PATAPSCO BANCORP, INC.









         [LOGO]







                                                              2002 ANNUAL REPORT




<PAGE>



PATAPSCO BANCORP, INC.
================================================================================

     Patapsco  Bancorp,  Inc.  (the  "Company")  is the holding  company for The
Patapsco Bank (the "Bank").  The Bank is a Maryland  commercial  bank  operating
through three  offices  located in Dundalk,  Parkville  and Carney  Maryland and
serving eastern Baltimore County. The principal business of the Bank consists of
attracting  deposits  from the general  public and investing  these  deposits in
loans secured by residential  and commercial  real estate,  construction  loans,
commercial  business  loans,  commercial  leases and  consumer  loans.  The Bank
derives its income  principally  from interest  earned on loans and, to a lesser
extent, interest earned on mortgage-backed  securities and investment securities
and noninterest income. Principally operating revenues,  deposits and repayments
of outstanding loans and investment  securities and  mortgage-backed  securities
provide funds for these activities.


MARKET INFORMATION
================================================================================

     The  Company's  common  stock  trades  under the  symbol  "PATD" on the OTC
Bulletin  Board.  There  are  currently  373,613  shares  of  the  common  stock
outstanding  and  approximately  353  holders  of  record of the  common  stock.
Following  are the high and low  closing  sale  prices,  by fiscal  quarter,  as
reported on the OTC Bulletin Board during the periods indicated,  as well as the
dividends paid during such  quarters.  In the second quarter of fiscal 2002, the
Company paid a 10% common stock dividend.
<TABLE>
<CAPTION>
                                                      High            Low           Dividends Per Share
                                                      ----            ---           -------------------
              <S>                                    <C>           <C>                  <C>
              Fiscal 2001:
                    First Quarter                    $  22.25      $   20.31            $    .14
                    Second Quarter                      22.63          21.00                 .14
                    Third Quarter                       21.88          21.125                .14
                    Fourth Quarter                      23.00          21.125                .14

              Fiscal 2002:
                    First Quarter                    $  27.50      $   21.85            $    .14
                    Second Quarter                      28.05          22.73                 .14
                    Third Quarter                       29.90          27.30                 .14
                    Fourth Quarter                      30.00          28.50                 .14
</TABLE>

     The stated high and low closing sale prices  reflect  inter-dealer  prices,
without retail  mark-up,  markdown or commission,  and may not represent  actual
transactions.

TABLE OF CONTENTS
================================================================================

Patapsco Bancorp, Inc........................................................(i)
Market Information...........................................................(i)
Letter to Stockholders........................................................1
Selected Consolidated Financial and Other Data................................3
Management's Discussion and Analysis of Financial Condition and
  Results of Operations.......................................................5
Consolidated Financial Statements............................................21
Corporate Information.........................................Inside Back Cover

                                       (i)

<PAGE>
                         [PATAPASCO BANCORP LETTERHEAD]

Dear Shareholder:

     The  directors,  officers  and  staff of  Patapsco  Bancorp,  Inc.  and The
Patapsco Bank proudly present our seventh Annual Report.

     This past year was  extraordinary to say the least. The events of September
11 will be felt  and  absorbed  by our  Country  for many  years  to  come.  The
accounting  scandals  associated  with  the  failure  of a few  of  our  largest
companies will affect the corporate actions of all public companies,  both large
and  small.  Stock  prices  tumbled as the market  absorbed  the  effects of the
Country's first recession in many years.

     From  a  financial  standpoint,  the  major  story  of  the  year  was  the
unprecedented  drop in interest  rates,  which fell to their lowest  levels in a
generation.  While we are not immune to global issues,  this  phenomenon had the
most  significant  impact on our  Company.  Not only did this affect our savings
customers,  but also it also  significantly  influenced  our balance  sheet,  as
assets decreased by 3% to $159 million.  This was the first time since we became
a public company that our assets declined and it was a direct result the massive
amount of mortgage payoffs.

     The drop in interest rates also affected our earnings. While our net profit
for the year  increased  by  $119,000  or 11.7% to $1.14  million,  our  diluted
earnings per share decreased 4.6% to $2.29 per share, from $2.40 per share. Part
of the decrease can be attributed to the facts that our preferred  stock and new
option plan were outstanding for a full year. However, the mortgage payoffs also
caused the Bank to experience  excessive liquidity for the majority of the year.
This resulted in a short-term  negative effect on our net interest  margin,  the
spread between our interest earning assets and our interest bearing liabilities,
which  improved  during the second  half of the year and  continues  to improve.
Similarly,  because of the decrease in assets and our relatively  flat earnings,
our return on assets (ROA)  increased  only slightly  from .72% to .73%.  From a
positive standpoint, it also allowed us to continue to diversify from our thrift
past by restructuring our assets into more commercial bank assets.

     At year end the Company's provision for loan losses stood at 1.20% of total
loans,  up from .88% the previous year.  This was the result of the smaller loan
portfolio  and the addition of $560,000 to the loan loss reserve,  which,  after
adjusting  for charge offs,  increased to $1.44  million from $1.16  million the
previous  year. The addition to the provision  reflects the Company'  experience
and the riskier  nature of a commercial  bank's loan  portfolio.  The  Company's
ratio of  non-performing  assets to total assets was .52% and our capital  ratio
(equity to assets) was a very strong 9.22%.

<PAGE>

     We have  continued  to pay a  $.14/share  quarterly  dividend  which,  when
coupled  with the stock  dividend  declared in October  2001,  represents a 10 %
increase in the cash  dividend  payout.  The stock price has  increased 29% from
$22.05 at fiscal year end 2001 to $28.50 at fiscal year end 2002.

     This past year  represented  a year of  consolidation  and  refocus as your
Company absorbed it first acquisition and moved forward into a rapidly weakening
economy.  Looking  forward,  our  merger  is now  complete  and the  economy  is
attempting to shrug off the effects of the recession. The Company's net interest
margin has recovered and the Company is poised to continue with the gains it has
experienced  since  `going  public'  in  1995.  But,  as  always,  it  will be a
challenge.

     We continue to have other goals to  accomplish.  We shall continue to focus
on creating new products and services  that will allow us to be  successful in a
highly competitive banking  environment.  We will expand our efforts relative to
business lending,  commercial real estate loans,  construction  loans,  consumer
loans and leases.  We shall continue to attract more demand deposit accounts and
build our loan loss reserves as our portfolio  continues to grow and change.  In
short,  we will continue to implement  the  strategic  plan to achieve a rate of
growth that can be sustained over time consistent with safe and sound practices.

     We will be accomplishing this in a changing  regulatory  environment.  As a
financial  institution,  we  are  comfortable  working  in  a  highly  regulated
environment.  Nevertheless,  the  resultant  fallout from the Enron and WorldCom
debacles will result in more regulation and  accountability for corporations and
their  officials.  While your Company  realizes that we are very small player in
the corporate world, we do pride ourselves on our  accountability and integrity.
The Board of Directors and officers of your Company are committed to working for
the benefit of our  shareholders and working within the rules and regulations of
the corporate world.

     We will continue to execute our strategic  plan that was designed to take a
small   savings  and  loan   association   and  turn  it  into  a  full  service
community/commercial  bank We are determined to make the next year and the years
to come, fruitful and fulfilling in a prudent manner.

     In conclusion, the directors,  officers and staff of Patapsco Bancorp, Inc.
and The Patapsco  Bank thank all of our  stockholders  and  customers  for their
confidence  and  support  during  the past  year.  We look  forward  to  another
prosperous new year.



         /s/ Thomas P. O'Neill               /s/ Joseph J. Bouffard

         Thomas P. O'Neill                   Joseph J. Bouffard
         Chairman                            President and
         Board of Directors                  Chief Executive Officer


<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
================================================================================

PATAPSCO BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
                                                                           At June 30,
                                                                 ------------------------------
                                                                     2002               2001
                                                                   --------          ---------
                                                                           (In thousands)
<S>                                                             <C>                  <C>
Total assets..................................................   $ 158,736           $ 164,170
Loans receivable, net.........................................     118,350             127,834
Cash, federal funds sold and other interest
   bearing deposits...........................................      14,857              11,161
Investment securities.........................................       5,006               2,188
Mortgage-backed securities....................................      13,705               5,680
Deposits......................................................     119,593             123,993
Borrowings....................................................      22,616              23,662
Stockholders' equity..........................................      13,930              12,805

-------------------------------------------------------------------------------------------------
<CAPTION>

SELECTED CONSOLIDATED INCOME DATA
                                                                        Year Ended June 30,
                                                                 -----------------------------
                                                                   2002                 2001
                                                                 --------            --------
                                                                         (In thousands)
<S>                                                              <C>                 <C>
Interest income...............................................   $  11,445           $ 11,587
Interest expense..............................................       5,580              6,240
                                                                 ---------           --------

Net interest income before provision
   for loan losses............................................       5,865              5,347
Provision for loan losses.....................................         560                433
                                                                 ---------           --------
Net interest income after provision
   for loan losses............................................       5,305              4,914
Noninterest income............................................         866                576
Noninterest expenses:
   Compensation and employee benefits.........................       2,609              2,133
   Insurance..................................................          63                 51
   Professional fees..........................................         190                114
   Equipment expenses.........................................         234                167
   Net occupancy costs........................................         197                137
   Advertising................................................         136                132
   Data processing............................................         204                192
   Goodwill Amortization......................................          --                 91
   Other......................................................         683                619
                                                                 ---------           --------
      Total noninterest expenses..............................       4,316              3,636
Income before provision (benefit) for income taxes............       1,855              1,854
Income tax provision (benefit)................................         718                836
                                                                 ---------           --------
Net income....................................................   $   1,137           $  1,018
                                                                 =========           ========
</TABLE>

                                       3
<PAGE>
KEY OPERATING RATIOS
================================================================================

PATAPSCO BANCORP, INC.
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
                                                                            At or for the
                                                                          Year Ended June 30,
                                                                   ------------------------------
                                                                       2002               2001
                                                                   ------------       -----------
<S>                                                                   <C>                  <C>
PERFORMANCE RATIOS:
   Return on average assets (net income divided by
      average total assets.......................................     0.73 %               0.72 %
   Return on average stockholders' equity (net income
      divided by average stockholders' equity)...................     8.20                 8.74
   Interest rate spread (combined weighted average
      interest rate earned less combined weighted
      average interest rate cost)................................     3.54                 3.45
   Net interest margin (net interest income
      divided by average interest-earning assets)................     3.90                 3.90
   Ratio of average interest-earning assets to
      average interest-bearing liabilities.......................   109.58               109.78
   Ratio of noninterest expense to average total assets..........     2.76                 2.57

ASSET QUALITY RATIOS:
   Nonperforming assets to total assets at
      end of period..............................................     0.52                 0.20
   Nonperforming (nonaccrual) loans to loans
      receivable, net at end of period...........................     0.58                 0.14
   Allowance for loan losses to total loans
      at end of period...........................................     1.20                 0.88
   Allowance for loan losses to nonperforming
      loans at end of period.....................................   206.48               660.78
   Net charge-offs to average loans outstanding..................     0.23                 0.16

CAPITAL RATIOS:
   Stockholders' equity (incl .temporary equity) of period.......     9.22                 8.20
   Average stockholders' equity to average assets................     8.86                 8.23

</TABLE>

                                       4
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

================================================================================

GENERAL

     The Company's  results of operations  depend  primarily on its level of net
interest   income,   which  is  the  difference   between   interest  earned  on
interest-earning  assets,  consisting primarily of loans, investment securities,
mortgage-backed  securities  and other  investments,  and the  interest  paid on
interest-bearing liabilities, consisting primarily of deposits and advances from
the  Federal  Home Loan  Bank of  Atlanta.  The net  interest  income  earned on
interest-earning   assets   ("net   interest   margin")   and   the   ratio   of
interest-earning  assets  to  interest-bearing  liabilities  have a  significant
impact on net interest income.  The Company's net interest margin is affected by
regulatory, economic and competitive factors that influence interest rates, loan
and deposit flows. The Company, like other financial institutions, is subject to
interest  rate risk to the degree  that its  interest-earning  assets  mature or
reprice at different times, or on a different basis,  than its  interest-bearing
liabilities.  To a lesser extent,  the Company's  results of operations are also
affected  by the  amount  of its  noninterest  income,  including  loan fees and
service charges, and levels of noninterest  expense,  which consists principally
of compensation and employee benefits,  insurance  premiums,  professional fees,
equipment  expense,  occupancy  costs,  advertising,  data  processing and other
operating expenses.

     The  Company's  operating  results  are  significantly  affected by general
economic and competitive conditions,  in particular,  changes in market interest
rates, government policies and actions taken by regulatory authorities.  Lending
activities  are influenced by general  economic  conditions,  competition  among
lenders,  the level of interest  rates and the  availability  of funds.  Deposit
flows and costs of funds are influenced by prevailing  market rates of interest,
primarily on competing investments, account maturities and the level of personal
income and savings in the Company's market area.

FORWARD-LOOKING STATEMENTS

     When used in this Annual Report, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated,"  "estimate,"  "project" or
similar expressions are intended to identify "forward-looking statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
statements are subject to certain risks and  uncertainties  including changes in
economic  conditions  in the  Company's  market  area,  changes in  policies  by
regulatory  agencies,  fluctuations in interest  rates,  demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially  from  historical   earnings  and  those  presently   anticipated  or
projected.  The Company wishes to caution readers not to place undue reliance on
any such forward-looking  statements,  which speak only as of the date made. The
Company  wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

     The Company does not undertake,  and specifically disclaims any obligation,
to  publicly  release  the  result  of any  revisions  that  may be  made to any
forward-looking  statements to reflect events or circumstances after the date of
such  statements or to reflect the occurrence of  anticipated  or  unanticipated
events.


                                       5
<PAGE>

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

     The  following  table  sets  forth  certain  information  relating  to  the
Company's average  interest-earning assets and interest-bearing  liabilities and
reflects  the average  yield on assets and average cost of  liabilities  for the
periods  and at the date  indicated.  Dividing  income or expense by the average
daily balance of assets or  liabilities,  respectively,  derives such yields and
costs for the  periods  presented.  Average  balances  are  derived  from  daily
balances.

