SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                     10-KSB
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                                            For the fiscal  year ended  December
31, 2001 Commission File No. 0-11255

                            Heritage Bankshares, Inc.


            Virginia                                           54-1234322
(State or other jurisdiction of                        (IRS Employer corporation
 incorporation or organization)                          identification number)


       200 East Plume Street
         Norfolk, Virginia                                        23514
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code:          (757) 523-2600


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


Common Stock, $5 par value         Securities not registered on a stock exchange
Title of Each Class


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

                  Yes X                                       NO_
                      -


Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of Regulation SB is not contained herein, and will not be contained, to the best
of  registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by  reference  in Part III of the Form 10-KSB of any  amendment to
this Form 10-KSB. [x]


State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant as of March 20, 2002: $9,717,847
--------------------------------------------------------------------------------

Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 20, 2002: Common Stock, $5 Par Value - 779,975

*In calculating  the aggregate  market value, we have used the most recent sales
price of Common Stock known to the Company, which is $15.40 per share and voting
stock held by non-affiliates of the registrant March 20, 2002 of 631,029.

<PAGE>

This Form 10-KSB contains certain forward-looking  statements.  For this purpose
any  statements  contained  in this  Form  10-KSB  that  are not  statements  of
historical fact may be deemed to be forward-looking statements. Without limiting
the   foregoing,   words   such   as   "may",   "will",   "expect",   "believe",
"anticipate","estimate"  or "continue" or comparable terminology are intended to
identify  forward  looking-statements.  These statements by their nature involve
substantial  risks and  uncertainties,  and actual results may differ materially
depending on a variety of factors.

Part I

Item 1.  BUSINESS

General

         Heritage  Bankshares,  Inc. (the "Company") was incorporated  under the
laws of the  Commonwealth  of  Virginia in 1983.  In August of 1992,  two wholly
owned subsidiaries,  Princess Anne Bank and The Heritage Bank-McLean,  were spun
off, and the Company has operated as a one bank holding company since that time.
The  principal  executive  office of the  Company  is  located at 200 East Plume
Street, Norfolk, Virginia. Currently, the Company does not transact any material
business  other than  through its wholly  owned  banking  subsidiary.  The total
consolidated assets of the Company on December 31, 2001 were $116.6 million.

The Bank

         Heritage Bank & Trust, a state banking  corporation,  is engaged in the
general  commercial  and retail  banking  business.  The  cities of Norfolk  and
Chesapeake,  Virginia,  constitute the primary service area of the Bank and to a
lesser  extent the Bank  includes the  remaining  areas of Hampton  Roads in its
market area. The Bank was  incorporated  as a Virginia  corporation on September
19,  1975,  and  commenced  business at 841 North  Military  Highway in Norfolk,
Virginia on  February 7, 1977.  On  December  31,  2001,  the Bank had assets of
$116.49  million,  with total loans of $79.77  million  and  deposits of $100.27
million.

IBV Real Estate Holding, Inc.

         IBV Real Estate  Holdings,  Inc., is a corporation  formed for the sole
purpose of owning  additional  real estate assets acquired by the Company or the
Bank.  Currently,  IBV Real  Estate  Holdings,  Inc.  owns a 1%  interest in IBV
Partners,  LP, a Virginia limited  partnership formed in December 1986. IBV Real
Estate  Holdings,  Inc.,  serves as the sole general partner of the partnership.
The partnership's  sole asset is a 17,200 square-foot office building located at
1450 South Military Highway,  Chesapeake,  Virginia.  Heritage Bank & Trust is a
tenant in the property.

Sentinel Title Services, Inc. and Sentinel Trust Services, L.L.C.

         Sentinel Trust  Services,  L.L.C.  is a wholly owned  subsidiary of the
Company.  Sentinel Title Services, Inc. is a wholly owned subsidiary of Heritage
Bank & Trust.  These entities own an interest in providers of various  insurance
products and trust  services.  The strategic  relationship  with these  entities
provides the Bank with the ability to provide these  services to its  customers.
The financial activities  pertaining to these interests are recorded on the cost
method of accounting for investments.

Competition

         The banking  business in the cities of Norfolk and Chesapeake,  as well
as all of the  Hampton  Roads area is highly  competitive.  The Bank  encounters
competition  from major  commercial  banking  institutions,  local banks,  money
market and mutual funds,  small loan companies,  credit unions,  brokerage firms
and other financial institutions.  Current federal law allows the acquisition of
banks by bank holding companies  nationwide.  Further,  federal and Virginia law
permit interstate banking.  As a consequence of these developments,  competition
in the Bank's  principal  market may increase,  and a consolidation of financial
institutions in Virginia may occur.
                                        2
<PAGE>

Employees

         The  Company  and the Bank have 46  employees.  Of this  total,  40 are
full-time and 6 are part-time. Management considers its employee relations to be
excellent.

Regulation And Supervision

         The Company is  registered  as a bank holding  company,  under the Bank
Holding  Company Act of 1956. As such,  the Company is subject to regulation and
examination  by the Federal  Reserve  Board,  and is  required to file  periodic
reports  and any  additional  information  that the  Federal  Reserve  Board may
require.  The Bank Holding  Company Act imposes  certain  restrictions  upon the
Company  regarding  the  acquisition  of  substantially  all of the assets of or
direct or indirect  ownership  or control of any bank of which it is not already
the  majority  owner;  or, with  certain  exceptions  of any company  engaged in
nonbanking activities.

         The Bank is subject to  supervision,  regulation and examination by the
State Corporation Commission of the State of Virginia.  Asset growth,  deposits,
reserves,  investments,  loans, consumer law compliance, issuance of securities,
establishment  of  branches,  mergers  and  consolidation,  changes in  control,
electronic funds transfer,  management practices and other aspects of operations
are subject to  regulation  by the  appropriate  federal  and state  supervisory
authorities.  The Bank is also subject to various regulatory requirements of the
Federal Reserve Board applicable to FDIC insured depository institutions.

Legislation

         Because of concerns relating to the  competitiveness and the safety and
soundness  of  the  industry,   Congress  continues  to  consider  a  number  of
wide-ranging  proposals for altering the structure,  regulation and  competitive
relationships  of the  nation's  financial  institutions.  Among  such bills are
proposals  to  combine  banks and  thrifts  into a unified  charter,  to combine
regulatory  agencies,  to alter  the  statutory  separation  of  commercial  and
investment banking, and to further expand the powers of depository institutions,
bank holding companies, and competitors of depository institutions. It cannot be
predicted  whether or in what form any of these proposals will be adopted or the
extent to which the business of the Company or the Bank may be affected thereby.

Monetary Policy

         The Company and the Bank are affected by fiscal and  monetary  policies
of the federal  government,  including those of the Federal Reserve Board, which
regulates  the  national  money  supply in order to  mitigate  recessionary  and
inflationary  pressures.  Among the techniques  available to the Federal Reserve
Board are engaging in open market  transactions of U.S.  Government  securities,
changing  the  discount  rate and  changing  reserve  requirements  against bank
deposits.  These  techniques are used in varying  combinations  to influence the
overall  growth of bank  loans,  investments  and  deposits.  Their use may also
affect  interest  rates  charged  on loans and paid on  deposits.  The effect of
governmental  policies  on the  earnings  of the  Company and the Bank cannot be
predicted.

Item 2.  PROPERTIES

         The  Bank  owns  four of its  banking  locations,  841  North  Military
Highway,  200 East  Plume  Street,  4815  Colley  Avenue and 735 East Ocean View
Avenue  in  Norfolk,  Virginia.  Management  believes  these  locations  are  in
excellent  condition.  A fifth banking location and the bank's operations center
are located at 1450 South  Military  Highway in Chesapeake,  Virginia.  See "IBV
Real Estate Holdings,  Inc." under Item 1 and "Certain Relationships and Related
Transactions" under Item 12.

Item 3.  LEGAL PROCEEDINGS

         The Company is subject to claims and lawsuits arising  primarily in the
ordinary  course  of  business.  Based on  information  presently  available  to
management  and advice  received from legal  counsel,  there are no  meritorious
claims involving the Company.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

         No matters were  submitted to a vote of securities  holders  during the
fourth quarter of 2001.
                                       3
<PAGE>

PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         The  Company's  common stock is listed on the OTC Bulletin  Board under
the symbol  HBKS.ob.  At March 20, 2002,  there are 1,048 record  holders of the
779,975  outstanding  shares of common  stock.  As of March 20,  2002,  the most
recent sales price of common stock known to the Company is $15.40 per share.

         The  following  table sets forth the trading range for the common stock
by calendar quarters for the past two years.

Calendar Quarter

                           HIGH         LOW
2001
Fourth Quarter           $15.00       $14.10
Third Quarter             15.10        14.00
Second Quarter            15.00        11.03
First Quarter             11.75        10.63

2000
Fourth Quarter           $11.38       $10.50
Third Quarter             11.88         9.75
Second Quarter            10.38         9.50
First Quarter             13.63         9.00


         The  Company's  Board  of  Directors   determines  whether  to  declare
dividends  and the amount of such  dividends.  Determinations  by the Board take
into account the Company's financial condition,  results of operations,  capital
requirements,  general  business  conditions  and other  relevant  factors.  The
Company's principal source of funds for cash dividends are the dividends paid to
the Company by the Bank. The Company  declared and paid annual dividends of $.26
and $.23 per share in 2001 and 2000, respectively. These dividends represented a
dividend payout ratio of 17% in 2001 and 15% in 2000. Regulatory restrictions on
the payment of dividends  by the Bank to the Company are  disclosed in Note 3 to
the Consolidated Financial Statements.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

FINANCIAL REVIEW:

         Heritage Bankshares, Inc. (the "Company"),  recorded net income in 2001
of $1.21 million, $39 thousand ahead of the $1.18 million reported in 2000. That
earnings  level  represents  a return  on  average  assets of 1.12% and 1.23% at
December 31, 2001 and December  31,  2000,  respectively.  The return on average
equity was 12.05% at December 31, 2001  compared to 12.30% at December 31, 2000.
On a diluted  per share  basis,  net income for 2001 was $1.51  compared  to the
$1.50 earned in 2000.

         The Company's  principal source of revenue is net interest income,  the
amount by which interest  income exceeds  interest  expense.  Interest income is
presented on a tax-equivalent basis to recognize  associated tax benefits.  This
presentation  provides a basis for  comparison  of yields with  taxable  earning
assets.  Tax-equivalent net interest income decreased $9 thousand from 2000. The
net  interest  yield  margin  for 2001 was 4.24%  compared  with  4.67% in 2000.
Despite a 13% increase in gross loans,  the falling  interest  rate  environment
negatively  impacted  the net  interest  margin.  Conversely,  the falling  rate
environment  positively  impacted the net interest  margin by reducing costs for
the  Company's  interest  bearing  liabilities.  The  average  yield on interest
earning assets decreased from 8.48% to 7.89% while the average yield on interest
bearing liabilities  decreased from 4.81% to 4.55%.  Average earning assets grew
$8.95 million or 9.87% while average  interest  bearing  liabilities  grew $7.98
million or 11.12%.

         The  provision  for loan losses is charged to  operations  in an amount
sufficient  to maintain  the  allowance  for loan  losses at a level  management
considers  adequate to provide for future losses inherent in the loan portfolio.
Loans  are  charged  against  this  allowance  when  management   perceives  the
collection  of the loan is  unlikely.  The  level of the  allowance  is based on


                                       4
<PAGE>

management's  ongoing  review of the loan portfolio and includes the present and
prospective financial condition of borrowers,  consideration of actual loan loss
experience  and  projected  economic  conditions  in general  and for the Bank's
service area.  The 2001  provision for loan losses was $34 thousand  compared to
the 2000  provision of $124  thousand.  The  allowance  for loan losses of $1.09
million at  year-end  2001 and $1.06  million in 2000  reflect an  allowance  to
year-end loans ratio of 1.36% and 1.49%, respectively.

         Noninterest  income is largely  derived  from  fee-based  services  and
mortgage banking activities. Total noninterest income increased $136 thousand to
$715  thousand.  Fees  related to  mortgage  banking  activities  increased  $81
thousand  reaching $144  thousand in 2001 compared to $63 thousand in 2000.  Net
income  from the Bank's  investment  properties  increased  $25  thousand to $38
thousand due to higher  occupancy  levels.  Deposit  account fees  increased $27
thousand from $265 thousand at year-end 2000 to $292 thousand at year-end 2001.

         Noninterest expense totaled $3.09 million for 2001, compared with $2.96
million in 2000.  The ratio of  noninterest  expense to average assets was 2.86%
compared  to the 3.03%  reported  in 2000.  This ratio  reflects  the  Company's
successful management of overhead and other related expenses.

         Total loans at December 31, 2001 were $79.8 million compared with $70.7
million at December 31, 2000. The increase is  attributable  to an $8.09 million
or 16% increase in the real estate loan portfolio.

         Deposits increased $13.45 million or 15.70% to $100.04 million compared
to $86.4 million at December 31, 2000.  Noninterest  bearing deposits  increased
$4.08 million to $19.95 million compared to $15.87 million at December 31, 2000.
Interest  bearing  deposits grew to $9.50 million to $80.09  million from $70.60
million at December 31, 2000.

LIQUIDITY:

         An important component of the Bank's  asset/liability  structure is the
level of liquidity  available to fund depositors'  withdrawals and extensions of
credit to  borrowers.  Traditional  sources of bank  liquidity  include  deposit
growth,  loan  repayments,   investment  maturities,   borrowings  and  interest
received.  Liquid  assets  include  cash,  federal  funds  sold and  investments
maturing  within one year.  The Bank's  ability to obtain  deposits and purchase
funds at favorable rates determines its liability liquidity.  As a result of the
Bank's management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
that is  sufficient  to  satisfy  its  depositors'  requirements  and  meet  its
customers' credit needs.

