 1998

[   ] Transition  report under Section 13 or 15(d) of the Securities  Exchange
      Act of 1934 (No fee required)

      For the transition period from ___________ to ___________

      Commission File No. 0-24958

                            Potomac Bancshares, Inc.
                 (Name of Small Business Issuer in Its Charter)

West Virginia                                         55-0732247
(State or Other Jurisdiction of                       (I.R.S. Employer
Incorporation or Organization)                        Identification No.)

111 East Washington Street
PO Box 906, Charles Town WV                           25414-0906
(Address of Principal Executive Offices)              (Zip Code)

                                  304-725-8431
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                                  Name of Each Exchange
        Title of Each Class                       on  Which Registered
        -------------------                       ---------------------
     NONE
     ---------------------------               ---------------------------

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


         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $1.00 Par Value
                                (Title of Class)

Check whether the issuer: (l) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.

Yes   [XXX]     No  [   ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [XX]

<PAGE>

                                                                               2

State issuer's revenues for its most recent fiscal year.            $11,180,990

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.         $21,427,060

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.

Yes [  ]          No  [  ]          Not Applicable   [XXX]

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.      600,000

Transitional Small Business Disclosure Format (check one):
Yes  [   ]         No   [XXX]

                       DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents which are incorporated by reference in the
Form 10-KSB Annual Report, and the Parts and Items of the Form 10-KSB into which
the documents are incorporated.

                                             Part of the Form 10-KSB Into Which
               Document                          the Document is Incorporated
               --------                          ----------------------------

Portions of Potomac Bancshares, Inc.'s              Part II, Items 6 and 7
1998 Annual Report to Shareholders for
the year ended December 31, 1998

Portions of Potomac Bancshares, Inc.'s              Part III, Items 9,
Proxy Statement for 10, 11 and 12 the
1999 Annual Meeting of Shareholders

PART I

ITEM  1.       DESCRIPTION OF BUSINESS.

History and Operations

        The Board of Directors of Bank of Charles Town (the "Bank") caused
Potomac Bancshares, Inc. ("Bancshares") to be formed on March 2, 1994, as a
single-bank holding company. To date, Bancshares' only activities have involved
the acquisition of the Bank. Bancshares acquired all of the shares of common
stock of the Bank on July 29, 1994.


<PAGE>

                                                                               3

        Bank of Charles Town is a West Virginia state-chartered bank which
formed and opened for business in 1871. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation. Engaged in general banking business with
the primary market area being Jefferson County, West Virginia, the Bank also
provides services to Washington County and Frederick County, Maryland; Loudoun
County and Clarke County, Virginia; and Berkeley County, West Virginia. The main
office is in Charles Town at 111 East Washington Street, with branch offices in
Harpers Ferry, West Virginia and Kearneysville, West Virginia.

        The Bank provides consumers, businesses, and governments with a broad
range of banking services, including lines of credit, home equity lines of
credit, commercial, agricultural, real estate, and installment loans, checking,
savings, NOW, and money market accounts, certificates of deposit, and individual
retirement accounts. Automated teller machines located at each of the three
offices and Touchline 24, an interactive voice response system available at
1-304-728-2424, provide certain services to customers on a twenty-four hour
basis. Bill paying and certain other banking services are available online
through a personal computer and/or the World Wide Web. These same bill paying
and banking services are also available using a special telephone. The trust and
financial services department provides financial management, investment and
trust services.

        LENDING ACTIVITIES. The Bank offers installment, term, and real estate
loans for consumer, business and commercial purposes. These loans can be
unsecured or secured by collateral being purchased or other collateral.

        Underwriting standards covering all lending include sound credit
analysis, proper documentation according to the Bank's loan documentation
checklist, promotion of profitable customer relationships with cross-selling of
bank services, avoidance of loan concentrations to a single industry or with a
single class of collateral, and diligent maintenance of past due and nonaccrual
loans at a minimum.