     The table also presents  information for the periods indicated with respect
to the institution's  net interest margin,  which is net interest income divided
by the  average  balance  of  interest  earning  assets.  This  is an  important
indicator of commercial bank profitability.  The net interest margin is affected
by yields on interest earning assets, the costs of interest bearing  liabilities
and the  relative  amounts  of  interest  earning  assets and  interest  bearing
liabilities.  Another  indicator of an institution's  net interest income is the
interest  rate spread or the  difference  between the average  yield on interest
earning assets and the average rate paid on interest bearing liabilities.
<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                                  --------------------------------------------------------------------
                                                                 2002                                 2001
                                                  -----------------------------------    -----------------------------
                                                                              Average                          Average
                                                  Average                      Yield/    Average                Yield/
                                                  Balance       Interest        Cost     Balance     Interest    Cost
                                                  -------       --------       ------    -------     --------  -------
                                                                              (Dollars in thousands)
<S>                                              <C>            <C>            <C>      <C>          <C>         <C>
Interest-earning assets:
   Loans receivable (1)........................  $  123,569     $ 10,415       8.43%    $ 122,458    $10,676     8.72%
   Investment securities(2)....................       4,368          252       5.43         3,564        245     6.88
   Mortgage-backed securities..................       5,323          361       6.78         5,663        378     6.68
   Short-term investments and other
     interest-earning assets...................      16,685          417       2.50         5,414        288     5.32
                                                 ----------     --------                ---------    -------
      Total interest-earning assets............     149,945       11,445       7.62       137,099     11,587     8.45
Non-interest-earning assets....................       6,617                                 4,357
                                                 ----------                             ---------
      Total assets.............................  $  156,562                             $ 141,456
                                                 ==========                             =========
Interest-bearing liabilities:
   Deposits (3)................................  $  118,081     $  4,429       3.75     $ 100,244      4,740     4.73
   Borrowings..................................      18,754        1,151       6.14        24,638      1,500     6.09
                                                 ----------     --------                ---------    -------
      Total interest-bearing liabilities.......     136,835        5,580       4.08       124,882      6,240     5.00
                                                                --------                             -------     ----
Non-interest-bearing liabilities...............       5,863                                 4,929
                                                 ----------                             ---------
      Total liabilities........................     142,698                               129,811
Total Equity...................................      13,864                                11,645
                                                 ----------                             ---------
      Total liabilities and retained earnings..  $  156,562                             $ 141,456
                                                 ==========                             =========

Net interest income............................                 $ 5,865                              $ 5,347
                                                                ========                             =======
Interest rate spread...........................                                3.54%                             3.45%
                                                                             ======                            ======
Net interest margin............................                                3.90%                             3.90%
                                                                             ======                            ======
Ratio of average interest-earning assets to
   average interest-bearing liabilities........                              109.58%                           109.78%
                                                                             ======                            ======
<FN>
-----------
(1) Includes nonaccrual loans.
(2) Includes investments required by law
(3) Includes interest-bearing escrow accounts.
</FN>
</TABLE>
                                       6
<PAGE>
RATE/VOLUME ANALYSIS

     The following  table sets forth certain  information  regarding  changes in
interest income and interest  expense of the Company for the periods  indicated.
For each  category of  interest-earning  asset and  interest-bearing  liability,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes  in volume  multiplied  by prior  year's  rate);  (ii)  changes in rate
(changes in rate multiplied by prior year's volume).
<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                      -----------------------------------
                                                           2002        vs.          2001
                                                      -----------------------------------
                                                           Increase (Decrease) Due to
                                                      -----------------------------------
                                                       Volume        Rate         Total
                                                       ------        ----         -----
                                                                 (In thousands)
<S>                                                   <C>          <C>            <C>
Interest income:
   Loans receivable.................................  $    98      $  (358)       $ (260)
   Investment securities............................       21          (15)            6
   Mortgage-backed securities.......................      (23)           6           (17)
   Short-term investments and other
     interest-earning assets........................      173          (44)          129
                                                      -------      -------       -------
       Total interest-earning assets................      269         (411)         (142)
                                                      -------      -------       -------

Interest expense:
   Deposits (1).....................................    1,919       (2,230)         (311)
   Borrowings.......................................     (361)          12          (349)
                                                      -------      -------      --------
       Total interest-bearing liabilities...........    1,558       (2,218)         (660)
                                                      -------      -------      --------

Change in net interest income.......................  $(1,289)     $ 1,807      $    518
                                                      =======      =======      ========
<FN>
__________
(1)  Includes interest-bearing escrow accounts.
(2)  Combined  Rate/volume  variances,  a third element of the calculation,  are
     allocated to the volume and rate variances based on their relative size.
</FN>
</TABLE>

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND 2001

     General.  Total assets  decreased by $5.5 million or 3.3% to $158.7 million
at June 30,  2002  from  $164.2  million  at June 30,  2001.  The  decrease  was
primarily due to loan sales and loan payoffs and amortization exceeding new loan
production.

     Loans Receivable. Net loans receivable decreased by $9.5 million or 7.4% to
$118.3  million at June 30,  2002 from  $127.8  million at June 30,  2001 as the
first mortgage and consumer home improvement  portfolios were reduced due to the
mortgage  re-financing wave resulting from record low interest rates. Loans held
for sale  decreased  $9.9  million as the loan package held for sale at June 30,
2001 was sold in July. Commercial leases have increased $5.4 million, commercial
business loans $1.2 million and commercial  real estate and  construction  loans
have  increased  $3.2 million.  Since the  conversion  of the Company's  primary
subsidiary  from a mutual  savings and loan  association to a stock savings bank
and later into a commercial  bank,  the Company has  continued to diversify  its
lending away from the traditional single-family mortgage market.

                                       7
<PAGE>

     The following table sets forth selected data relating to the composition of
the Company's loan portfolio by type of loan at the dates indicated. At June 30,
2002, the Company had no  concentrations  of loans  exceeding 10% of gross loans
other than as disclosed below:
<TABLE>
<CAPTION>
                                                                                   At June 30,
                                                            -------------------------------------------------------
                                                                         2002                       2001
                                                            ------------------------        -----------------------
                                                             Amount              %          Amount             %
                                                             ------            -----        ------           ------
                                                                              (Dollars in thousands)
<S>                                                         <C>               <C>           <C>             <C>
Real estate loans:
   Residential (1)........................................  $   59,609        47.89%        $  75,497       57.39%
   Commercial.............................................      15,487        12.44            13,542       10.29
   Construction (2).......................................       3,332         2.68             2,098        1.59
Consumer loans:
   Home improvement.......................................       9,562         7.68            11,427        8.69
   Home equity loans......................................       3,096         2.49             2,315        1.76
   Loans secured by deposits..............................         231         0.19               255        0.19
   Other consumer loans...................................       1,345         1.08             1,146        0.87
Commercial loans:
   Commercial loans.......................................      14,159        11.38            12,991        9.88
   Commercial leases......................................      17,643        14.17            12,287        9.34
                                                            ----------       ------         ---------      ------
                                                               124,464       100.00%          131,558      100.00%
                                                                             ======                        ======
Less:
   Deferred loan origination fees, net of costs...........          66                             16
   Unearned interest consumer loans.......................         289                            331
   Unearned interest commercial loans.....................       3,976                          1,602
   Purchase accounting discount, net......................         345                            614
   Allowance for loan losses..............................       1,438                          1,161
                                                            ----------                      ---------
      Total...............................................  $  118,350                      $ 127,834
                                                            ==========                      =========
<FN>
____________
(1)  Does not include loans held for sale.
(2)  Net of loans in process.
</FN>
</TABLE>

     The  following  table  sets  forth  certain  information  at June 30,  2002
regarding  the dollar  amount of loans  maturing or repricing  in the  Company's
portfolio.  Demand loans,  loans having no stated schedule of repayments and any
stated  maturity,  and  overdrafts  are  reported  as due in one  year or  less.
Adjustable-rate  and  floating-rate  loans are  included  in the period in which
interest  rates are next  scheduled  to adjust  rather than the periods in which
they mature,  and fixed-rate loans are included in the period in which the final
contractual  repayment  is due.  The table  does not  include  any  estimate  of
prepayments  that  significantly  shorten the average life of all mortgage loans
and may cause the  Company's  repayment  experience  to differ  from that  shown
below.
<TABLE>
<CAPTION>
                                                          Due after
                                       Due during         1 through          Due after
                                   the year ending      5 years after       5 years after
                                    June 30, 2003       June 30, 2003       June 30, 2003         Total
                                   --------------       -------------       -------------       ---------
                                                                  (In thousands)
<S>                                  <C>                <C>                  <C>                <C>
Real estate loans:
   Residential...................    $ 11,233           $  3,632             $  44,744          $  59,609
   Commercial....................      10,338                865                 4,284             15,487
   Construction..................       3,332                 --                    --              3,332
Consumer loans...................       3,448              5,060                 5,726             14,234
Commercial loans.................      12,718             14,075                 5,009             31,802
                                     --------           --------             ---------          ---------
        Total....................    $ 41,069           $ 23,632             $  59,763          $ 124,464
                                     ========           ========             =========          =========
</TABLE>
                                       8
<PAGE>

     The  following  table sets forth at June 30, 2002 the dollar  amount of all
loans  which may  reprice or are due one year or more after June 30,  2002 which
have  predetermined  interest  rates and have  floating or  adjustable  interest
rates.
<TABLE>
<CAPTION>
                                   Predetermined            Floating or
                                       Rates              Adjustable Rates        Total
                                   -------------          -----------------     ---------
                                                         (In thousands)
<S>                                   <C>                   <C>                 <C>
Real estate loans:
   Residential....................    $ 44,763              $   3,612           $  48,375
   Commercial.....................       4,225                    924               5,149
Consumer..........................      10,787                     --              10,787
Commercial........................      19,084                     --              19,084
                                      --------              ---------           ---------
   Total..........................    $ 78,859              $   4,536           $  83,395
                                      ========              =========           =========
</TABLE>

     Scheduled  contractual  principal  repayments  of loans do not  reflect the
actual life of such assets. The average life of loans is substantially less than
their  contractual  terms because of  prepayments.  The average life of mortgage
loans  tends  to  increase   when  current   mortgage   loan  market  rates  are
substantially  higher than rates on  existing  mortgage  loans and,  conversely,
decrease when current  mortgage loan market rates are  substantially  lower than
rates on existing mortgage loans.

     Investment  Securities  and  Mortgage-Backed  Securities.  U.S.  government
agency  securities  increased to $2.2 million at June 30, 2002 from $0.7 million
at June 30, 2001, and other investment securities increased from $1.2 million to
$2.5 million.  Mortgage-backed  securities increased by $8.0 million in the year
ended June 30, 2002 in part due to a $10 million  leverage  transaction  entered
into in May 2002. In September 2001, $2.0 million of investment  securities were
sold for a gain of $174,000.  Equity securities increased $60,000 in the year as
a result of increases in market values.

     The  following  table  sets  forth  the  carrying  value  of the  Company's
investments at the dates indicated.
<TABLE>
<CAPTION>
                                                                                         At June 30,
                                                                              -----------------------------------
                                                                                 2002                     2001
                                                                              ----------               ----------
                                                                                    (Dollars in thousands)
<S>                                                                           <C>                      <C>
Securities available for sale, at fair value:
   U.S. government and agency securities....................................  $  2,244                 $    735
   Equity securities........................................................       259                      199
   Investment securities....................................................     2,503                    1,254
   Mortgage-backed securities...............................................    13,705                    5,680
                                                                              --------                 --------
     Total securities available for sale....................................    18,711                    7,868
                                                                              --------                 --------

Investments required by law, at cost:
  FHLB of Atlanta stock.....................................................     1,595                    1,595
  FRB of Richmond stock.....................................................       308                      308
                                                                              --------                 --------
    Total investments required by law, at cost..............................     1,903                    1,903
                                                                              --------                 --------

    Total investments.......................................................  $ 20,614                 $  9,771
                                                                              ========                 ========
</TABLE>
                                       9
<PAGE>
     The following table sets forth the scheduled  maturities,  carrying values,
market values and average yields for the Company's  investment portfolio at June
30, 2002.
<TABLE>
<CAPTION>
                                      One Year or Less       One to Five Years       Five to Ten Years
                                    --------------------   ---------------------   ---------------------
                                     Carrying   Average     Carrying    Average     Carrying    Average
                                      Value     Yield        Value      Yield        Value      Yield
                                    ---------  -------     ---------   -------     ---------   -------
                                                          (Dollars in thousands)
<S>                                  <C>       <C>          <C>         <C>          <C>        <C>
Securities available for sale:
   Mortgage-backed  securities...... $   --      -- %       $   106     6.20%        $   --      -- %
   U.S. Government & agency.........     --      --           1,502     4.17            742     5.00
   Corporate Securities.............     --      --           2,503     4.97             --      --
   Investments required by law......     --      --              --      --              --      --
   Equity securities................    259    1.88              --      --              --      --
                                     ------                 -------                  ------
       Total........................ $  259    1.88%        $ 4,111     4.71%        $  742     5.00%
                                     ======                 =======                  ======

<CAPTION>
                                       More than Ten Years      Total Investment Portfolio
                                      ---------------------   ----------------------------
                                       Carrying    Average     Carrying   Market    Average
                                        Value       Yield        Value    Value      Yield
                                      ---------    ------      ---------  ------    -------
                                                    (Dollars in thousands)
<S>                                   <C>          <C>         <C>        <C>        <C>
Securities available for sale:
   Mortgage-backed  securities......  $13,599      6.09%       $ 13,705   $ 13,705   6.09%
   U.S. Government & agency.........       --       --            2,244      2,244   4.44
   Corporate Securities.............       --       --            2,503      2,503   4.97
   Investments required by law......    1,903      6.01           1,903      1,903   6.01
   Equity securities................       --       --              259        259   1.88
                                      -------                  --------   --------
       Total........................  $15,502      6.08%       $ 20,614   $ 20,614   5.72%
                                      =======                  ========   ========
</TABLE>
                                       10
<PAGE>
     Deposits.  Deposits  decreased by $4.4 million or 3.5% to $119.6 million at
June 30, 2002 from $124.0  million at June 30, 2001. The decrease in deposits is
largely attributable to the bank allowing higher priced certificates of deposits
to run-off. Certificates of deposit comprised 56.4% of the deposits. Noninterest
checking  accounts  increased  35.2% to $5.9  million at June 30, 2002 from $4.4
million at June 30, 2001.

     The following tables set forth the average balances based on daily balances
and interest rates for various types of deposits as of the dates indicated.
<TABLE>
<CAPTION>
                                                             Year Ended June 30,
                                         ------------------------------------------------------------
                                                  2002                               2001
                                         -------------------------          --------------------------
                                         Average          Average           Average           Average
                                         Balance            Rate            Balance             Rate
                                         -------          --------          -------           --------
                                                                (Dollars in thousands)
<S>                                      <C>                <C>             <C>                <C>
Passbook, statement savings
   and Christmas Club.................   $ 23,272           1.68%           $ 21,001           2.71%
NOW checking..........................      6,847           1.06               5,764           1.28
Money market..........................     12,693           2.18               8,391           3.34
Certificates of deposit...............     74,459           4.95              64,200           6.01
Noninterest-bearing checking..........      5,045            --                4,594            --
                                         --------                           --------
     Total............................   $122,316                           $103,950
                                         ========                           ========
</TABLE>

     The following table  indicates the amount of the Company's  certificates of
deposit of  $100,000  or more by time  remaining  until  maturity as of June 30,
2002. At such date, such deposits  represented 6.36% of total deposits and had a
weighted average rate of 4.18%.

                                                   Certificates
     Maturity Period                               of Deposits
     ---------------                               -----------
                                                  (In thousands)


     Three months or less.......................   $   1,762
     Over three through 12 months...............       1,079
     Over 12 months.............................       4,760
                                                   ---------
         Total..................................   $   7,601
                                                   =========

     Borrowings.  The  Company's  borrowings  decreased by $1.0 million to $22.6
million at June 30, 2002 from $23.7  million at June 30, 2001.  During the year,
the Company  paid down $6.4  million in Federal  Home Loan Bank  borrowings  and
$700,000 in the holding  company loan,  and borrowed an additional  $6.0 million
for a mortgage-backed security leverage transaction.  At June 30, 2002, the Bank
had $16.6  million in an unused  credit  line at the  Federal  Home Loan Bank of
Atlanta.

