PATAPSCO BANCORP, INC.









         [LOGO]







                                       2003 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  412,634  shares  of  the  common  stock
outstanding  and  approximately  334  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 quarters of both fiscal 2002
and 2003, the Company paid 10% common stock dividends.  The prices quoted below,
but not the dividends per share, have been adjusted for those stock dividends.
<TABLE>
<CAPTION>

                                                          High             Low          Dividends Per Share
                                                     ------------      ----------       -------------------
                <S>                                   <C>                <C>                       <C>
              Fiscal 2002:
                    First Quarter                    $      22.73      $    18.06            $       .14
                    Second Quarter                          24.82           21.49                    .14
                    Third Quarter                           25.91           24.86                    .14
                    Fourth Quarter                          27.27           25.91                    .14

              Fiscal 2003:
                    First Quarter                    $      27.27      $    25.91            $       .14
                    Second Quarter                          27.30           25.15                    .14
                    Third Quarter                           29.00           26.05                    .14
                    Fourth Quarter                          33.00           28.35                    .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>

                        [LETTERHEAD OF PATAPSCO BANCORP]

Dear Shareholder:

     The  directors,  officers  and  staff of  Patapsco  Bancorp,  Inc.  and The
Patapsco  Bank proudly  present our eighth  Annual  Report to our  shareholders.
Since this is an era of heightened awareness of corporate  governance,  we would
like to use this  opportunity  to tell you not only how your  Company  performed
this past fiscal year but also  describe how the Directors of your Company guide
the Company's affairs through the functions of its various committees.

Performance
-----------

     Your Company achieved record  performance levels for the fiscal year ending
June 30, 2003. Net income was $1,345,000 as compared to $1,137,000 for the prior
year.  Earnings per share,  after  adjustment  for stock  dividends,  were $2.41
versus  $2.08.  Return on equity  increased  to 8.77%  from  8.20% and return on
assets  rose to 0.86%  from  0.73%.  Each of these  measures  is the best in the
Company's  history.  These  results were achieved with no growth in total assets
and in the worst  economy in recent  memory.  The  lending  officers  produced a
record amount of new loans but loan payoffs and refinancings were also at record
levels,  resulting in no growth in total assets. Fee income,  while a very small
portion  of  revenue,  continues  to grow  rapidly  as a result  of  initiatives
instituted during the past year.

Committees
----------

     The Asset  Liability  Committee  meets  monthly and monitors the  Company's
interest rate risk, liquidity,  deposit rates,  borrowings,  cash position,  non
loan investments and the Company's financial performance.  During the past year,
this  Committee  supervised  the  implementation  of a new  interest  rate  risk
monitoring  program and a loan  pricing  model to more  effectively  compete for
loans.  The Committee also analyzed and recommended  several non loan investment
strategies to the Board.

     The Loan Review and Delinquency Committee also meets monthly and supervises
the Company's  loan  production  and  delinquent  loans.  During the year,  this
Committee  dealt with higher than usual  non-performing  loans and charge  offs.
This was reflective of the country's economic slowdown as well as the maturation
of some the new loan  portfolios  that  the Bank has  developed  in the past few
years.  Fortunately,  because  the Bank  maintained  adequate  reserves  and the
Company's experienced loan officers were up to the challenges,  loan performance
ratios were at or better than historic levels by year end.

     In addition to the Loan Review and  Delinquency  Committee,  the  Directors
loan  committee,  consisting of two non employee  Directors on a rotating basis,
met on an as needed basis to review,  approve and recommend  loans that exceeded
management's specified loan approval authorities.


<PAGE>

     The Company's  Audit  Committee meets at least quarterly and is responsible
for the Bank's audit function, both internal and external,  including regulatory
reporting and oversight as well as the  maintenance of policies and  procedures.
This past year,  this  Committee  oversaw  your  Company's  compliance  with the
increasing  regulatory  burden  mandated by the provisions of the Sarbanes Oxley
legislation.  Fortunately,  the Audit  Committee  has always been  diligent with
these issues and has put in place policies and  procedures to ensure  compliance
with the new regulations.

     The Company also has an Investor  Relations  Committee which meets at least
quarterly  and  evaluates  matters from the  viewpoint of enhancing  shareholder
value.  During  this past year,  this  Committee  recommended  that the  Company
continue  to  pay  a  regular  dividend  and,  for  the  second  straight  year,
recommended a 10% stock dividend. This Committee regularly reviews trades in the
Company stock,  including insider trading and related regulatory issues, as well
as stock buybacks and other items of importance to the shareholders.

     The Company's  Compensation Committee meets at least quarterly and oversees
the Company's human relations issues.  This includes  compensation items such as
stock  options and the Employee  Stock  Ownership  Plan as well as the Company's
benefit plans.

     The  Company's  Public  Relations and  Marketing  Committee  meets at least
quarterly and is concerned with the image presented to the public, including the
Company's customers. This Committee reviews and approves the Company's marketing
efforts, in all types of media. Currently, among other things, this Committee is
overseeing  the revamping of the  Company's  Internet  site in  anticipation  of
Internet  banking  which the  Company  expects to offer in the next  year.  This
Committee   also  monitors  the  Company's   support  of  local   charities  and
organizations.

     Last but certainly not least, is the Company's Operations Committee,  which
also meets at least  quarterly  and is  responsible  for the  monitoring  all of
operational  aspects  of  the  organization.  Of  particular  importance  is the
Company's data processing conversion that was approved last year and will become
effective this next year.  This major upgrade of the Company's  data  processing
systems will enable the Company to enhance its current  products  while offering
many new products including the aforementioned Internet banking.

     A  different  Director  chairs  each  of  these  Committees  and all of the
Committees report directly to the full Board of Directors.

