<PAGE>

                                                                               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

        For the fiscal year ended December 31, 2001

___     Transition report under Section 13 or 15(d) of the Securities Exchange
        Act of 1934

        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 _____
    -----

<PAGE>

                                                                               2

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
                                      ---

State issuer's revenues for its most recent fiscal year.

                                   $12,313,495
                                   -----------

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. $21,424,371
      -----------

                   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.

<TABLE>
<CAPTION>
                                                                      Part of the Form 10-KSB Into Which
                  Document                                               the Document is Incorporated
                  --------                                            ----------------------------------

<S>                                                                   <C>
Portions of Potomac Bancshares, Inc.'s 2001 Annual                    Part II, Items 6 and 7
Report to Shareholders for the year ended December 31, 2001

Portions of Potomac Bancshares, Inc.'s Proxy Statement for            Part III, Items 9, 10, 11 and 12
the 2002 Annual Meeting of Shareholders
</TABLE>

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. ("Potomac") to be formed on March 2, 1994, as a
single-bank holding company. To date, Potomac's only activities have involved
the acquisition of the Bank. Potomac 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 that
formed and opened for business in 1871. The bank's deposits are insured by the
Federal Deposit Insurance Corporation. The bank is engaged in general banking
business primarily in Jefferson County and Berkeley County, West Virginia. The
bank also provides services to Washington County and Frederick County, Maryland
and Loudoun County, Frederick County and Clarke County, Virginia. The main
office is in Charles Town, West Virginia at 111 East Washington Street, with
branch offices in

                .    Harpers Ferry, West Virginia,
                .    Kearneysville, West Virginia and
                .    Martinsburg, West Virginia.

         The bank provides consumers, businesses, and governments with a broad
range of banking services. These services include

                .    lines of credit,
                .    home equity lines of credit,
                .    commercial, agricultural, real estate, installment loans,
                .    checking, savings, NOW, money market accounts,
                .    certificates of deposit, and
                .    individual retirement accounts.

Automated teller machines are located at each of the four offices. Touchline 24
is an interactive voice response system available at 1-304-728-2424 that
provides certain services to customers on a twenty-four hour basis. Bill paying
and certain other banking services are available online through any touch tone
telephone and/or the World Wide Web. 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, secured by collateral being purchased or secured by other collateral.

         Underwriting standards for 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.

         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,
                .    to purchase owner occupied one to four family residential
                     property,
                .    for lines of credit and
                .    for home equity loans.

         Approximately 76% of the bank's loans are secured by real estate. These
loans had an average delinquency rate of .62% and a loss rate of .01% during
2001. The average delinquency rate and loss rate is based on comparisons to 2001
average total loans.

<PAGE>

                                                                               4

         As of December 31, 2001, aggregate dollar amounts in loan categories
secured by real estate are as follows:

                  Construction and land development         $     530,000
                  Secured by farmland                           1,801,165
                  Secured by 1-4 family residential            56,283,230
                  Other                                        19,275,005
                                                            -------------

                                                            $  77,889,400
                                                            =============

         Loans to individuals for personal expenditures are approximately 21% of
the bank's total loans at December 31, 2001. The aggregate balance of these
loans was $21,213,959 at December 31, 2001. The majority of these loans are
installment loans with the remainder made as term loans.

         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 .22% and
a loss rate of .11% in 2001 (based on comparisons to 2001 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, a
loan officer must review the loan before a renewal can be approved. The average
delinquency rate was -0-% and the loss rate was .01% for term loans compared to
average total loans in 2001.

         The remaining aggregate dollar amount of the bank's loans is $3,286,309
at December 31, 2001. The amount includes:

<TABLE>
<S>                                                                                          <C>
         (1)  Dealer wholesale loans with generally no delinquencies or losses               $   978,351

         (2)  Term loans for business and commercial purposes                                  1,974,102

         (3)  Industrial revenue bond loans secured by real estate                                56,550

         (4)  Term loans for agricultural purposes                                                46,020

         (5)  Other loans                                                                        231,286
</TABLE>

         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 federal
funds sold and 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 federal
funds sold and 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.