     The following table sets forth certain information  regarding borrowings by
the Company at the dates and for the periods indicated: There were no short-term
borrowings outstanding in the years ended June 30, 2002 and 2001.
<TABLE>
<CAPTION>
                                                                     At June 30,
                                                            ----------------------------
                                                               2002               2001
                                                            ---------           --------
                                                                  (Dollars in thousands)
<S>                                                         <C>                 <C>
Amounts outstanding at end of period:
    FHLB advances......................................     $  21,700           $ 22,100
    Other borrowings...................................         1,000              1,700
     Purchase Accounting Discount......................           (49)              (138)
Weighted average rate paid on:

    FHLB advances......................................          6.22%              5.64%
    Other borrowings...................................          4.97%              6.25%
</TABLE>
                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                  Year Ended June 30,
                                                            ----------------------------
                                                              2002                2001
                                                            --------            --------
                                                                  (Dollars in thousands)
<S>                                                         <C>                 <C>
Maximum amount of borrowings outstanding
 at any month end:
    FHLB advances......................................     $ 22,100            $ 31,900
    Other borrowings...................................         1,700              3,100

<CAPTION>
                                                                 Year Ended  June 30,
                                                            ----------------------------
                                                               2002                2001
                                                            ----------          ----------
                                                                (Dollars in thousands)
<S>                                                         <C>                 <C>
Approximate average borrowings
 outstanding with respect to:
   FHLB advances.......................................     $17,385             $23,352
   Other borrowings....................................       1,369               1,286
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001

     General.  The Company's  net income  increased by $119,000 or 11.7% to $1.1
million in the year ended June 30,  2002  compared  to $1,0  million in the year
ended June 30,  2001.  The  increase  in net income was  primarily  due to lower
funding costs and higher  non-interest  income  offsetting lower interest income
and higher operating expenses.

     Net Interest  Income.  The Company's net interest income  increased by $0.5
million  or 9.7% to $5.8  million  in the year  ended  June 30,  2002  from $5.3
million in the year ended June 30, 2001.

     The increase in net  interest  income is  primarily  attributable  to lower
rates paid on deposits. As shown in the Rate/Volume Analysis above, the decrease
in rates, primarily,  deposits, was responsible for $1.8 million of the increase
in net interest  income and increases in average  volumes,  again,  primarily in
deposits, was responsible for decreasing net interest income by $1.3 million.

         The Company's net interest margin remained stable at 3.90% for the year
ended June 30, 2002, the same as the year ended June 30, 2001. The decrease in
yields on earning assets of 83 basis points was offset by a decrease of 92 basis
points in the cost of funds.

     After  decreasing  during the first half of the Company's  fiscal year, the
net interest margin has shown steady improvement.  After decreasing to 3.53% and
3.54%  for  the  quarters  ended  September  30,  2001  and  December  31,  2001
respectively,  the net  interest  margin has  improved to 4.19% and 4.35% in the
quarters ended March 31, 2002 and June 30, 2002, respectively. In the first half
of the year,  due to the loan sale,  other loan  pay-offs  and low loan  demand,
higher  balances were being kept in  low-yielding  overnight  investments.  This
significantly  reduced the yield on earning assets. During this same period, the
costs of deposits and borrowings did not decrease by a similar amount, resulting
in a lower net interest  margin.  In the last half of the Company's fiscal year,
funding  costs,  primarily  the cost of  certificates  of deposits  were lowered
significantly as maturing certificates either repriced at lower rates or left to
chase higher yields  elsewhere.  Future  improvements in the net interest margin
are anticipated to result from lower borrowing costs,  investing overnight funds
into loans and an improvement  in the deposit mix to reduce the Bank's  reliance
on certificate of deposit accounts.

     Interest Income.  The Company's total interest income decreased by $142,000
or 1.2% to $11.4  million in the year ended June 30, 2002 from $11.6  million in
the year ended June 30,  2001.  The  decrease  in the yields  earned on

                                       12
<PAGE>

interest earning assets reduced  interest income by $411,000.  This was somewhat
offset by an  increase in the average  balance of interest  earning  assets that
increased interest income by $269,000.

     Interest  income on loans  decreased  $260,000,  or 2.4% during fiscal year
2002. The decrease is  attributable to the 29 basis point decrease in the yields
earned on loans  slightly  offset by the $1.1  million  increase  in the average
balance of loans outstanding.

     Interest income on investment securities increased by $6,000 to $252,000 in
fiscal year 2002 as compared to $245,000 in fiscal year 2001.  The  increase was
primarily the result of an increase in average balances offsetting a decrease in
the average yields.

     Interest income on mortgage-backed  securities decreased $17,000 or 4.5% to
$361,000  in fiscal 2002 from  $378,000 in the fiscal year ended June 30,  2001.
The lower average balance outstanding of mortgage-backed  securities resulted in
a decrease  in interest  income of $23,000  that was  slightly  offset by higher
rates  earned.  The  year-to-year  increase  in the  balance of  mortgage-backed
securities was due to the May 2002 purchase of $10 million in these  securities.
This purchase occurred too late in the year to offset the lower balances, due to
normal amortization and prepays, of the rest of the portfolio.

     Interest income on short-term investments and other interest earning assets
increased  $129,000  or 44.7% to $417,000 in the fiscal year ended June 30, 2002
from  $288,000 in the fiscal year ended June 30, 2001.  The increase in interest
income  is the  result of  higher  average  balances  in  overnight  investments
resulting  from the $9.9 million loan sale, the high level of prepayments in the
first mortgage portfolio and low loan demand for much of the year.

     Interest  Expense.  The Company's  interest  expense  decreased by $660,000
or10.6% to $5.6 million in fiscal year 2002 from $6.2 million  during the fiscal
year ended June 30, 2001. As shown in the rate/volume  table above, the decrease
in rates paid on deposits and the lower average  balance of borrowed  money more
than offset the higher average balances of deposits outstanding for the year.

     Interest expense on deposits  decreased $311,000 or 6.6% to $4.4 million in
fiscal year 2002 from $4.7 million in fiscal 2001.  Lower rates were responsible
for $2.2 million in the decrease  somewhat offset by a $1.9 million  increase in
interest expense due to higher volumes.

     Interest  expense on  borrowed  money  decreased  $348,000 or 23.3% to $1.2
million in the year ended June 30, 2002 from $1.5 million in the year ended June
30, 2001.  The decrease is the result of lower  average  balances of  borrowings
outstanding.  As noted  previously,  the loan sale,  loan  pay-offs and low loan
demand have resulted in an increase in money invested overnight. Because of this
excess  liquidity,  borrowings  from the Federal  Home Loan Bank of Atlanta were
paid off as they came due.  It was not until  the  purchase  of  mortgage-backed
securities in May 2002, that the Bank borrowed new money.

     Provision  for Loan  losses.  Provisions  for loan  losses  are  charged to
earnings to maintain the total  allowance for loan losses at a level  considered
adequate by management  to provide for probable  loan losses.  The allowance for
loan losses consists of an allocated component and an unallocated component. The
components  of the  allowance  for loan  losses  represent  an  estimation  done
pursuant to either Statement of Financial  Accounting  Standards ("SFAS") No. 5,
"Accounting for  Contingencies,"  or ("SFAS") No. 114,  "Accounting by Creditors
for  Impairment  of a Loan." The  adequacy of the  allowance  for loan losses is
determined  through a  continuous  review of the loan and  lease  portfolio  and
considers  factors such as prior loss experience,  type of collateral,  industry
standards,  past due loans in the Company's  loan  portfolio,  current  economic
conditions  and  other  factors  unique to  particular  loans  and  leases.  The
Company's  management  periodically  monitors and adjusts its allowance for loan
losses based upon its analysis of the loan portfolio.

                                       13
<PAGE>

The following table shows the activity in the allowance for loan losses in the
years ended June 30 2002 and 2001:
<TABLE>
<CAPTION>
                                                                       Year Ended June 30,
                                                                 ----------------------------
                                                                    2002               2001
                                                                 ---------          ---------
                                                                      (Dollars in thousands)

<S>                                                              <C>                <C>
Balance at beginning of period.................................  $   1,161          $     743
Assumed in acquisition.........................................         --                183
Loans charged off:
   Real estate mortgage........................................         --                 --
   Commercial Loan.............................................         28                 --
   Commercial Lease............................................        128                 56
   Consumer....................................................        201                192
                                                                 ---------          ---------
      Total charge-offs........................................        357                248
Recoveries:
   Real estate mortgage........................................         12                 11
   Commercial Loan.............................................         10                 --
   Commercial Lease............................................         16                  2
   Consumer....................................................         36                 37
                                                                 ---------          ---------
      Total recoveries.........................................         74                 50
                                                                 ---------          ---------
Net loans charged off..........................................        283                198
Provision for loan losses......................................        560                433
                                                                 ---------          ---------
Balance at end of period.......................................  $   1,438          $   1,161
                                                                 =========          =========
Ratio of net charge-offs to average
   loans outstanding during the period.........................       0.23%              0.16%
                                                                 =========          =========
Ratio of loan loss reserve to non-performing loans.............     206.48%            660.78%
                                                                 =========          =========
</TABLE>

     The  following  table  allocates  the  allowance  for loan  losses  by loan
category  at the  dates  indicated.  The  allocation  of the  allowance  to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                    % of                          % of
                                                                  Loans to                       Loans to
                                                     Amount      Total Loans      Amount       to Total Loans
                                                     ------      -----------      ------       --------------
                                                                  (Dollars in thousands)
<S>                                                  <C>              <C>         <C>                 <C>
Real estate mortgage:
   Residential.....................................  $   111          47.9%       $   119             57.4%
   Commercial......................................      255          12.4            107             10.3
   Construction....................................       50           2.7             39              1.6
Consumer and other.................................      227          11.4            195             11.5
Commercial Business................................      275          11.4            154              9.9
Commercial Lease...................................      380          14.2            209              9.3
Unallocated........................................      140            --            338               --
                                                     -------         -----        -------            -----
     Total allowance for loan losses...............  $ 1,438         100.0%       $ 1,161            100.0%
                                                     =======         =====        =======            =====
</TABLE>
     The provision for loan losses was $560,000 in fiscal year 2002, an increase
of  $128,000  or 29.5% over the fiscal  year 2001  provision  of  $433,000.  Net
charge-offs  for the year  increased  43.9% to $283,000,  with  increases in all
categories  excepting  real estate  lending.  The  Company's  allowance for loan
losses has increased as a percentage of total loans outstanding to 1.20% at June
30, 2002 from 0.88% at June 30, 2001. This increase  resulted from both a higher
balance in the loan loss reserve and lower overall loan balances,  primarily due
to the sale and pay-offs of  residential  first

                                       14
<PAGE>
mortgage  loans.  The  Company's  allowance  for loan losses as a percentage  of
non-performing  loans was 206.5% at June 30, 2002 as compared to 660.78% at June
30, 2001.

     The following  table sets forth  information  with respect to the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
                                                                         At June 30,
                                                                 --------------------------
                                                                   2002               2001
                                                                 -------            -------
                                                                       (In thousands)
<S>                                                              <C>                <C>
Loans accounted for on a non-accrual basis: (1)
    Real estate:
       Residential.............................................  $     285          $      --
       Commercial..............................................         --                 --
       Construction............................................         --                 --
    Consumer...................................................         --                 --
    Commercial Loan/Lease......................................        411                176
                                                                 ---------          ---------
       Total...................................................  $     696          $     176
                                                                 =========          =========

Accruing loans which are contractually past due
   90 days or more.............................................  $      --          $      --
                                                                  --------           --------
       Total...................................................  $      --          $      --
                                                                  --------           --------

       Total non-performing loans..............................  $     696          $     176
                                                                 =========          =========

Percentage of total loans......................................       0.58%              0.14 %
                                                                 =========          =========
Other non-performing assets (2)................................  $     128          $     146
                                                                 =========          =========
<FN>
-------------
(1)  Non-accrual  status  denotes loans on which,  in the opinion of management,
     the collection of additional  interest is unlikely.  Payments received on a
     non-accrual loan are either applied to the outstanding principal balance or
     recorded as interest  income,  depending on management's  assessment of the
     collectability of the loan.
(2)  Other  non-performing  assets  represents  property acquired by the Company
     through foreclosure or repossession.  This property is carried at the lower
     of its fair market  value less  estimated  selling  costs or the  principal
     balance of the related loan, whichever is lower.
</FN>
</TABLE>

     At June 30,  2002,  non-accrual  loans  consisted of two  residential  real
estate  loans  totaling  $285,000,  one with a balance of $221,000 is  currently
under contract of sale. Also included on non-accrual  loans at June 30, 2002 are
six lease transactions with a balance of $215,000 and three commercial  business
loans with a balance of $196,000.  One of the commercial  loans totaling $61,000
is the  guaranteed  portion of an SBA loan. A claim has been  submitted  and the
Bank is awaiting payment from the SBA. Another commercial loan totaling $104,000
has an 80% SBA guarantee.

     Except as  discussed  below,  the  Company had no loans not  classified  as
non-accrual,  90 days past due or  restructured  where known  information  about
possible credit problems of borrowers caused management to have serious concerns
as to the ability of the borrowers to comply with present loan  repayment  terms
and may result in disclosure as non-accrual,  90 days past due or  restructured.
At June 30, the Company had a $0.9 million  commercial  loan  collateralized  by
automobile  leases and  automobiles in the 30 - 59 day delinquent  category that
was classified special mention. As a result of payments received,  at August 31,
this account  remained in the 30 - 59 day delinquent  category.  The borrower is
attempting  to  arrange  alternative  financing.   Due  to  the  nature  of  the
collateral,  the Bank at this time,  does not  anticipate  any loss of principal
from this  credit.  At June 30, the  company  had a  $250,000  loan that was not
delinquent,  to a local contracting  company that has subsequently  informed the
Bank that it will be ceasing operations and declaring bankruptcy. Collateral for
this loan is the  principal's  primary  residence  and business  assets.  A very
preliminary  analysis revealed a collateral shortfall in the range of $50,000 to
$100,000.  When this  estimate is firmed up, a charge will be taken  against the
Bank's loan loss reserve.

                                       15
<PAGE>

     At June 30, 2002,  the Company had $128,000 in  repossessed  assets,  which
consisted of two residential  properties.  As of August 31, 2002, both have been
sold for a combined loss of $3,000.

     Non-interest Income. The Company's noninterest income consists of loan fees
and service charges and net gains and losses on sales of investment  securities,
mortgage-backed  securities,  loans and repossessed  assets.  Total  noninterest
income  increased  by  $290,000  or 50.4% to  $866,100  in  fiscal  year 2002 as
compared  to  $576,000 in fiscal  year 2001.  The  increase  was a result of the
$337,000 gain on the sale of loans  recognized in the year. This represents 116%
of the total  increase  in  non-interest  income for the year.  Gains on sale of
investments  of  $175,000  were  recognized  in the year ended June 30,  2002 as
compared to $171,000 in the year ended June 30, 2001.  Fees and service  charges
decreased $7,000 or 2.0% due to lower miscellaneous income.

     Non-interest  Expense. The Company's total noninterest expense increased by
$679,000,  or 18.7%,  to $4.3 million  during  fiscal 2002,  as compared to $3.6
million in fiscal 2001. The Company experienced a $476,000, or 22.3% increase in
compensation  and employee  benefits  expense  during  fiscal 2002, a $75,000 or
65.9%  increase in  professional  fees, a $67,000 or 40.4% increase in equipment
expenses  and a $60,000 or 43.9%  increase  in  occupancy  costs.  Salaries  and
benefits  expense  increased  primarily due to a full year of staffing levels at
the  multiple  locations  acquired  in  the  Northfield  transaction,  increased
deferred  compensation  expense  related  to the now  frozen  Rabbi-  trust,  an
increased  accrual for the employee stock  ownership plan that resulted from the
appreciation in the Company's stock price,  and higher employee health insurance
costs.  Professional  fees  increased  due to the costs of  outside  consultants
performing  loan and internal  control reviews as well as higher legal and audit
expenses.  Occupancy  expenses  increased  as a result  of  operating  the three
locations  acquired in the  Northfield  transaction  for a full  twelve  months.
Equipment expenses  increased  primarily due to the costs associated with making
the multitude of software programs provided by our core systems vendor work with
modern operating systems and PC-based programs. The Company is in the process of
evaluating  alternative core processing systems both from the current vendor and
others.

