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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                 ---------------
                                   FORM 10-KSB
(Mark One)

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

For the fiscal year ended June 30, 2004

                                       OR

[   ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934.

For the transition period from                to
                               --------------    ---------------

                           Commission File No. 0-28032

                             PATAPSCO BANCORP, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


             MARYLAND                                         52-1951797
-------------------------------------                     -------------------
    (State or Other Jurisdiction                           (I.R.S. Employer
  of Incorporation or Organization)                       Identification No.)

1301 MERRITT BOULEVARD, DUNDALK, MARYLAND                  21222-2194
-----------------------------------------                  ----------
(Address of Principal Executive Offices)                   (Zip Code)

         Issuer's Telephone Number, Including Area Code: (410) 285-1010
                                                         --------------

       Securities registered under Section 12(b) of the Exchange Act: NONE
                                                                      ----

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

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                     --------------------------------------
                                (Title of Class)

         SERIES A NON-CUMULATIVE, PERPETUAL CONVERTIBLE PREFERRED STOCK,
         ---------------------------------------------------------------
                            PAR VALUE $.01 PER SHARE
                            ------------------------
                                (Title of Class)

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act  during  the past 12 months  (or such  shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes   X    No
                                                               ---      ----

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

For the fiscal year ended June 30, 2004, the issuer had $11,098,000 in revenues.

As of September 15, 2004, the aggregate market value of voting common stock held
by non-affiliates  was approximately  $14,223,114,  computed by reference to the
most recent sales price on September 20, 2004 as reported on the OTC  Electronic
Bulletin Board. For purposes of this calculation,  it is assumed that directors,
executive  officers and  beneficial  owners of more than 5% of the  registrant's
outstanding voting common stock are affiliates.

Number of shares of Common Stock outstanding as of September 20, 2004:
1,390,752.

                       DOCUMENTS INCORPORATED BY REFERENCE

         The  following  lists the documents  incorporated  by reference and the
Part of the Form 10-KSB into which the document is incorporated:

         1.       Portions of the issuer's Annual Report to Stockholders for the
                  Fiscal Year ended June 30, 2004. (Parts II and III)
         2.       Portions  of the Proxy  Statement  for  issuer's  2004  Annual
                  Meeting of Stockholders. (Part III)


<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------


GENERAL

         PATAPSCO  BANCORP,  INC.  Patapsco  Bancorp,  Inc. (the  "Company") was
incorporated  under the laws of the State of Maryland in November 1995. On April
1, 1996, Patapsco Federal Savings and Loan Association (the "Association"),  the
predecessor  of The Patapsco Bank ("the Bank"),  converted  from mutual to stock
form  and  reorganized   into  the  holding  company  form  of  ownership  as  a
wholly-owned subsidiary of the Company.

         The Company has no significant  assets other than its investment in the
Bank.  The Company is primarily  engaged in the business of directing,  planning
and  coordinating  the  business  activities  of  the  Bank.  Accordingly,   the
information set forth in this report, including financial statements and related
data,  focuses  primarily on the Bank. In the future,  the Company may become an
operating company or acquire or organize other operating subsidiaries, including
other financial institutions.  Currently,  the Company does not maintain offices
separate  from those of the Bank or employ any persons  other than its  officers
who are not separately compensated for such service.

         The  Company's  and the Bank's  executive  offices  are located at 1301
Merritt Boulevard,  Dundalk, Maryland 21222-2194,  and the main telephone number
is (410) 285-1010.

         THE PATAPSCO  BANK.  The Bank is a Maryland  commercial  bank operating
through three  full-service  offices  located in Dundalk,  Parkville and Carney,
Maryland and serving eastern Baltimore County.  The primary business of the Bank
is to attract deposits from individual and corporate  customers and to originate
residential and commercial mortgage loans,  commercial loans and consumer loans,
primarily in the Greater  Baltimore  Metropolitan  area.  The Bank is subject to
competition  from other  financial and mortgage  institutions  in attracting and
retaining  deposits and in making loans.  The Bank is subject to the regulations
of certain agencies of the federal government and undergoes periodic examination
by those  agencies.  The Bank has two  operating  subsidiaries,  Prime  Business
Leasing and Patapsco Financial  Services.  The primary business of Prime Leasing
is the origination and servicing of commercial  leases.  The primary business of
Patapsco Financial Services is the sale of consumer investments.

         At June 30,  2004,  the Bank had $21.9  million,  $6.5  million,  $16.5
million,  $14.5 million and $21.2 million in small business loans,  construction
loans,  commercial real estate loans,  home equity and other consumer loans, and
equipment leases, respectively.

AVAILABLE INFORMATION

         The Bank  maintains  a website  at  http://www.patapscobank.com,  which
makes  available  the  Company's  Section 16  filings  with the  Securities  and
Exchange Commission ("SEC").  The SEC maintains a website at  http://www.sec.gov
that makes  available the  Company's  annual  reports on Form 10-KSB,  quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to such reports
filed or  furnished  pursuant to Section  13(a) or 15(d) of the  Securities  and
Exchange  Act of  1934,  as  amended,  free of  charge,  on the  site as soon as
reasonably   practicable  after  the  Company  has  electronically  filed  these
documents with, or otherwise  furnished them to, the SEC. The Company's Internet
website  and the  information  contained  therein or  connected  thereto are not
intended to be incorporated into this annual report on Form 10-KSB.

MARKET AREA

         The Bank's market area for gathering  deposits  consists of eastern and
northeastern Baltimore County, Maryland, while the Bank makes loans to customers
in much  of the  Mid-Atlantic  area  with a  strong  emphasis  on the  Baltimore
metropolitan  area. The economy of the Bank's market area has historically  been
based on industries  such as steel,  shipyards and  automobile  assembly.  Major
employers in the area include Bethlehem Steel and General Motors. The economy in
the Bank's  market area  continues to be dependent,  to some extent,  on a small
number of


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major industrial  employers.  A significant  portion of eastern Baltimore County
has been designated as an "Enterprise Zone." As a result,  employers  relocating
to this area are entitled to significant tax and other economic incentives.

LENDING ACTIVITIES

         GENERAL.  The Company's gross loan portfolio  totaled $158.9 million at
June 30,  2004,  representing  72.9% of total  assets at that date.  At June 30,
2004, $78.3 million,  or 49.3% of the Company's gross loan portfolio,  consisted
of  residential  mortgage  loans.  Other loans  secured by real  estate  include
construction and commercial real estate loans,  which amounted to $23.0 million,
or 14.5% of the  Company's  gross loan  portfolio at June 30, 2004. In addition,
the Company  originates  consumer and other loans,  including home equity loans,
home improvement loans and loans secured by deposits. At June 30, 2004, consumer
and other loans  totaled  $14.5  million,  or 9.1% of the  Company's  gross loan
portfolio.  The Company's  commercial  loan  portfolio,  which consists of small
business loans and  commercial  leases,  totaled $43.1 million,  or 27.1% of the
Company's gross loan portfolio.

         ORIGINATIONS,  PURCHASES AND SALES OF LOANS. The Company  generally has
authority  to  originate  and  purchase  loans  throughout  the  United  States.
Consistent   with  its   emphasis  on  being  a   community-oriented   financial
institution,  the Company  concentrates  its lending  activities in its Maryland
market area with limited loan and equipment  lease  origination in the Delaware,
Pennsylvania and Northern Virginia markets.

         The Company's loan  originations  are derived from a number of sources,
including loan brokers,  advertising  and referrals by depositors and borrowers.
The Company's solicitation programs consist of advertisements in local media, in
addition to participation in various community  organizations and events. All of
the Company's loan personnel are salaried;  however, one originator does receive
commissions  on loans  approved by officers of the bank.  With the  exception of
applications for home improvement loans and equipment leases, which loans may be
originated  on an  indirect  basis  through a limited  number of  approved  home
improvement  contractors and loan brokers, loan applications are accepted at the
Company's  office.  In addition,  the Company's  salaried loan  originators  may
travel to meet prospective  borrowers and take  applications.  In all cases, the
Company has final approval of the application.

         In  recent  years,  the  Company  has  purchased  whole  loans and loan
participation  interests.  During  the  year  ended  June 30,  2004 the  Company
purchased  $0.2  million  in   participation   interests  and  $4.6  million  in
residential mortgage loans. In the future,  management will continue to consider
purchases  of whole loans or  participation  interests in  commercial  business,
residential and commercial real estate loans.

         LOAN  UNDERWRITING  POLICIES.  The  Company's  lending  activities  are
subject to the Company's  non-discriminatory  underwriting standards and to loan
origination  procedures  prescribed  by the  Company's  Board of  Directors  and
management.  Detailed loan applications are obtained to determine the borrower's
ability  to repay,  and the more  significant  items on these  applications  are
verified   through  the  use  of  credit  reports,   financial   statements  and
confirmations.  First mortgage loans in amounts of up to $252,700,  $350,000 and
$500,000  may be approved  by the Vice  President  - Real  Estate  Lending,  the
Officers'  Loan Committee  (consisting  of three officers of the Bank),  and the
Directors'  Loan  Committee  (consisting  of any  two  non-employee  directors),
respectively. Certain officers and committees have been granted authority by the
Board of Directors to approve commercial  business loans and equipment leases in
varying  amounts  depending  upon whether the loan is secured or unsecured  and,
with respect to secured  loans,  whether the  collateral  is liquid or illiquid.
Individual  officers  and certain  committees  of the Company  have been granted
authority  by the Board of  Directors  to approve  consumer  loans up to varying
specified dollar amounts, depending upon the type of loan.

         Applications  for   single-family   real  estate  loans  are  typically
underwritten  and closed in  accordance  with the standards of Federal Home Loan
Mortgage  Corporation   ("FHLMC")  and  Federal  National  Mortgage  Association
("FNMA").  Generally,  upon  receipt of a loan  application  from a  prospective
borrower,  a credit  report and  verifications  are ordered to confirm  specific
information  relating  to the loan  applicant's  employment,  income  and credit
standing.  If a proposed loan is to be secured by a mortgage on real estate,  an
appraisal of the real estate is undertaken,  pursuant to the Company's Appraisal
Policy,  by an  appraiser  approved by the Company and  licensed by the State of
Maryland.  In the case of single-family  residential mortgage loans, except when
the Company becomes


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aware of a particular risk of environmental contamination, the Company generally
does not obtain a formal  environmental  report on the real estate at the time a
loan is made. A formal  environmental  report may be required in connection with
nonresidential real estate loans.

         It is the Company's policy to record a lien on the real estate securing
a loan and to obtain title insurance, which insures that the property is free of
prior encumbrances and other possible title defects.  Borrowers must also obtain
hazard insurance  policies prior to closing and, when the property is in a flood
plain as designated  by the  Department  of Housing and Urban  Development,  pay
flood  insurance  policy  premiums.  Upon receipt of a loan  application  from a
prospective  borrower,  a credit report  generally is ordered to verify specific
information  relating  to the loan  applicant's  employment,  income  and credit
standing.

         With respect to single-family  residential  mortgage loans, the Company
makes a loan commitment of between 30 and 60 days for each loan approved. If the
borrower  desires a longer  commitment,  the commitment may be extended for good
cause and upon  written  approval.  No fees are charged in  connection  with the
issuance of a commitment  letter;  however,  extension fees are usually charged.
The interest rate is guaranteed for the commitment term.

         It is  the  policy  of the  Company  that  appraisals  be  obtained  in
connection  with all loans for the purchase of real estate or to refinance  real
estate  loans  where the  existing  mortgage  is held by a party  other than the
Company.  It is the  Company's  policy  that  all  appraisals  be  performed  by
appraisers  approved by the  Company's  Board of  Directors  and licensed by the
State of Maryland.

         Under  applicable  law,  with  certain  limited  exceptions,  loans and
extensions  of credit by a commercial  bank to a person  outstanding,  including
commitments,  at one time shall not exceed 15% of the bank's unimpaired  capital
and surplus.  Under these  limits,  the  Company's  loans to one  borrower  were
limited to $2.6  million at June 30,  2004.  At that date,  the  Company  had no
lending relationships in excess of the loans-to-one-borrower  limit. At June 30,
2004, the Company's largest lending relationship was a $2.2 million loan secured
by commercial  real estate,  which was current and performing in accordance with
its terms at June 30, 2004.