<PAGE>

                                                                              5

         Deposit Activities. The bank offers noninterest-bearing checking
accounts, interest-bearing NOW accounts and interest-bearing 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.

         To open a deposit account, the depositor must meet the following
requirements:

                .    present a valid identification,
                .    have a 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.

Competition
-----------

         As of March 7, 2002, there were 62 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
that compete with the bank in its market area.

         The bank's market area is generally defined as Jefferson County and
Berkeley County, West Virginia. The following data has not been updated since
Berkeley County became part of the bank's primary market area. As of June 30,
2001, there were six banks in Jefferson County with 14 banking offices. The
total deposits of those commercial banks as of June 2001 were $477,886,000 and
the bank ranked number one with $131,144,000 or 27.44% 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 has been increased competition for West Virginia banks, including
the bank.

<PAGE>

                                                                            6

Employees
---------

         Potomac currently has no employees.

         As of March 22, 2002, the bank had 79 full-time employees and 15
part-time employees.

Supervision and Regulation
--------------------------

         Introduction. Potomac 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 Potomac to secure the
prior approval of the Board of Governors before Potomac 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.

         As a bank holding company, Potomac 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 Potomac 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.

         Potomac's 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.

         Potomac 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. Potomac is also
subject to regulation and supervision by the Commissioner.

         Potomac 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
25% 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, 2002, FDIC set the Financing Corporation
(FICO) Bank Insurance Fund (BIF) premium for the bank at the annual rate of
1.820 basis points or .0001820 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 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 Potomac's results of operations.

<PAGE>

                                                                            7

         Capital Requirements. The Federal Reserve Board has issued risk-based
capital guidelines for bank holding companies, such as Potomac. 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.

         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.

<PAGE>

                                                                            8

         As of December 31, 2001, Potomac had capital in excess of all
applicable requirements as shown below:

<TABLE>
<CAPTION>
                                                  Actual           Required        Excess
                                             ---------------   ---------------  ------------
                                                           (Amounts in thousands)
<S>                                           <C>                 <C>            <C>
         Tier 1 capital:
             Common stock                     $      600
             Surplus                               5,400
             Retained earnings                    13,208
                                               ---------
         Total tier 1 capital                 $   19,208          $ 3,862        $  15,346
         Tier 2 capital:
             Allowance for loan losses (1)         1,209
                                               ---------

         Total risk-based capital             $   20,417          $ 7,724        $  12,693
                                               =========          =======        =========

         Risk-weighted assets                 $   96,545
                                               =========

         Tier 1 capital                       $   19,208          $ 5,099        $  14,109
                                               =========          =======        =========

         Average total assets                 $  169,982
                                               =========

         Capital ratios:
             Tier 1 risk-based capital ratio       19.90%            4.00%           15.90%
             Total risk-based capital ratio        21.15%            8.00%           13.15%
             Tier 1 capital to average total
                    assets (leverage)              11.30%            4.00%            7.30%
</TABLE>

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

         Gramm-Leach-Bliley Act of 1999. On November 4, 1999, Congress adopted
the Gramm-Leach-Bliley Act of 1999. This Act, also known as the Financial
Modernization Law, repealed a number of federal limitations on the powers of
banks and bank holding companies originally adopted in the 1930's. Under the
Act, banks, insurance companies, securities firms and other service providers
may now affiliate. In addition to broadening the powers of banks, the Act
created a new form of entity, called a financial holding company, which may
engage in any activity that is financial in nature or incidental or
complimentary to financial activities.

         The Federal Reserve Board provides the principal regulatory supervision
of financial services permitted under the Act. However, the Securities and
Exchange Commission and state insurance and securities regulators also assume
substantial supervisory powers and responsibilities.