Table 1:  Selected Liquidity Statistics
For the year ended December 31,

                                                    2001               2000
                                                    (Dollars in thousands)

Available short-term assets (1)                $     18,879          $ 14,161
Certificates of deposit $100,000 and over            18,390            14,241
                                            ---------------------------------
Net available short-term assets                        $489              ($80)
                                            ---------------------------------
Ratio of available short-term assets to
certificates $100,000 and over                          103%               99%

Ratio of loans to deposits                               80%               82%

Ratio of certificates $100,000 and over to
   total assets                                          16%               14%

(1)  As of December  31,  2001,  available  short-term  assets  include  cash of
     $5,942,000,   federal  funds  sold  of  $9,181,000,   held-to-maturity  and
     available-for-sale  securities  maturing  within one year of  $493,000  and
     $3,263,000,  respectively.  As of December 31, 2000,  available  short-term
     assets  include  cash of  $3,688,000,  federal  funds  sold of  $5,215,000,
     held-to-maturity and available-for-sale securities maturing within one year
     of $1,252,000 and $4,006,000, respectively.



                                       5
<PAGE>

         The  Company's  Consolidated  Statement  of Cash  Flows,  found  in the
Consolidated Financial Statements,  provides information as to cash provided and
used from operating,  investing and financing activities.  At December 31, 2001,
cash and cash  equivalents  available  to meet  immediate  liquidity  needs  and
reserve   requirements  were  $15.12  million.   The  Company's  cash  and  cash
equivalents increased $6.22 million from $8.90 million at December 31, 2000.

PARENT COMPANY LIQUIDITY:

         The parent holding company  incurred  expenses for  stockholder-related
activities,  stock transfer and other functions necessary for the administration
of the Company.  See Note 3 of the  Consolidated  Financial  Statements  for the
parent company's Cash Flow Statement for further information on cash provided or
used by the  parent  for  operating,  financing  and  investing  activities.  In
addition, certain restrictions on cash dividends, loans and advances are imposed
by regulation of the Bank, which are also disclosed in Note 3.

CAPITAL:

         Banking regulations  established to ensure capital adequacy require the
Company and the Bank to maintain  minimum amounts and ratios of Total and Tier I
capital (as defined in the  regulations) to  risk-weighted  assets (as defined),
and of Tier I capital (as defined) to average  assets (as  defined).  Management
believes,  as of December 31, 2001, that the Company meets all capital  adequacy
requirements to which it is subject.

         Stockholders'  equity at December 31, 2001 was $10.66 million  compared
to $9.44 million at the end of 2000.  Book value per share increased from $12.17
at December 31, 2000 to $13.71 at December 31, 2001.

         The following table provides  information on the Company's  risk-based,
leverage and capital ratios at December 31, 2001 and 2000.

Table 2: Capital Ratios
For the year ended December 31,

                                                   2001                 2000
                                                  (Dollars in thousands)

Risk-based capital:
Tier I Capital
   Stockholders' equity                          $10,445               $9,421
Tier II Capital
    Allowance for loan losses (limited)            1,068                  931
                                                   -----                  ---
Total                                            $11,513              $10,352
                                                 =======              =======

Risk adjusted assets                             $85,392              $74,361

Risk-based capital ratios:
   Tier I                                          12.23%               12.67%
   Total                                           13.48%               13.92%

Leverage ratio                                      9.67%                9.65%
Primary capital ratio                               9.80%               10.47%

RATE SENSITIVITY:

         An important  element of earnings  performance is proper  management of
the interest  sensitivity  gap. The interest  sensitivity  gap is the difference
between  interest  sensitive  assets and  interest  sensitive  liabilities  at a
specific time interval. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities,
and  is  considered   negative  when  the  amount  of  interest  rate  sensitive

                                       6
<PAGE>

liabilities  exceeds the amount of interest rate sensitive assets during a given
period. Repricing assets or liabilities, selling investments available for sale,
replacing  an asset or liability  at maturity or  adjusting  the  interest  rate
during the life of an asset or  liability  are all means by which a Company  can
manage the gap.  Matching the amounts of assets and liabilities  maturing in the
same time  interval  helps to  minimize  the  impact on net  interest  income in
periods of interest rate volatility.


         The  following  table  presents  the  Company's  interest   sensitivity
position at December  31, 2001.  This one-day  position,  which  continually  is
changing,  is not necessarily  indicative of the Company's position at any other
time.

Table 3:  Interest
Sensitivity         Analysis
 December 31, 2001
<TABLE>
                                               (1)           (2)          (3)         (4)         (5)
                                             Within         Over 3     Over 1 Yr    Over 3 Yr
                                           1 through 3      through      through     through     Over
                                              months       12 months       3 yrs       5 yrs     5 yrs      Total
                                       ----------------------------------------------------------------------------
Earning assets:
<S>                                            <C>               <C>         <C>         <C>        <C>     <C>
  Federal funds                                $9,181            $0          $0          $0         $0      $9,181
  Investment securities at cost                   917         5,675       7,374         970        633     $15,569
  Loans                                        27,191         5,579       9,620      10,977     26,407      79,774
Total Earning Assets                          $37,289       $11,254     $16,994     $11,947    $27,040    $104,524

Interest and non-interest bearing liab:

  Commercial DDA                               $8,194            $0      $4,916      $3,278         $0     $16,388
   Personal DDA                                     0             0       2,136         712        712       3,560
  TT&L Note                                        59             0           0           0          0          59
  Savings                                           0             0       3,437       1,145      1,145       5,727
  Money Market                                      0         3,293       3,293           0          0       6,586
  NOW                                               0             0       8,686       2,896      2,896      14,478
  Certificates                                 15,041        26,466       9,694       2,074         25      53,300
   Federal Funds Purchased                          0             0           0           0          0           0
  Repurchase Agreements                         5,150             0           0           0          0       5,150
Total Interest and non interest
  bearing liabilities                         $28,444       $29,759     $32,162     $10,105     $4,778    $105,249


Interest sensitivity gap                        8,845       (18,505)    (15,169)      1,842     22,262        (725)

Cumulative gap                                  8,845        (9,660)    (24,829)    (22,987)      (725)

Ratio interest sensitive assets
to interest-sensitive liabilities                1.31          0.38        0.53        1.18       5.66        0.99

Ratio of cumulative gap to
 total earning assets                            8.46%        -9.24%     -23.75%     -21.99%     -0.69%
</TABLE>

(1)  Assets and  liabilities are presented in the period they mature or reprice,
     whichever is earlier.


                                       7
<PAGE>

NET INTEREST INCOME:

         Net interest income is the difference between interest earned on loans,
investment  securities and short-term  investments and interest paid on deposits
and other  borrowings.  Material  factors  affecting net interest income include
interest rates earned on loans and investments  and those paid on deposits,  the
mix and volume of earning assets and interest-bearing  liabilities and the level
of noninterest bearing liabilities.  The following table presents the components
of net interest income.


                                       8
<PAGE>
<TABLE>
Table 4:  Components of Net Interest Income
For the years ended December 31,                                     2001                                  2000
 (Dollars in thousands)
                                                          Average                 Average         Average               Average
                                                         Balance(1)  Interest    yield/rate    Balance(1)  Interest  yield/rate
Interest earning assets: (taxable equivalent basis (2))
<S>                                                        <C>         <C>         <C>           <C>         <C>         <C>
Loans (net of unearned discount (3))                       $74,859     $6,560      8.76%         $69,234     $6,354      9.18%
Investment securities-taxable (4)                           16,290        921      5.65%          17,312      1,056      6.10%
Investment securities- non-taxable (1) (4)                     778         55      7.07%             924         65      7.03%
Federal Funds                                                7,710        321      4.16%           3,213        213      6.63%
                                                     ------------------------------------  ------------------------------------
Total Interest earning assets                              $99,637     $7,857      7.89%         $90,683     $7,688      8.48%
Noninterest earning assets:
Cash and due from banks                                      4,080                                 3,128
Allowance for loan losses
                                                            (1,044)                                 (998)
Other real estate owned                                        433                                   431
Premises and equipment                                       2,413                                 2,311
Other assets                                                 2,486                                 2,024
                                                             -----                                 -----
Total Assets                                              $108,005                               $97,579

Liabilities and stockholders' equity
Interest bearing liabilities:
Money Market and NOW accounts                              $17,348       $379      2.18%         $16,535       $445      2.70%
Savings Deposits                                             5,980        157      2.63%           5,091        166      3.26%
Savings Certificates                                        39,802      2,302      5.78%          36,045      2,036      5.64%
Large denomination certificates                             12,725        660      5.19%          10,614        643      6.06%
Securities sold under agreements to repurchase               3,770        129      3.42%           2,802        121      4.32%
Short-term borrowings                                           67          2      2.99%             630         41      6.51%
                                                     ------------------------------------  ------------------------------------
Total interest bearing liabilities                         $79,692     $3,629      4.55%         $71,717     $3,452      4.81%

Noninterest bearing liabilities:
Demand deposits                                             17,449                                16,146
Other                                                          785                                   959
 Total Liabilities                                          97,926                                88,822
Stockholders' equity                                        10,079                                 8,757
                                                     --------------                        --------------

  Total liabilities and stockholders' equity             $108,005                               $97,579
                                                         =========                              =======

Net interest earnings                                                 $4,228                                $4,236
                                                                      =======                               ======

Net interest yield  margin on average interest earning
 assets (taxable equivalent basis)                                                 4.24%                                 4.67%
                                                                                   =====                                 =====

Less tax equivalent adjustment                                          ($65)                                 ($84)
                                                                        -----                                 -----
Net interest income                                                   $4,163                                $4,152
                                                                      =======                               ======

 Net interest spread (taxable
    equivalent basis)                                                              3.34%                                 3.67%
                                                                                   =====                                 =====
</TABLE>

(1)  Daily average  balances are  calculated  using the aggregate  daily average
     balances on a monthly basis.
(2)  Tax equivalent  adjustments  (using 34% federal income tax rates) have been
     made in calculating the yields on tax-free loans and investments.  Virginia
     banks are exempt from state income tax.
(3)  For the purposes of these computations,  non-accruing loans are included in
     the daily average loan amounts outstanding.
(4)  The yield/rate of the investment securities is computed using the amortized
     cost basis.



                                       9
<PAGE>

         The following  table  illustrates  the impact on the interest income of
the Company resulting from changes in average balances and average rates for the
periods  indicated.  The change in interest due to both rate and volume has been
allocated to volume and rate changes in  proportion to the  relationship  of the
absolute dollar of the changes in each.

Table 5:  Volume and Rate
Analysis
For the years ended December 31,
(Dollars in thousands)
<TABLE>
                                            2001 / 2000                           2000 / 1999
                                        (Dollars in thousands)                (Dollars in thousands)
                                       Increase (Decrease)                   Increase (Decrease)
                                         Due to Change in:                    Due to Change in:

                                   Volume      Rate       Total          Volume      Rate      Total
                                 ----------------------------------    ---------------------------------
<S>                               <C>        <C>        <C>             <C>        <C>       <C>
Interest income (1):
  Loans                           $    464   $   (258)  $   206         $   826    $   289   $ 1,115
  Taxable securities                   (60)       (75)     (135)            (47)        24       (23)
  Non-taxable securities               (10)         -       (10)             (6)         -        (6)
  Federal funds sold                   147        (39)      108            (232)       156       (76)
                                 ----------------------------------    ---------------------------------
    Total interest income         $    541   $   (372)  $   169         $   541    $   469   $ 1,010

Interest expense:
  Money Market and NOW
    accounts                            23        (90)      (67)             20         14        34
  Savings                               78        (87)       (9)             14          6        20
  Certificates                         215         53       268              (1)       186       185
  Certificates of $100,000
    or more                             61        (44)       17             103         66       169
  Securities sold under
   agreements to repurchase             20        (12)        8              33          6        39
  Short-term borrowings                (24)       (15)      (39)             37          1        38
                                 -----------------------------------------------------------------------
    Total interest expense             373       (195)      178             206        279       485

Net change in interest
  earnings                        $    168   $   (177)  $    (9)        $   335    $   190    $  525
</TABLE>

(1)  Interest income includes taxable equivalent  adjustments of $65,000 in 2001
     and $84,000 in 2000 which are used to adjust  interest on tax exempt assets
     to a fully taxable basis.

LOAN PORTFOLIO:

         The loan  portfolio is the largest  category of the  Company's  earning
assets.   The  following  table  summarizes  the  type  and  maturity  of  loans
outstanding as of December 31, 2001.

                                       10
<PAGE>

Table 6:
Loan Portfolio Composition and Maturities
(Dollars in thousands)

<TABLE>

                                             After 1                                 Percentage
                                 Within    but within       After                     of total
                                 1 year      5 years       5 years      Total      Loan Portfolio
                                 ------      -------       -------      -----     ----------------
<S>                             <C>        <C>            <C>         <C>                   <C>
Commercial                      $  6,180   $    6,254     $   1,285   $ 13,719              17.20%
Real estate-mortgage              10,316       15,355        27,746   $ 53,417              66.96%
Real estate-construction           6,111            -             -   $  6,111               7.66%
Consumer                           2,118        4,261           148   $  6,527               8.18%
                                 -------    ---------      --------    --------             ------
                                 $24,725    $  25,870      $ 29,179   $ 79,774             100.00%
                                -------    ---------      --------    --------             ------

Loans maturing after 1 year with:
Fixed interest rates                        $  18,748      $ 26,442
Variable interest rates                         7,122         2,737
                                            ---------      --------
                                           $   25,870      $ 29,179
                                          -----------    ----------


         The  following  table  presents loan  collateralized  by real estate at
December 31, 2001.