        The Bank's loan policy designates particular loan-to-value limits for
real estate loans in accordance with recommendations in Section 304 of the
Federal Deposit Insurance Corporation Improvement Act of 1991.

        As stated in the loan policy, there may be certain lending situations
not subject to these loan-to-value limits and from time to time the Board of
Directors may permit exceptions to the established limits. Any exceptions are
sufficiently documented.

        Loans secured by real estate are made to individuals and businesses for
the purchase of raw land, for land development, for commercial, multi-family and
other non-residential construction, to purchase improved property, and to
purchase owner occupied one to four family residential property. Lines of credit
and home equity loans are available.

        Approximately 74% of the Bank's loans are secured by real estate. These
loans had an average delinquency rate of 2.76% and a loss rate of .00% during
1998. These rates are based on comparisons to 1998 average total loans.

        As of December 31, 1998, aggregate dollar amounts in loan categories
secured by real estate are as follows:


               Construction and land development              $  651,848
               Secured by farmland                             1,394,201
               Secured by 1-4 family residential              42,541,181
               Other                                          12,623,662
                                                              ----------
                                                             $57,210,892
                                                              ==========

        Loans to individuals for personal expenditures are approximately 23% of
the Bank's total loans at December 31, 1998. The aggregate balance of these
loans was $17,738,039 at December 31, 1998. The majority of these are
installment loans with the remainder made as term loans.


<PAGE>

                                                                               4

        The Bank's loan policy states that evaluation of applications for
installment loans will consider place and length of residence, place and length
of employment, and credit history. Although these are considered, verification
of employment is usually not done, since it is recognized that unless immediate
decisions on applications can be made, a lender may be unable to secure a fair
share of loan business since instant credit is available from many sources in
the market place. This may make installment lending more risky than real estate
lending; however, installment loans had an average delinquency rate of .31% and
a loss rate of .19% in 1998 (based on comparisons to 1998 average total loans).
This delinquency rate for installment loans is lower than the comparable rate
for real estate loans.

        The Bank's policy for evaluating term loans involves consideration of
credit history and current financial statements if the loan is of a certain
amount and is unsecured. If loans are not paid at original scheduled maturity,
information must be reviewed by a loan officer for a renewal. The average
delinquency rate was .13% and the loss rate was .02% compared to average total
loans in 1998.

        The remaining aggregate dollar amount of the Bank's loans is $2,857,605
at December 31, 1998. The amount includes:

        (1)  Dealer wholesale loans with generally
              no delinquencies or losses                              $1,201,858

        (2)  Term loans for business and commercial purposes             985,613

        (3)  Industrial revenue bond loans secured by real estate         85,817

        (4)  Term loans for agricultural purposes                        246,100

        (5)  Other loans                                                 338,217

        INVESTMENT ACTIVITIES. The Bank's investment activities are governed by
its investment policy.

        The policy states that excess daily funds are to be invested in
securities purchased under agreements to resell. The daily funds are used to
cover deposit draw downs by customers, to fund loan commitments, and to help
maintain the Bank's asset/liability mix.

        According to the policy, funds in excess of those invested in securities
purchased under agreements to resell are to be invested in U.S. Treasury bills,
notes or bonds, obligations of U.S. Government agencies, obligations of
political subdivisions of the State of West Virginia with a rating of not less
than AAA and, with prior approval of the Board of Directors, bank qualified
local industrial revenue bonds to be carried in the Bank's loan portfolio.

        The policy governs various other factors including maturities, the
closeness of purchase price to par, amounts that may be purchased, and
percentages of the various types of investments that may be held.

        DEPOSIT ACTIVITIES. The Bank offers noninterest bearing checking
accounts and interest bearing NOW accounts and money market accounts. Passbook
and statement savings accounts and Christmas Club accounts are available.
Certificates of deposit are offered in various terms from 91 days to four years
and may be automatically renewed if the depositor wishes. Individual retirement
accounts in the form of certificates of deposit are also available.