         Interest rates charged by the Company on loans are affected principally
by  competitive  factors,  the  demand  for such  loans and the  supply of funds
available for lending purposes.  These factors are, in turn, affected by general
economic conditions, monetary policies of the federal government,  including the
Board of Governors of the Federal  Reserve  System  ("Federal  Reserve  Board"),
legislative tax policies and government budgetary matters.

         RESIDENTIAL REAL ESTATE LENDING.  The Company  historically has been an
originator of residential real estate loans in its market area. Residential real
estate loans consist of both  single-family  and  multi-family  residential real
estate loans. At June 30, 2004, residential mortgage loans, excluding loans held
for sale, home  improvement  loans, and home equity loans totaled $78.3 million,
or 49.3% of the Company's gross loan portfolio. Of such loans, $7.2 million were
secured by nonowner-occupied investment properties.

         At June 30, 2004, $65.7 million, or 69.5% of the Company's  residential
and commercial  real estate loan portfolio was comprised of fixed-rate  mortgage
loans and $28.9 million or 30.5% of the  Company's  residential  and  commercial
real estate loan portfolio was comprised of adjustable-rate mortgage loans.

         The  Company's   multi-family   residential  loan  portfolio   consists
primarily of loans secured by small  apartment  buildings.  Such loans generally
range in size from $100,000 to $500,000.  At June 30, 2004, the Company had $0.4
million of multi-family residential real estate loans, which amounted to 0.3% of
the Company's loan portfolio at such date. Multi-family real estate loans either
are originated on an  adjustable-rate  basis with terms of up to 25 years or are
amortized  over a maximum of 25 years  with a three or five year note  maturity,
and are underwritten with loan-to-value ratios of up to 80% of the lesser of the
appraised value or the purchase price of the property.

         Multi-family  residential real estate lending entails  additional risks
as  compared  with  single-family  residential  property  lending.  Multi-family
residential  real estate loans typically  involve larger loan balances to


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single borrowers or groups of related borrowers.  The payment experience on such
loans  typically  is dependent  on the  successful  operation of the real estate
project.  These  risks  can be  significantly  impacted  by  supply  and  demand
conditions in the market for residential  space, and, as such, may be subject to
a greater  extent to adverse  conditions in the economy  generally.  To minimize
these  risks,  the  Company  generally  limits  itself to its market  area or to
borrowers with which it has prior  experience or who are otherwise  known to the
Company. It has been the Company's policy to obtain annual financial  statements
of  the  business  of  the  borrower  or  the  project  for  which  multi-family
residential real estate loans are made. The Company seeks to expand multi-family
residential real estate lending.

         CONSTRUCTION  LENDING.  The Bank also offers residential and commercial
construction  loans and land  acquisition  and  development  loans.  Residential
construction  loans are offered to  individuals  who are having their primary or
secondary   residence   built,  as  well  as  to  local  builders  to  construct
single-family  dwellings.  Residential construction advances are made on a stage
of completion basis. Generally, loans to owner/occupants for the construction of
residential properties are originated in conjunction with the permanent mortgage
on the property.  The term of the construction  loans is normally from six to 18
months and has a variable  interest  rate,  which is normally up to 2% above the
prime interest rate.  Upon completion of  construction,  the permanent loan rate
will be set at the  interest  rate  offered by the Bank on that loan product not
sooner than 60 days prior to completion.  Interest rates on residential loans to
builders are set at the prime interest rate plus a margin of 0.5% to 2.0% as may
be adjusted from time to time.  Interest rates on commercial  construction loans
and land  acquisition and  development  loans are based on the prime rate plus a
negotiated  margin of between  0.5% and 2.0% and adjust from time to time,  with
construction  terms  generally not  exceeding 18 months.  Advances are made on a
percentage of completion basis. At June 30, 2004, $6.5 million,  or 4.1%, of the
Company's loan portfolio consisted of construction loans.

         Prior to making a commitment to fund a loan,  the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of the  feasibility  of the  proposed  project.  The Bank also reviews and
inspects each project at the  commencement of construction  and prior to payment
of draw requests  during the term of the  construction  loan. The Bank generally
charges a construction fee between 1% and 2%.

         Construction  financing  generally  is  considered  to involve a higher
degree of risk of loss than  long-term  financing  on  improved,  occupied  real
estate.  Risk of loss on a  construction  loan is  dependent  largely  upon  the
accuracy  of the initial  estimate  of the  property's  value at  completion  of
construction  or  development  and the estimated  cost  (including  interest) of
construction. During the construction phase, a number of factors could result in
delays and cost  overruns.  If the estimate of  construction  costs proves to be
inaccurate and the borrower is unable to meet the Bank's requirements of putting
up additional  funds to cover extra costs or change  orders,  then the Bank will
demand  that  the  loan be paid off and,  if  necessary,  institute  foreclosure
proceedings,  or  refinance  the loan.  If the  estimate  of value  proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with  collateral  having a value that is  insufficient to assure full repayment.
The Bank has sought to minimize  this risk by limiting  construction  lending to
qualified  borrowers  (i.e.,  borrowers who satisfy all credit  requirements and
whose loans satisfy all other  underwriting  standards  which would apply to the
Bank's permanent mortgage loan financing for the subject property) in the Bank's
market area. On loans to builders,  the Bank works only with  selected  builders
with whom it has experience and carefully monitors the  creditworthiness  of the
builders.

         COMMERCIAL  REAL ESTATE LENDING.  The Company's  commercial real estate
loan  portfolio  consists of loans to finance the  acquisition  of small  office
buildings,  shopping centers and commercial and industrial buildings. Such loans
generally  range in size from  $100,000 to  $1,500,000.  At June 30,  2004,  the
Company had $16.5 million of commercial  real estate  loans,  which  amounted to
10.4% of the Company's gross loan portfolio at such date. Commercial real estate
loans are typically  originated on an adjustable-rate  basis with terms of up to
25 years or are amortized  over a maximum of 25 years with a maturity  generally
of three to five years, and are underwritten with loan-to-value  ratios of up to
80% of the lesser of the appraised  value or the purchase price of the property.
Because of the  inherently  greater risk  involved in this type of lending,  the
Company  generally limits its commercial real estate lending to borrowers within
its market area or with which it has had prior experience.  The Company seeks to
expand commercial real estate lending.




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         Commercial  real estate lending  entails  additional  risks as compared
with single-family  residential  property lending.  Commercial real estate loans
typically  involve larger loan balances to single borrowers or groups of related
borrowers.  The payment  experience on such loans  typically is dependent on the
successful  operation  of the  real  estate  project,  retail  establishment  or
business.  These  risks  can be  significantly  impacted  by supply  and  demand
conditions in the market for office, retail and residential space, and, as such,
may be  subject  to a  greater  extent  to  adverse  conditions  in the  economy
generally.  To minimize these risks, the Company  generally limits itself to its
market  area or to  borrowers  with  which it has  prior  experience  or who are
otherwise  known to the  Company.  It has been the  Company's  policy  to obtain
annual  financial  statements of the business of the borrower or the project for
which  commercial  real  estate  loans are  made.  In  addition,  in the case of
commercial  mortgage loans made to a partnership  or a corporation,  the Company
seeks,  whenever  possible,  to obtain personal  guarantees and annual financial
statements of the principals of the partnership or corporation.

         CONSUMER  LENDING.  The consumer loans  currently in the Company's loan
portfolio consist of home improvement loans, home equity loans, loans secured by
savings  deposits  and  overdraft  protection  for  checking  accounts and other
consumer  loans.  At June 30,  2004,  consumer  and other  loans  totaled  $14.5
million, or 9.1% of the Company's gross loan portfolio.

         In July 1995, the Company  instituted a home  improvement loan program.
Such loans are made to finance a variety  of other  home  improvement  projects,
such as replacement windows, siding and room additions.  The Company's policy is
to originate home improvement loans throughout Maryland,  except for the western
portion of the state, and northern Virginia, Delaware and Southern Pennsylvania.
While the Company originates some home improvement loans on a direct basis, most
of the home  improvement  loans in the Company's  portfolio are originated on an
indirect  basis through the Company's  relationships  with selected  independent
contractors.  The Company's  underwriting policies apply to all home improvement
loans whether or not directly originated by the Company.  Home improvement loans
generally  have terms  ranging  from  three to 15 years and have fixed  interest
rates.  Home  improvement  loans are made on both secured and  unsecured  bases.
However,  the majority of home  improvement  loans with a principal  loan amount
over  $10,000 or which have a term  longer  than 84 months are made on a secured
basis  with  loan-to-value  ratios  up to 80% or 90%,  depending  on the type of
project  financed.  At June 30, 2004,  home  improvement  loans amounted to $8.1
million,  or 5.1% of the  Company's  loan  portfolio,  with $1.2 million of such
loans being secured by real estate.

         Consumer  lending  affords the Company the  opportunity  to earn yields
higher than those  obtainable  with other types of  lending.  However,  consumer
loans entail greater risk than do other loans, particularly in the case of loans
that are  unsecured  or  secured  by  rapidly  depreciable  assets.  Repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment of the outstanding loan balance as a result of the greater  likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further  substantial  collection  efforts  against the  borrower.  In  addition,
consumer loan collections are dependent on the borrower's  continuing  financial
stability,  and thus are more likely to be adversely  affected by events such as
job loss, divorce, illness or personal bankruptcy.

         COMMERCIAL  LENDING.  The Bank's commercial loans consist of commercial
business loans and the financing of lease transactions, which may not be secured
by real estate.

         At June 30, 2004, the Company's commercial loans totaled $21.9 million,
or 13.8% of the  Company's  loan  portfolio.  This  commercial  lending  program
employs many of the  alternative  financing  and  guarantee  programs  available
through  the U.S.  Small  Business  Administration  and  other  state  and local
economic development agencies.

         The Bank originates commercial business loans to small and medium-sized
businesses  in its market  area.  The Bank's  commercial  business  loans may be
structured as term loans or as lines of credit. The Bank's commercial  borrowers
are  generally  small  businesses  engaged  in  manufacturing,  distribution  or
retailing,  or  professionals  in  healthcare,  accounting  and law.  Commercial
business loans are generally  made to finance the purchase of inventory,  new or
used commercial  business assets or for short-term  working capital.  Such loans
generally are secured by business assets and, if possible,  cross-collateralized
by a real estate lien,  although commercial business loans are sometimes granted
on an unsecured basis. Such loans are generally made for terms of seven years or
less,



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depending  on the  purpose  of the loan and the  collateral.  Interest  rates on
commercial  business  loans and lines of credit are either fixed for the term of
the loan or  adjusted  periodically  with the prime  rate as stated in the "Wall
Street Journal", plus a negotiated margin. Generally,  commercial business loans
are made in amounts ranging between $10,000 and $1.5 million.

         The Bank underwrites its commercial  business loans on the basis of the
borrower's  cash flow and ability to service the debt from earnings and the Bank
seeks to  structure  such loans to have more than one source of  repayment.  The
borrower is required to provide the Bank with  sufficient  information  to allow
the Bank to make its lending determination.  In most instances, this information
consists of at least two years of financial statements, a statement of projected
cash flows,  current  financial  information on any guarantor and any additional
information on the collateral. For loans with maturities exceeding one year, the
Bank  requires  that  borrowers  and  guarantors   provide   updated   financial
information at least annually throughout the term of the loan.

         Commercial  business  term  loans are  generally  made to  finance  the
purchase  of  assets  and have  maturities  of five  years  or less.  Commercial
business lines of credit are typically made for the purpose of providing working
capital and are usually  approved  with a term of 12 months and are  reviewed at
that time to determine if extension is warranted.  The Bank also offers  standby
letters of credit for its commercial borrowers.  The terms of standby letters of
credit generally do not exceed one year but may contain a renewal option.