Table 7:
Loan Collateralized By Real Estate
(Dollars in thousands)
                                                                               Percentage
                                                                                of total
                                                                   Amount    loan portfolio
                                                            ---------------------------------
Construction and land development                                  $6,111                 8%
Collateralized by 1 - 4 family residential properties              21,806                27%
Collateralized by multi-family residential properties               2,427                 3%
Collateralized by non-farm, non-residential properties             29,184                37%
                                                                   ------                ---
                                                                  $59,528                75%
</TABLE>
INVESTMENT PORTFOLIO:

         The Company's  investment portfolio is a source of liquidity and is the
second  largest  category  of  earning  assets.   The  portfolio  includes  U.S.
Government  securities,  municipal  securities,  mortgage-backed  securities and
other debt  securities.  In addition to the investment  securities,  the Company
also invests in federal funds sold.  Management's  principal  objectives for the
investment  portfolio  during  2001 were to  maintain  an  appropriate  level of
quality, ensure sufficient liquidity and maximize yield.

         The following  table  presents the maturity  distribution  and weighted
average yields of the securities portfolio at December 31, 2001.


                                       11
<PAGE>
<TABLE>
Table 8:  Investment Securities (1)
December 31, 2001
(Dollars in thousands)


                   1 year or less (2) 1-2 years         2 - 3 years       3 - 4 years       4- 5 years        Over 5 years (3)
------------------ -------- -------- --------- ------- --------- ------- --------- ------- --------- ------- --------- -------
                    Amount   Yield    Amount    Yield   Amount    Yield   Amount    Yield   Amount    Yield   Amount    Yield
------------------ -------- -------- --------- ------- --------- ------- --------- ------- --------- ------- --------- -------
<S>                <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>                         <C>     <C>
U.S. Treasury,
government
agencies , state
and political
subdivisions       $3,756    5.50%    $3,998   5.42%    $5,101   5.01%    $1,301   5.07%      -        -       $780    5.44%
------------------ -------- -------- --------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Other                 -        -        -        -        -        -        -        -        -        -       $633    7.30%
------------------ -------- -------- --------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Total              $3,756   5.50%    $3,998    5.42%   $5,101    5.01%   $1,301    5.07%      -        -     $1,413    6.37%
------------------ -------- -------- --------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(1)      Presented on an amortized cost basis.
(2)      Includes a $242,383 tax-exempt security with a yield of 4.46%
(3)      Includes $383,489 in tax-exempt securities with a weighted average yield of 4.67%
</TABLE>

DEPOSITS:

         The Company's deposit base includes large denomination  certificates of
deposit of $100,000 or more.  These deposits  represented  approximately  18% of
total deposits at December 31, 2001. The Bank pays market rates for these funds.
Generally  management  attempts  to match  large  denomination  certificates  of
deposit with rate sensitive assets.

Table 9:
Remaining Maturities of Large Denomination Certificates of Deposit
(Dollars in thousands)

                                                             December 31, 2001
                                                                   Amount
                                                                   ------
Three months or less                                               $8,128
Over three through six months                                       6,174
Over six through twelve months                                      2,083
Over twelve months                                                  2,005
                                                                  -------
Total                                                             $18,390

Noninterest Income

         The following table provides a comparison of noninterest income.

Table 10:  Noninterest Income
(Dollars in thousands)

                  For the years ended December 31,

                        2001    2000    2001 over/
                                       (under) 2000
                       ------- ------- ----------------------
Service Charges        $292    $265          $  27
Other Income            423     314            109
                       -----   -----           ---
                       $715    $579          $ 136

                                       12
<PAGE>
<TABLE>
Noninterest Expense

         The following table provides a comparison of noninterest expense.

                                                 For the years ended December 31,
Table 11:  Noninterest Expense                 2001           2000         2001 over/
                                                                          (under) 2000
                                         ------------------------------------------------
<S>                                                <C>            <C>         <C>
Salaries and employee benefits                     $1,705         $1,626      $ 79
Other                                                 534            545       (11)
Occupancy expenses                                    227            220         7
Automated services                                    257            231        26
Furniture and equipment expense                       185            166        19
Taxes and licenses                                    114             99        15
Stationery and supplies                                71             68         3
                                                      ---            ---       ---
                                                   $3,093         $2,955      $138
</TABLE>

Provision and Allowance For Loan Losses:

         In 2001,  the  provision  for loan losses was $34 thousand  compared to
$124  thousand  in 2000.  Net  loans  charged-off  in 2001 were $4  thousand  as
compared to 2000 when net loans  recovered  totaled $19 thousand.  The following
table  summarizes  activity in the  allowance  for loan  losses.  The table that
follows provides  statistics on non-performing  assets and past due loans. There
were no  restructured  loans,  as defined  by  applicable  securities  rules and
regulations.


                                       13
<PAGE>
<TABLE>
Table 12:  Summary of the Allowance For Loan Losses
Non-Performing Assets, Past Due Loans and Selected
Loan Loss Statistics

For The Years Ended
December 31,                                                          2001                 2000
(Dollars in Thousands)

Allowance for Loan Losses:
<S>                                                                 <C>                    <C>
Balance, December 31                                                $1,055                 $912
Charge-offs:
   Commercial                                                            0                    0
   Real estate                                                           0                   13
   Consumer                                                             46                   15
                                                                        --                   --
      Total loans charged-off                                           46                   28
Recoveries:
   Commercial                                                            0                    2
   Real estate                                                          25                   37
   Consumer                                                             17                    8
                                                                        --                    -
      Total recoveries                                                  42                   47

Net (recoveries) charge-offs                                             4                 (19)
Provision for loan losses                                               34                  124
                                                                        --                  ---
Balance, December 31, 2000                                          $1,085               $1,055

Ratio of net charge-offs to average loans outstanding                0.01%               -0.03%

Ratio of allowance for loan losses to loans at period-end            1.36%                1.49%

Non-performing Assets and Loans Past Due 90 Days
   Non-accrual loans                                                   $33                  $55
   Other real estate owned                                             433                  433

      Total non-performing assets                                     $466                 $488

   Ratio of non-performing assets to total assets                    0.40%                0.49%

   Non-accrual loans:
      Interest income that would have been recorded
      under original terms                                              $5                   $4

     Interest income recorded during the period                         $0                   $0

   Loans 90 days past due and still accruing                          $160                  $11
</TABLE>

Non-performing Assets:

         Non-performing  assets consist of loans on non-accrual status and other
real estate owned.  Loans are placed on non-accrual status when they become over
90 days past due unless such loans are fully collateralized and, in management's
judgment,  are  collectible.  Other real  estate  owned  consists of real estate
acquired in settlement of loans.  These  properties  are carried at the lower of
cost or estimated fair value.  Losses from the  acquisition of other real estate
owned in full or partial satisfaction of a loan are charged to the allowance for
loan losses. Subsequent declines in value or losses upon disposition are charged
to noninterest expense.



                                       14
<PAGE>
<TABLE>

         The  following  table  provides  an  analysis  of the size,  number and
collateral composition of non-performing assets at December 31, 2001.

Table 13:  Number and Collateral Composition
of Non-performing Assets
                                                  Number                             Total
Non-performing assets by dollar amount:         of items         Balance            Dollars
                                               --------------------------------------------
<S>                                                      <C>     <C>                   <C>
$100,000 - $200,000                                      4       $433                  93%
$50,000 - $100,000                                       -          -                   -%
$50,000 and under                                       21         33                   7%
                                                        --       -----                  --
                                                        25       $466                 100%
                                                        --       -----                ----
Non-performing assets by collateral composition:
 1 - 4 Family residential                                1       $128
Multi-family residential                                 3        305
Uncollateralized                                        21         33
                                                        --       -----
                                                        25       $466
</TABLE>


         The  allowance  for loan losses has two  components,  a specific  and a
general  portion.  The specific  portion is determined by the Banks' risk rating
system.  The Company assigns a reserve amount consistent with each loan's rating
category. The reserve amount is based on the loan rating system which focuses on
historical loss experience.

         The actual amount of losses  incurred can vary  significantly  from the
estimated amount. The Company's methodology includes general factors intended to
minimize the differences in estimate and actual losses.  These factors allow the
Company to adjust its  estimates of losses based on the most recent  information
available.  Although  the Company  determines  the amount of each element of the
allowance for loan losses  separately,  and this process in an important  credit
management  tool,  the entire  allowance  for loan losses is  available  for the
entire loan portfolio.

         The general  reserves are necessary to deal with conditions that cannot
be directly  measured in the risk  rating  system.  These risks are subject to a
higher degree of uncertainty but are a critical component of the total allowance
for possible loan losses.  Factors  involved in determining  the general reserve
include national and local economic conditions, downturns in specific industries
including loss in collateral value, the results of bank regulatory exams, trends
in credit quality at the Company and in the banking  industry,  loan volumes and
concentrations,  findings of internal credit reviews,  and trends in risk rating
changes.

         A breakdown  of the  allowance  for loan losses  among the various loan
types is  provided  in the  following  table.  Management  does not  believe the
allowance can be fragmented by category with any precision  that would be useful
to investors  because the entire  amount of the allowance is available to absorb
losses occurring in any category.  The allowance is allocated in the table based
on the proportion of the loan types that make up the specific problem loans. The
allowance  shown in the table should not be  interpreted  as an indication  that
charge-offs in future periods will occur in these amounts or proportions or that
the allowance indicates future charge-off amounts or trends. Also, the allowance
shown in the table does not assure that the allowance will be sufficient for all
future charge-off amounts.


                                       15
<PAGE>
<TABLE>
Table 14:  Allocation of Allowance for Loan Losses

Allocation of Allowance for Loan Losses
December 31,

                                             Percent of                          Percent of
                                                Loans                               Loans
                                             In Category                         In Category
                                 2001     To Total Loans             2000     To Total Loans
                             -------------------------------     -------------------------------
<S>                                <C>               <C>               <C>               <C>
Specific Problem Loans             $69,453                             $51,028

Loan Type Allocation:
Real Estate-Mortgage               175,050           66.96%            115,531           68.75%
Real Estate-Construction                -             7.66%                 -             3.96%
Commercial                         142,893           17.20%            116,246           18.79%
Consumer                            95,903            8.18%            130,479            8.50%
                                   -------            -----           --------            -----
                                   413,846          100.00%            362,256          100.00%

Unallocated                        601,849                             641,932
                             -------------                             -------

Total                           $1,085,148                          $1,055,216
                               ===========                          ==========
</TABLE>

Potential Problem Loans:

         At  December  31, 2001 and 2000 loans on either  non-accrual  status or
loans past due 90 days or more and still  accruing  amounted to $33 thousand and
$55 thousand,  respectively.  In addition to these loans,  at December 31, 2001,
the Company had  approximately  $402 thousand of loans that have been internally
classified,  and $1.8 million that required  more than normal  attention and are
potential  problem loans.  Management has considered these loans in establishing
the level of the allowance for loan losses. At December 31, 2000, loans that had
been internally classified or which required more than normal attention and were
potential   problem  loans  were  $330  thousand  and  $1.4  million   thousand,
respectively.

Credit Risk and Regulatory Matters:

         Credit  risk,  the risk of loss from  default,  is inherent in lending.
While management uses available information to recognize losses on loans, future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions.  Management  and the Board of Directors  of the Company  believe the
allowance  is a  reasonable  estimate  of  potential  loss  exposure in the loan
portfolio at year-end,  however, many factors affecting the ability of borrowers
to repay  their  loans,  including  economic  factors  beyond the control of the
Company or the borrowers, will impact this estimate on an ongoing basis.

         Management also considers  reports of  examinations  furnished by state
and federal banking  authorities.  Regulatory  agencies  periodically review the
allowance for loan losses as part of their  examination  process and may require
the Bank to recognize  additions  to the  allowance  based on their  judgment of
information  available  to  them  at the  time  of  their  examination.  A state
examination  of the Company and the Bank was  conducted in the first  quarter of
2001 for the  balance  sheet dated  September  30,  2000.  No  additions  to the
allowance for loan losses were recommended as a result of the examination.

Income Taxes:

         For the year ended December 31, 2001, the Company recognized an expense
of $537 thousand. This represents a $60 thousand increase from the $477 thousand
expense  for 2000.  See Note 11 of the  Consolidated  Financial  Statements  for
additional information with respect to income taxes.


                                       16
<PAGE>

Item 7. FINANCIAL STATEMENTS

            The  Consolidated  Financial  Statements  and the notes  thereto are
filed herewith.

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

            None.

Part III

Item 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         On January 5, 1990,  the Board of Directors  voted to amend the by-laws
to increase  the size of the Board of  Directors  from 12 to 14  members.  As of
March 20, 2002 there were 11 directors.

         The following  schedule sets forth-certain  information  concerning the
directors and executive officers of the Company.
<TABLE>
                                                                                            Director
Director's Name                Age                   Principal Occupation                     Since
---------------                ---                   --------------------                     -----
<S> <C>
Lisa F. Chandler                47    Executive Vice-President of Nancy Chandler Associates,   1998
                                      Inc.

James A. Cummings               59    President of Southern Atlantic Label Company, Inc.       1992

F. Dudley Fulton                53    President and Chief Executive Officer of Henderson and   1991
                                      Phillips, Inc.

Henry U. Harris, III            50    President of Virginia Investment Counselors, Inc.        1992
                                      Vice-Chairman of the Board since 1995.

Stephen A. Johnsen              56    President of Flagship Group, LTD.  Secretary of the      1988
                                      Board since 1995.

Robert J. Keogh                 53    President and Chief Executive Officer of the Company     1988
                                      since 1992; President and Chief Executive Officer of
                                      Heritage Bank & Trust since 1988.

Peter M. Meredith, Jr.          50    Chairman and Chief Executive Officer of Meredith         1992
                                      Construction Company, Inc.  Chairman of the Board
                                      since 1995.