ASSET/LIABILITY MANAGEMENT

     The  Company's  net income is largely  dependent on the Bank's net interest
income.  Net interest  income is susceptible to interest rate risk to the degree
that  interest-bearing  liabilities  mature or reprice on a different basis than
interest-earning  assets.  When  interest-bearing  liabilities mature or reprice
more quickly  than  interest-earning  assets in a given  period,  a  significant
increase in market rates of interest could adversely affect net interest income.
Similarly,  when  interest-earning  assets  mature or reprice  more quickly than
interest bearing liabilities,  falling interest rates could result in a decrease
in net interest  income.  Net interest income is also affected by changes in the
portion  of   interest-earning   assets  that  are  funded  by  interest-bearing
liabilities  rather than by other sources of funds, such as noninterest  bearing
deposits , other liabilities, and stockholders' equity.

     The Bank's interest rate  sensitivity,  as measured by the repricing of its
interest  sensitive assets and liabilities at June 30, 2002, is presented in the
following  table.  The table was  derived  using  assumptions  which  management
believes to be reasonable.

     The  Company  has  established  an  Asset/Liability   Management  Committee
("ALCO")  that  currently  is  comprised  of four  non-employee  directors,  the
President,  the Senior Vice  President  and the Chief  Financial  Officer.  This
Committee  meets on a monthly basis and reviews the  maturities of the Company's
assets and  liabilities  and  establishes  policies and  strategies  designed to
regulate the  Company's  flow of funds and to coordinate  the sources,  uses and
pricing of such  funds.  The first  priority  in  structuring  and  pricing  the
Company's  assets and  liabilities  is to maintain an  acceptable  net  interest
margin while reducing the net effects of changes in interest rates.

                                       16
<PAGE>

     Management's  principal  strategy in managing the  Company's  interest rate
risk has been to  maintain  short and  intermediate-term  assets  in  portfolio,
including  locally  originated   adjustable-rate   commercial  real  estate  and
commercial  business  loans.  In addition,  the Company has  available  for sale
investment and mortgage-backed securities, carried at fair value, totaling $18.7
million as of June 30, 2002. The Company is holding these investment  securities
as  available  for sale because it may sell these  securities  prior to maturity
should  it  need  to do so for  liquidity  or  asset  and  liability  management
purposes.

     The Company's Board of Directors is responsible for reviewing the Company's
asset  and  liability  management  policies.   The  Asset/Liability   Management
Committee reports to the Board monthly on interest rate risk and trends, as well
as liquidity and capital ratios and  requirements.  The Company's  management is
responsible  for  administering  the  policies  of the Board of  Directors  with
respect to the Company's asset and liability goals and strategies.

                                       17
<PAGE>
         The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 2002 that are expected
to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
                                            Three        Over Three          Over One        Over Five
                                           Months      Months Through         Through         Through
                                           or Less        One Year          Five Years       Ten Years
                                           -------        --------          ----------       ---------
                                                           (Dollars in thousands)
<S>                                      <C>              <C>               <C>              <C>
Rate sensitive assets:
   Loans receivable..................... $  35,910        $  6,996          $  25,770        $ 12,817
   Mortgage-Backed  securities..........       108             429                 96              --
   Investment securities................       259              --              3,997             750
   Short-term investments and other
       interest-earning assets .........    12,616              --                483              --
                                         ---------        --------          ---------        --------

        Total...........................    48,893           7,425             30,346          13,567
                                         ---------        --------          ---------        --------
Rate sensitive liabilities:
   Deposits ............................    16,666          24,955             58,642          19,326
   Borrowings...........................     3,000           2,500             12,100           5,100
                                         ---------        --------          ---------        --------
        Total...........................    19,666          27,455             70,742          24,426
                                         ---------        --------          ---------        --------

Interest sensitivity gap................ $  29,227        $(20,030)         $ (40,396)       $(10,859)
                                         =========        ========          =========        ========
Cumulative interest sensitivity gap..... $  29,227        $  9,197          $ (31,199)       $(42,058)
                                         =========        ========          ==========       ========
Ratio of cumulative gap to total assets.     18.43%           5.80%            (19.67)%        (26.52)%
                                         =========        ========          =========        ========


<CAPTION>
                                             Over Ten         Over
                                              Through        Twenty
                                           Twenty Years       Years          Total
                                           ------------      -------         -----
                                                    (Dollars in thousands)
<S>                                          <C>            <C>            <C>
Rate sensitive assets:
   Loans receivable.....................     $ 21,544       $ 21,427       $124,464
   Mortgage-Backed  securities..........        7,120          5,952         13,705
   Investment securities................           --             --          5,006
   Short-term investments and other
       interest-earning assets .........           --             --         13,099
                                             --------       --------       --------

        Total...........................       28,664         27,379        156,274
                                             --------       --------
Rate sensitive liabilities:
   Deposits ............................            3             --        119,592
   Borrowings...........................            -             --         22,700
                                             --------       --------       --------
        Total...........................            3             --        142,292
                                             --------       --------       --------

Interest sensitivity gap................     $ 28,661       $ 27,379
                                             ========       ========
Cumulative interest sensitivity gap.....      (13,397)      $ 13,982
                                             ========       ========
Ratio of cumulative gap to total assets.        (8.45)%         8.82%
                                             ========       ========
</TABLE>

                                       18
<PAGE>

     The  interest  rate-sensitivity  of the  Company's  assets and  liabilities
illustrated in the table above could vary substantially if different assumptions
were used or actual  experience  differs from the assumptions  used. If passbook
and NOW  accounts  were  assumed  to mature in one year or less,  the  Company's
one-year negative gap would have increased.

     Certain  shortcomings  are inherent in the method of analysis  presented in
the above  table.  Although  certain  assets and  liabilities  may have  similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes in market interest rates.  The interest rates on certain types of assets
and  liabilities  may fluctuate in advance of changes in market  interest rates,
while  interest  rates on other types of assets and  liabilities  may lag behind
changes  in market  interest  rates.  Certain  assets,  such as  adjustable-rate
mortgages, have features that restrict changes in interest rates on a short-term
basis  and over the life of the  asset.  In the  event of a change  in  interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in  calculating  the table.  The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.

     The  Company   utilizes  two  additional   measures  of  risk.   These  are
quantitative measures of the percentage change in net interest income and equity
capital  resulting from a hypothetical  change of plus or minus 200 basis points
in market interest rates for maturities from one day to thirty years. As of June
30,  2002,  the Bank had the  following  estimated  sensitivity  profile for net
interest income and fair value of equity:
<TABLE>
<CAPTION>
                                                       + 200 basis points        -200 basis points     Policy Limit
                                                       ------------------        -----------------     ------------
         <S>                                                <C>                        <C>           <C>
         % Change in Net Interest Income                    2.0 %                     -4.0 %         plus or minus 10.0%
         % Change in Fair Value of Equity                  -6.0 %                    -23.0 %         plus or minus 25.0%
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     An important  component of the Company's  asset/liability  structure is the
level of liquidity  available to meet the needs of customers and creditors.  The
Company's   Asset/Liability   Management   Committee  has  established   general
guidelines for the  maintenance  of prudent  levels of liquidity.  The Committee
continually monitors the amount and source of available  liquidity,  the time to
acquire it and its cost.

     The  Company's  most  liquid  assets  are  cash on  hand,  interest-bearing
deposits and Federal funds sold, which are short-term, highly liquid investments
with original  maturities of less than three months that are readily convertible
to known  amounts of cash.  The  levels of these  assets  are  dependent  on the
Company's operating, financing and investing activities during any given period.
At June 30, 2002,  the Company's  cash on hand,  interest  bearing  deposits and
Federal funds sold totaled $14.8 million.

     The Company  anticipates  that it will have  sufficient  funds available to
meet its current loan  origination,  and unused  lines-of-credit  commitments of
approximately  $4.5  million and $3.9  million,  respectively.  Certificates  of
deposit  that are  scheduled  to mature  in less than one year at June 30,  2002
totaled $35.1 million. Historically, a high percentage of maturing deposits have
remained with the Company.

     The  Company's  primary  sources  of funds  are  deposits,  borrowings  and
proceeds from maturing investment securities and mortgage-backed  securities and
principal  and  interest  payments  on loans.  While  maturities  and  scheduled
amortization of mortgage-backed  securities and loans are predictable sources of
funds,  deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and other factors.

     The  Company,  as the  holding  company  for the Bank,  has an annual  cash
requirement  of  approximately  $539,000 for the payment of common and preferred
dividends and interest and  principal on a loan whose  proceeds were used in the
acquisition of Northfield  Bancorp,  Inc. and Northfield Federal Savings Bank in
November 2000. As of June

                                       19
<PAGE>

30, 2002,  the balance of this loan is $1 million.  The only source of funds for
the holding company is dividends from the Bank. The Bank cannot pay dividends to
the holding  company  without prior  permission from the Federal Reserve Bank of
Richmond.  When  reviewing  requests to pay this type of  dividend,  the Federal
Reserve Bank of Richmond  considers,  among other factors,  the current  capital
levels  and  earnings  of the Bank.  The Bank has not  experienced,  nor does it
anticipate any difficulty in receiving such permission.

     At June 30, 2002,  the Company  exceeded  all  regulatory  minimum  capital
requirements.  The table  below  presents  certain  information  relating to the
Company's regulatory compliance at June 30, 2002.
<TABLE>
<CAPTION>
                                                                                                  To Be Well
                                                                                               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>
 Total Capital (to Risk Weighted Assets)..   $  13,109        13.49 %     $ 7,777      8.0%    $ 9,721     10.0%
 Tier 1 Capital (to Risk Weighted Assets).      11,894        12.24         3,888      4.0       5,833     6.0
 Tier 1 Capital (to Average Assets).......      11,894         7.73         6,157      4.0       7,696     5.0
</TABLE>

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated  Financial  Statements and Notes thereto  presented herein
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of  historical  dollars  without  considering  the change in the  relative
purchasing  power of  money  over  time  and due to  inflation.  The  impact  of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies,  nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's  performance  than do the  effects  of  general  levels of  inflation.
Interest  rates do not  necessarily  move in the same  direction  or to the same
extent as the price of goods and services.

ACCOUNTING PRONOUNCEMENTS WITH FUTURE EFFECTIVE DATES

     In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived  Assets".  This statement  supercedes SFAS No. 121 and
APB Opinion No. 30. SFAS No. 144 retains the fundamental  provisions of SFAS No.
121 for (a) recognition and measurement of impairment of long-lived assets to be
held and used and (b)  measurement  of  long-lived  assets to be  disposed of by
sale. SFAS No. 144 also requires reporting of discontinued operations separately
from  continuing  operations  and extends  that  reporting  to a component of an
entity that either has been disposed of or is  classified as held for sale.  The
Statement  also  eliminates  the  exception to  consolidation  for a temporarily
controlled  subsidiary.  Management  believes  that  the  above  will not have a
material impact on the Company's financial statements.


                                       20
<PAGE>

                            ANDERSON ASSOCIATES, LLP

                          Certified Public Accountants
                                7621 Fitch Lane
                           Baltimore, Maryland 21236
                                  410-882-8050


INDEPENDENT AUDITORS' REPORT



The Stockholders and The Board of Directors
Patapsco Bancorp, Inc.
Dundalk, Maryland


     We have  audited the  consolidated  statements  of  financial  condition of
Patapsco  Bancorp,  Inc. and  Subsidiaries as of June 30, 2002 and 2001, and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the two years in the two year  period  ended  June 30,  2002.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management. Our responsibility is to express an opinion on on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing  the  account  principles  used  and  significant  estimates  made  by
management,  as well as evaluating the overall consolidated financial statements
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Patapsco  Bancorp,  Inc. and  Subsidiaries as of June 30, 2002 and 2001, and the
consolidated  results of its  operations  and its cash flows for each of the two
years in the two year period ended June 30, 2002, in conformity  with accounting
principles generally accepted in the United Statesof America.


                                                    /s/ Anderson Associates, LLP



August 13, 2002
Baltimore, Maryland

                                       21
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, 2002 and 2001
========================================================================================================================
                                                                                         2002                  2001
------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                          <C>
ASSETS
Cash:
      On hand and due from banks                                                  $  3,660,638              2,710,768
      Interest bearing deposits                                                      7,464,183              2,630,770
Federal funds sold                                                                   3,732,000              5,819,093
Investment securities at fair value (note 2)                                         5,005,955              2,188,212
Mortgage-backed securities at fair value (note 3)                                   13,705,241              5,679,605
Loans Held for Sale (note 1)                                                                --              9,914,139
Loans receivable, net (note 4)                                                     118,349,734            127,833,640
Investment required by law, at cost (note 9)                                         1,903,350              1,903,350
Property and equipment, net (note 5)                                                 1,056,806              1,193,425
Goodwill                                                                             1,869,691              1,839,691
Deferred taxes (note 8)                                                                699,125                838,061
Accrued interest, prepaid expenses and other assets                                  1,288,860              1,589,529
------------------------------------------------------------------------------------------------------------------------
                                                                                  $158,735,583            164,170,283
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
      Interest bearing deposits (note 6)                                          $113,682,321            119,622,698
      Noninterest bearing deposits                                                   5,910,312              4,369,526
      Borrowings (note 7)                                                           22,616,019             23,661,772
      Accrued expenses and other liabilities                                         1,925,523              3,091,467
------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                  144,134,175            150,745,463

Temporary equity - ESOP shares subject to put option(note 11)                          671,724                620,311

Stockholders' equity (notes 9, 10 and 11):
       Preferred stock-Series A Noncumulative Convertible Perpetual $0.01 par
         value; authorized 1,000,000 shares with a liquidation preference of $25
         per share; 100,166 and 106,073 outstanding
         at June 30, 2002 and June 30, 2001, respectively                                1,002                  1,061
       Additional paid-in-capital                                                    2,505,495              2,650,733
      Common stock $0.01 par value; authorized 4,000,000 shares; issued and
        outstanding 373,613 shares at June 30, 2002 and
        332,950 shares at June 30, 2001                                                  3,736                  3,330
      Additional paid-in capital                                                     2,020,324              1,009,626
      Contra equity - Employee Stock Option Plan (ESOP)                               (119,537)              (185,695)
      Contra equity - Management Recognition Plan (MRP)                                     --                (60,610)
      Deferred compensation - Rabbi Trust                                              (77,544)               (77,544)
       Obligation under Rabbi Trust                                                    249,976                     --
      Retained earnings, substantially restricted                                    9,207,460              9,331,919
      Accumulated other comprehensive income, net of taxes                             138,772                131,689
------------------------------------------------------------------------------------------------------------------------
                                                                                    13,929,684             12,804,509
Commitments (notes 4, 5, 10 and 11)
------------------------------------------------------------------------------------------------------------------------
                                                                                  $158,735,583            164,170,283
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       22
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years Ended June 30, 2002 and 2001
========================================================================================================================
                                                                                  2002                    2001
------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                     <C>
Interest income:
      Loans receivable (note 4 )                                               $10,415,229             10,675,371
      Mortgage-backed securities                                                   361,170                378,275
      Investment securities                                                        251,639                245,281
      Federal funds sold and other investments                                     416,693                288,025
------------------------------------------------------------------------------------------------------------------------
Total interest income                                                           11,444,731             11,586,952
------------------------------------------------------------------------------------------------------------------------