         Commercial business loans are often larger and may involve greater risk
than other types of lending.  Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Bank seeks
to minimize these risks through its underwriting guidelines,  which require that
the loan be supported by adequate  cash flow of the borrower,  profitability  of
the  business,  collateral  and personal  guarantees of the  individuals  in the
business.  In addition,  the Bank  generally  limits this type of lending to its
market  area and to  borrowers  with  which it has prior  experience  or who are
otherwise well known to the Bank.

         The Company offers loans to finance lease transactions,  secured by the
lease and the  underlying  equipment,  to businesses of various size through its
subsidiary,  Prime Business Leasing.  In extending the financing in a commercial
lease  transaction,  the Company  reviews the borrower's  financial  statements,
credit reports, tax returns and other documentation. Generally, commercial lease
financing is made in amounts  ranging  between $3,000 and $120,000 with terms of
up to five years and carry fixed interest  rates.  At June 30, 2004,  commercial
lease finance transaction loans totaled $21.2 million, or 13.3% of the Company's
loan portfolio.

         LOAN FEES AND SERVICING.  The Company  receives fees in connection with
late payments and for  miscellaneous  services related to its loans. The Company
also charges fees in connection with loan originations  typically up to 3 points
(one  point  being  equal  to 1%  of  the  loan  amount)  on  real  estate  loan
originations.  The  Company  generally  does not service  loans for others.  The
Company has sold participating interests on residential,  commercial real estate
and commercial business loans to other local financial institutions. At June 30,
2004,  the  Company  was  servicing  these  participation  interests  for others
totaling approximately $5.7 million.

         NONPERFORMING LOANS AND OTHER PROBLEM ASSETS. It is management's policy
to continually  monitor its loan  portfolio to anticipate and address  potential
and actual delinquencies. When a borrower fails to make a payment on a loan, the
Company  takes  immediate  steps  to have  the  delinquency  cured  and the loan
restored to current status. Loans, which are delinquent between ten and 15 days,
depending on the type of loan, typically incur a late fee of 5% of principal and
interest due. As a matter of policy, the Company will contact the borrower after
the date the late  payment  is due.  If payment is not  promptly  received,  the
borrower is contacted  again,  and efforts are made to formulate an  affirmative
plan to cure the delinquency. Generally, after any loan is delinquent 90 days or
more, formal legal proceedings are commenced to collect amounts owed.

         Loans  generally  are placed on  nonaccrual  status if the loan becomes
past due more than 90 days,  except in instances where in management's  judgment
there is no doubt as to full  collectibility of principal and interest.  At June
30,  2004,  all loans  past due more than 90 days were on  nonaccrual.  Consumer
loans are  generally  charged  off


                                       7

<PAGE>



after they  become  more than 90 days past due.  All other loans are charged off
when management concludes that they are uncollectible.  See Notes 1 and 4 of the
Notes to Consolidated Financial Statements.

         Real  estate  acquired  by the  Company as a result of  foreclosure  is
classified  as real  estate  owned  until  such  time as it is sold.  When  such
property is acquired, it is initially recorded at the lower of cost or estimated
fair  value and  subsequently  at the  lower of book  value or fair  value  less
estimated  costs to  sell.  Fair  value  is  defined  as the  amount  in cash or
cash-equivalent  value of other  consideration  that a real estate  parcel would
yield in a  current  sale  between a willing  buyer  and a  willing  seller,  as
measured by market  transactions.  If a market does not exist, fair value of the
item is estimated based on selling prices of similar items in active markets or,
if there are no active markets for similar  items,  by discounting a forecast of
expected cash flows at a rate commensurate with the risk involved. Fair value is
generally  determined  through  an  appraisal  at the time of  foreclosure.  Any
required  write-down of the loan to its fair value upon  foreclosure  is charged
against  the  allowance  for  loan  losses.  See  Notes 1 and 4 of the  Notes to
Consolidated Financial Statements.

INVESTMENT ACTIVITIES

         GENERAL.  The Company makes investments in order to maintain the levels
of liquid  assets  preferred  by  regulatory  authorities  and manage cash flow,
diversify  its assets,  obtain  yield and to satisfy  certain  requirements  for
favorable  tax  treatment.  The  investment  activities  of the Company  consist
primarily of investments  in  mortgage-backed  securities  and other  investment
securities.  Typical  investments  include  federally  sponsored agency mortgage
pass-through,   federally  sponsored  agency  debt  securities,   U.S.  treasury
obligations and investment grade corporate securities.  Investment and aggregate
investment limitations and credit quality parameters of each class of investment
are prescribed in the Company's investment policy. The Company performs analyses
on securities  prior to purchase and on an ongoing basis to determine the impact
on  earnings  and  market  value  under  various  interest  rate and  prepayment
conditions.  Senior  management  and the  Company's  Asset/Liability  Management
Committee  have limited  authority to sell  investment  securities  and purchase
comparable  investment  securities  with similar  characteristics.  The Board of
Directors reviews all securities transactions on a monthly basis.

         Under applicable accounting rules,  investment securities classified as
held-to-maturity  are  recorded  at  amortized  cost  and  those  classified  as
available-for-sale  are reported at fair value, with unrealized gains and losses
excluded  from  earnings and reported as a separate  component of  stockholders'
equity.  At  June  30,  2004,  the  Company's  entire  portfolio  of  investment
securities  was  classified as available for sale and had an aggregate  carrying
value of $29.2  million and an  unrealized  net loss after tax of $0.4  million.
Management of the Company  currently  does not  anticipate  that the presence of
unrealized  losses in the  Company's  portfolio  of  investment  securities  and
mortgage-backed  securities is likely to have a material  adverse  effect on the
Company's financial condition, results of operations or liquidity.

DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

         GENERAL.  Deposits are the primary  source of the  Company's  funds for
lending,  investment activities and general operational purposes. In addition to
deposits, the Company derives funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed  securities and interest
payments  thereon.  Although loan  repayments are a relatively  stable source of
funds,  deposit  inflows and outflows are  significantly  influenced  by general
interest  rates  and  money  market  conditions.  Borrowings  may be  used  on a
short-term  basis to compensate for reductions in the  availability of funds, or
on a long-term basis for general operational purposes.  The Bank may borrow from
the FHLB of Atlanta and the Bankers Bank in Atlanta, Georgia.

         DEPOSITS.  The Company  attracts  deposits  principally from within its
market area by  offering a variety of deposit  instruments,  including  checking
accounts, Christmas Club accounts, money market accounts, statement and passbook
savings accounts,  Individual  Retirement Accounts,  and certificates of deposit
which  range in  maturity  from seven  days to five  years.  Deposit  terms vary
according  to the minimum  balance  required,  the length of time the funds must
remain on deposit and the interest  rate.  Maturities,  terms,  service fees and
withdrawal  penalties for its deposit accounts are established by the Company on
a periodic  basis.  The Company  reviews its deposit mix and pricing on a weekly
basis. In determining the  characteristics of its deposit accounts,  the Company
considers  the rates



                                       8

<PAGE>


offered by competing institutions,  lending and liquidity  requirements,  growth
goals and  federal  regulations.  Management  believes  it prices  its  deposits
comparably to rates offered by its competitors. At the present time, the Company
is not accepting brokered deposits.

         The Company attempts to compete for deposits with other institutions in
its market area by offering  competitively  priced deposit  instruments that are
tailored to the needs of its customers.  Additionally, the Company seeks to meet
customers'  needs by providing  convenient  customer  service to the  community,
efficient  staff  and  convenient  hours of  service.  Substantially  all of the
Company's depositors are Maryland residents.  To provide additional convenience,
the  Company  participates  in the STAR  Automatic  Teller  Machine  network  at
locations throughout the United States,  through which customers can gain access
to their accounts at any time.

         BORROWINGS.  While savings deposits  historically have been the primary
source of funds for the Company's  lending,  investments  and general  operating
activities,  the Bank  utilizes  advances from the FHLB of Atlanta to supplement
its supply of lendable funds and to meet deposit  withdrawal  requirements.  The
FHLB of Atlanta  functions as a central reserve bank providing credit for member
financial institutions.  As a member of the FHLB System, the Bank is required to
own  stock in the FHLB of  Atlanta  and is  authorized  to apply  for  advances.
Advances are pursuant to several different  programs,  each of which has its own
interest  rate and range of  maturities.  The Bank has a Blanket  Agreement  for
advances  with the FHLB  under  which  the Bank may  borrow  up to 25% of assets
subject to normal  collateral and underwriting  requirements.  Advances from the
FHLB of Atlanta are secured by the Bank's stock in the FHLB of Atlanta and other
eligible assets. At June 30, 2004, the Company had outstanding Federal Home Loan
Bank of  Atlanta  advances  of $20.9  million  with an  average  rate of  4.13%.
Additionally,  the Bank has a $5.1  million  line of  credit,  of which $0.0 was
outstanding  at June 30, 2004 with the Bankers  Bank of  Atlanta,  Georgia.  The
Company,  as the holding  company of the Bank has a $2.5  million line of credit
with The Bankers Bank of Atlanta,  GA of which $2.0 is  outstanding  at June 30,
2004.

SUBSIDIARY ACTIVITIES

         The Bank has three subsidiaries,  PFSL Holding Corp. ("PFSL"), which it
formed in November 1995 to hold certain real estate owned at that time and which
is currently  inactive,  Prime Business  Leasing that was formed in October 1998
and is discussed under commercial lending and Patapsco Financial Services, Inc.,
which was formed in March 2000 in order to sell alternative  investment products
to the Company's customers.

COMPETITION

         The Company faces strong  competition both in originating  loans and in
attracting deposits.  The Company competes for loans principally on the basis of
interest rates, the types of loans it originates, the deposit products it offers
and the quality of services it provides to borrowers.  The Company also competes
by offering  products that are tailored to the local community.  Its competition
in  originating  loans comes  primarily  from other  commercial  banks,  savings
institutions and mortgage bankers, credit unions and finance companies.

         Management  considers  its market  area for  gathering  deposits  to be
eastern  Baltimore County,  Baltimore City, and Harford County in Maryland.  The
Company  originates loans throughout much of the Mid-Atlantic  area. The Company
attracts  its  deposits  through  its  offices in  Dundalk,  Parkville,  Carney,
Baltimore  City and Glen Arm primarily from the local  community.  Consequently,
competition for deposits is principally  from other  commercial  banks,  savings
institutions,  credit unions,  mutual funds and brokers in the local  community.
The Company competes for deposits and loans by offering what it believes to be a
variety of deposit accounts at competitive rates,  convenient  business hours, a
commitment to outstanding customer service and a well-trained staff.

EMPLOYEES

         As of June 30,  2004,  the Company had 62  full-time  and 14  part-time
employees,  none of whom were represented by a collective  bargaining agreement.
Management considers the Company's relationships with its employees to be good.




                                       9

<PAGE>



DEPOSITORY INSTITUTION REGULATION

         GENERAL.  The  Bank is a  Maryland  commercial  bank  and  its  deposit
accounts  are  insured  by  the  Savings  Association  Insurance  Fund  ("SAIF")
administered by the Federal Deposit  Insurance  Corporation  ("FDIC").  The Bank
also  is a  member  of the  Federal  Reserve  System.  The  Bank is  subject  to
supervision, examination and regulation by the State of Maryland Commissioner of
Financial Regulation  ("Commissioner"),  the Federal Reserve Board, Maryland and
federal  statutory and regulatory  provisions  governing such matters as capital
standards, mergers and establishment of branch offices, and it is subject to the
FDIC's authority to conduct special  examinations.  The Bank is required to file
reports with the  Commissioner  and the Federal  Reserve  Board  concerning  its
activities  and  financial  condition  and  is  required  to  obtain  regulatory
approvals prior to entering into certain  transactions,  including mergers with,
or acquisitions of, other depository institutions.

         As a federally insured depository  institution,  the Bank is subject to
various  regulations   promulgated  by  the  Federal  Reserve  Board,  including
Regulation B (Equal Credit  Opportunity),  Regulation D (Reserve  Requirements),
Regulation  E  (Electronic  Fund  Transfers),  Regulation  Z (Truth in Lending),
Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD
(Truth in Savings).