        Prior to opening any deposit account particular requirements must be met
by the depositor including presentation of valid identification and social
security number, must not be on record with Chex Systems (credit reporting
agency), must be a U.S. citizen or possess evidence of legal alien status, and
must be at least 18 years of age or share account with a person at least 18
years of age.


<PAGE>
                                                                               5

Competition

        As of March 5, 1999, there were 52 bank holding companies (including
multi-bank and one bank holding companies) operating in the State of West
Virginia. These holding companies are headquartered in various West Virginia
cities and control banks throughout the State of West Virginia, including banks
which compete with the Bank in its market area.

        The Bank's market area is generally defined as Jefferson County, West
Virginia. As of June 30, 1998, there were six banks in Jefferson County with 17
banking offices. The total deposits of those commercial banks as of June, 1998,
were $456,515,000 and the Bank ranked number one with $121,756,000 or 26.7% of
the total deposits in the market.

        For most of the services which the Bank performs, there is also
competition from financial institutions other than commercial banks. For
instance, credit unions and issuers of commercial paper and money market funds
actively compete for funds and for various types of loans. In addition, personal
and corporate trust and investment counseling services are offered by insurance
companies, investment counseling firms and other business firms and individuals.
Due to the geographic location of the Bank's primary market area, the existence
of larger financial institutions in Maryland, Virginia and Washington, D.C.
influences the competition in the market area. In addition larger regional and
national corporations continue to be increasingly visible in offering a broad
range of financial services to all types of commercial and consumer customers.
The principal competitive factors in the markets for deposits and loans are
interest rates, either paid or charged. The chartering of numerous new banks in
West Virginia and the opening of numerous federally chartered savings and loan
associations have increased competition for the Bank. The 1986 legislation
passed by the West Virginia Legislature allowing state-wide branch banking
provided increased opportunities for the Bank, but it also increased competition
for the Bank in its service area. With the beginning of reciprocal interstate
banking in 1988, bank holding companies (such as Potomac Bancshares, Inc.) also
face additional competition in efforts to acquire other subsidiaries throughout
West Virginia.

        In 1994, Congress passed the Riegle-Neal Interstate Banking and
Branching Efficiency Act. Under this Act, bank holding companies are permitted
to acquire banks located in states other than the bank holding company's home
state without regard to whether the transaction is permitted under state law.
Commencing on June 1, 1997, the Act allows national banks and state banks with
different home states to merge across state lines, unless the home state of a
participating bank enacted legislation prior to May 31, 1997, that expressly
prohibits interstate mergers. Additionally, the Act allows banks to branch
across state lines, unless the state where the new branch will be located
enacted legislation restricting or prohibiting de novo interstate branching on
or before May 31, 1997. West Virginia adopted legislation, effective May 31,
1997, that allows for interstate branch banking by merger across state lines and
allows for de novo branching and branching by purchase and assumption on a
reciprocal basis with the home state of the bank in question. The effect of this
legislation will likely be increased competition with West Virginia banks,
including the Bank.

Employees

        Bancshares currently has no employees.

        As of January 31, 1999, the Bank had 77 full-time employees and 13
part-time employees.

Supervision and Regulation

        INTRODUCTION. Bancshares is a bank holding company within the provisions
of the Bank Holding Company Act of 1956, is registered as such, and is subject
to supervision by the Board of Governors of the Federal Reserve System ("Board
of Governors"). The Bank Holding Company Act requires Bancshares to secure the
prior approval of the Board of Governors before Bancshares acquires ownership or
control of more than five percent (5%) of the voting shares or substantially all
of the assets of any institution, including another bank.


<PAGE>

                                                                               6

        As a bank holding company, Bancshares is required to file with the Board
of Governors annual reports and such additional information as the Board of
Governors may require pursuant to the Bank Holding Company Act. The Board of
Governors may also make examinations of Bancshares and its banking subsidiaries.
Furthermore, under Section 106 of the 1970 Amendments to the Bank Holding
Company Act and the regulations of the Board of Governors, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or any provision of
credit, sale or lease of property or furnishing of services.