Interest expense:
      Deposits                                                                   4,422,358              4,733,067
      Interest on short term borrowing                                               6,597                  7,067
      Interest on long term debt                                                 1,150,842              1,499,662
------------------------------------------------------------------------------------------------------------------------
Total interest expense                                                           5,579,797              6,239,796
------------------------------------------------------------------------------------------------------------------------

Net interest income                                                              5,864,934              5,347,156
Provision for losses on loans (note 4)                                             560,000                432,500
------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans                          5,304,934              4,914,656
------------------------------------------------------------------------------------------------------------------------

Noninterest income:
      Fees and service charges                                                     334,836                342,324
      Net gain on sales of other real estate owned                                      --                 19,556
      Gain on sale of investment and mortgage-backed
        securities (notes 2 and 3)                                                 174,470                170,830
       Gain on sale of loans held-for-sale                                         337,025                     --
      Other                                                                         19,788                 43,059
------------------------------------------------------------------------------------------------------------------------
Total noninterest income                                                           866,119                575,769
------------------------------------------------------------------------------------------------------------------------

Noninterest expenses:
      Compensation and employee benefits                                         2,609,419              2,133,066
      Insurance                                                                     62,733                 51,267
      Professional fees                                                            189,826                114,448
      Equipment expenses                                                           233,781                166,534
      Net occupancy costs                                                          197,133                136,996
      Advertising                                                                  135,989                132,250
      Data processing                                                              203,948                191,499
      Goodwill Amortization                                                             --                 91,424
      Other                                                                        682,852                619,042
------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses                                                       4,315,681              3,636,526
------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                       1,855,372              1,853,899
Income tax provision (note 8)                                                      718,458                836,269
------------------------------------------------------------------------------------------------------------------------
Net income                                                                      $1,136,914              1,017,630
------------------------------------------------------------------------------------------------------------------------

Net income per share of common stock (note 1):
      Basic                                                                     $     2.63                   2.61
      Diluted                                                                         2.29                   2.40
========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       23
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2002 and 2001

==================================================================================================================

                                                                  Additional
                                                                    Paid-In                 Additional   Contra-
                                                      Preferred      Capital      Common     Paid-In    Equity
                                                         Stock     Preferred       Stock     Capital     ESOP
------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>              <C>     <C>         <C>
Balance at June 30, 2000                              $     -           -           3,274     950,692   (254,045)

 Comprehensive income
    Net income                                              -           -            -          -           -
     Adjustment to unrealized net holding losses on
        available-for-sale portfolios, net (note 1)         -           -            -          -           -
     Comprehensive income                                   -           -            -          -           -
  Compensation under stock-based benefit plans              -                        -         37,561     68,350
  Cash dividends declared ($.56 per share)                  -           -            -          -           -
  Options exercised                                         -           -              34      63,712       -
  Purchase of common stock                                  -           -             (10)    (21,639)      -
  Transfer to temporary equity                              -           -            -        (99,750)      -
  Rabbi Trust Shares from Acquisition                       -           -            -          -           -
  Issuance of Preferred Stock                             1,093   2,729,783          -          -           -
  Conversion of Preferred to Common                         (32)    (79,050)           32      79,050       -
------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001                                  1,061   2,650,733         3,330   1,629,937   (185,695)

 Comprehensive income
    Net income                                              -           -            -          -           -
     Adjustment to unrealized net holding losses on
        available-for-sale portfolios, net (note 1)         -           -            -          -           -
     Comprehensive income                                   -           -            -          -           -
  Compensation under stock-based benefit plans              -           -            -         42,538     66,158
  Cash dividends declared ($.56 per share)                  -           -            -          -           -
  Options exercised                                         -           -             334     872,579       -
  Purchase of common stock                                  -           -              33      57,374       -
  Purchase of preferred stock                               (23)    (55,615)         -          -           -
  Transfer to temporary equity                              -           -            -        (51,413)      -
  Rabbi Trust Shares from Acquisition                       -           -            -          -           -
  Issuance of Preferred Stock                               -           -            -          -           -
  Conversion of Preferred to Common                         (36)    (89,623)           39      89,620       -
------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002                                  1,002   2,505,495         3,736   2,020,324   (119,537)
==================================================================================================================
<CAPTION>

========================================================================================================================
                                                                                               Accumulated
                                                                                                Other
                                                       Contra-     Stock                     Comprehensive      Total
                                                       Equity      Held by       Retained      Income, Net  Stockholders'
                                                       MRP      Rabbi Trust      Earnings      of Taxes        Equity
-------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>            <C>            <C>           <C>
Balance at June 30, 2000                              (154,761)         -       8,625,749      (112,172)      9,058,737

 Comprehensive income
    Net income                                            -             -       1,017,630          -              -
     Adjustment to unrealized net holding losses on
        available-for-sale portfolios, net (note 1)       -             -            -          243,860           -
     Comprehensive income                                 -             -            -            -           1,261,491
  Compensation under stock-based benefit plans         94,151           -            -            -             200,062
  Cash dividends declared ($.56 per share)                -             -       (311,460)         -            (311,460)
  Options exercised                                       -             -            -            -              63,746
  Purchase of common stock                                -             -            -            -             (21,649)
  Rabbi Trust Shares from Acquisition                     -         (77,544)         -            -             (77,544)
  Issuance of Preferred Stock                             -             -            -            -           2,730,876
  Conversion of Preferred to Common                       -             -            -            -               -
-------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001                               (60,610)     (77,544)    9,331,919       131,688      12,804,509

 Comprehensive income
    Net income                                            -             -       1,136,914          -             -
     Adjustment to unrealized net holding losses on
        available-for-sale portfolios, net (note 1)       -             -            -            7,083          -
     Comprehensive income                                 -             -            -            -          1,143,997
  Compensation under stock-based benefit plans         60,610           -            -            -            169,306
  Cash dividends declared ($.56 per share)                -             -       (338,460)         -           (338,460)
  Common Stock dividend                                                         (872,913)                         -
  Options exercised                                       -             -            -            -             57,407
  Purchase of common stock                                -             -            -            -               -
  Purchase of preferred stock                             -             -            -            -            (55,638)
  Transfer to temporary equity                            -             -            -            -            (51,413)
  Rabbi Trust Shares from Acquisition                     -             -            -            -               -
  Obligation and rabbi trust                              -         249,976          -            -            249,976
  Issuance of Preferred Stock                             -             -            -            -               -
  Conversion of Preferred to Common                       -             -            -            -               -
-------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002                                  -         172,432     9,207,460       138,772      13,929,684
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       24
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows

Years ended June 30, 2002 and 2001

========================================================================================================================
                                                                                    2002                       2001
------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                            <C>
Cash flows from operating activities:
     Net income                                                                   $ 1,136,914                 1,017,630
     Adjustments to reconcile net income to net
          cash provided by operating activities:
               Goodwill amortization                                                    --                       91,424
               Depreciation                                                           149,715                   153,866
               Provision for losses on loans                                          560,000                   432,500
               Provision for loss on foreclosed real estate                            10,000                        --
               Non-cash compensation under stock-based benefit plans                  169,306                   200,062
               Amortization of premiums and discounts, net                            142,330                  (199,947)
               Deferred loan origination fees, net of costs                            19,971                     1,389
               Gain on sale of investment securities                                (174,470)                  (169,475)
               Gain on sale of loans held-for-sale                                  (337,025)                        --
               Gain on sale of mortgage-backed securities                                 --                     (1,355)
               Gain on sale of real estate owned                                          --                    (19,556)
               Change in deferred taxes                                               134,481                   (19,943)
               Increase(Decrease) in accrued interest on investments,
                prepaid expenses and other assets                                     290,669                  (151,525)
               (Decrease) increase in accrued expenses and other liabilities         (915,968)                 (321,760)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                           1,185,923                 1,013,310
------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Cash consideration Northfield acquisition, net                                        --                (2,831,106)
     Purchase of certificate of deposit                                               (99,000)                       --
     Purchase of investment securities                                             (4,755,665)                   (6,811)
     Proceeds from sale of investment securities                                    2,004,510                 3,117,986
     Purchase of mortgage-backed-securities                                       (10,000,000)                       --
     Proceeds from sale of mortgage-backed securities                                      --                   250,715
     Principal repayments on mortgage-backed securities                             2,023,423                 1,349,931
     Proceeds from sale of loans-held-for-sale                                     10,251,164                        --
     Principal repayments on loans held for sale                                           --                   105,801
     Loan principal disbursements, net of repayments                                8,834,366                (3,803,482)
     Proceeds from sale of real estate owned                                               --                   330,357
     Purchase of investment required by law                                                --                  (442,500)
     Purchases of property and equipment                                              (13,096)                 (175,356)
------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                            $  8,245,702                (2,104,465)
------------------------------------------------------------------------------------------------------------------------

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

                                       25
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, Continued

Years ended June 30, 2002 and 2001

========================================================================================================================
                                                                                    2002                    2001
------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                       <C>
Cash flows from financing activities:
    Net increase (decrease) in deposits                                        $ (4,347,744)             9,999,366
    Purchase of common stock                                                             --                (21,649)
    Purchase of preferred stock                                                     (55,638)                    --
    Stock options exercised                                                          57,407                 63,746
    Additional borrowings                                                         6,000,000             27,900,000
    Repayments of borrowings                                                      7,100,000            (29,200,000)
    Dividends paid                                                                 (388,460)              (311,460)
------------------------------------------------------------------------------------------------------------------------
Net cash(used in) provided by financing activities                               (5,834,435)             8,430,003
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                              3,597,190              7,338,848
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year                                   10,776,631              3,437,783
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                       $ 14,373,821             10,776,631
========================================================================================================================

The Following is a Summary of Cash and Cash Equivalents:
     Cash on hand and due from banks                                           $  3,660,638              2,710,768
     Interest bearing deposits in other banks                                     7,464,183              2,630,770
     Federal funds sold                                                           3,732,000              5,819,093
------------------------------------------------------------------------------------------------------------------------
                                                                                 14,856,821             11,160,631
========================================================================================================================

         Less - Certificates of deposit maturing in 90 days or more
                      included in interest bearing deposits in other banks         (483,000)              (384,000)
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents reflected on the Statement of Cash Flows             $ 14,373,821             10,776,631
========================================================================================================================

Supplemental information:
     Interest paid on savings deposits and borrowed funds                      $  5,579,797              6,239,796
     Income taxes paid                                                              820,400                836,269
     Transfer from loans to real estate owned                                            --                384,899
     Preferred stock issued for acquired company                                         --              2,730,876
     Preferred stock converted to common stock                                       89,659                 79,082
     Common Stock Dividend                                                          872,913                     --
     Transfer ESOP shares to temporary capital                                       51,413                     --
------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(1)  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF BUSINESS

     Patapsco Bancorp, Inc. (the Company) is the holding company of The Patapsco
     Bank (Patapsco).  Patapsco owns 100% of Prime Business Leasing, Inc. (Prime
     Leasing) and Patapsco Financial  Services,  Inc.  (Financial).  The primary
     business of Patapsco is to attract  deposits from  individual and corporate
     customers  and to originate  residential  and  commercial  mortgage  loans,
     commercial  loans and consumer  loans.  Patapsco is subject to  competition
     from other financial and mortgage  institutions in attracting and retaining
     deposits and in making  loans.  Patapsco is subject to the  regulations  of
     certain  agencies  of  the  federal   government  and  undergoes   periodic
     examination by those agencies. The primary business of Prime Leasing is the
     origination  and servicing of commercial  leases.  The primary  business of
     Financial is the sale of consumer investments.

     BASIS OF PRESENTATION

     The consolidated  financial  statements include the accounts of the Company
     and its wholly-owned  subsidiaries,  Patapsco, Prime Leasing and Financial.
     All significant intercompany accounts and transactions have been eliminated
     in consolidation.

     In preparing the consolidated financial statements,  management is required
     to make  estimates  and  assumptions  that affect the  reported  amounts of
     assets  and  liabilities  as of the  date of the  statements  of  financial
     condition  and income and  expenses  for the  periods  then  ended.  Actual
     results could differ significantly from those estimates. Material estimates
     that are  particularly  susceptible to significant  change in the near-term
     relate to the determination of the allowance for loan losses. In connection
     with this  determination,  management  obtains  independent  appraisals for
     significant properties and prepares fair value analyses as appropriate.

     Management  believes that the allowance for loan losses is adequate.  While
     management uses and considers available  information in making the required
     estimates,  additional  provisions  for  losses may be  necessary  based on
     changes in economic conditions,  particularly in Baltimore and the State of
     Maryland. In addition,  various regulatory agencies, as an integral part of
     their examination  process,  periodically  review Patapsco's  allowance for
     loan losses.  Such agencies may require Patapsco to recognize  additions to
     the allowance based on their judgments about information  available to them
     at the time of their examination.

     CASH AND CASH EQUIVALENTS

     Cash  equivalents  include cash,  federal  funds sold and interest  bearing
     deposits in other bank with an original  maturity of 90 days or less.  Cash
     equivalents and other  liquidity and short term  investments are carried at
     cost, which approximates market value.

                                       27
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(1)  CONTINUED

     INVESTMENT AND MORTGAGE-BACKED SECURITIES

     Debt  securities  that the Company has the  positive  intent and ability to
     hold to  maturity  are  classified  as  held-to-maturity  and  recorded  at
     amortized   cost.   Debt  and   equity   securities   not   classified   as
     held-to-maturity  and equity  securities  with  readily  determinable  fair
     values are classified as trading  securities if bought and held principally
     for the purpose of selling them in the near term.  Trading  securities  are
     reported  at fair  value,  with  unrealized  gains and losses  included  in
     earnings.  Investments  not classified as  held-to-maturity  or trading are
     considered   available-for-sale  and  are  reported  at  fair  value,  with
     unrealized  holding gains and losses excluded from earnings and reported as
     a separate component of stockholders' equity, net of tax effects.

     If  a  decline  in  value  of  an   individual   security   classified   as
     held-to-maturity  or   available-for-sale   is  judged  to  be  other  than
     temporary, the cost basis of that security is reduced to its fair value and
     the  amount of the  write-down  is  included  in  earnings.  Fair  value is
     determined  based on bid prices  published in financial  newspapers  or bid
     quotations  received  from  securities  dealers.  For purposes of computing
     realized  gains or losses on the sales of  investments,  cost is determined
     using  the  specific  identification  method.  Premiums  and  discounts  on
     investment  and  mortgage-backed  securities are amortized over the term of
     the security using the interest method.

     LOANS HELD FOR SALE

     Loans held for sale are  carried at the lower of  aggregate  cost or market
     value. Market value is determined based on outstanding investor commitments
     or, in the absence of such  commitments,  based on current  investor  yield
     requirements.  Gains and  losses on loan  sales  are  determined  using the
     specific identification method.

     PROPERTY AND EQUIPMENT

     Property and  equipment  are stated at cost less  accumulated  depreciation
     computed by use of straight-line and accelerated methods over the estimated
     useful  lives  of  the  related  assets.   Additions  and  betterments  are
     capitalized  and  costs  of  repairs  and  maintenance  are  expensed  when
     incurred.  The related costs and  accumulated  depreciation  are eliminated
     from the accounts when an asset is sold or retired and the  resultant  gain
     or loss is credited or charged to income.