         The Act addresses a variety of other matters, including customer
privacy issues. The obtaining of certain types of information by false or
fraudulent pretenses is a crime. Banks and other financial institutions must
notify their customers about their policies on sharing information with certain
third parties. In some instances, customers may refuse to permit their
information to be shared. The Act also requires disclosures of certain automatic
teller machine fees and contains certain amendments to the federal Community
Reinvestment Act.

         Permitted Non-Banking Activities. Under the Gramm-Leach-Bliley Act,
bank holding companies may become financial holding companies and engage in
certain non-banking activities. Potomac has not yet filed to become a financial
holding company and presently does not engage in, nor does it have any immediate
plans to engage in, any such non-banking activities.

         A notice of proposed non-banking activities must be furnished to the
Federal Reserve and the Banking Board before Potomac engages in such activities,
and an application must be made to the Federal Reserve and Banking Board
concerning acquisitions by Potomac 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 that 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 Potomac or the bank.

<PAGE>

                                                                            9

Item 2.  Description of Property.

         Potomac currently has no property.

         The bank owns the land and buildings of the main office and the branch
office facilities in Harpers Ferry and Kearneysville.

         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 adjoining corridors. During 2000 the construction of
the newer of these two buildings was completed. The first floor of the new
building houses the Trust and Financial Services Division. The second floor of
the new building houses certain administrative and loan offices. Both of these
floors open into the older bank premises. The basement of the new building is
used for record storage.

         The older premises, constructed in 1967, was renovated at the same time
the new building was constructed. The renovation includes all new lighting, new
ceilings, new floor and wall coverings as well as some minor structural changes
for more efficient operations.

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

         The branch facility in Kearneysville, West Virginia 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.

         The bank leases the facilities housing the branch office in
Martinsburg, West Virginia. The three year lease expires in February, 2004.
Renewals are an option. This branch opened for business in July, 2001.

         The bank has an option to buy property in Hedgesville, West Virginia.
If purchased, a fourth full service branch will be constructed on the sight.

         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 Potomac 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 Potomac common stock for (a) trading values, and (b)
dividends. As of March 15, 2002, there were approximately 1,100 shareholders.

<PAGE>

                                                                             10

         Potomac Common Stock is not traded on any stock exchange or over the
counter. Potomac (symbol PTBS) is now on the OTC 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 Potomac common stock. A
market maker is one who makes a market for a particular stock. Information about
sales (but not necessarily all sales) of Potomac common stock is available on
the Internet through many of the stock information services using Potomac's
symbol. Shares of Potomac common stock are occasionally bought and sold by
private individuals, firms or corporations, and, in many instances, Potomac does
not have knowledge of the purchase price or the terms of the purchase. The
trading values for 2000 and 2001 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 Potomac to verify or determine
the accuracy of the representations made to Potomac or gathered on the Internet.

<TABLE>
<CAPTION>
                                               Price Range        Cash Dividends*
                                            High         Low      Paid per Share

<S>                                      <C>            <C>           <C>
          2000     First Quarter         $ 33.500       $ 28.250      $ N/A
                   Second Quarter          30.000         26.125        .50
                   Third Quarter           28.500         24.000        N/A
                   Fourth Quarter          28.000         22.000        .75

          2001     First Quarter         $ 28.750       $ 25.000      $ N/A
                   Second Quarter          33.500         25.250        .50
                   Third Quarter           34.500         32.000        N/A
                   Fourth Quarter          38.500         33.000        .85
</TABLE>


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

         The primary source of funds for dividends paid by Potomac 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 Potomac
anticipates that the dividends paid by Potomac 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 4-11 of the Annual Report to
Shareholders for the year ended December 31, 2001, is incorporated herein by
reference.

Item  7. Financial Statements.

         The information contained on pages 13-31 of the Annual Report to
Shareholders for the year ended December 31, 2001, 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 5-6 and 13 of the Proxy Statement
dated March 29, 2002, for the April 23, 2002 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.