         The  system  of  regulation  and  supervision  applicable  to the  Bank
establishes  a  comprehensive  framework  for the  operations of the Bank and is
intended  primarily  for the  protection  of the FDIC and the  depositors of the
Bank.  Changes in the regulatory  framework  could have a material effect on the
Bank and their respective operations that in turn, could have a material adverse
effect on the Company.

         FINANCIAL  MODERNIZATION   LEGISLATION.   On  November  12,  1999,  the
Gramm-Leach-Bliley  Act ("G-L-B Act") was signed into law and which could have a
far-reaching impact on the financial services industry. The G-L-B Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding  companies  and national  banks to engage in a variety of new  financial
activities.  Among the new  activities  permitted by bank holding  companies are
securities  and  insurance   brokerage,   securities   underwriting,   insurance
underwriting  and merchant  banking.  The Federal Reserve Board, in consultation
with the Secretary of the Treasury, may approve additional financial activities.
The G-L-B Act,  however,  prohibits  future  acquisitions  of  existing  unitary
savings and loan  holding  companies by firms,  which are engaged in  commercial
activities,  and limits the permissible  activities of unitary holding companies
formed after May 4, 1999.

         The G-L-B Act imposes new requirements on financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer information to nonaffiliated third parties unless the customer has been
given  the  opportunity  to  object  and has not  objected  to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers annually.  Financial institutions,  however, are required to comply
with state law if it is more protective of customer  privacy than the G-L-B Act.
The federal  banking  agencies,  the National Credit Union  Administration,  the
Secretary  of the  Treasury,  the  Securities  and Exchange  Commission  and the
Federal Trade Commission,  after  consultation with the National  Association of
Insurance  Commissioners,  have promulgated implementing regulations that became
effective in July 2001.

         The G-L-B Act contains  significant  revisions to the FHLB System.  The
G-L-B Act imposes new capital  requirements  on the FHLBs and authorizes them to
issue  two  classes  of stock  with  differing  dividend  rates  and  redemption
requirements.  The G-L-B Act  deletes  the  current  requirement  that the FHLBs
annually   contribute  $300  million  to  pay  interest  on  certain  government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible  uses of FHLB advances by community  financial  institutions  (under
$500  million in assets) to include  funding  loans to small  businesses,  small
farms and small  agri-businesses.  The  G-L-B Act makes  membership  in the FHLB
voluntary for federal savings associations.

         The G-L-B Act  contains  a variety  of other  provisions,  including  a
prohibition against ATM surcharges unless the customer has first received notice
of the  imposition and amount of the fee. The G-L-B Act reduces the frequency of
Community  Reinvestment Act  examinations  for smaller  institutions and imposes
certain reporting requirements on depository  institutions that make payments to
non-governmental entities in connection with the Community Reinvestment Act. The
G-L-B Act eliminates the SAIF special reserve.



                                       10


<PAGE>


         CAPITAL  REQUIREMENTS.  The Bank is subject to  Federal  Reserve  Board
capital  requirements,  as well as statutory capital  requirements imposed under
Maryland law. Federal Reserve Board regulations  establish two capital standards
for state-chartered banks that are members of the Federal Reserve System ("state
member banks"): a leverage requirement and a risk-based capital requirement.  In
addition, the Federal Reserve may, on a case-by-case basis, establish individual
minimum capital  requirements  for a bank that vary from the  requirements  that
would otherwise apply under Federal Reserve Board regulations. A bank that fails
to satisfy  the  capital  requirements  established  under the  Federal  Reserve
Board's regulations will be subject to such  administrative  action or sanctions
as the Federal Reserve Board deems appropriate.

         The leverage  ratio  adopted by the Federal  Reserve  Board  requires a
minimum ratio of "Tier 1 capital" to adjusted total assets of 3% for banks rated
composite 1 under the CAMELS rating system for banks.  Banks not rated composite
1 under the CAMELS  rating  system for banks are  required to maintain a minimum
ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the
level and  nature of risks of their  operations.  For  purposes  of the  Federal
Reserve  Board's  leverage  requirement,  Tier 1 capital  consists  primarily of
common  stockholders'  equity,  certain perpetual preferred stock (which must be
noncumulative  with  respect to banks),  and  minority  interests  in the equity
accounts of consolidated  subsidiaries;  less most intangible assets,  primarily
goodwill.

         The risk-based capital requirements  established by the Federal Reserve
Board's regulations require state member banks to maintain "total capital" equal
to at least 8% of total  risk-weighted  assets.  For purposes of the  risk-based
capital  requirement,  "total capital" means Tier 1 capital (as described above)
plus "Tier 2 capital" (as described  below),  provided that the amount of Tier 2
capital may not exceed the amount of Tier 1 capital, less certain assets. Tier 2
capital  elements  include,  subject to certain  limitations,  the allowance for
losses on loans and leases,  perpetual preferred stock that does not qualify for
Tier 1 and long-term  preferred  stock with an original  maturity of at least 20
years from issuance,  hybrid capital  instruments,  including perpetual debt and
mandatory  convertible  securities,  and subordinated debt and intermediate-term
preferred stock and up to 45% of unrealized  gains on equity  securities.  Total
risk-weighted  assets generally are determined under the Federal Reserve Board's
regulations, which establish four risk categories, with risk weights of 0%, 20%,
50% and 100%. These computations result in the total risk-weighted  assets. Most
loans are assigned to the 100% risk  category,  except for first  mortgage loans
fully  secured  by  residential  property  and,  under  certain   circumstances,
residential  construction  loans,  both  of  which  carry  a  50%  rating.  Most
investment securities are assigned to the 20% category,  except for municipal or
state revenue bonds, which have a 50% risk-weight,  and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
agencies,  which have a 0% risk-weight.  In converting  off-balance sheet items,
direct credit  substitutes,  including general guarantees and standby letters of
credit  backing  financial  obligations,  are  given a 100%  conversion  factor.
Transaction-related  contingencies  such as bid bonds,  other standby letters of
credit  and  undrawn  commitments,  including  commercial  credit  lines with an
initial  maturity  of  more  than  one  year,  have  a  50%  conversion  factor.
Short-term,  self-liquidating  trade  contingencies  are  converted  at 20%, and
short-term commitments have a 0% factor.

         The Federal Reserve Board has proposed to revise its risk-based capital
requirements to ensure that such requirements provide for explicit consideration
of interest rate risk.  Under the proposed rule, a state member bank's  interest
rate risk exposure would be quantified  using either the measurement  system set
forth in the proposal or the bank's  internal model for measuring such exposure,
if such model is determined to be adequate by the bank's examiner. If the dollar
amount of a bank's  interest  rate  risk  exposure,  as  measured  under  either
measurement  system,  exceeds 1% of the bank's total  assets,  the bank would be
required under the proposed rule to hold additional  capital equal to the dollar
amount of the excess.  Management of the Bank has not determined what effect, if
any, the Federal  Reserve  Board's  proposed  interest rate risk component would
have on the Bank's capital if adopted as proposed.

         In addition,  the Bank is subject to the statutory capital requirements
imposed by the State of Maryland.  Under Maryland  statutory law, if the surplus
of a  Maryland  commercial  bank at any time is less  than  100% of its  capital
stock,  then,  until the surplus is 100% of the capital  stock,  the  commercial
bank:  (i)  must  transfer  to its  surplus  annually  at  least  10% of its net
earnings;  and (ii) may not declare or pay any cash dividends that exceed 90% of
its net earnings.



                                       11

<PAGE>

<TABLE>
<CAPTION>

         The  table  below  provides  information  with  respect  to the  Bank's compliance with its regulatory capital
requirements at the dates indicated.

                                                                                                    Regulatory
                                                                                                    Requirements
                                                                                Regulatory          To Be Well
                                                                               Requirements       Capitalized Under
                                                                                For Capital       Prompt Corrective
                                                      Actual                 Adequacy Purposes    Action Provisions
                                               --------------------       --------------------   ------------------
                                               Amount         Ratio       Amount         Ratio   Amount       Ratio
                                               ------         -----       ------         -----   ------       -----
                                                                        (Dollars in thousands)

<S>                                            <C>            <C>        <C>             <C>     <C>          <C>
As of June 30, 2004:
 Total Capital (to Risk Weighted Assets)....   $15,138        12.08%     $10,026         8.00%   $ 12,533     10.00%
 Tier 1 Capital (to Risk Weighted Assets)...    14,202        11.33        5,013         4.00       7,520      6.00
 Tier 1 Capital (to Average Assets).........    14,202         6.82        8,325         4.00      10,407      5.00

As of June 30, 2003:
 Total Capital (to Risk Weighted Assets)....   $14,416        14.58 %    $ 7,912         8.00%   $  9,890     10.00%
 Tier 1 Capital (to Risk Weighted Assets)...    13,277        13.43        3,956         4.00       5,934      6.00
 Tier 1 Capital (to Average Assets).........    13,277         8.56        6,205         4.00       7,756      5.00

</TABLE>

         PROMPT  CORRECTIVE   REGULATORY  ACTION.   Under  the  Federal  Deposit
Insurance  Corporation  Improvement Act of 1991 ("FDICIA"),  the federal banking
regulators  are  required  to  take  prompt  corrective  action  if  an  insured
depository  institution  fails to satisfy certain minimum capital  requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital  distribution or paying any management fees if the institution would
thereafter   fail  to  satisfy  the  minimum  levels  for  any  of  its  capital
requirements.  An  institution  that  fails to meet the  minimum  level  for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased  monitoring by the  appropriate  federal  banking  regulator;  (ii)
required to submit an acceptable capital  restoration plan within 45 days; (iii)
subject to asset growth  limits;  and (iv)  required to obtain prior  regulatory
approval for  acquisitions,  branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the  institution's  holding company
that the  institution  will  comply  with the plan until it has been  adequately
capitalized on average for four  consecutive  quarters,  under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution  into capital  compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
did not  submit an  acceptable  capital  restoration  plan,  may be  subject  to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of  directors  and
officers,  and restrictions on capital distributions by any bank holding company
controlling the institution.  Any company controlling the institution could also
be required to divest the  institution or the  institution  could be required to
divest   subsidiaries.   The  senior  executive   officers  of  a  significantly
undercapitalized   institution   may  not  receive   bonuses  or   increases  in
compensation  without prior  approval and the  institution  is  prohibited  from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such actions are  necessary  to carry out the purposes of the prompt  corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls  below a "critical  capital  level,"  the  institution  will be subject to
conservatorship  or receivership  within 90 days unless periodic  determinations
are made that  forbearance  from such action  would  better  protect the deposit
insurance fund. Unless  appropriate  findings and certifications are made by the
appropriate  federal bank  regulatory  agencies,  a critically  undercapitalized
institution   must  be  placed  in   receivership   if  it  remains   critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.