Gerald L. Parks                 68    Chairman of the Board of Capes Shipping Agencies, Inc.   1977

L. Allan Parrott, Jr.           36    President, Tidewater Fleet Supply, LLC                   2002

Ross C. Reeves                  53    Member of the law firm of Willcox & Savage, P.C.         1994

Harvey W. Roberts, III          57    Partner in the accounting firm of McPhillips, Roberts    1993
                                      and Deans.
</TABLE>

                                       17
<PAGE>

Item 10.  EXECUTIVE COMPENSATION

1.  CASH COMPENSATION:

         Set forth below is information  concerning the compensation paid to the
Company's executive officer.

<TABLE>

                        COMPENSATION OF EXECUTIVE OFFICER
                           SUMMARY COMPENSATION TABLE


Name and Principal Position              Annual Compensation            Other Annual      Stock Options
                              Year       Salary          Bonus         Compensation (1)   Granted

<S>                           <C>        <C>            <C>               <C>
                              2001       $135,000       $18,000           $4,800             -
Robert J. Keogh (2)
President & Chief             2000       $125,000       $31,000           $4,800             1,950
Executive Officer
                              1999       $97,190        $29,800           $4,800             4,500
(1)  Represents director's fees
(2)  In addition, the Company provides Mr. Keogh with an automobile
</TABLE>


2.  COMPENSATION PURSUANT TO PLANS:

DEFERRED COMPENSATION AND RETIREMENT ARRANGEMENTS

         In 1985,  Heritage Bank & Trust entered into deferred  compensation and
retirement  arrangements with seven directors and in 1989 with one officer. Each
participant  is fully vested.  The  Company's  policy is to accrue the estimated
amounts  to be paid  under  the  contracts  over the  expected  period of active
service or employment.

         Upon  reaching  age 70,  each  participant  will  receive a  retirement
benefit  ranging  from $391 to $3,355 per month for each of the next 120 months.
If the  participant  dies prior to reaching age 70, his  beneficiary  will begin
receiving the monthly retirement benefits. The bank has purchased life insurance
contracts  in  order  to  fund  the  expected  liabilities  under  the  deferred
compensation  arrangements.  See disclosures regarding deferred compensation and
retirement arrangements in Note 10 to the Consolidated Financial Statements.

         In 1989, Robert J. Keogh,  President of Heritage Bank & Trust, became a
participant in the Heritage Bank & Trust  Executive  Security Plan. In the event
Mr. Keogh dies prior to age 65, his beneficiary will receive monthly payments of
$4,167 for each of the next 180 months. Upon his retirement at age 65, Mr. Keogh
will  receive  $4,167  per  month  for each of the next 180  months or until his
death, and thereafter other beneficiaries will receive such retirement benefits.
Heritage Bank & Trust funds this obligation  through a life insurance  contract.
See disclosures regarding deferred  compensation and retirement  arrangements in
Note 10 to the Consolidated Financial Statements.

         Effective January 1, 1984, the Board of Directors adopted an Employee's
Stock Bonus Plan and Trust (the  "ESOP").  See  disclosures  regarding  deferred
compensation  and  retirement  arrangements  in  Note  10  to  the  Consolidated
Financial Statements.

         Effective  January 1, 1993, the Board of Directors adopted a Retirement
Program (the  "401K").  See  disclosures  regarding  deferred  compensation  and
retirement arrangements in Note 10 to the Consolidated Financial Statements.

         Effective January 1, 1998, the Board of Directors adopted an Employee's
Stock  Ownership  Plan  (the  "ESOP").   See  disclosures   regarding   deferred
compensation  and  retirement  arrangements  in  Note  10  to  the  Consolidated
Financial Statements.

                                       18
<PAGE>


         COMPENSATION OF DIRECTORS:

         Directors of the Company and Directors of Heritage Bank & Trust receive
$500 for each Board of Directors'  meeting  attended and $150 for each committee
meeting  attended.  The  chairperson  of the  committee  receives  $200 for each
meeting attended.

         The Board of  Directors  adopted a  Non-employee  Stock  Option Plan in
January of 1999. The Plan was approved by the requisite  majority of outstanding
shares of the Company at the Annual Stockholders'  Meeting held on May 25, 1999.
At December 31, 2001, 5,994 of the 18,000 shares outstanding under the plan were
exercisable. The exercise price is $12.30 per share.

ITEM 11:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         The following schedule sets forth information  regarding the beneficial
ownership of the Company's common stock as of March 20, 2002, of (i) each of the
Company's  directors;  (ii) each person known by the Company to be the holder of
5% or more of the  Company's  outstanding  common  stock;  and  (iii) all of the
Company's directors and executive officers as a group. In calculating the number
of shares of common stock which are beneficially  owned (and thus the percentage
of common  stock  beneficially  owned) a person is deemed to own common stock if
that person has the right to acquire beneficial ownership of common stock within
sixty (60) days through the exercise of any option, warrant or right, or through
the conversion of any security.


                                       19
<PAGE>
<TABLE>

                                                                              PERCENT OF
           NAME OF INDIVIDUAL                SHARES                              CLASS
<S>                                             <C>                                     <C>
Lisa F. Chandler                                642                                     0.08%
6127 Studeley Avenue
Norfolk, VA  23508 USA

James A. Cummings                             6,128 (1)                                 0.79%
2073 Thomas Bishop Lane
Virginia Beach, VA 23454 USA

F. Dudley Fulton                              8,300                                     1.06%
5306 Lakeside Avenue
Virginia Beach, VA  23451 USA

Henry U. Harris, III                         31,305 (2)                                 4.01%
1503 North Shore Road
Norfolk, VA  23505 USA

Stephen A. Johnsen                            3,618 (3)                                 0.46%
29368 Harborton Rd Box 48
Pungoteague, VA 23422 USA

Robert J. Keogh                              51,898 (4)                                 6.65%
6146 Sylvan Street
Norfolk, VA  23508 USA

Peter M. Meredith, Jr.                       47,176 (5)                                 6.05%
5320 Edgewater Drive
Norfolk, VA  23508 USA

L. Allan Parrott, Jr.                           365                                      .05%
417 Susan Constant Drive
Virginia Beach, VA 23451 USA

Gerald L. Parks                               5,195 (6)                                 0.67%
27307 Evergreen Lane
Harborton, VA 23389  USA

Ross C. Reeves                                4,142 (7)                                 0.53%
1068 Algonquin Road
Norfolk, VA  23505 USA

Harvey W. Roberts, III                       29,792 (8)                                 3.82%
7612 North Shore Road
Norfolk, VA  23505 USA

Directors and Executive Officers as a
     group (10 persons)                     188,196                                    24.13%
</TABLE>

(1)  Includes 1,500 shares owned jointly with his wife.
(2)  Includes  (a) 3,555  shares  owned by his wife and (b) 4,249 shares held as
     custodian for others.
(3)  Includes 1,650 shares owned jointly with his wife.
(4)  Includes (a) 1,335 shares owned jointly with his wife and (b) 39,250 shares
     issuable upon exercise of options to purchase  shares pursuant to the Stock
     Option Plan for  employees of the Company.  See  "Compensation  Pursuant to
     Plans."
(5)  Includes (a) 10,960 shares held as Meredith  Realty  Company,  L.L.C.,  (b)
     13,208 shares held as Pomar  Holding,  L.L.C.  and (c) 3,000 shares held as
     Meredith Realty Associates.
(6)  Includes 4,614 shares owned jointly with his wife.
(7)  Includes 3,142 shares held as custodian for others.
(8)  Includes  (a) 17,280  shares  owned by his wife and (b) 3,000  shares owned
     jointly with his wife.


                                       20
<PAGE>

ITEM 12:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

         Many  directors  of the  Company  and  Heritage  Bank & Trust and their
associates,  including  firms and  corporations  of which they are  officers  or
directors;  or in which they and their  immediate  families  have a  substantial
interest,  are  customers  of  Heritage  Bank & Trust.  As such,  they  have had
transactions  with the bank,  including  loans  made in the  ordinary  course of
business on substantially the same terms,  including interest rates,  collateral
and repayment  terms,  as those  prevailing at the time for comparable  loans to
other  parties.  Such  loans  have not  involved  more than the  normal  risk of
collectibility or other unfavorable features. See related party loan and deposit
disclosures in Note 13 of the Consolidated Financial Statements.

         Heritage Bank & Trust occupies 7,581 square feet of space in a building
located at 1450 South Military Highway in Chesapeake,  Virginia. The building is
owned by IBV Partners,  L.P., a Virginia limited  partnership,  which has as its
sole general partner IBV Real Estate Holdings,  Inc., a wholly-owned  subsidiary
of the Company.  Former and current  directors  of Heritage  Bank & Trust own an
aggregate of approximately 34% of the partnership interests.  IBV Partners, L.P.
and  Heritage  Bank & Trust  entered  into a lease in  December  1986  which was
renewed in December 2001. See disclosures regarding the lease commitment in Note
12 of the Consolidated Financial Statements.

         The  Company  and  Heritage  Bank & Trust  purchase  various  types  of
business  insurance  through the Flagship Group LTD, of which Stephen A. Johnsen
is President. Mr. Johnsen is a director and Secretary of the Company.  Insurance
premiums  paid to the  Flagship  Group  LTD as agent  for  commercial  insurance
providers was $48 thousand during 2001. The Bank has also sold securities to the
Flagship   Group  LTD  under   agreements  to   repurchase,   which   constitute
approximately  64% of the  securities  sold under  agreements  to  repurchase at
December  31,  2001.  See  Note  9 and  Note  13 of the  Consolidated  Financial
Statements for additional information.

         Heritage  Bank & Trust has  retained  the law firm of Willcox & Savage,
P.C. in connection with certain legal representations and expects to continue to
do so in the future. Ross C. Reeves, a director of the Company is an attorney in
the law firm.  Fees paid to Willcox & Savage,  P.C. by Heritage Bank & Trust was
$1 thousand in 2001.


                                       21
<PAGE>

PART IV

Item 13:  EXHIBITS AND REPORTS ON FORM 8-K

(A)      (3) Exhibits:


3.1          Articles of  Incorporation.  (Incorporated  herein by  reference to
             Corporation's Form 10-K for 1983 filed March 29, 1984.)

3.2          Bylaws, as amended

10.1         Stock Option Plan for Employees.  (Incorporated herein by reference
             to the Corporation's Form 10-K for 1987 filed March 25, 1988.)

10.2         Employee's Stock Option Plan.  (Incorporated herein by reference to
             the Corporation's Form 10-K for 1987 filed March 25, 1988.)

10.3         Employee Stock Ownership Plan. (Incorporated herein by reference to
             the Corporation's Form 10-K for 1984 filed April 12, 1985.)

10.4         Lease  dated  December  29,  1996,  between IBV  Partners,  L.P. as
             landlord,  and Heritage Bank & Trust,  as Tenant,  for the lease of
             7,581  square  feet of space in a  building  located  at 1450 South
             Military Highway,  Chesapeake,  Virginia.  (Incorporated  herein by
             reference  to the  Corporation's  Form  10-K for 1986  filed  March
             1987.)

10.5         Amended and restated  January 1, 1989,  Stock Ownership Plan, which
             provided for certain changes required by IRS regulations  including
             changes in participant vesting schedules.  (Incorporated  herein by
             reference to the  Corporation's  Form 10-K for 1990 filed March 30,
             1991.)

10.6         Employee's Stock Ownership Plan.  (Incorporated herein by reference
             to the Corporation's Form 10-KSB for 1998 filed March 30,1999.)


(B)      Reports on Form 8-K

         None

     Financial Statements Filed

         None


                                       22
<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 Bankshares, Inc.
 (Registrant)

Date: March 27, 2002                    /s/ Robert J. Keogh
                                       -----------------------------------------
                                       Robert J. Keogh, President and Chief
                                       Executive Officer

                                        /s/ Peter M. Meredith, Jr.
                                       ----------------------------------------
                                       Peter M. Meredith, Jr., Chairman of
                                       the Board of Directors



                                       23
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on March 27, 2002.

                                   SIGNATURES*

/s/ Peter M. Meredith, Jr.
--------------------------------------
Peter M. Meredith, Jr.
Chairman of the Board of Directors

/s/ Robert J. Keogh
--------------------------------------
Robert J. Keogh
President and Chief Executive Officer & Director

/s/
--------------------------------------
Henry U. Harris, III
Vice-Chairman of the Board of Directors

/s/ Stephen A. Johnsen
--------------------------------------
Stephen A. Johnsen
Secretary of the Board of Directors

/s/ Lisa F. Chandler
---------------------------------------
Lisa F. Chandler
Director

/s/ James A. Cummings
--------------------------------------
James A. Cummings
Director

/s/ F. Dudley Fulton
--------------------------------------
F. Dudley Fulton
Director

/s/ Gerald L. Parks
--------------------------------------
Gerald L. Parks
Director

/s/ L. Allan Parrott
--------------------------------------
L. Allan Parrott
Director

/s/ Ross C. Reeves
--------------------------------------
Ross C. Reeves
Director

/s/ Harvey W. Roberts, III
--------------------------------------
Harvey W. Roberts, III
Director


*POWER OF ATTORNEY

Each person whose signature appears above under  "SIGNATURES"  hereby authorizes
Robert J. Keogh and Peter M. Meredith,  Jr. or either of them, to execute in the
name of each such person,  and to file any amendment to this report,  and hereby
appoints  Robert  J.  Keogh  and Peter M.  Meredith,  Jr. or either of them,  as
attorneys-in-fact  to  sign on his  behalf,  individually  and in each  capacity
stated below, and to file any and all amendments to this report.


                                       24
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS


The Stockholders and Board of Directors
Heritage Bankshares, Inc.
Norfolk, Virginia


           We have  audited  the  accompanying  consolidated  balance  sheet  of
Heritage  Bankshares,  Inc.  and its  subsidiaries  at December 31, 2001 and the
related consolidated  statements of income,  stockholders' equity and cash flows
for the years  then  ended.  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.  The
consolidated financial statement of Heritage Bankshares, Inc. as of December 31,
2000 were  audited  by other  auditors  whose  report  dated  January  21,  2001
expressed an unqualified opinion of those statements.