        Bancshares' depository institution subsidiaries are subject to affiliate
transaction restrictions under federal law which limit the transfer of funds by
the subsidiary banks to their respective parents and any nonbanking
subsidiaries, whether in the form of loans, extensions of credit, investments or
asset purchases. Such transfers by any subsidiary bank to its parent corporation
or any nonbanking subsidiary are limited in an amount to 10% of the
institution's capital and surplus and, with respect to such parent and all such
nonbanking subsidiaries, to an aggregate of 20% of any such institution's
capital and surplus.

        Bancshares is required to register annually with the Commissioner of
Banking of West Virginia ("Commissioner") and to pay a registration fee to the
Commissioner based on the total amount of bank deposits in banks with respect to
which it is a bank holding company. Although legislation allows the Commissioner
to prescribe the registration fee, it limits the fee to ten dollars per million
dollars of deposits rounded off to the nearest million dollars. Bancshares is
also subject to regulation and supervision by the Commissioner.

        Bancshares is required to secure the approval of the West Virginia Board
of Banking before acquiring ownership or control of more than five percent of
the voting shares or substantially all of the assets of any institution,
including another bank. West Virginia banking law prohibits any West Virginia or
non-West Virginia bank or bank holding company from acquiring shares of a bank
if the acquisition would cause the combined deposits of all banks in the State
of West Virginia, with respect to which it is a bank holding company, to exceed
20% of the total deposits of all depository institutions in the State of West
Virginia.

        DEPOSITORY INSTITUTION SUBSIDIARIES. Bank is subject to FDIC deposit
insurance assessments. As of January 1, 1998, FDIC set the Financing Corporation
(FICO) Bank Insurance Fund (BIF) premium for the Bank at the annual rate of
1.195 basis points or .0001195 times the total deposits of the Bank. This
premium is not tied to the Bank's risk classification. The rate of the premium
based on the Bank's risk classification is still at 0.00%. It is possible that
BIF insurance assessments will be changed, and it is also possible that there
may be a special additional assessment. A large special assessment could have an
adverse impact on Bancshares' results of operations.

        CAPITAL REQUIREMENTS. The Federal Reserve Board has issued risk-based
capital guidelines for bank holding companies, such as Bancshares. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations, takes off-balance sheet exposures into explicit account
in assessing capital adequacy, and minimizes disincentives to holding liquid,
low-risk assets. Under the guidelines and related policies, bank holding
companies must maintain capital sufficient to meet both a risk-based asset ratio
test and leverage ratio test on a consolidated basis. The risk-based ratio is
determined by allocating assets and specified off-balance sheet commitments into
four weighted categories, with higher levels of capital being required for
categories perceived as representing greater risk. The leverage ratio is
determined by relating core capital (as described below) to total assets
adjusted as specified in the guidelines. Bank is subject to substantially
similar capital requirements adopted by applicable regulatory agencies.

        Generally, under the applicable guidelines, the financial institution's
capital is divided into two tiers. "Tier 1", or core capital, includes common
equity, noncumulative perpetual preferred stock (excluding auction rate issues)
and minority interests in equity accounts or consolidated subsidiaries, less
goodwill. Bank holding companies, however, may include cumulative perpetual
preferred stock in their Tier 1 capital, up to a limit of 25% of such Tier 1
capital. "Tier 2", or supplementary capital, includes, among other things,
cumulative and limited-life preferred stock, hybrid capital instruments,
mandatory convertible securities, qualifying subordinated debt, and the
allowance for loan losses, subject to certain limitations, less required
deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital.


<PAGE>
                                                                               7
        Financial institutions are required to maintain a risk-based ratio of
8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when an institution's particular circumstances
warrant.