         Federal banking  regulators have adopted  regulations  implementing the
prompt  corrective  action provisions of FDICIA.  Under these  regulations,  the
federal  banking  regulators will generally  measure a depository  institution's
capital  adequacy on the basis of the  institution's  total  risk-based  capital
ratio  (the  ratio  of  its  total  capital  to  risk-weighted  assets),  Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted assets)
and  leverage  ratio (the ratio of its core capital to adjusted  total  assets).
Under the regulations, an institution that is not subject to



                                       12

<PAGE>


an order or  written  directive  by its  primary  federal  regulator  to meet or
maintain a specific  capital level will be deemed "well  capitalized" if it also
has:  (i) a total  risk-based  capital  ratio of 10% or  greater;  (ii) a Tier 1
risk-based capital ratio of 6.0% or greater;  and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" depository institution is an institution
that  does not meet the  definition  of well  capitalized  and has:  (i) a total
risk-based  capital ratio of 8.0% or greater;  (ii) a Tier 1 risk-based  capital
ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0%
or greater if the depository  institution has a composite 1 CAMELS  rating).  An
"undercapitalized  institution" is a depository institution that has (i) a total
risk-based  capital  ratio less than 8.0%;  or (ii) a Tier 1 risk-based  capital
ratio of less than 4.0%;  or (iii) a  leverage  ratio of less than 4.0% (or less
than 3.0% if the institution has a composite 1 CAMELS rating).  A "significantly
undercapitalized"  institution is defined as a depository  institution that has:
(i) a total  risk-based  capital  ratio  of  less  than  6.0%;  or (ii) a Tier 1
risk-based  capital ratio of less than 3.0%;  or (iii) a leverage  ratio of less
than  3.0%.  A  "critically   undercapitalized"  institution  is  defined  as  a
depository  institution that has a ratio of "tangible equity" to total assets of
less than  2.0%.  Tangible  equity is defined as core  capital  plus  cumulative
perpetual  preferred stock (and related surplus) less all intangibles other than
qualifying  supervisory  goodwill and certain  mortgage  servicing  rights.  The
appropriate federal banking agency may reclassify a well capitalized  depository
institution as adequately  capitalized and may require an adequately capitalized
or   undercapitalized   institution  to  comply  with  the  supervisory  actions
applicable  to  institutions  in the next lower  capital  category  (but may not
reclassify  a   significantly   undercapitalized   institution   as   critically
under-capitalized)  if it  determines,  after  notice and an  opportunity  for a
hearing,  that the institution is in an unsafe or unsound  condition or that the
institution has received and not corrected a  less-than-satisfactory  rating for
any CAMELS rating  category.  At June 30, 2004,  the Bank was classified as well
capitalized under Federal Reserve regulations.

         SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community  Development and Regulatory  Improvement Act of 1994 (the "CDRI Act"),
each  federal  banking  agency was required to  establish  safety and  soundness
standards for institutions  under its authority.  The federal banking  agencies,
including  the Federal  Reserve  Board,  have  released  Interagency  Guidelines
Establishing  Standards  for  Safety  and  Soundness.   The  guidelines  require
depository  institutions to maintain internal  controls and information  systems
and internal audit systems that are appropriate  for the size,  nature and scope
of the  institution's  business.  The guidelines  also  establish  certain basic
standards  for loan  documentation,  credit  underwriting,  interest  rate  risk
exposure and asset  growth.  The  guidelines  further  provide  that  depository
institutions  should maintain safeguards to prevent the payment of compensation,
fees and benefits  that are  excessive or that could lead to material  financial
loss,  and should take into  account  factors  such as  comparable  compensation
practices at  comparable  institutions.  In addition,  a depository  institution
should maintain systems,  commensurate with its size and the nature and scope of
its operations,  to identify  problem assets and prevent  deterioration in those
assets, as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. If the appropriate federal
banking  agency  determines  that a depository  institution is not in compliance
with the safety and  soundness  guidelines,  it may require the  institution  to
submit  an  acceptable  plan  to  achieve  compliance  with  the  guidelines.  A
depository  institution must submit an acceptable compliance plan to its primary
federal  regulator  within  30 days of  receipt  of a  request  for such a plan.
Failure to submit or implement a compliance  plan may subject the institution to
regulatory sanctions.  Management believes that the Bank meets substantially all
the standards adopted in the interagency guidelines.

         FEDERAL HOME LOAN BANK SYSTEM.  The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB").  The FHLBs  provide a central  credit  facility  primarily  for member
institutions.  As a member  of the FHLB of  Atlanta,  the  Bank is  required  to
acquire and hold shares of capital  stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate  unpaid principal of its home mortgage loans,
home purchase  contracts and similar  obligations at the beginning of each year,
or 1/20 of its  advances  (borrowings)  from the FHLB of Atlanta,  whichever  is
greater.  The Bank was in compliance  with this  requirement  with investment in
FHLB of  Atlanta  stock at June 30,  2004 of $1.4  million.  The FHLB of Atlanta
serves as a reserve  or  central  bank for its  member  institutions  within its
assigned district. It is funded primarily from proceeds derived from the sale of
consolidated  obligations of the FHLB System.  It offers  advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors  of the FHLB of Atlanta.  Long-term  advances may only be made for the
purpose of providing funds for residential  housing finance and small businesses
and small farms and small agri-businesses.  At June 30, 2004, the Bank had $20.9
million in advances outstanding from the FHLB of Atlanta.



                                       13

<PAGE>


         FEDERAL RESERVE SYSTEM.  Pursuant to regulations of the Federal Reserve
Board, a financial  institution must maintain average daily reserves equal to 3%
on transaction  accounts of over $6.0 million up to $42.1  million,  plus 10% on
the remainder.  This  percentage is subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a non-interest  bearing  account at a Federal Reserve Bank, the effect of the
reserve   requirement   is  to   reduce   the   amount   of  the   institution's
interest-earning  assets.  As of  June  30,  2004,  the  Bank  met  its  reserve
requirements.

         The Bank is a member of the Federal  Reserve  System and subscribed for
stock in the Federal  Reserve  Bank of Richmond in an amount  equal to 6% of the
Bank's  paid-up  capital  and  surplus.  The  Bank  is  subject  to the  reserve
requirements to which the Bank is presently  subject under Federal Reserve Board
regulations.

         The monetary policies and regulations of the Federal Reserve Board have
a significant  effect on the operating  results of commercial banks. The Federal
Reserve  Board's  policies  affect the  levels of bank  loans,  investments  and
deposits  through  its  open  market  operation  in  United  States   government
securities,  its  regulation  of the interest rate on borrowings of member banks
from  Federal   Reserve  Banks  and  its  imposition  of   non-earning   reserve
requirements  on all depository  institutions,  such as the Bank,  that maintain
transaction accounts or non-personal time deposits.

         DEPOSIT INSURANCE. The Bank's savings deposits are insured by the SAIF,
which is  administered  by the FDIC.  The Bank is required  to pay  assessments,
based on a percentage of its insured deposits,  to the FDIC for insurance of its
deposits by the FDIC. The FDIC is required to set  semi-annual  assessments  for
SAIF-insured  institutions  at a level  necessary  to  maintain  the  designated
reserve ratio of the SAIF at 1.25% of estimated insured deposits, or at a higher
percentage  of  estimated  insured  deposits  that  the  FDIC  determines  to be
justified  for that  year by  circumstances  indicating  a  significant  risk of
substantial future losses to the SAIF.

         Under the FDIC's risk-based  deposit insurance  assessment  system, the
assessment rate for an insured depository  institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the  institution's  capital level and supervisory  evaluations.  Based on the
data reported to regulators  for the date closest to the last day of the seventh
month preceding the semi-annual assessment period,  institutions are assigned to
one of three  capital  groups -- well  capitalized,  adequately  capitalized  or
undercapitalized  -- using the same  percentage  criteria  as under  the  prompt
corrective action  regulations.  See " -- Prompt Corrective  Regulatory Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority,  and such other  information as the FDIC determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor  weaknesses.  Subgroup B consists of institutions  that  demonstrate
weaknesses,  which, if not corrected,  could result in significant deterioration
of the  institution  and increased risk of loss to the deposit  insurance  fund.
Subgroup C consists of institutions that pose a substantial  probability of loss
to the deposit insurance fund unless effective corrective action is taken.

         Regular  semi-annual  SAIF  assessment  rates set by the FDIC currently
range from 0 to 27 basis  points.  In addition,  FDIC-insured  institutions  are
required  to pay  assessments  to the FDIC to help  fund  interest  payments  on
certain bonds issued by the  Financing  Corporation  ("FICO"),  an agency of the
federal government  established to finance takeovers of insolvent thrifts. Until
December 31, 1999, Bank Insurance Fund ("BIF)-insured institutions were required
to pay  FICO  assessments  at  one-fifth  the rate at which  SAIF  members  were
assessed.  After December 31, 1999, both BIF and SAIF members have been assessed
at the same rate for FICO payments.

         FDIC regulations provide that any insured depository institution with a
ratio of Tier 1  capital  to total  assets  of less than 2% will be deemed to be
operating in an unsafe or unsound condition,  which would constitute grounds for
the  initiation  of  termination  of deposit  insurance  proceedings.  The FDIC,
however,  would  not  initiate  termination  of  insurance  proceedings  if  the
depository  institution  has entered  into and is in  compliance  with a written
agreement with its primary regulator,  and the FDIC is a party to the agreement,
to increase its Tier 1 capital to such level as the FDIC deems appropriate. Tier
1 capital is defined as the sum of common  stockholders'  equity,  noncumulative
perpetual preferred stock (including any related surplus) and minority interests
in consolidated


                                       14

<PAGE>


subsidiaries,  minus all intangible assets other than mortgage  servicing rights
and qualifying supervisory goodwill eligible for inclusion in core capital under
FDIC  regulations  and  minus  identified  losses  and  investments  in  certain
securities  subsidiaries.  Insured  depository  institutions with Tier 1 capital
equal to or greater  than 2% of total  assets may also be deemed to be operating
in an unsafe or  unsound  condition  notwithstanding  such  capital  level.  The
regulation  further  provides  that, in  considering  applications  that must be
submitted to it by savings  banks,  the FDIC will take into account  whether the
savings bank meets the Tier 1 capital  requirement for state non-member banks of
4% of total assets for all but the most highly-rated state non-member banks.

         DIVIDEND RESTRICTIONS.  The Bank's ability to pay dividends is governed
by the  Maryland  General  Corporation  Law,  Maryland law relating to financial
institutions  and the  regulations  of the  Federal  Reserve  Board.  Under  the
Maryland  General  Corporation  Law,  dividends may not be paid if, after giving
effect  to the  dividend:  (i)  the  corporation  would  not be  able to pay the
indebtedness  of the corporation as the  indebtedness  becomes due in the normal
course of business;  or (ii) the  corporation's  total assets would be less than
the sum of the  corporation's  total  liabilities  plus,  unless the articles of
incorporation  permits otherwise,  the amount needed, if the corporation were to
be dissolved at the time of  distribution,  to satisfy the  preferential  rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the dividend.  Under Maryland law relating to financial  institutions,
if the surplus of a commercial bank at any time is less than 100% of its capital
stock,  then,  until the surplus is 100% of the capital  stock,  the  commercial
bank:  (i)  must  transfer  to its  surplus  annually  at  least  10% of its net
earnings;  and (ii) may not declare or pay any cash dividends that exceed 90% of
its net earnings.

         The Bank's payment of dividends is also subject to the Federal  Reserve
Board's  Regulation  H, which  provides  that a state  member bank may not pay a
dividend if the total of all dividends declared by the bank in any calendar year
exceeds the total of its net profits for the year combined with its retained net
profits for the preceding  two calendar  years,  less any required  transfers to
surplus or to a fund for the retirement of preferred stock,  unless the bank has
received the prior  approval of the Federal  Reserve  Board.  Additionally,  the
Federal  Reserve Board has the authority to prohibit the payment of dividends by
a Maryland  commercial  bank when it determines such payment to be an unsafe and
unsound banking practice.  Finally, the Bank is not able to pay dividends on its
capital  stock if its  regulatory  capital  would  thereby be reduced  below the
remaining balance of the liquidation  account established in connection with its
conversion in April 1996 from mutual to stock form.  See Note 10 of the Notes to
Consolidated  Financial  Statements  contained in the Company's Annual Report to
Stockholders attached hereto as Exhibit 13.

         UNIFORM LENDING  STANDARDS.  Under Federal  Reserve Board  regulations,
state member  banks must adopt and  maintain  written  policies  that  establish
appropriate  limits and standards  for  extensions of credit that are secured by
liens or  interests  in real  estate or are made for the  purpose  of  financing
permanent  improvements  to real estate.  These  policies  must  establish  loan
portfolio diversification standards,  prudent underwriting standards,  including
loan-to-value  limits  that  are  clear  and  measurable,   loan  administration
procedures  and  documentation,  approval and reporting  requirements.  The real
estate lending policies of state member banks must reflect  consideration of the
Interagency  Guidelines  for Real  Estate  Lending  Policies  (the  "Interagency
Guidelines") that have been adopted by the federal banking agencies.