           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 audits 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  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  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  consolidated  financial
position of Heritage  Bankshares,  Inc. and its  subsidiaries as of December 31,
2001, and the consolidated  results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.

Witt Mares & Company, PLC


Virginia Beach, Virginia
January 18, 2002


                                       25
<PAGE>
<TABLE>
HERITAGE BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS

December 31,                                                                      2001                    2000
-----------------------------------------------------------------------------------------------------------------------

ASSETS
<S>                                                                      <C>                      <C>
Cash and due from banks                                                  $            5,941,788   $          3,687,811
Federal funds sold                                                                    9,180,640              5,214,506
Securities available for sale                                                        14,101,169             12,672,549
Securities held to maturity                                                           1,789,552              3,098,932
Loans, net                                                                           78,689,246             69,681,205
Loans held for sale                                                                   2,253,100             166,779
Accrued interest receivable                                                             549,393                635,222
Other real estate owned                                                                 433,340                433,340
Premises and equipment, net                                                           2,428,391              2,288,429
Other assets                                                                          1,260,012              1,331,451
                                                                         ----------------------------------------------
                                                                         $          116,626,631   $         99,210,224
                                                                         ----------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
           Noninterest bearing deposits                                  $           19,948,266   $         15,866,993
           Interest-bearing deposits                                                 80,091,489             70,595,058
                                                                         ----------------------------------------------
                                                                                    100,039,755             86,462,051
Securities sold under agreements to repurchase                                        5,149,857              2,288,919
Short-term borrowings                                                                    59,217                 58,485
Accrued interest payable                                                                291,249                354,076
Other liabilities                                                                       428,622                607,460
                                                                         ----------------------------------------------
                                                                                    105,968,700             89,770,991
                                                                         ----------------------------------------------
Stockholders' equity
           Common stock, $5 par value - authorized
                     3,000,000 shares; issued and outstanding:
                     2001 - 777,625 shares; 2000 - 775,325                            3,888,125              3,876,625
           Additional paid-in capital                                                 (323,421)              (333,721)
           Retained earnings                                                          6,880,776              5,877,616
           Accumulated other comprehensive income (loss)                                212,451                 18,713
                                                                         ----------------------------------------------
                                                                                     10,657,931              9,439,233
                                                                         ----------------------------------------------

                                                                         $          116,626,631   $         99,210,224
                                                                         ----------------------------------------------
</TABLE>

                       The notes to consolidated financial
               statements are an integral part of this statement.

                                       26
<PAGE>
<TABLE>

HERITAGE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,                                                                        2001                 2000
---------------------------------------------------------------------------------------------------------------------------------
Interest income
<S>                                                                                      <C>                  <C>
 Interest and fees on loans                                                              $        6,513,877   $        6,292,625
                                                                                         ----------------------------------------
 Interest on investment securities:
     Available for sale                                                                             807,094              875,708
     Held to maturity                                                                               150,224              222,794
                                                                                         -------------------  -------------------
                                                                                                    957,319            1,098,502
                                                                                         ----------------------------------------

 Interest on federal funds sold                                                                     320,675              213,347
                                                                                            ----------------     ----------------
        Total interest income                                                                     7,791,871            7,604,474
                                                                                         ----------------------------------------
Interest expense
 Interest on deposits                                                                             3,498,233            3,289,477
 Interest on short-term borrowings                                                                  131,125              162,162
                                                                                         -------------------  -------------------
        Total interest expense                                                                    3,629,358            3,451,639
                                                                                         ----------------------------------------
        Net interest income                                                                       4,162,513            4,152,835
Provision for loan losses                                                                            33,500              123,750
                                                                                         ----------------------------------------

        Net interest income after provision for loan losses                                       4,129,013            4,029,085
                                                                                         ----------------------------------------

Noninterest income
 Services charges                                                                                   292,000              265,039
 Other                                                                                              423,243              314,201
                                                                                            ----------------     ----------------
                                                                                                    715,243              579,240
                                                                                         ----------------------------------------
Noninterest expense
 Salaries and employee benefits                                                                   1,704,800            1,625,694
 Other                                                                                              534,287              545,389
 Occupancy expenses                                                                                 227,190              219,956
 Automated services                                                                                 257,054              230,934
 Furniture and equipment expense                                                                    185,354              166,458
 Taxes and licenses                                                                                 113,871               99,413
 Stationery and supplies                                                                             70,720               67,662
                                                                                         ----------------------------------------
                                                                                                  3,093,276            2,955,506
                                                                                         ----------------------------------------
Income before income taxes                                                                        1,750,980            1,652,819
Income tax expense                                                                                  536,500              476,869
                                                                                         ----------------------------------------
Net income                                                                               $        1,214,480   $        1,175,950
                                                                                         ----------------------------------------
Earnings per common share - basic                                                        $             1.57   $             1.53
                                                                                         ----------------------------------------
Earnings per common share - assuming dilution                                            $             1.51   $             1.50
                                                                                         ----------------------------------------
</TABLE>


                       The notes to consolidated financial
               statements are an integral part of this statement.

                                       27
<PAGE>
<TABLE>

HERITAGE BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 31, 2001 and 2000
                                                                                                      Accumulated
                                                                                                         Other
                                                                 Additional                          Comprehensive
                                       Shares      Amount      Paid-in Capital   Retained Earnings   Income (Loss)        Total
                                      ---------- ------------ ------------------ ------------------ ----------------- --------------
<S>                                    <C>       <C>             <C>                <C>                <C>              <C>
Balance, December 31, 1999             765,700   $3,828,500      $(343,377)         $4,908,908         ($120,641)       8,273,390
                                                                                                                      --------------

Net Income for 2000                       -           -               -              1,175,950             -            1,175,950

Net changes in unrealized gain  on
securities available-for-sale, net
of deferred income taxes of
$(71,788)                                 -           -               -                  -              139,354          139,354
                                                                                                                      --------------
                                                                                                                      --------------
Total comprehensive income                -           -               -                  -                 -            1,315,304
                                                                                                                      --------------
                                                                                                                      --------------

Stock options exercised in 2000         15,625      78,125           9,656                -                               87,781
Common stock reacquired                 (6,000)    (30,000)            -              (31,062)              -            (61,062)
Less: Dividends paid in 2000               -           -               -             (176,180)              -           (176,180)
                                      ---------- ------------ ------------------ ------------------ ----------------- --------------

Balance, December 31, 2000             775,325    3,876,625       (333,721)         5,877,616,           18,713         9,439,233
                                                                                                                      --------------

Net Income for 2001                       -           -               -             $1,214,480             -            1,214,480

Net changes in unrealized gain  on
securities available-for-sale, net
of deferred income taxes of
$(99,804)                                 -           -               -                  -              193,738           193,738
Total comprehensive income                -           -               -                  -                 -            1,408,218
                                                                                                                      --------------

Stock options exercised in 2001         3,800      19,000          10,300                -                               29,300
Common stock reacquired                (1,500)     (7,500)            -               (10,125)             -             (17,625)
Less: Dividends paid in 2001              -           -               -              (201,195)             -            (201,195)
                                      ---------- ------------ ------------------ ------------------ ----------------- --------------

Balance, December 31, 2001             777,625   $3,888,125      $(323,421)         $6,880,776,         $212,451       $10,657,931
                                      ---------- ------------ ------------------ ------------------ ----------------- --------------
</TABLE>
                       The notes to consolidated financial
               statements are an integral part of this statement.


                                       28
<PAGE>
<TABLE>
HERITAGE BANKSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,                                                    2001                         2000
Operating activities
<S>                                                                      <C>                         <C>
  Net income                                                             $1,214,480                  $1,175,950
   Adjustments to reconcile to net cash provided
  by operating activities:
     Provision for loan losses                                               33,500                     123,750
     Provision for depreciation and amortization                            162,768                     150,562
     Amortization of investment security premiums,
     net of discounts                                                        24,560                      (7,284)
     Deferred loan origination fees, net of costs                            16,709                       9,314
     Changes in:
         Interest receivable                                                 85,829                      11,397
         Interest payable                                                   (62,827)                     51,800
         Loans held for sale                                             (2,086,321)                   (166,779)
         Other assets                                                       (29,224)                    (89,144)
         Other liabilities                                                 (178,837)                     44,672
                                                                 ---------------------------- ---------------------------
            Net cash provided by operating activities                      (819,363)                  1,304,238
                                                                 ---------------------------- ---------------------------
Investing activities
    Proceeds from maturities of available-for-sale securities             7,784,961                   4,462,619
    Proceeds from maturities, prepayments and calls of held-
    to-maturity securities                                                1,302,123                   1,214,107
    Purchases of held-to-maturity securities                             (8,936,482)                     (4,300)
    Loan originations, net of principal repayments                       (9,058,250)                 (8,377,245)
    Purchases of land, premises and equipment                              (302,731)                    (85,467)
                                                                 ---------------------------- ---------------------------
          Net cash used by investing activities                          (9,210,379)                 (2,790,286)
                                                                 ---------------------------- ---------------------------
Financing activities
   Net increase in demand deposits, NOW accounts and
   savings accounts                                                       9,832,327                     855,244
   Net increase (decrease) in certificates of deposit                     3,745,376                   1,972,399
   Net increase (decrease) in securities sold under
    agreements to repurchase                                              2,860,938                     219,109
   Net increase (decrease) in short-term borrowings                             732                       5,440
    Common stock reacquired                                                 (17,625)                    (61,062)
    Net proceeds from exercise of stock options                              29,300                      87,781
    Cash dividends paid                                                    (201,195)                   (176,180)
                                                                 ---------------------------- ---------------------------
          Net cash provided by financing activities                      16,249,853                   2,902,731
                                                                 ---------------------------- ---------------------------
Increase in cash and cash equivalents                                     6,220,111                   1,416,683
Cash and cash equivalents at beginning of year                            8,902,317                   7,485,634
                                                                 ---------------------------- ---------------------------
Cash and cash equivalents at end of year                                $15,122,428                  $8,902,317
                                                                 ---------------------------- ---------------------------
   As shown on the Consolidated Balance Sheets
    Cash and due from banks                                               5,941,788                   3,687,811
    Federal funds sold                                                    9,180,640                   5,214,506
                                                                 ---------------------------- ---------------------------
                                                                        $15,122,428                  $8,902,317
                                                                 ---------------------------- ---------------------------
Supplemental schedules and cash flow information Cash paid for:
         Interest on deposits and other borrowings                       $3,692,185                   3,399,839
                                                                 ---------------------------- ---------------------------
         Income taxes                                                      $429,833                    $417,040
                                                                 ---------------------------- ---------------------------
</TABLE>

                                       29
<PAGE>

HERITAGE BANKSHARES, INC.
--------------------------------------------------------------------------------
DECEMBER 31, 2001 AND 2000


NOTE 1 - ORGANIZATION AND BUSINESS

Heritage  Bankshares,  Inc. (the  "Company") was organized under the laws of the
Commonwealth   of  Virginia  in  1983.   The  Company  has  four  wholly   owned
subsidiaries,  including one bank:  Heritage Bank & Trust (the "Bank") with five
full-service branches in Norfolk and Chesapeake,  Virginia.  The Company's other
subsidiaries  are IBV  Real  Estate  Holdings,  Inc.,  a  Virginia  corporation,
Sentinel  Title  Services,  Inc., a Virginia  corporation,  and  Sentinel  Trust
Services,   L.L.C.,  a  Virginia  limited  liability  company.  The  Bank  is  a
state-chartered bank and a member of the Federal Reserve System. The deposits of
the Bank are insured by the Federal Deposit  Insurance  Corporation (the "FDIC")
to the extent and subject to the  limitations  set forth in the Federal  Deposit
Insurance Act, as amended.

The Bank is a  full-service  bank  conducting a general  commercial and consumer
banking business with its customers located throughout the Hampton Roads area of
Virginia. Its principal banking activities include receiving demand, savings and
time deposits for personal and  commercial  accounts;  making  commercial,  real
estate and consumer  loans;  acting as a United States tax depository  facility;
providing money transfer and cash management services; selling traveler's checks
and bank money orders; issuing letters of credit; and investing in U.S. Treasury
securities and securities of other U.S.  government  agencies and  corporations,
and mortgage-backed and state and municipal securities.

IBV Real Estate Holdings, Inc. was formed in December, 1986. Presently, its only
business is owning a 1% general partnership interest in IBV Partners,  L.P., the
lessor of office  space to  Heritage  Bank and  Trust in  Chesapeake,  Virginia.
Sentinel Title  Services,  Inc. and Sentinel Trust Services,  L.L.C.  are wholly
owned  subsidiaries,  which  own an  interest  in  providers  of title and trust
services.  As these  subsidiaries  own a less than ten percent (10%) interest in
other  companies,  the financial  activities  pertaining to these  interests are
recorded  on the cost  method  of  accounting  for  investments.  The  Company's
strategic relationship with these entities provides the Bank with the ability to
provide title and trust services to its customers.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Statement Presentation and Principles of Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Heritage Bankshares,  Inc. and its wholly owned subsidiaries,  Heritage Bank and
Trust,  IBV Real Estate  Holdings,  Inc.,  Sentinel  Title  Services,  Inc.  and
Sentinel  Trust  Services,  L.L.C.  All  significant  intercompany  balances and
transactions have been eliminated in consolidation.

Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents  include cash on
hand,  amounts due from banks,  interest bearing deposits with banks and federal
funds sold. Generally, federal funds are sold for one-day periods.


                                       30
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities

Investments  in debt  securities  that  management  has the positive  intent and
ability to hold to maturity are  classified  as "held to maturity" and reflected
at amortized cost.  Investments  that are purchased and held principally for the
purpose of selling  them in the near term,  if any, are  classified  as "trading
securities"  and  reflected  at fair  value,  with  unrealized  gains and losses
included in  earnings.  Investments  not  classified  as either of the above are
classified as "available for sale" and recorded at fair value,  with  unrealized
gains and losses  excluded  from  earnings and  reported in other  comprehensive
income.