        Financial institutions that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate exposure and the
highest regulatory rating, are required to maintain a minimum leverage ratio of
3%. Financial institutions not meeting these criteria are required to maintain a
leverage ratio which exceeds 3% by a cushion of at least 100 to 200 basis
points, and, therefore, the ratio of Tier 1 capital to total assets should not
be less than 4%.

        The guidelines also provide that financial institutions 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's guidelines indicate that the Federal Reserve Board will continue to
consider a "tangible Tier 1 leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage is the ratio of an
institution's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.

        Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies available to the
federal regulatory authorities, including limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital directive to
increase capital and the termination of deposit insurance by the FDIC, as well
as to the measures described in the "Federal Deposit Insurance Corporation
Improvement Act of 1991" as applicable to undercapitalized institutions.

        The Federal Reserve Board, as well as the FDIC, has adopted changes to
their risk-based and leverage ratio requirements that require that all
intangible assets, with certain exceptions, be deducted from Tier 1 capital.
Under the Federal Reserve Board's rules, the only types of intangible assets
that may be included in (i.e., not deducted from) a bank holding company's
capital are readily marketable purchased mortgage servicing rights ("PMSRs") and
purchased credit card relationships ("PCCRs"), provided that, in the aggregate,
that total amount of PMSRs and PCCRs included in capital does not exceed 50% of
Tier 1 capital. PCCRs are subject to a separate limit of 25% of Tier 1 capital.
The amount of PMSRs and PCCRs that a bank holding company may include in its
capital is limited to the lesser of (i) 90% of such assets' fair market value
(as determined under the guidelines), or (ii) 100% of such assets' book value,
each determined quarterly. Identifiable intangible assets (i.e., intangible
assets other than goodwill) other than PMSRs and PCCRs, including core deposit
intangibles, acquired on or before February 19, 1992 (the date the Federal
Reserve Board issued its original proposal for public comment), generally will
not be deducted from capital for supervisory purposes, although they will
continue to be deducted for purposes of evaluating applications filed by bank
holding companies.

        As of December 31, 1998, Bancshares had capital in excess of all
applicable requirements as shown below:

<TABLE>
<CAPTION>
                                                  Actual             Required              Excess
                                                  ------             --------              ------
<S>                                            <C>                   <C>                 <C>
Tier 1 capital:
   Common stock                                 $    600,000
   Surplus                                         5,400,000
   Retained earnings                              10,090,870
                                                ------------
Total tier 1 capital                            $ 16,090,870       $    2,843,486       $   13,247,384
Tier 2 capital:
   Allowance for loan losses (1)                     891,693

Total risk-based capital                        $ 16,982,563       $    5,686,972       $   11,295,591
                                                ============       ==============       ==============

Risk-weighted assets                            $ 71,087,152
                                                ============

Tier 1 capital                                  $ 16,090,870       $    4,330,639       $   11,760,231
                                                ============       ==============       ==============

Average total assets                            $144,354,648
                                                ============
</TABLE>
<PAGE>
                                                                               8
<TABLE>
<CAPTION>
                                                  Actual             Required              Excess
                                                  ------             --------              ------
<S>                                            <C>                   <C>                 <C>
Capital ratios:
   Tier 1 risk-based capital ratio                     22.64%                4.00%               18.64%
   Total risk-based capital ratio                      23.89%                8.00%               15.89%
   Tier 1 capital to average total
       assets (leverage)                               11.15%                4.00%                7.15%
</TABLE>

       (1) Limited to 1.25% of gross risk-weighted assets.

        PERMITTED NON-BANKING ACTIVITIES. The Federal Reserve permits bank
holding companies to engage in non-banking activities closely related to banking
or managing or controlling banks. Bancshares presently does not engage in, nor
does it have any immediate plans to engage in, any non-banking activities bank
holding companies are permitted to perform.