         The Interagency  Guidelines,  among other things,  call upon depository
institutions to establish  internal  loan-to-value  limits for real estate loans
that are not in  excess  of the  following  supervisory  limits:  (i) for  loans
secured by raw land, the supervisory  loan-to-value limit is 65% of the value of
the collateral;  (ii) for land development loans (I.E., loans for the purpose of
improving  unimproved  property  prior  to  the  erection  of  structures),  the
supervisory  limit is 75%; (iii) for loans for the  construction  of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one-to-four family properties, the supervisory
limit is 85%;  and (v) for  loans  secured  by other  improved  property  (E.G.,
farmland,  completed  commercial  property and other  income-producing  property
including  non-owner-occupied,  one-to-four family property),  the limit is 85%.
Although  no  supervisory   loan-to-value   limit  has  been   established   for
owner-occupied,  one-to-four  family  and home  equity  loans,  the  Interagency
Guidelines  state that for any such loan with a loan-to-value  ratio that equals
or exceeds 90% at origination,  an institution should require appropriate credit
enhancement  in the form of either  mortgage  insurance  or  readily  marketable
collateral.


                                       15

<PAGE>


         The  Interagency  Guidelines  state  that  it  may  be  appropriate  in
individual  cases to originate or purchase  loans with  loan-to-value  ratios in
excess of the supervisory loan-to-value limits, based on the support provided by
other credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits,  however,  should not exceed 100% of total capital and the
total of such loans secured by commercial,  agricultural,  multifamily and other
non-one-to-four  family  residential  properties  should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans  including  loans insured or guaranteed by the U.S.  government and its
agencies or by  financially  capable  state,  local or municipal  governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible  party, loans that are renewed,  refinanced or restructured  without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout,  loans to facilitate sales of real estate acquired
by the  institution  in the  ordinary  course of  collecting  a debt  previously
contracted and loans where the real estate is not the primary collateral.

         Management will  periodically  evaluate its lending  policies to assure
conformity  to the  Interagency  Guidelines  and  does not  anticipate  that the
Interagency Guidelines will have a material effect on its lending activities.

         LIMITS ON LOANS TO ONE  BORROWER.  The Bank has chosen to be subject to
federal law with respect to limits on loans to one  borrower.  Generally,  under
federal law, the maximum amount that a commercial  bank may loan to one borrower
at one time may not  exceed 15% of the  unimpaired  capital  and  surplus of the
commercial  bank.  The Bank's  lending limit to one borrower as of June 30, 2004
was $2.6 million.

         TRANSACTIONS WITH RELATED PARTIES.  Transactions between a state member
bank and any  affiliate  are  governed  by  Sections  23A and 23B of the Federal
Reserve Act. An affiliate of a state member bank is any company or entity, which
controls,  is  controlled  by or is under  common  control with the state member
bank. In a holding company context, the parent holding company of a state member
bank and any companies  which are controlled by such parent holding  company are
affiliates of the state member bank.  Generally,  Sections 23A and 23B (i) limit
the extent to which an  institution or its  subsidiaries  may engage in "covered
transactions"  with  any  one  affiliate  to an  amount  equal  to 10%  of  such
institution's  capital stock and surplus,  and contain an aggregate limit on all
such  transactions with all affiliates to an amount equal to 20% of such capital
stock and  surplus,  and (ii)  require  that all such  transactions  be on terms
substantially  the  same,  or at  least  as  favorable,  to the  institution  or
subsidiary as those provided to a nonaffiliate.  The term "covered  transaction"
includes the making of loans,  purchase of assets,  issuance of a guarantee  and
similar other types of transactions.  In addition to the restrictions imposed by
Sections  23A and 23B,  no state  member bank may (i) loan or  otherwise  extend
credit  to an  affiliate,  except  for  any  affiliate  which  engages  only  in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks,  bonds,  debentures,  notes or similar  obligations of any
affiliate,  except for  affiliates  which are  subsidiaries  of the state member
bank.

         State  member banks also are subject to the  restrictions  contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve's  Regulation O
thereunder on loans to executive officers, directors and principal stockholders.
Under Section  22(h),  loans to a director,  executive  officer and to a greater
than 10% stockholder of a state member bank and certain affiliated  interests of
such persons, may not exceed,  together with all other outstanding loans to such
person and affiliated interests, the institution's  loans-to-one-borrower  limit
(generally equal to 15% of the institution's unimpaired capital and surplus) and
all loans to such persons may not exceed the  institution's  unimpaired  capital
and  unimpaired  surplus.  Section  22(h) also  prohibits  loans,  above amounts
prescribed by the appropriate  federal banking agency,  to directors,  executive
officers and greater  than 10%  stockholders  of a state member bank,  and their
respective affiliates,  unless such loan is approved in advance by a majority of
the board of directors of the  institution  with any  "interested"  director not
participating  in the voting.  Regulation  O prescribes  the loan amount  (which
includes  all other  outstanding  loans to such  person)  as to which such prior
board of director  approval is required as being the greater of $25,000 or 5% of
capital and surplus (up to $500,000). Further, Section 22(h) requires that loans
to directors,  executive  officers and principal  stockholders  be made on terms
substantially  the same as offered in comparable  transactions to other persons.
Section 22(h) also generally prohibits a depository  institution from paying the
overdrafts of any of its executive officers or directors.


                                       16

<PAGE>


         State   member  banks  also  are  subject  to  the   requirements   and
restrictions  of Section 22(g) of the Federal  Reserve Act on loans to executive
officers  and  the   restrictions  of  12  U.S.C.  ss.  1972  on  certain  tying
arrangements and extensions of credit by correspondent  banks.  Section 22(g) of
the Federal  Reserve Act  requires  loans to  executive  officers of  depository
institutions  not be made on terms more  favorable  than those afforded to other
borrowers,  requires  approval  by  the  board  of  directors  of  a  depository
institution  for extension of credit to executive  officers of the  institution,
and imposes reporting requirements for and additional  restrictions on the type,
amount  and terms of credit  to such  officers.  Section  1972 (i)  prohibits  a
depository  institution from extending credit to or offering any other services,
or fixing or varying the  consideration for such extension of credit or service,
on the  condition  that the  customer  obtain some  additional  service from the
institution or certain of its affiliates or not obtain  services of a competitor
of the institution, subject to certain exceptions, and (ii) prohibits extensions
of credit to executive officers,  directors and greater than 10% stockholders of
a depository  institution  by any other  institution  which has a  correspondent
banking relationship with the institution, unless such extension of credit is on
substantially  the same  terms as those  prevailing  at the time for  comparable
transactions  with other  persons and does not involve more than the normal risk
of repayment or present other unfavorable features.

         Additionally,  Maryland  statutory law imposes  restrictions on certain
transactions  with affiliates of Maryland  commercial  banks.  Generally,  under
Maryland  law, a  director,  officer or employee  of a  commercial  bank may not
borrow,  directly or  indirectly,  any money from the bank,  unless the loan has
been  approved  by a  resolution  adopted at and  recorded in the minutes of the
board of directors of the bank, or the executive  committee of the bank, if that
committee  is  authorized  to make  loans.  If such a loan  is  approved  by the
executive  committee,  the  loan  approval  must be  reported  to the  board  of
directors at its next meeting.  Certain  commercial  loans made to  non-employee
directors  of a  bank  and  certain  consumer  loans  made  to  non-officer  and
non-director employees of the bank are exempt from the statute's coverage.

         PATRIOT  ACT.  The  Patriot  Act is intended  to  strengthen  U.S.  law
enforcement's and the intelligence  communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial  institutions  of all kinds is  significant  and wide ranging.  The
Patriot Act contains sweeping anti-money  laundering and financial  transparency
laws and imposes various  regulations,  including standards for verifying client
identification  at  account  opening,  and rules to  promote  cooperation  among
financial  institutions,  regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.

REGULATION OF THE COMPANY

         GENERAL.  The Company,  as the sole  shareholder of the Bank, is a bank
holding company and is registered as such with the Federal  Reserve Board.  Bank
holding companies are subject to comprehensive regulation by the Federal Reserve
Board under the Bank Holding  Company Act of 1956, as amended (the "BHCA"),  and
the  regulations of the Federal Reserve Board.  As a bank holding  company,  the
Company is required to file with the Federal  Reserve  Board annual  reports and
such  additional  information as the Federal  Reserve Board may require,  and is
subject to regular  examinations  by the  Federal  Reserve  Board.  The  Federal
Reserve  Board  also has  extensive  enforcement  authority  over  bank  holding
companies,  including,  among other  things,  the ability to assess  civil money
penalties,  to issue  cease and desist or removal  orders and to require  that a
holding  company  divest  subsidiaries  (including  its bank  subsidiaries).  In
general,  enforcement  actions  may be  initiated  for  violations  of  law  and
regulations and unsafe or unsound practices.

         Under the BHCA, a bank  holding  company  must obtain  Federal  Reserve
Board  approval  before:  (i) acquiring,  directly or  indirectly,  ownership or
control of any voting  shares of another bank or bank holding  company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such  shares);  (ii)  acquiring  all or
substantially  all of the assets of another  bank or bank  holding  company;  or
(iii) merging or consolidating with another bank holding company.

         The  BHCA  also  prohibits  a  bank  holding   company,   with  certain
exceptions,  from acquiring direct or indirect ownership or control of more than
5% of the  voting  shares  of any  company  which is not a bank or bank  holding
company,  or from engaging directly or indirectly in activities other than those
of  banking,  managing or  controlling  banks,  or  providing  services  for its
subsidiaries.  The principal  exceptions to these  prohibitions  involve


                                       17

<PAGE>



certain  non-bank  activities  which,  by statute or by  Federal  Reserve  Board
regulation or order,  have been identified as activities  closely related to the
business of banking or managing or  controlling  banks.  The list of  activities
permitted by the Federal Reserve Board includes, among other things, operating a
savings institution,  mortgage company,  finance company, credit card company or
factoring  company;  performing  certain data processing  operations;  providing
certain investment and financial advice; underwriting and acting as an insurance
agent for  certain  types of  credit-related  insurance;  leasing  property on a
full-payout,  non-operating basis;  selling money orders,  travelers' checks and
United  States  Savings  Bonds;  real estate and personal  property  appraising;
providing  tax  planning  and  preparation  services;  and,  subject  to certain
limitations, providing securities brokerage services for customers.

         ACQUISITIONS OF BANK HOLDING  COMPANIES AND BANKS.  Under the BHCA, any
company  must obtain  approval of the Federal  Reserve  Board prior to acquiring
control of the Company or the Bank. For purposes of the BHCA, control is defined
as ownership of more than 25% of any class of voting  securities  of the Company
or the Bank, the ability to control the election of a majority of the directors,
or the exercise of a controlling  influence  over  management or policies of the
Company or the Bank.

         Under the Holding  Company Act, a bank holding  company must obtain the
prior  approval of the Federal  Reserve  Board  before (1)  acquiring  direct or
indirect  ownership or control of any voting  shares of any bank or bank holding
company if, after such  acquisition,  the bank holding company would directly or
indirectly  own or control more than 5% of such  shares;  (2)  acquiring  all or
substantially all of the assets of another bank or bank holding company;  or (3)
merging  or  consolidating  with  another  bank  holding  company.  Satisfactory
financial  condition,   particularly  with  regard  to  capital  adequacy,   and
satisfactory  Community  Reinvestment Act ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.

         The  Change in Bank  Control  Act and the  related  regulations  of the
Federal  Reserve Board require any person or persons  acting in concert  (except
for companies  required to make  application  under the BHCA), to file a written
notice with the Federal  Reserve Board before such person or persons may acquire
control of the  Company  or the Bank.  The Change in Bank  Control  Act  defines
control as the power, directly or indirectly,  to vote 25% or more of any voting
securities or to direct the management or policies of a bank holding  company or
an insured bank.

         Under Maryland law, acquisitions of 5% or more of the voting stock of a
commercial bank or a bank holding company and other acquisitions of voting stock
of such  entities  which affect the power to direct or to cause the direction of
the management or policy of a commercial  bank or a bank holding company must be
approved in advance by the  Commissioner.  Any person  proposing to make such an
acquisition  must file an  application  with the  Commissioner  at least 60 days
before the acquisition becomes effective.  The Commissioner may deny approval of
any such  acquisition if the  Commissioner  determines  that the  acquisition is
anticompetitive  or threatens the safety or soundness of a banking  institution.
Any voting stock  acquired  without the approval  required under the statute may
not be voted for a period of five years.  This  restriction is not applicable to
certain acquisitions by bank holding companies of the stock of Maryland banks or
Maryland bank holding companies which are governed by Maryland's holding company
statute.

         RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994 AND
ITS APPLICATION IN MARYLAND.  The Riegle-Neal  Interstate  Banking and Branching
Efficiency  Act of  1994  (the  "Act")  was  enacted  to  ease  restrictions  on
interstate  banking.  Effective  September 29, 1995,  the Act allows the Federal
Reserve  Board to  approve  an  application  of an  adequately  capitalized  and
adequately managed bank holding company to acquire control of, or acquire all or
substantially  all of the assets of, a bank  located in a state  other than such
holding  company's  home state,  without  regard to whether the  transaction  is
prohibited by the laws of any state.  The Federal  Reserve Board may not approve
the  acquisition  of a bank that has not been in existence  for the minimum time
period (not  exceeding  five years)  specified by the  statutory law of the host
state.  The Act also  prohibits  the Federal  Reserve  Board from  approving  an
application  if  the  applicant  (and  its  depository  institution  affiliates)
controls or would  control  more than 10% of the insured  deposits in the United
States or 30% or more of the deposits in the target  bank's home state or in any
state in which the target bank  maintains a branch.  The Act does not affect the
authority of states to limit the  percentage  of total  insured  deposits in the
state which may be held or controlled  by a bank or


                                       18

<PAGE>


bank holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding  companies.  Individual states may also waive
the 30% state-wide concentration limit contained in the Act.

         Additionally,  the Act  authorizes  the  federal  banking  agencies  to
approve   interstate  merger   transactions   without  regard  to  whether  such
transaction is prohibited by the law of any state,  unless the home state of one
of the banks has opted out of the Act by adopting a law that applies  equally to
all out-of-state  banks and expressly  prohibits merger  transactions  involving
out-of-state   banks.  The  State  of  Maryland  has  enacted  legislation  that
authorizes  interstate  mergers  involving  Maryland banks. The Maryland statute
also authorizes  out-of-state  banks to establish  branch offices in Maryland by
means of merger, branch acquisition or de novo branching, provided that the home
state  of  the  out-of-state  bank  provides  reciprocal   interstate  branching
authority to Maryland banks. The Maryland  statute permits an out-of-state  bank
to branch into Maryland without regard to the laws of such bank's home state.

         DIVIDENDS.  The Federal Reserve Board has issued a policy  statement on
the payment of cash  dividends by bank holding  companies,  which  expresses the
Federal  Reserve  Board's  view  that a bank  holding  company  should  pay cash
dividends  only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is  consistent  with the  company's  capital  needs,  asset  quality and overall
financial  condition.  The Federal Reserve Board also indicated that it would be
inappropriate for a company  experiencing  serious financial  problems to borrow
funds  to  pay  dividends.  Furthermore,  under  the  prompt  corrective  action
regulations adopted by the Federal Reserve Board pursuant to FDICIA, the Federal
Reserve  Board may prohibit a bank holding  company from paying any dividends if
the holding company's bank subsidiary is classified as  "undercapitalized."  See
"Depository Institution Regulation -- Prompt Corrective Regulatory Action."

         Bank holding  companies are required to give the Federal  Reserve Board
prior written  notice of any purchase or redemption  of its  outstanding  equity
securities  if the gross  consideration  for the  purchase or  redemption,  when
combined with the net  consideration  paid for all such purchases or redemptions
during  the  preceding  12  months,  is  equal  to 10%  or  more  of  the  their
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines  that the proposal would  constitute an unsafe or
unsound  practice or would violate any law,  regulation,  Federal  Reserve Board
order,  or any  condition  imposed by, or written  agreement  with,  the Federal
Reserve Board.

         CAPITAL REQUIREMENTS. The Federal Reserve Board has established capital
requirements,  similar  to the  capital  requirements  for  state  member  banks
described above,  for bank holding  companies with  consolidated  assets of $150
million or more. The Company's levels of consolidated  regulatory capital exceed
the Federal Reserve Board's minimum requirements.

         STOCK REPURCHASES.  As a bank holding company,  the Company is required
to give the  Federal  Reserve  Board  prior  written  notice of any  purchase or
redemption of its outstanding  equity securities if the gross  consideration for
the purchase or redemption,  when combined with the net  consideration  paid for
all such  purchases or redemptions  during the preceding 12 months,  is equal to
10% or more of the Company's  consolidated  net worth. The Federal Reserve Board
may disapprove  such a purchase or redemption if it determines that the proposal
would violate any law, regulation,  Federal Reserve Board order,  directive,  or
any condition  imposed by, or written agreement with, the Federal Reserve Board.
This   requirement   does  not  apply  to  bank  holding   companies   that  are
"well-capitalized," received one of the two highest examination ratings at their
last examination and are not the subject of any unresolved supervisory issues.

         SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 ("SOX") was signed into law which mandated a variety of reforms intended to
address corporate and accounting fraud. SOX contained provisions which amend the
Securities  Exchange Act of 1934,  as amended (the "Act") and  provisions  which
directed the SEC to promulgate  rules.  The resultant law and regulations  under
the Act as of the time of this  annual  report  are set  forth in the  following
paragraphs.  SOX  provides  for  the  establishment  of  a  new  Public  Company
Accounting  Oversight  Board  ("PCAOB"),  which will enforce  auditing,  quality
control and independence  standards for firms that audit Securities and Exchange
Commission  ("SEC")-reporting  companies  and will be  funded  by fees  from all
SEC-reporting  companies.  SOX imposed higher standards for auditor independence
and restricts  provision


                                       19

<PAGE>


of consulting  services by auditing firms to companies they audit. Any non-audit
services  being  provided to an audit  client will  require  preapproval  by the
Company's audit committee members.  In addition,  certain audit partners must be
rotated periodically.  SOX requires chief executive officers and chief financial
officers,  or their  equivalent,  to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully  violate  this  certification  requirement.  In  addition,  under SOX,
counsel  will be required  to report  evidence  of a material  violation  of the
securities  laws or a  breach  of  fiduciary  duty  by a  company  to its  chief
executive  officer or its chief legal  officer,  and, if such  officer  does not
appropriately  respond,  to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.

         Longer  prison terms will also be applied to corporate  executives  who
violate federal  securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended,  and bonuses
issued  to  top  executives  prior  to  restatement  of  a  company's  financial
statements  are now  subject  to  disgorgement  if such  restatement  was due to
corporate  misconduct.  Executives  are  also  prohibited  from  trading  during
retirement  plan  "blackout"  periods,  and  loans  to  company  executives  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited in a fund for the benefit of harmed investors. Directors and executive
officers  must also  report  most  changes  in their  ownership  of a  company's
securities  within two  business  days of the change,  and as of the end of June
2003, all ownership reports must be electronically filed.

         SOX also  increases the oversight and authority of audit  committees of
publicly traded  companies.  Audit committee members must be independent and are
barred from accepting  consulting,  advisory or other compensatory fees from the
issuer. In addition, all SEC-reporting  companies must disclose whether at least
one member of the committee is an audit  committee  "financial  expert" (as such
term is  defined  by the SEC rules) and if not,  why not.  Audit  committees  of
publicly  traded  companies  will have authority to retain their own counsel and
other advisors funded by the company. Audit committees must establish procedures
for the receipt,  retention and treatment of complaints regarding accounting and
auditing  matters and  procedures  for  confidential,  anonymous  submission  of
employee concerns regarding  questionable  accounting or auditing matters. It is
the  responsibility  of the  audit  committee  to  hire,  oversee  and  work  on
disagreements with the Company's independent auditor.

         Beginning six months after the SEC determines that the PCAOB is able to
carry  out its  functions,  it will be  unlawful  for any  person  that is not a
registered  public  accounting firm ("RPAF") to audit an SEC-reporting  company.
Under the Act, a RPAF is prohibited from performing  statutorily  mandated audit
services  for a  company  if  such  company's  chief  executive  officer,  chief
financial officer,  comptroller,  chief accounting officer or any person serving
in equivalent  positions has been employed by such firm and  participated in the
audit of such company during the one-year period  preceding the audit initiation
date.  SOX also  prohibits  any  officer or  director  of a company or any other
person  acting  under their  direction  from  taking any action to  fraudulently
influence,  coerce,  manipulate or mislead any  independent  public or certified
accountant  engaged in the audit of the Company's  financial  statements for the
purpose of rendering the financial statement's  materially  misleading.  The SEC
has  prescribed  rules  requiring  inclusion of an internal  control  report and
assessment by management in the annual report to shareholders.  SOX requires the
RPAF that  issues  the audit  report  to  attest to and  report on  management's
assessment of the Company's  internal controls.  In addition,  SOX requires that
each financial  report required to be prepared in accordance with (or reconciled
to) generally accepted accounting  principles and filed with the SEC reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally  accepted  accounting  principles and the rules and regulations of the
SEC.

         Although the Company  anticipates it will incur  additional  expense in
complying with the provisions of the Act and the related rules,  management does
not expect that such  compliance  will have a material  impact on the  Company's
financial condition or results of operations.

TAXATION

         For fiscal year 2004, the Company's maximum federal income tax rate was
34%. The Company and the Bank, together with the Bank's subsidiary, to date have
not filed a  consolidated  federal  income tax return for the fiscal  year ended
June 30, 2004.  The Company has had no material tax  liability  through June 30,
2004.


                                       20

<PAGE>


         Certain bad debt  reserves of  approximately  $2,561,000  deducted from
income for federal  income tax  purposes  and  included in retained  earnings of
Patapsco,  are  not  available  for  the  payment  of cash  dividends  or  other
distributions  to stockholders  without payment of taxes at the then-current tax
rate  by   Patapsco,   on  the  amount   removed  from  the  reserves  for  such
distributions.  The unrecorded deferred income tax liability on the above amount
was approximately $998,000.

         The Bank's  federal  income tax returns have been audited  through June
30, 1995. The Company's tax returns have never been audited.

         STATE INCOME  TAXATION.  The State of Maryland imposes an income tax of
approximately 7% on income measured  substantially the same as federally taxable
income, except that U.S. Government interest is not fully taxable.

         For additional  information regarding taxation,  see Note 8 of Notes to
Consolidated Financial Statements.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

         The following table sets forth the  location and certain additional
information regarding the Bank's offices at June 30, 2004.

<TABLE>
<CAPTION>
                                                                          Book Value at
                                          Year           Owned or           June 30,           Approximate
                                         Opened           Leased             2004            Square Footage
                                         ------          --------        -------------       --------------
                                                                     (Dollars in thousands)
<S>                                       <C>             <C>                <C>                  <C>
Headquarters and Branch Office
1301 Merritt Boulevard
Dundalk, Maryland 21222                   1970            Owned              $541                 9,600

Branch Office
8705 Harford Road
Baltimore, Maryland 21234                 1923            Owned              $ 92                   750

Branch Office
1844 E. Joppa Road
Baltimore, Maryland 21234                 1983            Leased             $  8                 3,150

Branch Office
7802 Harford Road
Baltimore, Maryland 21234                 1979            Owned              $281                 2,000


Branch Office
821 W. 36th Street
Baltimore, Maryland 21211                 1988            Owned              $124                 1,100

Branch Office
12128 Long Green Pike
Glen Arm, Maryland 21057                  1988            Leased             $  8                 1,400

Administrative Center
8005 Harford Road
Baltimore, Maryland 21234                 1998            Leased             $ 12                 2,900

</TABLE>


                                       21

<PAGE>



         The book value of the  Bank's  investment  in  premises  and  equipment
totaled  $1.6  million  at June 30,  2004.  See Note 5 of Notes to  Consolidated
Financial Statements.