Purchase  premiums and  discounts are  recognized  in interest  income using the
interest   method  over  the  period  to  maturity   on   held-to-maturity   and
available-for-sale  securities.  Other-than-temporary declines in the fair value
of individual held-to-maturity and available-for-sale securities, if any, result
in write-downs of the individual  securities to fair value. Gains and losses are
determined using the specific-identification method.

Loans

Loans are reported at their  principal  outstanding  balance net of charge-offs,
deferred  loan  fees  and  costs  on  originated  loans,  unearned  income,  and
unamortized premiums or discounts,  if any, on purchased loans.  Interest income
is generally  recognized when income is earned using the interest  method.  Loan
origination fees and certain direct loan origination  costs are deferred and the
net amounts are amortized as an adjustment to yield on the respective loans.

Loans Held For Sale

Mortgage  loans  originated  and intended for sale in the  secondary  market are
carried at the lower of cost or  estimated  market value in the  aggregate.  Net
unrealized  losses,  if any,  are  recognized  through a valuation  allowance by
charges to income.

Allowance for Loan Losses

A loan is considered impaired, based on current information and events, if it is
probable  that the Bank will be unable to  collect  the  scheduled  payments  of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  The  measurement of impaired loans is generally based on the present
value of  expected  future cash flows  discounted  at the  historical  effective
interest  rate,  except that all  collateral-dependent  loans are  measured  for
impairment based on the fair value of the collateral.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly,  the Bank  does  not  separately  identify  individual
consumer and residential loans for impairment disclosures.

The adequacy of the allowance for loan losses is  periodically  evaluated by the
Bank, in order to maintain the allowance at a level that is sufficient to absorb
probable credit losses. Management's evaluation of the adequacy of the allowance
is based  on a review  of the  Bank's  historical  loss  experience,  known  and
inherent risks in the loan portfolio,  including adverse  circumstances that may
affect the  ability of the  borrower to repay  interest  and/or  principal,  the
estimated  value of  collateral,  and an  analysis  of the  levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.



                                       31
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses (continued)


  Such factors as the level and trend of interest rates and the condition of the
national  and  local  economies  are  also  considered.  In  addition,   various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Bank's allowance for losses on loans. Such agencies may
require  the  Bank to  recognize  additions  to the  allowance  based  on  their
judgments of information available to them at the time of their examination.

The allowance for loan losses is established  through charges to earnings in the
form of a provision  for loan losses.  Increases  and decreases in the allowance
due to changes in the measurement of impaired loans, if applicable, are included
in the  provision for loan losses.  Loans  continue to be classified as impaired
unless they are brought fully current and the  collection of scheduled  interest
and principal is considered probable.

When a loan or portion of a loan is determined to be uncollectible,  the portion
deemed uncollectible is charged against the allowance and subsequent recoveries,
if any, are credited to the allowance.

Income Recognition on Impaired and Nonaccrual Loans

Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days,  unless  such loans are  well-secured  and in the  process of
collection.  If a loan or a portion of a loan is classified  as doubtful,  or is
partially  charged off, the loan is generally  classified as  nonaccrual.  Loans
that are on a current  payment  status or past due less than 90 days may also be
classified as nonaccrual,  if repayment in full of principal  and/or interest is
in doubt.

Loans may be returned to accrual status when all principal and interest  amounts
contractually  due (including  arrearages)  are reasonably  assured of repayment
within  an  acceptable  period  of time,  and  there is a  sustained  period  of
repayment  performance  (generally a minimum of six months) by the borrower,  in
accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual  and the future  collectibility  of the
recorded  loan balance is doubtful,  collections  of interest and  principal are
generally  applied as a  reduction  to  principal  outstanding.  When the future
collectibility of the recorded loan balance is expected,  interest income may be
recognized  on a cash  basis.  In the  case  where a  nonaccrual  loan  had been
partially  charged  off,  recognition  of interest on a cash basis is limited to
that which  would  have been  recognized  on the  recorded  loan  balance at the
contractual  interest rate. Cash interest  receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior  charge-offs
have been fully recovered.

Other Real Estate Owned

Other  real  estate  owned  is  comprised  of  real  estate   acquired   through
foreclosure,  acceptance of a deed in lieu of foreclosure, or loans in which the
Bank receives physical possession of the debtor's real estate. Other real estate
owned is carried at the lower of the recorded investment in the loan or the fair
value less estimated costs to sell.

                                       32
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restructured Loans

Loans are  considered  troubled  debt  restructurings  if for  economic or legal
reasons, a concession has been granted to the borrower related to the borrower's
financial  difficulties that the Bank would not have otherwise  considered.  The
Bank has restructured  certain loans in instances where a determination was made
that  greater  economic  value will be  realized  under new terms  than  through
foreclosure,  liquidation, or other disposition.  The terms of the renegotiation
generally involve some or all of the following  characteristics:  a reduction in
the interest pay rate to reflect actual  operating  income,  an extension of the
loan  maturity date to allow time for  stabilization  of operating  income,  and
partial forgiveness of principal and interest.

The carrying value of a restructured loan is reduced by the fair value of assets
or equity interest  received,  if any. Prior to demonstrating  performance,  the
Bank generally  classifies  impaired  restructured loans, if any, as nonaccrual.
The accrual of interest  resumes  when such loans can  demonstrate  performance,
generally  evidenced  by  six  months  of  pre-  or  post-restructuring  payment
performance in accordance  with the  restructured  terms,  or by the presence of
other significant factors. In addition, at the time of restructuring,  loans are
generally  classified  as impaired.  A  restructured  loan that is not impaired,
based on the  restructured  terms and has a stated interest rate greater than or
equal  to  a  market  interest  rate  at  the  date  of  the  restructuring,  is
reclassified  as  unimpaired in the year  immediately  following the year it was
disclosed as restructured.

Premises and Equipment

Premises and equipment  are stated at cost less  accumulated  depreciation.  For
financial reporting purposes, assets are depreciated over their estimated useful
lives using the straight-line  method. For income tax purposes,  the accelerated
cost recovery system and the modified accelerated cost recovery system are used.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales,  when control over the
assets has been  surrendered.  Control over  transferred  assets is deemed to be
surrendered  when (1) the  assets  have been  isolated  from the  Bank,  (2) the
transferee  obtains the right (free of conditions  that constrain it from taking
advantage of that right) to pledge or exchange the transferred  assets,  and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.

Income Taxes

The Company files a consolidated tax return. Provisions for income taxes reflect
tax expense incurred as a consolidated group. Tax expense is allocated among the
members of the consolidated  group in accordance with an intercompany  agreement
for  tax  expense.  Income  taxes  are  provided  for  the  tax  effects  of the
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related  primarily to  differences  between the basis of
investment securities,  deferred loan fees, allowance for loan losses, allowance
for losses on  foreclosed  real estate,  accumulated  depreciation  and deferred
compensation for financial and income tax reporting. The deferred tax assets and
liabilities  represent the future tax return  consequences of those differences,
which will either be taxable or deductible  when the assets and  liabilities are
recovered or settled. An allowance is

                                       33
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

provided if it is more  likely  than not that the  Company  will not realize the
benefits of a deferred tax asset. As of December 31, 2001, a valuation allowance
has not been provided against the deferred tax asset.

Deferred Compensation Plans

The Bank  maintains  deferred  compensation  and  retirement  arrangements  with
certain  directors and officers.  The Company's  policy is to accrue the present
value of  estimated  amounts to be paid under the  contracts  over the  expected
period of active employment. The Bank purchased life insurance contracts to fund
the expected liabilities under the contracts.

Off-Balance-Sheet Financial Instruments

In the ordinary course of business,  the Bank has entered into off-balance-sheet
financial  instruments  consisting of commitments to extend credit,  commitments
under credit card arrangements, commercial letters of credit, standby letters of
credit and financial guarantees written. Such financial instruments are recorded
in the financial statements when they become payable.

Use of Estimates

The preparation of financial  statements  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Material  estimates that are  particularly  susceptible  to  significant  change
relate  to the  determination  of the  allowance  for  losses  on loans  and the
valuation  of  real  estate  acquired  in  connection  with  foreclosures  or in
satisfaction of loans. While management uses available  information to recognize
losses on loans and foreclosed  real estate,  future  additions to the allowance
may be  necessary  based on  changes  in local  economic  conditions  and  other
factors.

Earnings per Share

Basic  earnings  per share (EPS)  excludes  dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares  outstanding for the period.  Diluted EPS reflects the potential dilution
that could occur if  securities  or other  contracts  to issue common stock were
exercised,  converted  into common  stock or resulted in the  issuance of common
stock that then shared in the earnings of the entity.

Comprehensive Income

Accounting principles generally require that recognized revenue,  expenses,  and
realized gains and losses be included in net income. Although certain changes in
assets   and   liabilities,   such   as   unrealized   gains   and   losses   on
available-for-sale  securities,  are  reported  as a separate  component  of the
equity  section of the balance  sheet,  such items,  along with net income,  are
components of comprehensive income.

                                       34
<PAGE>

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The  components  of other  comprehensive  income and  related tax effects are as
follows:


                                                2001                2000
Unrealized holding gains (losses) on
   available-for-sale securities              $ 293,542          $ 211,142
Tax effect                                      (99,804)           (71,788)
                                               --------           --------
Net-of-tax amount                             $ 193,738          $ 139,354
                                              ==========         ==========



Reclassifications

Certain  reclassifications  have been made to prior year financial statements to
conform them to the current year's presentation.


                                       35
<PAGE>

NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.

 (PARENT COMPANY ONLY)

The  financial  position,  results  of  operations  and cash  flows of  Heritage
Bankshares,  Inc.  are  presented  below on a parent  company only basis for the
years indicated.
<TABLE>
Condensed Balance Sheets
                                                                                       2001                  2000
                                                                                ------------------- ------------------
Assets
<S>                                                                                      <C>                <C>
Cash on deposit with Heritage Bank & Trust                                               $ 233,581          $ 465,284
Investment in Heritage Bank & Trust                                                     10,130,065          8,934,433
Investment in non-bank subsidiaries                                                        217,549            217,549
Other assets                                                                               218,967             37,676
                                                                                --------------------------------------
     Total assets                                                                      $10,800,162        $ 9,654,942
                                                                                --------------------------------------

Liabilities and Stockholders' Equity

Other liabilities                                                                        $ 142,231          $ 215,709
Common stock                                                                             3,888,125          3,876,625
Additional paid-in capital                                                                (323,421)          (333,721)
Retained earnings                                                                        6,880,776          5,877,616
Accumulated other comprehensive income (loss)                                              212,451             18,713
                                                                                --------------------------------------
    Total liabilities and stockholders' equity                                         $10,800,162        $ 9,654,942
                                                                                --------------------------------------

                                                                                        Years Ended December 31,
                                                                                --------------------------------------
Condensed Statements of Income                                                         2001                  2000
                                                                                ------------------- ------------------

Income
Dividends from subsidiary bank                                                           $ 218,820          $ 196,989
Other                                                                                       13,091             49,041
                                                                                --------------------------------------

Expenses
Other                                                                                       22,537             31,266
                                                                                --------------------------------------

Income before income taxes and equity in
    undistributed net income of subsidiaries                                               209,374            214,764
Applicable income tax benefit (expense)                                                      3,212               (745)
                                                                                --------------------------------------
Income before equity in undistributed net
    income of subsidiaries                                                                 212,586            214,019
Equity in undistributed net income of subsidiaries                                       1,001,894            961,931
                                                                                --------------------------------------

             Net income                                                                 $1,214,480        $ 1,175,950
                                                                                --------------------------------------
</TABLE>

                                       36
<PAGE>
<TABLE>
NOTE 3 - CONDENSED FINANCIAL INFORMATION OF HERITAGE BANKSHARES, INC.

(PARENT COMPANY ONLY) (Continued)


                                                                                 Years Ended December 31,
Condensed Statements of Cash Flows                                               2001                2000

Operating activities:
<S>                                                                            <C>               <C>
Net income                                                                     $1,214,480        $ 1,175,950
Adjustments to reconcile to net cash provided by operating activities:
Depreciation                                                                                               -
Undistributed net income of subsidiaries                                       (1,001,894)          (961,931)
   Changes in:
    Other assets                                                                 (181,291)            98,680
    Other liabilities                                                             (73,478)            69,337
                                                                                  --------           -------
Net cash provided by operating activities                                         (42,183)           382,036
                                                                                  --------          --------

Financing activities:
Net proceeds from exercise of stock options                                        29,300             87,781
Common stock reacquired                                                           (17,625)           (61,063)
Cash dividends paid                                                              (201,195)          (176,180)

Net cash used by financing activities                                            (189,520)          (149,462)

Net increase (decrease) in cash and cash equivalents                             (231,703)           232,574

Cash and cash equivalents at beginning of year                                    465,284            232,710

Cash and cash equivalents at end of year                                        $ 233,581          $ 465,284
                                                                                =========          =========
</TABLE>


Certain  restrictions  exist regarding the ability of Heritage Bank and Trust to
transfer funds to Heritage Bankshares, Inc. in the form of cash dividends, loans
or advances. Pursuant to federal regulations, dividends are generally restricted
to net profits, as defined,  for the current year, plus retained net profits for
the previous two years. At December 31, 2001, the Bank could have paid dividends
to the Company of approximately $2,550,000 under these regulations.  The maximum
amount available for transfer from Heritage Bank and Trust to the Company in the
form of loans and  advances  is 10% of Heritage  Bank and Trust's  stockholder's
equity.  At December 31, 2001,  such maximum amount  available is  approximately
$1,013,000.

NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Bank is required by the Federal  Reserve  Bank to maintain  average  reserve
balances.  The average amount of maintained  reserve balances was  approximately
$953,000  for the  year  ended  December  31,  2001,  with the  average  reserve
requirement for the same period being  approximately $ 934,000.  On December 31,
2001, the reserve balances were approximately $1,090,000.


                                       37
<PAGE>
<TABLE>
NOTE 5 - SECURITIES

        Securities at December 31, 2001 and 2000 are as follows:
                                                                               Gross              Gross
                                                          Amortized         Unrealized          Unrealized        Estimated
                                                            Cost               Gains              Losses          Fair Value
                                                -----------------------------------------------------------------------------
December 31, 2001
  Securities available for sale
<S>                                                     <C>                   <C>                <C>               <C>
      U.S. Treasury                                     $ 1,002,807           $ 36,883           $      -          $1,039,690
      U.S. government agencies                           12,380,249            291,219             10,771          12,660,697
      Mortgage-backed securities                            206,628              5,076                  6             211,698
      State and political subdivisions                      189,590                  -                506             189,084
                                                ------------------------------------------------------------------------------

                                                       $ 13,779,274          $ 333,178           $ 11,283         $14,101,169
                                                ------------------------------------------------------------------------------

Securities held to maturity
      U.S. Treasury                                             $ -                $ -                $ -                 $ -
      U.S. government agencies                              501,500             16,077                  -             517,577
      Mortgage-backed securities                             68,930                954                  -              69,884
      State and political subdivisions                      586,281             12,192                  -             598,473
      Other                                                 632,841                  -                  -             632,841
                                                ------------------------------------------------------------------------------

                                                        $ 1,789,552           $ 29,223                $ -          $1,818,775
                                                ------------------------------------------------------------------------------

December 31, 2000
  Securities available for sale
      U.S. Treasury                                     $ 2,005,513            $ 9,118               $ 19          $2,014,612
      U.S. government agencies                            9,955,298             35,382             15,330           9,975,350
      Mortgage-backed securities                            492,363              1,497                799             493,061
      State and political subdivisions                      191,022                  -              1,496             189,526
                                                ------------------------------------------------------------------------------

                                                       $ 12,644,196           $ 45,997           $ 17,644         $12,672,549
                                                ------------------------------------------------------------------------------

Securities held to maturity
      U.S. Treasury                                       $ 499,661                $ -              $ 131           $ 499,530
      U.S. government agencies                            1,005,150                  -              3,587           1,001,563
      Mortgage-backed securities                            121,891                167                  -             122,058
      State and political subdivisions                      589,502              9,507                  -             599,009
      Other                                                 882,728                  -              2,426             880,302
                                                ------------------------------------------------------------------------------

                                                        $ 3,098,932            $ 9,674            $ 6,144          $3,102,462
                                                ------------------------------------------------------------------------------
</TABLE>



Other  securities  include  restricted  investments  of $630,386 and $630,400 at
December 31, 2001 and 2000, respectively. These securities do not have a readily
determinable fair value and lack a market.  Therefore,  they are carried at cost
and periodically evaluated for impairment.


                                       38
<PAGE>
<TABLE>
NOTE 5 - SECURITIES (Continued)

Investment  securities  having  carrying  values of $6,590,210 and $6,836,041 at
December 31, 2001 and 2000, respectively,  are pledged to secure deposits of the
U.S.  government and the Commonwealth of Virginia.  The estimated fair values of
these  securities  were $6,788,330 and $6,850,081 at December 31, 2001 and 2000,
respectively.

The amortized cost and fair value of securities by maturity date,  including the
contractual maturities of mortgage-backed  securities,  at December 31, 2001 are
as follows:

                                                        Securities Held to Maturity            Securities Available for Sale
                                                        ---------------------------            -----------------------------
                                                       Amortized          Estimated           Amortized            Estimated
                                                          Cost            Fair Value             Cost              Fair Value
                                                     -----------        -----------         ------------         ------------
<S>                                                    <C>                <C>                <C>                  <C>
     Due in one year or less                           $ 492,959          $ 503,811          $ 3,263,053          $ 3,317,458
     Due from one year to five years                     250,924            260,313           10,149,470           10,413,369
     Due from five years to ten years                    193,898            201,327              189,591              189,084
     Due after ten years                                 851,771            853,324              177,161              181,258
                                                     -----------        -----------         ------------         ------------
                                                     $ 1,789,552        $ 1,818,775         $ 13,779,275         $ 14,101,169
                                                     -----------        -----------         ------------         ------------



NOTE 6 - LOANS

     Loans consist of the following:

                                                     2001                  2000
                                                  ------------         ------------
Gross loans
    Commercial                                    $ 13,719,824         $ 13,293,885
    Real estate - mortgage                          53,416,568           48,632,641
    Real estate - construction                       6,110,906            2,799,852
    Installment and consumer loans                   6,527,096            6,010,043
                                                  ------------         ------------
Total gross loans                                   79,774,394           70,736,421

Less - allowance for loan losses                    (1,085,148)          (1,055,216)
                                                  ------------         ------------
Loans, net                                        $ 78,689,246         $ 69,681,205
                                                  ============         ============
</TABLE>

                                       39
<PAGE>
<TABLE>
NOTE 6 LOANS Continued)

         A summary of the activity in the allowance  for loan losses  account is
as follows:

                                                                                 Years Ended December 31,
                                                                                 ------------------------
                                                                                 2001                2000
                                                                               ----------        -----------
<S>                                                                            <C>                 <C>
Balance, beginning of year                                                     $1,055,216          $ 911,603
Provision charged to operations                                                    33,500            123,750
Loans charged-off                                                                 (45,882)           (27,609)
Recoveries                                                                         42,314             47,472
                                                                               ----------        -----------
Balance, end of year                                                           $1,085,148        $ 1,055,216
                                                                               ==========        ===========



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

                                                                                       December 31,
                                                                                       ------------
                                                                                 2001                2000
                                                                               ----------        -----------
Impaired loans without a valuation allowance                                          $ -                $ -
Impaired loans with a valuation allowance                                       2,146,404          1,736,102
                                                                               ----------        -----------
Total impaired loans                                                           $2,146,404        $ 1,736,102
                                                                               ==========        ===========

Valuation allowance related to impaired loans                                   $ 483,299          $ 413,284
                                                                               ==========        ===========


                                                                                  Years Ended December 31,
                                                                                  ------------------------
                                                                                  2001                  2000
                                                                               ----------           -----------
Average investment in impaired loans                                           $2,323,497           $ 1,891,681
                                                                               ==========           ===========

Interest income recognized on impaired loans                                    $ 149,952             $ 139,739
                                                                               ==========           ===========
Interest income recognized on a cash basis on impaired loans                          $ -                   $ -
                                                                               ==========           ===========
</TABLE>


No additional  funds are  committed to be advanced in  connection  with impaired
loans.

Loans on which the accrual of interest has been  discontinued  amount to $33,463
and $55,411 at December  31, 2001 and 2000,  respectively.  If interest on these
loans had been accrued,  such income would have  approximated  $5,204 and $8,558
for 2001 and 2000,  respectively.  No interest income was recognized or received
on these loans in 2001 and 2000.

                                       40
<PAGE>

NOTE 7 - PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

                                                       December 31,
                                                       ------------
                                                 2001                2000
                                              -----------        -----------
Land and improvements                           $ 612,567          $ 612,567
Buildings                                       1,943,071          1,810,710
Leasehold improvements                              7,951              7,951
Equipment, furniture and fixtures               1,416,895          1,246,526
                                              -----------        -----------
                                                3,980,485          3,677,754
Less - accumulated depreciation                (1,552,093)        (1,389,325)
                                              -----------        -----------
                                              $ 2,428,391        $ 2,288,429
                                              ===========        ===========


Depreciation  charged to operating expense for the years ended December 31, 2001
and 2000 was $163,048 and $150,562, respectively.

NOTE 8 - DEPOSITS

Interest-bearing deposits consist of the following:

                                                       December 31,
                                                       ------------
                                                 2001                  2000
                                             ------------         ------------
Money market and NOW account deposits        $ 21,064,507         $ 16,160,153
Savings deposits                                5,727,176            5,319,743
Certificates of deposit $100,000 and over      18,390,041           14,240,570
Other time deposits                            34,909,765           34,874,592
                                             ------------         ------------
                                             $ 80,091,489         $ 70,595,058
                                             ============         ============


         At December 31, 2001, the scheduled  maturities of time deposits are as
follows:

2002                                   $ 41,507,733
2003                                      7,828,531
2004                                      1,865,163
2005                                      1,060,094
2006                                      1,013,285
Thereafter                                   25,000
                                     ---------------

                                       $ 53,299,806
                                     ===============

                                       41
<PAGE>

NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM
         BORROWINGS

Securities sold under  agreements to repurchase  generally  mature within one to
four days from the transaction date.  Investment securities with carrying values
of $5,347,655  and $4,723,505 at December 31, 2001 and 2000,  respectively,  are
pledged to secure these agreements. Information concerning securities sold under
agreements to repurchase is summarized, as follows:

                                                   2001             2000
                                             ---------------  --------------
Average balance during the year                 $ 3,770,166     $ 2,802,352
                                             ===============  ==============

Average interest rate during the year                 3.42%           4.32%
                                             ===============  ==============

Maximum month end balance during the year       $ 5,149,866     $ 4,402,502
                                             ===============  ==============


Short-term borrowings consist of U.S. Treasury tax and loan deposit notes, which
are payable on demand and fully collateralized by investment securities.

The Bank is a member  of the  Federal  Home  Loan  Bank of  Atlanta.  One of the
benefits of  membership  is a borrowing  capacity of $5.9  million  secured by a
blanket floating lien on the unpaid principal balance of the Bank's  one-to-four
unit residential  real estate loans. In addition,  the Bank may borrow up to 10%
of its total  assets  under a  separate  credit  availability  program  with the
Federal  Home Loan Bank of Atlanta.  As of December  31,  2001,  the Bank had no
outstanding balance on these lines of credit.


NOTE 10 - EMPLOYEE BENEFIT PLANS

Stock Compensation Plans

At  December  31,  2001,  the Bank had fixed  stock  compensation  plans for its
employees. The Bank applies Accounting Principles Board Opinion No. 25 (APB 25),
Accounting  for Stock  Issued  to  Employees,  and  related  interpretations  in
accounting for its plans. Accordingly,  no compensation cost has been recognized
for these plans  against  earnings.  For those  companies  applying APB 25, FASB
Statement No. 123,  Accounting for Stock-Based  Compensation,  requires  certain
pro-forma  disclosures  of net income  and  earnings  per share.  Net income and
earnings  per share  computed  under FASB  Statement  No. 123 do not  materially
differ from the amounts reported.

All options have  ten-year  terms,  vest and become fully  exercisable  in three
years. The option exercise price equals or exceeds the market price of the stock
as of the date the option was granted.

                                       42
<PAGE>
<TABLE>
 EMPLOYEE BENEFIT PLANS (Continued)

Stock Compensation Plans (continued)

The  following  is a summary of the Bank's stock  option  activity,  and related
information for the years ended December 31:

                                                                2001                                   2000
                                                      ---------------------------           ---------------------------
                                                                       Weighted-                             Weighted-
                                                                        Average                               Average
                                                                        Exercise                              Exercise
                                                      Options             Price             Options             Price
                                                      -------            -------            -------            -------
<S>                                                   <C>                <C>                <C>                 <C>
    Outstanding - beginning of year                   128,250            $ 10.27            117,950             $ 9.40
    Granted                                                 -                  -             30,000              11.48
    Exercised                                          (3,800)              7.71            (15,625)              5.62
    Forfeited                                          (1,600)              9.09             (4,075)             12.81
                                                      -------            -------            -------            -------
    Outstanding - end of year                         122,850            $ 10.36            128,250            $ 10.27
                                                      =======            =======            =======            =======
    Exercisable - end of year                          94,319             $ 9.73             79,800             $ 8.83
                                                      =======            =======            =======            =======
</TABLE>

Deferred Compensation Plans

In  1985,  the  Bank  entered  into  a  deferred   compensation  and  retirement
arrangement  with  seven  directors  and in 1998  with  one  officer.  The  Bank
purchased  life  insurance  contracts in order to fund the expected  liabilities
under the contracts.  The Bank's policy is to accrue the estimated amounts to be
paid under the  contracts  over the  expected  period of active  employment.  At
December 31, 2001 and 2000, other  liabilities  included  $239,605 and $261,625,
respectively, related to the deferred compensation plans.

Employee Stock Ownership Plan

The Board of  Directors  adopted an  Employees'  Stock  Bonus Plan (the  "ESOP")
effective January 1, 1998. The ESOP covered substantially all employees, whereby
funds contributed were used to purchase outstanding common stock of the Company.
Employees  become eligible after they have completed six  consecutive  months of
employment.  Contributions  to the plan  are  funded  as  accrued.  The  Company
expensed  approximately  $33,300 and $32,188,  for the years ended  December 31,
2001 and 2000 respectively.

401k Retirement Program

Effective January 1, 1993, the Board of Directors  adopted a Retirement  Program
(the "401K").  Eligible  participants in the 401K include all employees who have
completed six months of service  beginning  with the effective date of the 401K.
Contributions  to the  plan  are  funded  by the  employees  with an  associated
employer  match.  At December  31,  2001 and 2000,  other  liabilities  included
$49,220 and $84,775,  respectively,  related to this  program.  The Bank did not
accrue for a contribution  to the plan in 2001. The accrued  contribution  as of
December 31, 2000 was $65,000.