        A notice of proposed non-banking activities must be furnished to the
Federal Reserve and the Banking Board before Bancshares engages in such
activities, and an application must be made to the Federal Reserve and Banking
Board concerning acquisitions by Bancshares of corporations engaging in those
activities. In addition, the Federal Reserve may, by order issued on a
case-by-case basis, approve additional non-banking activities.

        THE BANK. The Bank is a state-chartered bank which is not a member of
the Federal Reserve system and is subject to regulation and supervision by the
FDIC and the Commissioner.

        COMPLIANCE WITH ENVIRONMENTAL LAWS. The costs and effects of compliance
with federal, state and local environmental laws will not have a material effect
or impact on Bancshares or the Bank.

ITEM  2.       DESCRIPTION OF PROPERTY.

        Bancshares currently has no property.

        The Bank owns the land and buildings of the main office and two branch
office facilities.

        Main office property is located at 111 East Washington Street, Charles
Town, West Virginia. This property consists of two separate two story buildings
located side by side with an adjoining corridor. The older of these two
buildings houses the Bank's Trust and Financial Services Division on its first
floor and the second floor is used for storage. The Trust and Financial Services
area was remodeled in 1982. The newer building houses the commercial bank
operations, using the majority of both floors of the building. This building was
constructed in 1967. Two adjoining sections of property at this location were
purchased in 1986 and 1988 to meet additional parking needs.

        The schematic design has been completed for a major building and
renovation project approved by the Board. The design and development stage is
now underway. The project will include demolition of the older building now
housing Trust and Financial Services and construction of a new building on the
same location. This new building will house Trust, some of the commercial
operations, and provide storage. The project will also include redecoration of
the main office building originally constructed in 1967. The total estimated
cost is $1,800,000 and completion is expected within a year and a half of the
start date.

        The Bank sold the property formerly housing the Charles Town Lodge,
Loyal Order of Moose, Inc., during 1996 for $220,000. This property, used only
as a storage facility, was no longer needed.

        One branch office is located at 1318 Washington Street, Bolivar, West
Virginia. The office is a one story brick building constructed in 1975. On this
property is another building which existed at the time of the Bank's purchase.
This is rented to others by the Bank.


<PAGE>
                                                                               9

        In addition, the Bank owns property in Kearneysville, West Virginia, on
which a second branch facility was erected in 1985. This one story brick
building opened for business in April of 1985. During 1993, an addition was
constructed, doubling the size of this facility.

        There are no encumbrances on any of these properties. In the opinion of
management, these properties are adequately covered by insurance.

ITEM  3.       LEGAL PROCEEDINGS.

        Currently Bancshares is involved in no legal proceedings.

        The Bank is involved in various legal proceedings arising in the normal
course of business, and in the opinion of the Bank, the ultimate resolution of
these proceedings will not have a material effect on the financial position or
operations of the Bank.

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

        Not Applicable.

PART II

ITEM  5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        The following information reflects comparative per share data for the
periods indicated for Bancshares Common Stock for (a) trading values, and (b)
dividends. As of March 1, 1999, there were approximately 830 shareholders.

        Bancshares Common Stock is not traded on any stock exchange or over the
counter. Bancshares (symbol PTBS) is now on the Bulletin Board, a network
available to brokers. Scott and Stringfellow, a regional securities firm with an
office in Winchester, Virginia, is a market maker for Bancshares Common Stock. A
market maker is one who makes a market for a particular stock. Information about
sales (but not necessarily all sales) of Bancshares Common Stock is available on
the Internet through many of the stock information services using Bancshares's
symbol. Shares of Bancshares Common Stock are occasionally bought and sold by
private individuals, firms or corporations, and, in many instances, Bancshares
does not have knowledge of the purchase price or the terms of the purchase. The
following information relating to trading values for Bancshares Common Stock in
1997 is based upon information furnished to Bancshares by one or more parties
involved in purchases or sales of Bancshares Common Stock. The trading values
shown below are based on arms-length transactions between shareholders. The
trading values for 1998 are based on information available as a result of our
participation on the Bulletin Board described above and information gathered on
the Internet. NO ATTEMPT WAS MADE BY BANCSHARES TO VERIFY OR DETERMINE THE
ACCURACY OF THE REPRESENTATIONS MADE TO BANCSHARES OR GATHERED ON THE INTERNET.