                                       28
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(1)  CONTINUED

     LOAN FEES

     Loan  origination  fees are  deferred  and  amortized  to  income  over the
     contractual  lives of the related loans using the interest method.  Certain
     incremental  direct loan origination costs are deferred and recognized over
     the  contractual  lives of the related loans using the interest method as a
     reduction of the loan yield.  Deferred  fees and costs are  combined  where
     applicable and the net amount is amortized.

     PROVISION FOR LOSSES ON LOANS

     Provisions for losses on loans  receivable are charged to income,  based on
     management's  judgment with respect to the risks inherent in the portfolio.
     Such  judgment  considers  a number of factors  including  historical  loss
     experience,  the present and prospective  financial condition of borrowers,
     the estimated value of underlying  collateral,  geographic  concentrations,
     current and prospective  economic  conditions,  delinquency  experience and
     status of  nonperforming  assets.  Additionally,  accrual  of  interest  on
     potential  problem  loans is excluded  from income when,  in the opinion of
     management,  the full  collection of principal or interest is in doubt,  or
     payment of principal  or interest  has become 90 days past due,  unless the
     obligation  is well  secured  and in the  process of  collection.  Interest
     collected on nonaccrual loans is generally recorded in income in the period
     received.

     In  accordance  with the  provisions  of Statement of Financial  Accounting
     Standards No. 114,  Accounting  for Creditors for  Impairment of a Loan, as
     amended by Statement 118,  Accounting by Creditors for Impairment of a Loan
     -  Income  Recognition  and  Disclosures   (collectively   referred  to  as
     "Statement 114"),  Patapsco determines and recognizes impairment of certain
     loans.  A  loan  is  determined  to be  impaired  when,  based  on  current
     information  and events,  it is probable  that  Patapsco  will be unable to
     collect all  amounts due  according  to the  contractual  terms of the loan
     agreement.  A loan is not considered  impaired  during a period of delay in
     payment if Patapsco expects to collect all amounts due,  including past-due
     interest.  Patapsco  generally  considers  a period of delay in  payment to
     include  delinquency  up to and  including 90 days.  Statement 114 requires
     that impaired loans be measured at the present value of its expected future
     cash flows  discounted  at the loan's  effective  interest  rate, or at the
     loan's  observable  market price or the fair value of the collateral if the
     loan is collateral dependent.

     Statement 114 is generally  applicable for all loans except large groups or
     smaller-balance  homogeneous  loans  that are  evaluated  collectively  for
     impairment,  including  residential  first and  second  mortgage  loans and
     consumer   installment  loans.   Impaired  loans  are  therefore  generally
     comprised of  commercial  mortgage,  real estate  development,  and certain
     restructured  residential loans. In addition,  impaired loans are generally
     loans which  management  has placed in  nonaccrual  status  since loans are
     placed in  nonaccrual  status on the  earlier  of the date that  management
     determines that the collection of principal  and/or interest is in doubt or
     the date that principal or interest is 90 days or more past-due.

                                       29
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(1)  CONTINUED

     Patapsco  recognized interest income for impaired loans consistent with its
     method for nonaccrual loans.  Specifically,  interest payments received are
     recognized  as  interest  income  or,  if the  ultimate  collectibility  of
     principal is in doubt, are applied to principal.

     REAL ESTATE ACQUIRED THROUGH FORECLOSURE

     Real estate acquired through foreclosure 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.  Costs relating to holding such
     real estate are charged against income in the current  period,  while costs
     relating  to  improving  such real estate are  capitalized  until a salable
     condition is reached.

     INCOME TAXES

     Deferred  income  taxes  are  recognized,   with  certain  exceptions,  for
     temporary  differences between the financial reporting basis and income tax
     basis of assets and  liabilities  based on enacted tax rates expected to be
     in effect when such  amounts are  realized or settled.  Deferred tax assets
     (including tax loss carry  forwards) are recognized only to the extent that
     it is more likely  than not that such  amounts  will be  realized  based on
     consideration of available evidence,  including tax planning strategies and
     other factors.

     The  effects  of changes  in tax laws or rates on  deferred  tax assets and
     liabilities are recognized in the period that includes the enactment date.

     NET INCOME PER SHARE OF COMMON STOCK

     Basic per share amounts are based on the weighted  average shares of common
     stock  outstanding.  Diluted  earnings  per share  assume  the  conversion,
     exercise or issuance of all  potential  common  stock  instruments  such as
     options,  warrants  and  convertible  securities,  unless  the effect is to
     reduce a loss or increase  earnings per share. No adjustments  were made to
     net income (numerator) for all periods presented.  Fiscal year 2001 figures
     have been  adjusted  to  reflect  the 10%  common  stock  dividend  paid in
     December 2002.

                                       30
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(1)  CONTINUED
<TABLE>
<CAPTION>
                                                     -----------------------------------------------------------------------
                                                                                   YEAR ENDED
                                                     -----------------------------------------------------------------------
                                                              JUNE 30, 2002                          JUNE 30, 2001
                                                        BASIC              DILUTED             BASIC            DILUTED
----------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>                <C>               <C>
Net income                                           $1,136,914          1,136,914          1,017,630         1,017,630
Preferred Stock Dividends                               186,373                  -            126,925                 -
Net Income Available to Common                          950,541          1,136,914            890,705         1,017,630
Weighted average shares outstanding                     361,646            361,646            341,439           341,439
Diluted securities:
    Preferred Stock                                           -            113,552                  -            78,623
    MRP shares                                                -                523                  -                92
    Options                                                   -             21,744                  -             3,808
----------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares                        361,646            497,494            341,439           423,962
----------------------------------------------------------------------------------------------------------------------------
Per share amount                                     $     2.63               2.29               2.61              2.40
============================================================================================================================
</TABLE>

     STOCK-BASED COMPENSATION

     In October 1995, the FASB issued  Statement of Financial  Standards No. 123
     (Statement 123),  Accounting for Stock-Based  Compensation.  Statement 123,
     which is effective  for fiscal  years  beginning  after  December 15, 1995,
     establishes  financial  accounting and reporting  standards for stock-based
     employee  compensation plans and for transactions in which an entity issues
     its equity  instruments  to acquire goods and services  from  nonemployees.
     Statement  123 allows  companies  to account for  stock-based  compensation
     either  under the new  provisions  of SFAS 123 or under the  provisions  of
     Accounting  Principles Board Opinion No. 25 (APB 25),  Accounting for Stock
     Issued to Employees,  but requires pro forma disclosure in the footnotes to
     the financial statements as if the measurement  provisions of Statement 123
     had been adopted.  The Company has continued to account for its stock-based
     compensation in accordance with APB 25.  Information  required by Statement
     123 regarding the Company's  stock-based  compensation plans is provided in
     note 11.

     EMPLOYEE STOCK OWNERSHIP PLAN

     Patapsco recognizes the cost of the ESOP in accordance with AICPA Statement
     of Position 93-6 Employers'  Accounting for Employee Stock Ownership Plans.
     As shares are  released  from  collateral,  Patapsco  reports  compensation
     expense  equal to the  current  market  price of the  shares and the shares
     become  outstanding  for  earnings  per share  computations.  Dividends  on
     allocated  shares  are  recorded  as  a  reduction  of  retained  earnings;
     dividends on unallocat- ed shares are recorded as a reduction of debt.


                                       31
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

     RECLASSIFICATION AND RESTATEMENT

     Certain  prior  year's  amounts  have been  reclassified  to conform to the
     current year's presentation.

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

(2)  INVESTMENT SECURITIES

     Investment securities, classified as available-for-sale,  are summarized as
     follows as of June 30:
<TABLE>
<CAPTION>
                                                                        2002
                                          -------------------------------------------------------------------
                                           AMORTIZED        UNREALIZED       UNREALIZED            FAIR
                                               COST             GAINS            LOSSES           VALUE
  -----------------------------------------------------------------------------------------------------------
<S>                                       <C>                     <C>              <C>            <C>
  Equity securities                       $   223,734             41,563           6,010          259,287
  Corporate Bonds                           2,500,000              8,970           5,985        2,502,985
  U.S. Government and Agency                2,251,309             10,630          18,256        2,243,683
  ===========================================================================================================
                                          $ 4,975,043             61,163          30,251        5,005,955
<CAPTION>

                                          -------------------------------------------------------------------
                                                                             2001
                                          -------------------------------------------------------------------
<S>                                       <C>                    <C>              <C>             <C>
  Equity securities                       $   217,064                  -          17,867          199,197
  Corporate Bonds                           1,146,753            106,928               -        1,253,681
  U.S. Government and Agency                  680,414             54,920               -          735,334
  -----------------------------------------------------------------------------------------------------------
                                            2,044,231            161,848          17,867        2,188,212
  ===========================================================================================================
</TABLE>

     The equity investments have no stated maturity. The scheduled maturities of
     other investments available for sale at June 30, 2002 are as follows:
<TABLE>
<CAPTION>
                                                                                      2002
                                                                       AMORTIZED                   FAIR
                                                                         COST                      VALUE
  -----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                        <C>
     Due in one to five years                                       $ 4,001,309                4,004,633
     Due after five through ten years                                   750,000                  742,035

     Due after ten years                                                      -                        -
                                                                    -----------------------------------------
                                                                    $ 4,751,309                4,746,668
  ===========================================================================================================
</TABLE>

     Accrued interest receivable balances at June 30, 2002 and 2001 were $34,500
     and $31,895, respectively.

     In fiscal year 2002, the Company  received  proceeds of $2,004,510 from the
     sale of  corporate  and  agency  securities  resulting  in  gross  gains of
     $174,471.

     In fiscal year 2001, the Company  received  proceeds of $3,117,985 from the
     sale of  corporate  and  municipal  securities  resulting in gross gains of
     $169,475.

                                       32
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(3)  MORTGAGE-BACKED SECURITIES

     Mortgage-backed   securities,   classified   as   available-for-sale,   are
     summarized as follows as of June 30:
<TABLE>
<CAPTION>
                                                                        2002
                                           ----------------------------------------------------------------
                                            AMORTIZED        UNREALIZED      UNREALIZED         FAIR
                                                   COST          GAINS           LOSSES        VALUE
-----------------------------------------------------------------------------------------------------------
<S>                                        <C>                  <C>               <C>         <C>
Government National Mortgage
  Association (GNMA)                       $ 3,452,205          114,347             -         3,566,552
Federal National Mortgage
  Association (FNMA)                         7,093,273           52,904             -         7,146,177
Federal Home Loan Mortgage
  Corporation (FHLMC)                        2,964,574           27,938             -         2,992,512
                                           ----------------------------------------------------------------
                                           $13,510,052          195,189             -        13,705,241
===========================================================================================================
                                                                         2001
                                           ----------------------------------------------------------------
Government National Mortgage
  Association (GNMA)                        $5,303,412           56,012              -        5,359,424
Federal National Mortgage
  Association (FNMA)                           305,610           14,571              -          320,181
Federal Home Loan Mortgage
  Corporation (FHLMC)                                -                -              -                -
                                           ----------------------------------------------------------------
                                            $5,609,022            70,583                     5,679,605
===========================================================================================================
</TABLE>

     Accrued interest  receivable at June 30, 2002 and June 30, 2001 was $68,729
     and $32,293, respectively.

     There were no sales of mortgage-backed securities in 2002.

     In fiscal year 2001,  the Company  received  proceeds of $250,715  from the
     sale of one FNMA security resulting in a gross gain of $1,355.

                                       33
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(4)  LOANS RECEIVABLE

     Loans receivable and accrued interest  receivable thereon are summarized as
     follows as of June 30:
<TABLE>
<CAPTION>
                                                                              2002                     2001
   -----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                      <C>
   Real estate secured by first mortgage:
        Residential                                                        $ 59,609,316              75,495,976
        Commercial                                                           15,487,336              13,541,630
        Construction, net of loans in process                                 3,331,977               2,097,996
   -----------------------------------------------------------------------------------------------------------------
                                                                             78,428,629              91,135,602

   Home improvement loans                                                     9,562,248              11,427,469
   Commercial loans                                                          14,158,551              12,991,549
   Home equity loans                                                          3,096,376               2,315,451
   Commercial leases                                                         17,643,326              12,287,292
   Loans secured by deposits                                                    230,956                 255,247
   Consumer loans                                                             1,344,524               1,145,294
   -----------------------------------------------------------------------------------------------------------------
                                                                            124,464,610             131,557,904

   ----------------------------------------------------------------------------------------------------------------
                                                                              2002                     2001
   Less:
        Deferred loan origination fees, net of costs                       $     66,162                  16,961
        Unearned interest consumer loans                                        290,314                 330,995
        Unearned interest commercial leases                                   3,975,799               1,601,808
        Purchase accounting discount, net                                       344,528                 613,888
        Allowance for loan losses                                             1,438,073               1,160,612
   -----------------------------------------------------------------------------------------------------------------
   Loans receivable, net                                                   $118,349,734             127,833,640
   =================================================================================================================
</TABLE>


     Accrued interest  receivable on loans was $693,000 and $804,100 at June 30,
     2002 and 2001, respectively.

     A substantial  portion of the Company's loans receivable are mortgage loans
     secured by  residential  real estate  properties.  Loans are extended  only
     after  evaluation by management  of customers'  creditworthiness  and other
     relevant  factors on a case-by-case  basis.  On first mortgage  loans,  the
     Company  does not lend  more  than 95% of the  appraised  value of an owner
     occupied residential property and in instances where the Company lends more
     than 80% of the appraised value,  private  mortgage  insurance is required.
     For investor loans on residential property (not owner occupied) the Company
     generally does not lend more than 75% of the appraised value.

     The Company also originates  leases with its commercial  customers.  Leases
     are  extended   only  after   evaluation   by   management   of  customers'
     creditworthiness and other relevant factors on a case-by-case basis. Direct
     costs for the  origination  of leases for the years ended June 30, 2002 and
     2001 were $35,400 and $28,000, respectively.

                                       34
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001


     The Company's  residential  lending  operations are focused in the State of
     Maryland,  primarily the Baltimore  Metropolitan  area.  While  residential
     lending is  generally  considered  to involve less risk than other forms of
     lending,  payment  experience on these loans is dependent to some extent on
     economic and market conditions in the Company's primary lending area.

     Impairment of loans having recorded investments of $698,473 and $181,500 at
     June 30, 2002 and 2001  respectively has been recognized in conformity with
     SFAS No. 114. The average recorded investment in impaired loans during 2002
     and 2001 respectively was $686,650 and $348,300. There was an allowance for
     losses related to those loans of $154,000 and $ 73,900 at June 30, 2002 and
     2001, respectively. The amount of interest that would have been recorded on
     impaired  loans  at June 30,  2001 and  2000,  respectively  had the  loans
     performed  in  accordance  with their terms was  approximately  $57,950 and
     $822,  respectively.  The actual  interest  income  recorded on these loans
     during 2001 and 2000 was $32,960 and $8,900, respectively.

     The Company,  through its normal asset review process,  classifies  certain
     loans  which  management  believes  involve  a  degree  of risk  warranting
     additional   attention.   These   classifications   are  special   mention,
     substandard,  doubtful and loss. At June 30, 2002 loans classified  special
     mention,   substandard  and  doubtful  totaled  approximately   $2,489,234,
     $663,599 and $66,618. No loans were classified loss at June 30, 2001.