<PAGE>

                                                                              11

The Executive Officers are as follows:

<TABLE>
<CAPTION>
        Name               Position Since             Age            Principal Occupation
-----------------------    ---------------            ---            --------------------
<S>                        <C>                        <C>            <C>
Robert F. Baronner, Jr.    President & CEO             43            Employed by bank as of 1/1/01 as President
                           2001                                      & CEO; former Senior Credit Officer BB&T
                                                                     Northern West Virginia May 2000 - December
                                                                     2000; former Executive Vice President One
                                                                     Valley Bank East September 1997 - April
                                                                     2000; Senior Vice President Commercial
                                                                     Lending Division One Valley Bank East April
                                                                     1994 - September 1997.

William R. Harner          Sr. Vice President,         61            Employed at bank since 1967; Sr. Vice
                           Secretary & Treasurer                     President & Cashier since 1988.
                           1994

Gayle Marshall Johnson     Vice President & Chief      52            Employed with the bank 1977-1985 as as
                           Financial Officer                         internal auditor. Rejoined bank in 1988
                           1994                                      as Financial Officer.  Vice President &
                                                                     Financial Officer of bank since 1990.

Donald S. Smith            Vice President &            73            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 29, 2002, for the April 23, 2002 Annual Meeting under the captions
"Executive Compensation," "Employment Agreement," and "Compensation of
Directors" is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

         The information contained on pages 6-8 of the Proxy Statement dated
March 29, 2002, for the April 23, 2002 Annual Meeting under the captions
"Principal Holders of Voting Securities" and "Ownership of Securities by
Nominees, Directors and Officers" is incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions.

         The information contained on page 12 of the Proxy Statement dated March
29, 2002, for the April 23, 2002 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) 2.1 Agreement 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.

<PAGE>

                                                                              12

     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.

    10.2 Employment Agreement

    13   2001 Annual Report to Shareholders

    21   Subsidiaries of the Registrant

    99   Proxy Statement for the 2002 Annual Meeting for Potomac

  (b) No Form 8-K reports were filed during the last quarter of 2001.

<PAGE>

                                                                              13

                                   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/ Robert F. Baronner, Jr.                        March  22, 2002
   ------------------------------------------------         ---
   Robert F. Baronner, Jr.
   President & Chief Executive Officer



By /s/ L. Gayle Marshall Johnson                      March  22,  2002
   ------------------------------------------------         ---
   L. Gayle Marshall Johnson
   Vice President & Chief Financial 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/ J. Scott Boyd                                  March  22, 2002
   ------------------------------------------------         ---
   J. Scott Boyd, Director

By /s/ John P. Burns, Jr.                             March  22, 2002
   ------------------------------------------------         ---
   John P. Burns, Jr., Director

By /s/ Robert W. Butler                               March  22, 2002
   ------------------------------------------------         ---
   Robert W. Butler, Director

By  /s/ Guy Gareth Chicchirichi                       March  22, 2002
   ------------------------------------------------         ---
    Guy Gareth Chicchirichi, Director

By  /s/ Thomas C. G. Coyle                            March  22, 2002
    -----------------------------------------------         ---
    Thomas C. G. Coyle, Director

<PAGE>

                                                                              14

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


By /s/ William R. Harner                                  March  22, 2002
   ----------------------------------------------------         ---
   William R. Harner, Director,
   Sr. Vice President, Secretary & Treasurer

By /s/ E. William Johnson                                 March  22, 2002
   ----------------------------------------------------         ---
   E. William Johnson, Director

By /s/ John C. Skinner, Jr.                               March  22, 2002
   ----------------------------------------------------         ---
   John C. Skinner, Jr., Director

By /s/ Donald S. Smith                                    March  22, 2002
   ----------------------------------------------------         ---
   Donald S. Smith, Director