ITEM 3. LEGAL PROCEEDINGS
-------------------------

         From time to time,  the Bank is a party to  various  legal  proceedings
incident to its business.  At June 30, 2004, there were no legal  proceedings to
which the Company or the Bank was a party, or to which any of their property was
subject,  which were  expected by management to result in a material loss to the
Company or the Bank.  There are no pending  regulatory  proceedings to which the
Company,  the  Bank  or its  subsidiary  is a party  or to  which  any of  their
properties is subject which are currently expected to result in a material loss.

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

         None.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
--------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------

         The  information   contained  under  the  sections   captioned  "Market
Information" in the Company's  Annual Report to Stockholders for the Fiscal Year
Ended  June 30,  2004  (the  "Annual  Report")  filed as  Exhibit  13  hereto is
incorporated herein by reference.

         No  repurchases of the Company's  common stock were  repurchased in the
year ended June 30, 2004.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  on
pages 1 through 22 in the Annual Report is incorporated herein by reference.

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

         The Consolidated Financial Statements,  Notes to Consolidated Financial
Statements and Independent  Auditors' Report contained on pages 23 through 48 in
the Annual  Report,  which are listed  under  Item 13 herein,  are  incorporated
herein by reference.

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

         On January 2, 2004, Anderson Associates LLP ("Anderson") announced that
it was joining Beard Miller to become the Baltimore office of Beard Miller. As a
result,  on January 2, 2004,  Anderson  resigned as independent  auditors of the
Company.  On January 8, 2004, the Company  engaged Beard Miller as its successor
independent audit firm. The Company's engagement of Beard Miller was approved by
the Company's Audit Committee on January 8, 2004.

         Anderson served as the Company's  independent  accountants to audit the
Company's consolidated financial statements as of and for the fiscal years ended
June  30,  2003 and  2002.  Anderson's  reports  on the  Company's  consolidated
financial  statements  as of and for the years  ended June 30, 2003 and 2002 did
not contain an adverse  opinion or  disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles.

         During the Company's  fiscal years ended June 30, 2003 and 2002 and the
subsequent  interim period from July 1, 2003 through January 2, 2004, there were
no  disagreements  with  Anderson  on any  matter of  accounting  principles  or
practices,  financial statement disclosure or auditing scope or procedure, which
disagreements,  if not  resolved to the  satisfaction  of  Anderson,  would have
caused Anderson to make reference to the subject matter of the  disagreements in
their report on the financial statements for such years.

ITEM 8A.  CONTROLS AND PROCEDURES
---------------------------------

         As of the end of the period  covered by this report,  management of the
Company  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation  of  the  Company's  principal  executive  officer  and  principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures.  Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and  procedures  are  effective  in  ensuring  that  information  required to be
disclosed  by the  Company  in  reports  that it  files  or  submits  under  the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported,  within the time periods  specified in the Securities and Exchange
Commission's rules and forms.


                                       22

<PAGE>

         In  addition,  there  have been no changes  in the  Company's  internal
control  over  financial  reporting  (to the extent  that  elements  of internal
control over financial  reporting are subsumed  within  disclosure  controls and
procedures)  identified in connection with the evaluation described in the above
paragraph  that occurred  during the  Company's  last fiscal  quarter,  that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


                                    PART III

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

         For  information  concerning  the  Board  of  Directors  and  executive
officers of the Company,  the information  contained under the section captioned
"Proposal  I--Election  of  Directors"  in  the  Company's  Proxy  Statement  is
incorporated herein by reference.

CODE OF ETHICS

         The Company has adopted a written code of ethics,  which applies to our
senior  financial  officers.  The  Company  intends to  disclose  any changes or
waivers from our Code of Ethics  applicable to any senior financial  officers on
our website at http://www.patapscobank.com or in a report on Form 8-K. A copy of
the Code of Ethics  is  available,  without  charge,  upon  written  request  to
Theodore C. Patterson,  Corporate Secretary, Patapso Bancorp, Inc., 1301 Merritt
Boulevard, Dundalk, Maryland 21222-2194.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

         The information  contained under the sections captioned  "Proposal I --
Election of Directors -- Executive  Compensation,"  "-- Director  Compensation,"
and "-- Employment  Agreements" in the Proxy Statement is incorporated herein by
reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
----------------------------------------------------------------------------
RELATED STOCKHOLDER   MATTERS
-----------------------------

         (a)   Security Ownership of Certain Beneficial Owners

               Information  required  by this  item is  incorporated  herein  by
               reference  to  the  section  captioned  "Voting   Securities  and
               Principal Holders thereof" in the Proxy Statement.

         (b)   Security Ownership of Management

               Information  required  by this  item is  incorporated  herein  by
               reference  to  the  sections  captioned  "Security  Ownership  of
               Management" in the Proxy Statement.

         (c)   Changes in Control

               Management of the Company knows of no arrangements, including any
               pledge by any person of securities of the Company,  the operation
               of which may at a  subsequent  date result in a change in control
               of the registrant.



                                       23

<PAGE>

         (d)   Equity Compensation Plans

<TABLE>
<CAPTION>
         The following table sets forth certain  information with respect to the Company's equity compensation plans.

                                                (a)                           (b)                             (c)
                                                                                                Number of securities remaining
                                     Number of securities to be                                 available for future issuance
                                      issued upon exercise of       Weighted-average exercise     under equity compensation
                                        outstanding options,          price of outstanding       plans (excluding securities
                                          warrants & rights       options, warrants and rights     reflected in column (a))
                                          -----------------       ----------------------------     ------------------------

<S>                                           <C>                             <C>                           <C>
Equity compensation plans
  approved by security holders                197,898                         $5.40                         8,562

Equity compensation plans not
  approved by security holders                 40,146                          NA                             0
                                              -------                                                       -----
       Total                                  238,044                                                       8,562

</TABLE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference  to the section  captioned  "Proposal I --  Election of  Directors  --
Transactions with Management" in the Proxy Statement.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)   LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
               ----------------------------------------------
<TABLE>
<CAPTION>

<S>      <C>
         (1)   FINANCIAL  STATEMENTS.   The following consolidated financial statements are incorporated by
reference from Item 7 hereof (see Exhibit 13):

               Independent Auditors' Report
               Consolidated Statement of Financial Condition as of June 30, 2004 and 2003
               Consolidated Statements of Income for the Years Ended June 30, 2004 and 2003
               Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2004 and 2003
               Consolidated Statements of Cash Flows for the Years Ended June 30, 2004 and 2003
               Notes to Consolidated Financial Statements

         (2)   EXHIBITS. The following is a list of exhibits filed as part of this Annual Report on Form 10-KSB
and also constitutes the Exhibit Index.

          NO.     DESCRIPTION
          ---     -----------

*****    3.1      Articles of Incorporation of Patapsco Bancorp, Inc. and Articles Supplementary
******   3.2      Bylaws of Patapsco Bancorp, Inc., as amended
**       4        Form of Common Stock Certificate of Patapsco Bancorp, Inc.
***     10.1      Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan
***     10.2      Patapsco Bancorp, Inc. Management Recognition Plan
*       10.3(a)   Employment  Agreement  between  Patapsco  Federal  Savings  and Loan  Association  and  Joseph J.
                  Bouffard
*       10.3(b)   Employment Agreement between Patapsco Bancorp, Inc. and Joseph J. Bouffard
*       10.4(a)   Severance Agreement between Patapsco Federal Savings and Loan Association and John McClean
*       10.4(b)   Severance Agreement between Patapsco Bancorp, Inc. and John McClean

                                                       24


<PAGE>


*       10.5      Patapsco Federal Savings and Loan Association Retirement Plan for Non-Employee Directors
******  10.6      Patapsco Federal Savings and Loan Association Incentive Compensation Plan, as amended
*       10.7      Deferred  Compensation  Agreements between Patapsco Federal Savings and Loan Association
                  and each of Directors McGowan and Patterson
****    10.9      The Patapsco Bank Retirement Plan for Non-Employee Directors
*****   10.10     Patapsco Bancorp, Inc. 2000 Stock Option and Incentive Plan
*****   10.11     Severance  Agreements  between Patapsco  Bancorp,  Inc. and Michael J. Dee and Frank J.
                  Duchacek, Jr.
******  10.12     Patapsco Bancorp, Inc. Cash Deferred Compensation Plan
        13        2004 Annual Report to Stockholders
        21        Subsidiaries of the Registrant
        23        Consent of Beard Miller Company LLP
        31.1      Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
        31.2      Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
        32        Certification pursuant to 18 U.S.C. Section 1350

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

*      Incorporated  herein  by  reference  from the  Company's  Registration  Statement  on Form  SB-2
       (File  No. 33-99734).
**     Incorporated herein by reference from the Company's Registration Statement on Form 8-A
       (File No. 0-28032).
***    Incorporated  herein by reference  from the  Company's  Annual Report on Form 10-KSB for the
       year ended June 30, 1996 (File No. 0-28032).
****   Incorporated herein by reference from the Company's Annual Report on Form 10-KSB for the year
       ended June 30, 1999 (File No. 0-28032).
*****  Incorporated herein by reference from the Company's Annual Report on Form 10-KSB for the year
       ended June 30, 2000 (File No. 0-28032).
****** Incorporated herein by reference from the Company's Annual Report on Form 10-KSB for the year
       ended June 30, 2002 (File No. 0-28032).
****** Incorporated herein by reference from the Company's Annual Report on Form 10-KSB for the year
       ended June 30, 2003 (File No. 0-28032).

       (b)    REPORTS ON FORM 8-K
              -------------------

              The Company  filed the  following  Current  Report on Form 8-K during the fourth quarter
       of the fiscal year ended June 30, 2004:

                  DATE OF REPORT            ITEM(S) REPORTED           FINANCIAL STATEMENTS FILED
                  --------------            ----------------           --------------------------

                  April 2, 2004                   2, 7                          No
                  June 15, 2004                   [Amended] 7                   Yes (1)
                  June 21, 2004                   5,7                           No
-------------

(1)    The following financial statements were filed with the Company's Current Report on Form 8-K dated June
       15, 2004:

       Consolidated Financial Statements of Parkville Federal Savings Bank as of December 31, 2003 and 2002 and
           for each of the years in the two-year period ended December 31, 2003.

       Unaudited Pro Forma Condensed Combined Statement of Financial Condition of Patapsco Bancorp, Inc. as of
           March 31, 2004.

       Unaudited Pro Forma Condensed Combined Statements of Operations of Patapsco Bancorp, Inc. for the year
           ended June 30, 2003 and the nine months ended March 31, 2004.
</TABLE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------

       The information required by this item is incorporated herein by reference
to the section  captioned "Audit and Other Fees Paid to Independent  Accountant"
in the Proxy Statement.


                                       25
<PAGE>




                                   SIGNATURES

         Pursuant  to the  requirements  of Section 13 or 15(d) of the  Exchange
Act,  the  registrant  caused  this  report to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S>                                                            <C>
                                                               PATAPSCO BANCORP, INC.

September 22, 2004
                                                                By: /s/ Joseph J. Bouffard
                                                                    -----------------------------------------------
                                                                    Joseph J. Bouffard
                                                                    President and Chief Executive Officer
                                                                    (Duly Authorized Officer)

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

/s/ Joseph J. Bouffard                                                 September 22, 2004
-----------------------------------------------------
Joseph J. Bouffard
President, Chief Executive Officer
  and Director
(Principal Executive Officer)


/s/ Michael J. Dee                                                     September 22, 2004
-----------------------------------------------------
Michael J. Dee
Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)


/s/ Thomas P. O'Neill                                                  September 22, 2004
-----------------------------------------------------
Thomas P. O'Neill
Chairman of the Board


/s/ Theodore C. Patterson                                              September 22, 2004
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Theodore C. Patterson
Director and Secretary


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Douglas H. Ludwig
Director


/s/ Nicole N. Glaeser                                                  September 22, 2004
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Nicole N. Glaeser
Director


/s/ William R. Waters                                                  September 22, 2004
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William R. Waters
Director


/s/ Gary R. Bozel                                                      September 22, 2004
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Gary R. Bozel
Director

                                                                       September 22, 2004
/s/ J. Thomas Hoffman
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J. Thomas Hoffman
Director
</TABLE>