     The activity in the  allowance for loan losses is summarized as follows for
     the years ended June 30:
<TABLE>
<CAPTION>
                                                                                   2002                    2001
   ---------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                    <C>
   Balance at beginning of year                                                 $1,160,612             $  742,809
   Provision for losses on loans                                                   560,000                432,500
   Allowance assumed in acquisition                                                     --                182,811
   ---------------------------------------------------------------------------------------------------------------------
   Charge-offs                                                                    (356,537)              (248,460)
   Recoveries                                                                       73,998                 50,952
   ---------------------------------------------------------------------------------------------------------------------
   Balance at end of year                                                       $1,438,073             $1,160,612
   =====================================================================================================================
</TABLE>

     Commitments to extend credit are agreements to lend to customers,  provided
     that  terms and  conditions  of the  commitment  are met.  Commitments  are
     generally  funded from loan  principal  repayments,  excess  liquidity  and
     savings deposits. Since certain of the commitments may expire without being
     drawn  upon,  the total  commitment  amounts do not  necessarily  represent
     future cash requirements.


     Substantially all of the Company's outstanding commitments at June 30, 2002
     and  2001 are for  loans,  which  would  be  secured  by  various  forms of
     collateral with values in excess of the commitment  amounts.  The Company's
     exposure   to  credit  loss  under   these   contracts   in  the  event  of
     non-performance  by the other parties,  assuming that the collateral proves
     to be of no value, is represented by the commitment amounts.

                                       35
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

     Outstanding  commitments to extend credit, which generally expire within 60
     days, are as follows:
<TABLE>
<CAPTION>
                                                                                              2002
                                                                               FIXED RATE               FLOATING RATE
   ----------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                       <C>
   Commercial business and lease loans                                         $1,661,796                2,800,000
   Home equity loans                                                                                        50,000
   ======================================================================================================================
   Undisbursed lines of credit                                                          -                3,878,098
   ======================================================================================================================
<CAPTION>
                                                                                              2001
   ----------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                       <C>
   Commercial business and lease loans                                          2,054,667                  200,000
   Undisbursed lines of credit                                                          -                2,651,046
   ======================================================================================================================
</TABLE>

     As of June 30, 2002 and 2001,  Patapsco was servicing loans for the benefit
     of others, approximately $1,225,252 and $1,301,413, respectively.

(5)  PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows at June 30:
<TABLE>
<CAPTION>
                                                                                                             ESTIMATED
                                                                  2002                 2001                USEFUL LIVES
   --------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                      <C>                   <C>
   Land                                                       $  153,404               153,404                      -
   Building and improvements                                   1,055,803             1,054,045                 40 years
   Leasehold improvements                                        117,249               105,109               3 - 10 years
   Furniture, fixtures and equipment                           1,675,473             1,635,544               3 - 10 years
   --------------------------------------------------------------------------------------------------------------------------
   Total, at cost                                              3,001,929             2,948,102

   Less accumulated depreciation                               1,945,123             1,754,677
   -------------------------------------------------------------------------------------------
   Property and equipment, net                                $1,056,806             1,193,425
   ===========================================================================================
</TABLE>

     At June 30,  2002,  the minimal  rental  commitments  under  noncancellable
     operating leases are as follows:

        Year ended June 30,

                      2003     58,748
                      2004      7,000
                      2005          -

(6)  DEPOSITS

     The  aggregate   amount  of  jumbo   certificates,   each  with  a  minimum
     denomination of $100,000,  was approximately  $7,601,000 and $10,747,000 in
     2002 and 2001, respectively.

                                       36
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

     At June 30, 2002, the scheduled maturities of certificates are as follows:

   Under 12 months                                          $35,148,000
   12 months to 24 months                                    12,035,000
   24 months to 36 months                                    12,421,000
   36 months to 60 months                                     7,832,000
   Greater than 60 months                                        70,000
   ----------------------------------------------------------------------------
                                                            $67,506,000
   ============================================================================

(7)  BORROWINGS

     At  June  30,  2002  and  2001,  the  Company  has  an  agreement  under  a
     blanket-floating  lien with the Federal Home Loan Bank of Atlanta providing
     the Company a line of credit of $38.3 and $41.0 million, respectively and a
     revolving  line of credit of with The Bankers  Bank of Atlanta,  Georgia of
     $3.0 million and $3.0, respectively. At June 30, 2002 and 2001, the Company
     had $1.0 and $1.7 million  outstanding  under this line,  respectively.  At
     June 30, 2002,  the Bank also has a Federal  Funds  accommodation  with the
     Bankers  Bank of $3.0  million at June 30, 2002 and $2.8 at June 30,  2001.
     The Company is required to  maintain as  collateral  for its FHLB  advances
     qualified  mortgage  loans in an  amount  equal to 175% of the  outstanding
     advances.  The  Company  has  pledged  the  stock of The  Patapsco  Bank as
     collateral for borrowing from The Bankers Bank.

     At June 30, the scheduled maturities of borrowings are as follows:
<TABLE>
<CAPTION>
                                                   2002                              2001
---------------------------------------------------------------------------------------------------------
                                                           Weighted                         Weighted
                                          Balance       Average Rate        Balance       Average Rate
---------------------------------------------------------------------------------------------------------
<S>                                    <C>                  <C>            <C>                 <C>
Under 12 months                        $ 4,500,000          5.55           6,400,000           5.77
12 months to 24 months                   4,000,000          4.45           4,500,000           5.55
24 months to 36 months                   3,000,000          4.42           1,000,000           6.57
36 months to 48 months                   2,100,000          5.74               -                 -
48 months to 120 months                  9,100,000          5.32          11,900,000           5.62
---------------------------------------------------------------------------------------------------------
                                       $22,700,000          5.13          23,800,000           5.69
=========================================================================================================
</TABLE>

                                       37
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(8)  INCOME TAXES

     The  provision  for income taxes is composed of the following for the years
     ended June 30:
<TABLE>
<CAPTION>
                                           2002                 2001
   -----------------------------------------------------------------------------
<S>                                     <C>                   <C>
   Current:
          Federal                        $477,385             696,441
          State                           106,592             159,771
   -----------------------------------------------------------------------------
                                          583,977             856,212
   -----------------------------------------------------------------------------
   Deferred:
          Federal                         109,487             (16,329)
          State                            24,994              (3,614)
   -----------------------------------------------------------------------------
                                          134,481             (19,943)
   -----------------------------------------------------------------------------
                                         $718,458             836,269
   =============================================================================
</TABLE>

     The net deferred tax assets consist of the following at June 30:
<TABLE>
<CAPTION>
                                                            2002                     2001
   ----------------------------------------------------------------------------------------------
<S>                                                     <C>                         <C>
   Allowance for losses on loans                        $  555,384                  448,229
   Deferred compensation                                   256,105                  341,727
   Purchase accounting adjustment                          167,358                  334,918
   Other, net                                               20,922                   11,679
                                                        -----------------------------------------
         Total deferred tax assets                         999,769                1,136,553


   Unrealized holding losses                               (87,319)                 (82,864)
   Tax bad debt reserve                                         --                  (12,954)
   Federal Home Loan Bank stock dividends                 (133,311)                (133,311)
   Accumulated depreciation                                (65,350)                 (69,363)
   Other,net                                               (14,664)                      --
                                                        -----------------------------------------
         Total deferred tax liabilities                   (300,644)                (298,492)
   ----------------------------------------------------------------------------------------------
   Net deferred tax assets                              $  699,125                  838,061
   ==============================================================================================
</TABLE>

          A  reconciliation  of the income tax provision and the amount computed
          by  multiplying  income before  income taxes by the statutory  Federal
          income tax rate of 34% is as follows for the years ended June 30:
<TABLE>
<CAPTION>
                                                                        2002           2001
   ----------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>
   Tax at statutory rate                                             $  630,826       630,325
   State income taxes, net of Federal income tax benefit                 86,847       115,095
   Other                                                                    785        90,849
   ----------------------------------------------------------------------------------------------
   Income tax provision                                              $  718,458       836,269
   ==============================================================================================
</TABLE>

                                       38
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001


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

(8)  CONTINUED

     The Company has qualified under  provisions of the Federal Internal Revenue
     Code which  permit it to deduct from  taxable  income a  provision  for bad
     debts based on actual bad debt experience. Therefore, the provision for bad
     debts  deducted  from  taxable  income for Federal  income tax purposes was
     based on the experience method.

(9)  REGULATORY MATTERS

     The  Federal  Deposit  Insurance  Corporation  (FDIC)  insures  deposits of
     account holders up to $100,000.  Patapsco pays an annual premium to provide
     for this insurance. Patapsco is also a member of the Federal Home Loan Bank
     System  and is  required  to  maintain  an  investment  in the stock of the
     Federal  Home  Loan  Bank of  Atlanta  equal to at  least 1% of the  unpaid
     principal  balances  of its  residential  mortgage  loans,  3% of its total
     assets or 5% of its outstanding advances to Patapsco, whichever is greater.
     Purchases and sales of stock are made directly with Patapsco at par value.

     Pursuant to regulations  of the Federal  Reserve  Board,  all  FDIC-insured
     depository  institutions must maintain average daily reserves against their
     transaction  accounts.  No reserves  are required to be  maintained  on the
     first $4.7 million of  transaction  accounts,  reserves equal to 3% must be
     maintained on the next $47.8 million of transaction accounts, and a reserve
     of 10% plus $1,434,000 must be maintained against all remaining transaction
     accounts.  These reserve  requirements  are subject to  adjustments  by the
     Federal Reserve Board.  Because required reserves must be maintained in the
     form of vault cash or in a noninterest 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.  At June 30, 2002 the Bank met its
     reserve requirements.

     Patapsco is subject to various regulatory capital requirements administered
     by  the  federal  banking   agencies.   Failure  to  meet  minimum  capital
     requirements  can  initiate  certain  mandatory - and  possibly  additional
     discretionary  - actions by regulators  that, if  undertaken,  could have a
     direct material effect on Patapsco's  financial  statements.  Under capital
     adequacy  guidelines  and the  regulatory  framework for prompt  corrective
     action,  Patapsco  must  meet  specific  capital  guidelines  that  involve
     quantitative  measures  of  Patapsco's  assets,  liabilities,  and  certain
     off-balance-sheet   items  as  calculated   under   regulatory   accounting
     practices.  Patapsco's  capital amounts and classification are also subject
     to  qualitative   judgments  by  the  regulators  about  components,   risk
     weightings, and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
     require  Patapsco to maintain minimum amounts and ratios (as defined in the
     regulations  and as set forth in the table below,  as defined) of total and
     Tier I capital (as defined) to  risk-weighted  assets (as defined),  and of
     Tier I capital to average assets (as defined).  Management believes,  as of
     June 30, 2001,  that Patapsco meets all capital  adequacy  requirements  to
     which it is subject.

                                       39
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

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

(9)  CONTINUED

     As of June 30, 2002, the most recent  notification from banking  regulators
     categorized Patapsco as well capitalized under the regulatory framework for
     prompt  corrective  action.  To be  categorized  as adequately  capitalized
     Patapsco must maintain  minimum total  risk-based,  Tier I risk-based,  and
     Tier I leverage  ratios as set forth in table.  There are no  conditions or
     events since that  notification  that management  believes have changed the
     institution's category.

     Patapsco's  actual  capital  amounts and ratios are also  presented  in the
     table (in thousands).
<TABLE>
<CAPTION>
                                                                                                       TO BE WELL
                                                                                                    CAPITALIZED UNDER
                                                                          FOR CAPITAL               PROMPT CORRECTIVE
                                                  ACTUAL               ADEQUACY PURPOSES            ACTION PROVISIONS
                                        --------------------------------------------------------------------------------
                                           AMOUNT          RATIO      AMOUNT         RATIO          AMOUNT         RATIO
   ---------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>           <C>             <C>           <C>            <C>
   As of June 30, 2002:
       Total Capital (to Risk
          Weighted Assets)                 $13,109         13.49%        $7,777          8.00%         $9,721         10.00%
       Tier I Capital (to Risk
          Weighted Assets)                  11,894         12.24%         3,888          4.00%          5,833          6.00%
       Tier I Capital (to Average
          Assets)                           11,894          7.73%         6,157          4.00%          7,696          5.00%
   As of June 30, 2001:
       Total Capital (to Risk
          Weighted Assets)                 $12,594         13.32%        $7,567          8.00%        $ 9,458         10.00%
       Tier I Capital (to Risk
          Weighted Assets)                  11,433         12.09%         3,783          4.00%          5,675          6.00%
       Tier I Capital (to Average
          Assets)                           11,433          7.15%         6,394          4.00%          7,992          5.00%
   ------------------------------------ --------------- ------------- -------------- -------------- -------------- -------------
</TABLE>

(10) STOCKHOLDERS' EQUITY AND RELATED MATTERS

     In 1995,  the Bank  converted  from a federally  chartered  mutual  savings
     association  to a capital  stock  savings  bank.  Simultaneously,  the Bank
     consummated the formation of a holding company,  Patapsco Bancorp, Inc., of
     which  the  Bank is a  wholly-owned  subsidiary.  In  connection  with  the
     Conversion, the Company publicly issued 362,553 shares of its common stock.

     Federal  regulations  required that,  upon  conversion from mutual to stock
     form of ownership,  a "liquidation account" be established by restricting a
     portion of net worth for the benefit of eligible  savings  account  holders
     who maintain their savings accounts with Patapsco after conversion.  In the
     event of  complete  liquidation  (and  only in such  event),  each  savings
     account  holder who  continues  to maintain  his savings  account  shall be
     entitled  to receive a  distribution  from the  liquidation  account  after
     payment to all  creditors,  but before any  liquidation  distribution  with
     respect to capital stock. This account will be proportionately  reduced for
     any subsequent  reduction in the eligible  holders'  savings  accounts.  At
     conversion the liquidation account totaled approximately $6,088,000.

                                       40
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

(10) CONTINUED

     In addition to the  foregoing,  certain bad debt reserves of  approximately
     $2,300,000  deducted  from  income  for  federal  income tax  purposes  and
     included in retained income 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 $897,000.

(11) BENEFIT PLANS

     EMPLOYEE STOCK OWNERSHIP PLAN

     Patapsco has  established an Employee  Stock  Ownership Plan (ESOP) for its
     employees.  On  April  1,  1996  the ESOP  acquired  28,480  shares  of the
     Company's  common  stock in  connection  with  Patapsco's  conversion  to a
     capital stock form of organization. The ESOP purchased an additional 12,861
     shares  as a result  of the  return  of  capital  distribution  paid by the
     Company  in June  1997.  The ESOP  holds  the  common  stock in a trust for
     allocation  among  participating  employees,  in trust or  allocated to the
     participants' accounts and an annual contribution from Patapsco to the ESOP
     and earnings thereon.

     All ESOP  shares  contain a "Put  Option"  which  requires  the  Company to
     repurchase  the  share  at  the  then  fair  market  value  subject  to the
     availability of retained earnings. The "Put Option" may be exercised within
     60 days of  distribution  of the shares and then again within 60 days after
     the fair market value determination date of the next plan year. The current
     fair market value of shares that have been allocated contain a "Put Option"
     of $671,724.

     All  employees of Patapsco who attain the age of 21 and complete six months
     of service  with  Patapsco  will be  eligible to  participate  in the ESOP.
     Participants will become 100% vested in their accounts after three years of
     service with Patapsco or, if earlier, upon death, disability or attainments
     of normal  retirement  age.  Participants  receive  credit for service with
     Patapsco prior to the establishment of the ESOP.