                                       43
<PAGE>

NOTE 11- INCOME TAXES

        The principal components of income tax expense are as follows:

                                                    Years Ended December 31,
                                                    2001                2000
                                                  ---------          ---------
Federal income tax expense - current              $ 539,081          $ 507,666

Deferred federal income tax expense (benefit)        (2,581)           (30,797)
                                                  ---------          ---------
Income tax expense                                $ 536,500          $ 476,869
                                                  =========          =========



        Differences  between income tax expense calculated at the statutory rate
and that shown in the statements of income are summarized as follows:
<TABLE>
                                                         Years Ended December 31,
                                                         2001                2000
                                                       ---------          ---------
<S>                                                    <C>                <C>
Federal income tax expense - at 34% statutory rate     $ 595,333          $ 561,958
Tax effect of:
  Tax-exempt interest                                    (37,204)           (49,415)
  Exercised stock options                                 (8,384)           (31,699)
  Other                                                  (13,245)            (3,975)
                                                       ---------          ---------
Income tax expense                                     $ 536,500          $ 476,869
                                                       =========          =========

A cumulative  net deferred tax asset is included in other assets at December 31,
2001 and 2000. The components of the asset are as follows:

                                                           2001                2000
                                                        ---------          ---------
Deferred compensation                                    $ 81,466           $ 88,953
Bad debts and other provisions                            344,888            333,498
Other                                                      18,558             28,823
Interest income                                             5,461              4,949
Net unrealized depreciation on available-for-sale
    securities                                                  -                  -
                                                        ---------          ---------
Total deferred tax asset                                  450,373            456,223
                                                        ---------          ---------

Deferred loan fees                                        (39,504)           (41,452)
Discount accretion on securities                          (15,625)           (21,950)
Net unrealized appreciation on available-for-sale
    securities                                           (109,444)            (9,640)
Fixed assets                                              (64,366)           (59,174)
                                                        ---------          ---------
                                                         (228,939)          (132,216)
                                                        ---------          ---------
Net deferred tax asset                                  $ 221,434          $ 324,007
                                                        =========          =========
</TABLE>


                                       44
<PAGE>

NOTE 12 - COMMITMENTS AND CONTINGENCIES- RELATED PARTY

The Company has entered into a long-term  lease with a related  party to provide
space for one  branch  and the  Bank's  operations  center.  This lease has been
classified  as an  operating  lease for  financial  reporting  purposes.  Future
minimum  lease  payments of $75,810 are required  each year for five years under
the  long-term  noncancellable  lease  agreement as of December 31, 2001,  which
expires on December 31,2007.  Total lease expense was $64,439 for the years 2001
and 2000, respectively.


NOTE 13 - OTHER RELATED PARTY TRANSACTIONS

The Bank has loan and deposit transactions with its officers and directors,  and
with  companies in which the officers and directors  have a financial  interest.
Related party deposits  amounted to  approximately  $5,120,000 and $6,300,000 at
December 31, 2001 and 2000, respectively. In addition to related party deposits,
securities sold under  agreements to repurchase with related parties amounted to
approximately   $3,500,000  and  $1,603,000  at  December  31,  2001  and  2000,
respectively.  A summary of related  party loan  activity for Heritage  Bank and
Trust is as follows during 2001:

A summary  of related  party loan  activity  for  Heritage  Bank and Trust is as
follows during 2001:

Balance, December 31, 2000                            $ 6,020,459
Originations - 2001                                     1,066,416
Repayments - 2001                                      (2,284,638)
                                                ------------------

Balance, December 31, 2001                            $ 4,802,237
                                                ==================


In the  opinion of  management,  such loans are made in the  ordinary  course of
business  at  normal  credit  terms,  including  interest  rate  and  collateral
requirements and do not represent more than normal credit risk.

In the ordinary course of business, the Company has engaged in transactions with
certain of its directors' companies for legal services and insurance.

Commitments to extend credit and letters of credit to related  parties  amounted
to $920,405 and $841,378 at December 31, 2001 and 2000, respectively.

NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK

The Bank has outstanding at any time a significant  dollar amount of commitments
to extend credit. To accommodate major customers, the Bank also provides standby
letters  of credit and  guarantees  to third  parties.  Those  arrangements  are
subject to strict credit control assessments.  Guarantees and standby letters of
credit  specify  limits  to  the  Bank's   obligations.   The  amounts  of  loan
commitments,  guarantees  and  standby  letters  of  credit  are  set out in the
following table as of December 31, 2001 and 2000.  Because many  commitments and
almost all standby letters of credit and guarantees  expire without being funded
in whole or in part,  the  contract  amounts  are not  estimates  of future cash
flows.  The majority of  commitments to extend credit have terms up to one year.
Interest rates on fixed-rate commitments range from 7% to 18%.

                                       45
<PAGE>
<TABLE>
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued)

                                                         December 31, 2001                           December 31, 2000
                                                         -----------------                           -----------------
                                                  Variable Rate         Fixed Rate           Variable Rate         Fixed Rate
                                                    Commitment          Commitment             Commitment          Commitment
                                                  -------------        -----------           -------------        -----------
<S>                                                <C>                 <C>                   <C>                  <C>
Loan Commitments                                   $14,890,019         $ 2,376,038           $ 11,224,866         $ 4,664,451

Standby letters of credit
   and guarantees written                            $ 196,748           $ 208,600              $ 134,759           $ 313,006
</TABLE>

All of the guarantees outstanding at December 31, 2001 expire during 2002.

Loan  commitments,  standby  letters  of  credit  and  guarantees  written  have
off-balance-sheet  credit risk  because only  origination  fees and accruals for
probable losses, if any, are recognized in the statement of financial  position,
until  the  commitments  are  fulfilled  or the  standby  letters  of  credit or
guarantees expire. Credit risk represents the accounting loss that

would be recognized at the reporting date if counterparties failed completely to
perform as  contracted.  The credit risk  amounts  are equal to the  contractual
amounts,  assuming  that the amounts are fully  advanced and that, in accordance
with the requirements of FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk,  collateral or other security is of no value. The
Bank's  policy  is to  require  customers  to  provide  collateral  prior to the
disbursement  of approved  loans.  For retail loans,  the Bank usually retains a
security  interest  in  the  property  or  products  financed,   which  provides
repossession rights in the event of default by the customer.  For business loans
and  financial  guarantees,  collateral  is usually in the form of  inventory or
marketable securities (held in trust) or property (notations on title).

Concentrations  of credit risk  (whether on or off balance  sheet)  arising from
financial instruments exist in relation to certain groups of customers.  A group
concentration  arises  when a number of  counterparties  have  similar  economic
characteristics  that would cause their ability to meet contractual  obligations
to be similarly  affected by changes in economic or other  conditions.  The Bank
does not have significant  exposure to any individual  customer or counterparty.
The major concentrations of credit risk for the Bank arise by customer loan type
in relation to loans and credit commitments.  A geographic  concentration arises
because the Bank operates primarily in southeastern Virginia.

The credit risk  amounts  represent  the maximum  accounting  loss that would be
recognized at the reporting date if counterparties  failed completely to perform
as contracted and any collateral or security proved to be of no value.  The Bank
has experienced  little  difficulty in accessing  collateral when required.  The
amounts of credit risk shown,  therefore,  greatly exceed expected losses, which
are included in the allowance for loan losses.

NOTE 15 - REGULATORY MATTERS

The Bank 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
Bank's  financial   statements.   Under  capital  adequacy  guidelines  and  the
regulatory framework for

                                       46
<PAGE>

NOTE 15 - REGULATORY MATTERS (Continued)
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's assets,  liabilities,  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments by the regulators about components (such as interest rate risk),  risk
weighting, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below)  of  total  and  Tier  I  capital  (as  defined  in the  regulations)  to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as  defined).  Management  believes,  as of December 31, 2001,  the Bank
meets all capital adequacy requirements to which it is subject.

As of September 30, 1999, the most recent  notification from the Federal Reserve
Bank of Richmond  categorized the Bank as well capitalized  under the regulatory
framework for prompt  corrective  action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based,  Tier I risk-based,  and Tier I
leverage  ratios as set forth in the table.  There are no  conditions  or events
since that notification that management  believes have changed the institution's
category.

The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>

                                                                                                          To Be Well Capitalized
                                                                                                               Under Prompt
                                                                        For Capital Adequacy                 Corrective Action
                                              Actual                           Purposes                        Provisions
                                    -------------------------          -----------------------             ----------------------
                                       Amount          Ratio             Amount          Ratio             Amount          Ratio
                                       ------          -----             ------          -----             ------          -----
As of December 31, 2001:
Total Capital
<S>                                 <C>                <C>             <C>                <C>            <C>               <C>
          (to Risk-Weighted Assets) $ 10,554,000       12.59%          $ 6,708,000        8.00%          $ 8,385,000       10.00%
Tier I Capital
          (to Risk-Weighted Assets)  $ 9,505,000       11.34%          $ 3,354,000        4.00%          $ 5,031,000        6.00%
Tier I Capital
    (to Average Assets)              $ 9,505,000        8.80%          $ 4,320,000        4.00%          $ 5,400,000        5.00%


                                                                                                          To Be Well Capitalized
                                                                                                               Under Prompt
                                                                        For Capital Adequacy                 Corrective Action
                                              Actual                           Purposes                        Provisions
                                    -------------------------          -----------------------             ----------------------
                                       Amount          Ratio             Amount          Ratio             Amount          Ratio
                                       ------          -----             ------          -----             ------          -----
As of December 31, 2000:
Total Capital
          (to Risk-Weighted Assets)  $ 9,844,000       13.26%          $ 5,939,000        8.00%          $ 7,423,000       10.00%
Tier I Capital
          (to Risk-Weighted Assets)  $ 8,915,000       12.01%          $ 2,969,000        4.00%          $ 4,454,000        6.00%
Tier I Capital
    (to Average Assets)              $ 8,915,000        9.16%          $ 3,891,000        4.00%          $ 4,864,000        5.00%
</TABLE>


There is no significant  difference  between the Bank's actual ratios  disclosed
above, and the related actual ratios of the Company.

                                       47
<PAGE>

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  table presents the carrying  amounts and fair value of the Bank's
financial  instruments  at  December  31,  2001 and  2000.  The fair  value of a
financial instrument is the amount at which the instrument could be exchanged in
a  current  transaction  between  willing  parties,  other  than in a forced  or
liquidation  sale. The carrying amounts in the table are included in the balance
sheet under the indicated captions.
<TABLE>

                                                  Carrying Amount      Fair Value       Carrying Amount      Fair Value
                                                  ---------------      ----------       ---------------      ----------
                                                        (Dollars in thousands)                (Dollars in thousands)
<S>                                                  <C>                <C>                 <C>                <C>
Financial Assets
Cash and cash
    equivalents                                      $ 15,123           $ 15,123            $ 8,903            $ 8,903
Loans (net)                                            78,689             82,018             69,681             71,492
Investment securities                                  15,558             15,587             15,769             15,773
Accrued interest
    receivable                                            549                549                635                635

Financial Liabilities
Deposit liabilities                                   100,273            101,452             86,927             87,405
Accrued interest
    payable                                               291                291                354                354
Short term borrowings                                      59                 59                 58                 58
Securities sold under
    agreements to repurchase                            5,150              5,150              2,289              2,289

</TABLE>
Estimation of Fair Values

The  following  notes  summarize  the  major  methods  and  assumptions  used in
estimating the fair values of financial instruments:

Short-term  financial  instruments are valued at their carrying amounts included
in the Bank's balance sheet, which are reasonable estimates of fair value due to
the  relatively  short  period to maturity  of the  instruments.  This  approach
applies to cash and cash equivalents, short-term borrowings, and securities sold
under agreements to repurchase.

Loans are valued on the basis of  estimated  future  receipts of  principal  and
interest, which are discounted at various rates. Loan prepayments are assumed to
occur at the same rate as in previous periods when interest rates were at levels
similar to current  levels.  Future  cash flows for  homogeneous  categories  of
consumer loans,  such as motor vehicle loans, are estimated on a portfolio basis
and  discounted at current rates offered for similar loan terms to new borrowers
with  similar  credit  profiles.  The fair  value of  nonaccrual  loans  also is
estimated on a present value basis,  using higher discount rates  appropriate to
the higher risk involved.


                                       48
<PAGE>

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Estimation of Fair Values (continued)

Investment  securities  are valued at quoted  market  prices if  available.  For
unquoted  securities,  the fair value is  estimated  by the Bank on the basis of
financial and other information.

The fair value of demand deposits and deposits with no defined maturity is taken
to be the amount  payable  on demand at the  reporting  date.  The fair value of
fixed-maturity  deposits is estimated using rates currently offered for deposits
of similar remaining maturities. The intangible value of long-term relationships
with  depositors  is not  taken  into  account  in  estimating  the fair  values
disclosed.

The carrying amounts of accrued interest approximate fair value.

It  is  not   practicable   to   separately   estimate   the  fair   values  for
off-balance-sheet  credit  commitments,  including standby letters of credit and
guarantees  written,  due to the  lack of  cost-effective  reliable  measurement
methods for these instruments.

NOTE 17 - EARNINGS PER SHARE RECONCILIATION

The following is a  reconciliation  of the  numerators and  denominators  of the
basic and diluted earnings per share computations.
<TABLE>
                                                             2001                2000
                                                      -------------------- ------------------

<S>                                                            <C>               <C>
Net income (numerator, basic and diluted)                      $1,214,480        $ 1,175,950

Weighted average shares outstanding (denominator)                 775,275            766,956
                                                      -------------------- ------------------

Earnings per common share-basic                                    $ 1.57             $ 1.53
                                                      ==================== ==================

Effect of dilutive securities

Weighted average shares outstanding                             $ 775,275          $ 766,956
Effect of stock options                                            27,297             18,268
                                                      -------------------- ------------------
Diluted average shares outstanding (denominator)                  802,572            785,224
                                                      -------------------- ------------------

Earnings per common share - assuming dilution                      $ 1.51             $ 1.50
                                                      ==================== ==================
</TABLE>


                                    * * * * *


                                       49