<TABLE>
<CAPTION>
                                                Price Range          Cash Dividends *
                                             High          Low        Paid per Share
<S>                                         <C>          <C>             <C>
            1997   First Quarter            $30.000      $29.000         $ N/A
                   Second Quarter            32.000       30.000           .45
                   Third Quarter             32.000       30.000           N/A
                   Fourth Quarter            32.000       30.000           .70

            1998   First Quarter            $38.000      $34.875         $ N/A
                   Second Quarter            42.000       32.500           .50
                   Third Quarter             46.000       41.000           N/A
                   Fourth Quarter            41.000       40.000           .65
</TABLE>

* Dividends have been declared traditionally by Bancshares on a semi-annual
basis.

<PAGE>
                                                                              10

        The primary source of funds for dividends paid by Bancshares is the
dividend income received from the Bank. The Bank's ability to pay dividends is
subject to restrictions under federal and state law, and under certain cases,
approval by the FDIC and Commissioner could be required. Management of
Bancshares anticipates that the dividends paid by Bancshares will likely be
similar to those paid in the past, but dividends will only be paid when and as
declared by the Board of Directors.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

        The information contained on pages 4-12 of the Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.

ITEM  7.       FINANCIAL STATEMENTS.

        The information contained on pages 13-30 of the Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

        Not Applicable.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

        The information contained on pages 4-6 and 13 of the Proxy Statement
dated March 30, 1999, for the April 27, 1999 Annual Meeting under the captions
"Management Nominees to the Board of Potomac," "Directors Continuing to Serve
Unexpired Terms," and "Section 16(a) Beneficial Ownership Reporting Compliance"
is incorporated herein by reference.

        The Executive Officers are as follows:
<TABLE>
<CAPTION>
         Name                           Position Since          Age       Principal Occupation
         ----                           --------------          ---       --------------------
<S>                                    <C>                      <C>       <C>
Charles W. LeMaster                    President & CEO           57       Employed at Bank since 1983;
                                       1994                               President & CEO since 1991.

William R. Harner                      Sr. Vice President,       58       Employed  at Bank since  1967;  Sr. Vice
                                       Secretary & Treasurer              President & Cashier since 1988.
                                       1994

Gayle Marshall Johnson                 Vice President & Chief    49       Employed with the Bank 1977-1985 as
                                       Financial Officer                  as internal auditor. Rejoined Bank in 1988
                                       1994                               as Financial Officer.  Vice President &
                                                                          Financial Officer of Bank since 1990.

Donald S. Smith                        Vice President &          70       Employed  at Bank 1947 to 1991; President
                                       Assistant Secretary                1979  to  1991 (retired).
                                       1994
</TABLE>

ITEM 10.       EXECUTIVE COMPENSATION.

        The information contained on pages 8-9 and 12 of the Proxy Statement
dated March 30, 1999, for the April 27, 1999 Annual Meeting under the captions
"Executive Compensation" and "Compensation of Directors" is incorporated herein
by reference.

<PAGE>
                                                                              11

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The information contained on pages 6-8 of the Proxy Statement dated
March 30, 1999, for the April 27, 1999 Annual Meeting under the captions
"Principal Holders of Voting Securities" and "Ownership of Securities by
Nominees, Directors and Officer" is incorporated herein by reference.

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        The information contained on page 12 of the Proxy Statement dated March
30, 1999, for the April 27, 1999 Annual Meeting under the caption "Certain
Transactions with Directors, Officers and Their Associates" is incorporated
herein by reference.

ITEM 13.       EXHIBITS LIST AND REPORTS ON FORM 8-K.