     For the years ended June 30, 2002 and 2001 compensation  expense recognized
     related to the ESOP and  Patapsco's  contribution  to the ESOP was $131,356
     and $88,997, respectively.

     The ESOP shares were as follows as of June 30:
<TABLE>
<CAPTION>
                                                             2002            2001
   -----------------------------------------------------------------------------------
<S>                                                         <C>             <C>
   Shares released and allocated                            34,835          27,805
   Unearned shares                                           9,961          13,536
   -----------------------------------------------------------------------------------
                                                            44,796          41,341
   ===================================================================================
   Fair value of unearned shares                         $ 284,387         298,469
   ===================================================================================
</TABLE>

                                       41
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

(11) CONTINUED

     DIRECTORS RETIREMENT PLAN

     Effective September 28, 1995, Patapsco adopted a deferred compensation plan
     covering all non-employee directors.  The plan provides benefits based upon
     certain vesting requirements. Compensation expense recognized in connection
     with the Plan  during the year ended June 30, 2002 and 2001 was $77,613 and
     ($1,368), respectively.

     STOCK OPTIONS

     The Company's  1996 Stock Options and Incentive Plan (Plan) was approved by
     the  stockholders  at the 1996 annual  meeting.  The Plan  provides for the
     granting of options to acquire common stock to directors and key employees.
     Option prices are equal or greater than the estimated  fair market value of
     the common  stock at the date of the grant.  In  October  1996 the  Company
     granted options to purchase 34,474 shares at $27.50 per share.  Such shares
     and fair value have been  adjusted to 43,093 shares at $18.91 per share for
     the  effect of the return of capital  distribution  paid by the  Company in
     June 1997.  The shares and fair value have been further  adjusted to 47,402
     and $17.02 for the effect of the 10% stock  dividend paid by the Company in
     December 2001. The Plan provides for one-fifth of the options granted to be
     exercisable on each of the first five  anniversaries  of the date of grant.
     Additional  shares were granted to an officer and director in May 2000. The
     option  price is  $20.00  per  share and  vests as  described  above.  If a
     participant in the Plan terminates employment for reasons other than death,
     disability,  retirement at age 65 or change in control,  he or she forfeits
     all rights to unvested shares.

     The  Company's  2000 Stock  Option and  Incentive  Plan was approved by the
     stockholders at the 2000 annual meeting. The Plan provides for the granting
     of options to acquire common stock to directors and key  employees.  Option
     prices are equal or greater  than the  estimated  fair market  value of the
     common stock at the date of the grant.  The Plan  provides for one-fifth of
     the  options   granted  to  be  exercisable  on  each  of  the  first  five
     anniversaries  of the date of grant.  Under this plan,  in August  2001 the
     Company granted options to purchase 20,000 shares at $25.88 per share.  The
     shares  and fair  values  have been  adjusted  to 22,000 and $23.29 for the
     effect of the 10% stock  dividend paid by the Company in December  2001. As
     of June 30, 2002, none of the options granted under this plan had vested.

     The following  table  summarizes the status of and changes in the Company's
     stock option plan during the past two years, as retroactively  adjusted for
     the Company's return of capital and stock dividend.
<TABLE>
<CAPTION>
                                                             WEIGHTED                       WEIGHTED
                                                             AVERAGE                        AVERAGE
                                                             EXERCISE          OPTIONS      EXERCISE
                                              OPTIONS         PRICE          EXERCISABLE     PRICE
---------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>              <C>            <C>
Outstanding at end of 2000                     47,995         $17.02           23,764         17.02
Granted                                             -              -                -             -
Exercised                                      (3,707)         17.02
Cancelled                                      (5,561)         17.02
---------------------------------------------------------------------------------------------------------
Outstanding at end of 2001                     38,727          17.02           31,402         17.02

                                       42
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

Granted                                        27,561          23.29
Exercised                                      (3,373)         17.02
Cancelled                                        (743)         23.29
---------------------------------------------------------------------------------------------------------
Outstanding at end of 2002                     62,172          19.81           32,216         17.08
---------------------------------------------------------------------------------------------------------
</TABLE>


     SFAS No. 123,  "Accounting  for  Stock-Based  Compensation",  requires  the
     Company  to  make  certain  disclosures  as if the  fair  value  method  of
     accounting  had been  applied to the  Company's  stock  option  grants made
     subsequent to 1994. Accordingly,  the Company estimated the grant date fair
     value of each  option  awarded  in  fiscal  2000  using  the  Black-Scholes
     Option-Pricing  model with the  following  relevant  assumptions:  dividend
     yield of 2.80%,  risk-free  interest rate of 6.75% and expected lives of 10
     years. The assumption for expected volatility was 24.39%. Had 2002 and 2001
     compensation cost been determined including the  weighted-average  estimate
     of fair value of each option  granted of $5.20,  the  Company's  net income
     would  be  reduced  to  proforma   amount  of  $1,133,879  and  $1,010,736,
     respectively. Proforma earnings, basic, per share would have been $2.61 and
     $2.58 and diluted, per share would have been $2.27 and $2.38, respectively,
     in fiscal 2002 and 2001.

     MANAGEMENT RECOGNITION AND STOCK AWARD PLAN

     Effective   October  11,  1996,   the  Company   established  a  Management
     Recognition Plan (MRP) to retain personnel of experience and ability in key
     positions of responsibility.  Members of the Board of Directors and certain
     executive  officers were awarded a total of 14,502  shares of stock,  which
     are held in a separate  trust that manages the MRP. The Company  funded the
     MRP in 1997 by purchasing 14,502 shares of common stock in the open market.
     Shares awarded to participants in the MRP vest at a rate of 20% per year on
     each  anniversary of the effective  date of the MRP.  During the year ended
     June 30,  1998,  the Company  approved a Stock Award Plan ("SAP") to one of
     its  officers.  The Plan  provides for 1,247 shares to be vested at 25% per
     year beginning in October 1998. If a participant  terminates employment for
     reasons other than death, disability, change in control or retirement he or
     she forfeits all rights to unvested shares. As of June 30, 2002, all shares
     have been vested. For the years ended June 30, 2002 and 2001,  compensation
     expense related to the MRP and SAP was $8,700 and $9,300, respectively.

     401(K) RETIREMENT SAVINGS PLAN

     The Company has a 401(k) Retirement Savings Plan.  Employees may contribute
     a  percentage  of their  salary  up to a maximum  of 15%.  The  Company  is
     obligated to contribute 3% of each  employee's  salary,  whether or not the
     employee  contributes their own money. All employees who have completed six
     months of service  with the  Company  and are 21 years old are  eligible to
     participate.  The  Company's  contribution  to this  plan was  $54,000  and
     $35,000 for the years ended June 30, 2002 and 2001, respectively.

                                       43
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107, Disclosures about Fair
     Value of Financial  Instruments (SFAS 107) requires the Company to disclose
     estimated  fair  values for  certain on- and  off-balance  sheet  financial
     instruments.  Fair value estimates,  methods, and assumptions are set forth
     below the Company's financial instruments as of June 30, 2002 and 2001.

(12) CONTINUED

     The carrying  value and estimated  fair value of financial  instruments  is
     summarized as follows at June 30:
<TABLE>
<CAPTION>
                                                                     2002                             2001
                                                       -----------------------------    -----------------------------
                                                         CARRYING                         CARRYING
                                                          VALUE           FAIR VALUE         VALUE         FAIR VALUE
----------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>              <C>             <C>
Assets:
   Cash and interest-bearing deposits                  $11,125,000        11,125,000       5,342,000       5,342,000
   Federal funds sold                                    3,732,000         3,732,000       5,819,000       5,819,000
   Investment securities                                 5,006,000         5,006,000       2,188,000       2,188,000
   Mortgage-backed securities                           13,705,000        13,705,000       5,680,000       5,680,000
   Loans receivable, net                               118,350,000       128,000,000     127,834,000     134,571,000
   Loans held for sale                                           -                 -       9,914,000      10,094,000
Liabilities:
   Deposits                                            119,593,000       120,382,000     123,992,000     124,597,000
   Borrowings                                           22,616,000        22,003,000      23,662,000      23,560,000
   Advance payments by borrowers for
      taxes, insurance and ground rents                  1,147,000         1,147,000       1,547,000       1,547,000
Off balance sheet instruments:
   Commitments to extend credit                                  -                 -               -               -
======================================================================================================================
</TABLE>

     CASH ON HAND AND IN BANKS

     The carrying amount for cash on hand and in banks  approximates  fair value
     due to the short maturity of these instruments.

     SHORT-TERM INVESTMENTS

     The  carrying  amount for  short-term  investments  that consist of Federal
     funds sold,  approximates fair value due to the overnight maturity of these
     instruments.

     INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

     The fair value of investment  securities and mortgage-backed  securities is
     based on bid  prices  received  from an  external  pricing  service  or bid
     quotations received from securities dealers.

                                       44
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001

(12) CONTINUED

     LOANS

     Loans   were   segmented   into   portfolios    with   similar    financial
     characteristics.  Loans were also  segmented  by type such as  residential,
     multifamily  and  nonresidential,  construction  and land,  second mortgage
     loans,  commercial,  and consumer. Each loan category was further segmented
     by fixed and adjustable rate interest terms.

     The  fair  value  of  fixed  rate  loans  was   calculated  by  discounting
     anticipated  cash flows based on  weighted  average  contractual  maturity,
     weighted average coupon and current loan origination rate.  Adjustable rate
     loans  were  determined  to be at fair value due to their  adjustable  rate
     nature.

     ACCRUED INTEREST RECEIVABLE

     The carrying amount of accrued  interest  receivable  approximates its fair
     value.

     SAVINGS ACCOUNTS

     Under SFAS 107, the fair value of deposits with no stated maturity, such as
     noninterest bearing deposits,  interest bearing NOW accounts,  money market
     and statement savings accounts,  is equal to the carrying amounts. The fair
     value of  certificates  of  deposit  was based on the  discounted  value of
     contractual  cash flows.  The discount rate for certificates of deposit was
     estimated  using  the  rate  currently  offered  for  deposits  of  similar
     remaining maturities.

     BORROWED FUNDS

     The fair  value of  borrowed  funds  was based on the  discounted  value of
     contractual cash flows..

     ACCRUED INTEREST PAYABLE

     The  carrying  amount of accrued  interest  payable  approximates  its fair
     value.

     ADVANCE PAYMENTS BY BORROWERS FOR TAXES, INSURANCE AND GROUND RENTS

     The carrying amount of advance  payments by borrowers for taxes,  insurance
     and ground rents approximates its fair value.

(12) CONTINUED

     OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

     The Company is a party to financial instruments with off-balance sheet risk
     in the normal course of business,  including  mortgage loan commitments and
     undisbursed lines of credit on commercial business loans. These instruments
     involve, to various degrees, elements of credit and

                                       45
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001


     interest rate risk in excess of the amount  recognized in the  consolidated
     statements of financial condition.

     The Company's exposure to credit loss in the event of nonperformance by the
     other party to the  financial  instrument  is  represented  by the contract
     amount of the financial instrument.

     The  Company  uses the same  credit  policies  in  making  commitments  for
     off-balance-sheet  financial  instruments  as it does for  on-balance-sheet
     financial instruments. The fair values of such commitments are immaterial.

     The  disclosure  of fair value  amounts does not include the fair values of
     any  intangibles,   including  core  deposit   intangibles.   Core  deposit
     intangibles  represent the value attributable to total deposits based on an
     expected duration of customer relationships.

     LIMITATIONS

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


                                       46
<PAGE>
<TABLE>
<CAPTION>
                                                       BOARD OF DIRECTORS

<S>                                         <C>                                          <C>
THOMAS P. O'NEILL                           NICOLE N. GLAESER                            DR. THEODORE C. PATTERSON
Chairman of the Board                       Budget  Director for Baltimore County        Retired Physician
Managing Director of American               Police Department                            Secretary of the Company
Express Tax and Business Services
                                            DOUGLAS H. LUDWIG                            WILLIAM R. WATERS
JOSEPH J. BOUFFARD                          Retired Principal of the Baltimore           Owner Bel Air Pontiac
President and Chief  Executive  Officer     County Public School System                  Owner Bel Air Medicine, Inc.
of the Company and the Bank
                                            GARY R. BOZEL
J. THOMAS HOFFMAN                           Managing Principal
Self-employed financial consultant          Gary R. Bozel & Associates, P.A.


                                                 ADVISORY DIRECTORS
JOSEPH N. MCGOWAN                                                                       DAVID G. RITTENHOUSE
Retired Chairman of the Board                                                           Chief Executive Officer
                                                                                        Rittenhouse Fuel Company
                                                 EXECUTIVE OFFICERS

JOSEPH J. BOUFFARD                          FRANK J. DUCHACEK, JR.                         MICHAEL J. DEE
President and Chief Executive Officer       Senior-Vice President - Branch & Deposit       Vice-President - Treasurer
                                            Administration                                 Chief Financial Officer

JOHN W. MCCLEAN                              ALAN HERBST                                   LAURENCE S. MITCHELL
Vice President - Real Estate Lending         Vice President - Consumer Lending             Vice-President - Commercial Lending

BRIAN G. CONNELLY
Vice-President - Commercial Leasing

                                                       OFFICE LOCATIONS

                1301 Merritt Boulevard                  1844 E. Joppa Road                        8705 Harford Road
             Dundalk, Maryland 21222-2194               Baltimore, Maryland                      Baltimore, Maryland
               Telephone: (410) 285-1010                  (410) 665-5190                           (410) 665-5600
         Website: http://www.patapscobank.com

                                                      CORPORATE INFORMATION

INDEPENDENT CERTIFIED ACCOUNTANTS           SPECIAL COUNSEL                                ANNUAL REPORT ON FORM 10-KSB
Anderson Associates, LLP                    Stradley Ronon Stevens & Young, LLP
7621 Fitch Lane                             1220 19th Street, NW, Suite 700                A  COPY  OF  THE  COMPANY'S   ANNUAL
Baltimore, Maryland 21236                   Washington, DC  20036                          REPORT  ON  FORM   10-KSB   FOR  THE
                                                                                           FISCAL  YEAR ENDED JUNE 30,  2002 AS
GENERAL COUNSEL                             ANNUAL MEETING                                 FILED   WITH  THE   SECURITIES   AND
Nolan Plumhoff & Williams                   The 2002 Annual  Meeting of  Stockholders      EXCHANGE    COMMISSION,    WILL   BE
Suite 700, Nottingham Centre                will be held on October  24, 2002 at 4:00      FURNISHED    WITHOUT    CHARGE    TO
502 Washington Avenue                       p.m. at the office of The  Patapsco  Bank      STOCKHOLDERS  AS OF THE RECORD  DATE
Towson, Maryland 21204-4528                 located   at  1301   Merritt   Boulevard,      FOR THE  2002  ANNUAL  MEETING  UPON
                                            Dundalk, Maryland 21222.                       WRITTEN   REQUEST   TO:    CORPORATE
TRANSFER AGENT AND REGISTRAR                                                               SECRETARY,  PATAPSCO BANCORP,  INC.,
Registrar and Transfer Co.                                                                 1301  MERRITT  BOULEVARD,   DUNDALK,
10 Commerce Drive                                                                          MARYLAND  21222-2194.
Cranford, New Jersey 07016-3572
1-(800) 368-5948

</TABLE>
<PAGE>










PATAPSCO BANCORP
----------------

1301 Merritt Boulevard . Dundalk, Maryland 21222
(410) 285-1010 . (410) 285-8524 Fax

Over 85 Years of Continuous Service


Local Housing              FDIC
Lender                     Insured