        (a) 2.1Agreement and Plan of Merger dated March 8, 1994, by and between
Potomac Bancshares, Inc., and Bank of Charles Town filed with and incorporated
by reference from the Registration on Form S-4 filed with the Securities and
Exchange Commission on June 10, 1994: Registration no. 33-80092.

              3.1 Articles of Incorporation of Potomac Bancshares, Inc. filed
with and incorporated by reference from the Registration on Form S-4 filed with
the Securities and Exchange Commission on June 10, 1994: Registration no.
33-80092.

              3.2 Amendments to Articles of Incorporation of Potomac Bancshares,
Inc. adopted by shareholders on April 25, 1995 and filed with the West Virginia
Secretary of State on May 23, 1995, and incorporated by reference from Potomac's
Form 10-KSB for the year ended December 31, 1995 and filed with the Securities
and Exchange Commission, file no.
0-24958.

              3.3 Bylaws of Potomac Bancshares, Inc. filed with and incorporated
by reference from the Registration on Form S-4 filed with the Securities and
Exchange Commission on June 10, 1994: Registration no. 33-80092.

              3.4 Amended and Restated Bylaws of Potomac Bancshares, Inc.
adopted by shareholders April 25, 1995 and incorporated by reference from
Potomac's Form 10-KSB for the year ended December 31, 1995 and filed with the
Securities and Exchange Commission, file no. 0-24958.

13      1998 Annual Report to Shareholders

21      Subsidiaries of the Registrant

27      Financial Data Schedule

99      Proxy Statement for the 1999 Annual Meeting for Potomac

        (b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.


<PAGE>
                                                                              12
                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

POTOMAC BANCSHARES, INC.



By /s/ Charles W. LeMaster                                  March 30, 1999
   -----------------------------------------------                --
   Charles W. LeMaster
   President & Chief Executive Officer



By /s/ L. Gayle Marshall Johnson                            March 30, 1999
   -----------------------------------------------                --
   L. Gayle Marshall Johnson
   Vice President & Chief Financial Officer
   & Chief Accounting Officer



In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Signature & Title                                                   Date
-----------------                                                   ----

By /s/ John P. Burns, Jr.                                      March 30, 1999
   -------------------------------------------------                 --
   John P. Burns, Jr., Director


By /s/ Robert W. Butler                                        March 30, 1999
   -------------------------------------------------                 --
   Robert W. Butler, Director


By  /s/ Guy Gary Chicchirichi                                  March 30, 1999
   --------------------------------------------------                --
   Guy Gary Chicchirichi, Director


By  /s/ Thomas C. G. Coyle                                     March 30, 1999
   --------------------------------------------------                --
   Thomas C. G. Coyle, Director


By  /s/ Francis M. Frye                                        March 30, 1999
   --------------------------------------------------                --
   Francis M. Frye, Director


<PAGE>
                                                                              13

Signature & Title                                                   Date
-----------------                                                   ----

By  /s/ William R. Harner                                      March 30, 1999
   --------------------------------------------------                --
   William R. Harner, Director,
   Sr. Vice President, Secretary &
   Treasurer


By /s/ E. William Johnson                                      March 30, 1999
   --------------------------------------------------                --
   E. William Johnson, Director


By  /s/ Charles W. LeMaster                                    March 30, 1999
   --------------------------------------------------                --
   Charles W. LeMaster, Director,
   President, Chief Executive Officer


By  /s/ Minnie R. Mentzer                                      March 30, 1999
   --------------------------------------------------                --
   Minnie R. Mentzer, Director


By                                                             March 30, 1999
   --------------------------------------------------                --
   James E. Senseney, Director


By  /s/ John C. Skinner, Jr.                                   March 30, 1999
   --------------------------------------------------                --
   John C. Skinner, Jr., Director


By  /s/ Donald S. Smith                                        March 30, 1999
   --------------------------------------------------                --
   Donald S. Smith, Director