     We hope you found this discussion informative and as always, 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,
                                                                 ------------------------------
                                                                     2003               2002
                                                                   --------           ---------
<S>                                                                     <C>             <C>
                                                                          (In thousands)

Total assets..................................................  $  157,805            $158,736
Loans receivable, net.........................................     113,252             118,350
Cash, federal funds sold and other interest
   bearing deposits...........................................      14,207              14,857
Investment securities.........................................       4,542               5,006
Mortgage-backed securities....................................      19,843              13,705
Deposits......................................................     119,655             119,593
Borrowings....................................................      20,174              22,616
Stockholders' equity..........................................      15,905              14,602

</TABLE>

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

SELECTED CONSOLIDATED INCOME DATA

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                                 -----------------------------
                                                                   2003                 2002
                                                                 --------             --------
<S>                                                                  <C>                <C>
                                                                          (In thousands)

Interest income...............................................   $  10,764           $ 11,445
Interest expense..............................................       3,992              5,580
                                                                 ---------           --------

Net interest income before provision
   for loan losses............................................       6,772              5,865
Provision for loan losses.....................................         531                560
                                                                 ---------           --------
Net interest income after provision
   for loan losses............................................       6,241              5,305
Noninterest income............................................         568                866
Noninterest expenses:
   Compensation and employee benefits.........................       2,718              2,609
   Insurance..................................................          71                 63
   Professional fees..........................................         406                190
   Equipment expenses.........................................         201                234
   Net occupancy costs........................................         221                197
   Advertising................................................         117                136
   Data processing............................................         218                204
   Other......................................................         724                683
                                                                 ---------           --------
      Total noninterest expenses..............................       4,676              4,316
Income before provision (benefit) for income taxes............       2,133              1,855
Income tax provision (benefit)................................         788                718
                                                                 ---------           --------
Net income....................................................   $   1,345           $  1,137
                                                                 =========           ========
</TABLE>

                                       3
<PAGE>
KEY OPERATING RATIOS
--------------------------------------------------------------------------------

PATAPSCO BANCORP, INC.


KEY OPERATING RATIOS
<TABLE>
<CAPTION>

                                                                            At or for the
                                                                          Year Ended June 30,
                                                                   ------------------------------
                                                                       2003               2002
                                                                   ------------       -----------
<S>                                                                     <C>               <C>
PERFORMANCE RATIOS:
   Return on average assets (net income divided by
      average total assets.......................................     0.86%                0.73%
   Return on average stockholders' equity (net income
      divided by average stockholders' equity)...................     8.77                 8.20
   Interest rate spread (combined weighted average
      interest rate earned less combined weighted
      average interest rate cost)................................     4.19                 3.54
   Net interest margin (net interest income
      divided by average interest-earning assets)................     4.52                 3.90
   Ratio of average interest-earning assets to
      average interest-bearing liabilities.......................   112.21               109.58
   Ratio of noninterest expense to average total assets..........     3.01                 2.76

ASSET QUALITY RATIOS:
   Nonperforming assets to total assets at
      end of period..............................................     0.22                 0.52
   Nonperforming (nonaccrual) loans to loans
      receivable, net at end of period...........................     0.29                 0.58
   Allowance for loan losses to total loans
      at end of period...........................................     1.00                 1.20
   Allowance for loan losses to nonperforming
      loans at end of period.....................................   348.32               206.48
   Net charge-offs to average loans outstanding..................     0.72                 0.23

CAPITAL RATIOS:
   Stockholders' equity to total assets at end of period (1).....    10.08                 9.22
   Average stockholders' equity to average assets................     9.78                 8.86
   Dividends declared per share to diluted net income per share..    23.24                26.92
</TABLE>

(1) Stockholder's equity includes temporary equity.


                                       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.

CRITICAL ACCOUNTING POLICIES

     The Company's  consolidated financial statements are prepared in accordance
with accounting  principals  Generally  accepted in the United States of America
("GAAP") and follow general  practices within the industry in which it operates.
Application  of  these  principals   requires   management  to  make  estimates,
assumptions,  and  judgments  that affect the amounts  reported in the financial
statements and accompanying notes. These estimates,  assumptions,  and judgments
are based on information  available as of the date of the financial  statements;

                                       5
<PAGE>

accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions and judgments. Certain policies inherently have
a greater  reliance on the use of estimates,  assumptions,  and judgments and as
such have a greater  possibility  of producing  results that could be materially
different than originally reported.  These estimates,  assumptions and judgments
are necessary  when  financial  instruments  are required to be recorded at fair
value or when the decline in the value of an asset  carried on the balance sheet
at historic cost requires an impairment  write-down or a valuation reserve to be
established.

     The  allowance  for loan  losses is an  estimate  of the losses that may be
sustained  in the loan and  lease  portfolio.  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  is  based  on two  principals  of  accounting:  (1)
Statement  of Financial  Accounting  Standards  ("SFAS")  No.5  "Accounting  for
Contingencies",  that  requires  losses to be accrued when their  occurrence  is
probable  and  estimable,  and (2) SFAS No. 114  "Accounting  by  Creditors  for
Impairment of a Loan",  that requires losses be accrued when it is probable that
the lender will not collect all  principal  and  interest due under the original
term of the loan.

     Management   believes  that  the  allowance  is  adequate.   However,   its
determination  requires  significant  judgment,  and  estimates  of the probable
losses in the loan and lease portfolio can vary  significantly from amounts that
actually occur.

                                       6
<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,
                                                      -----------------------------------------------------------------------------
                                                                      2003                                         2002
                                                      ---------------------------------------   -----------------------------------
                                                                                    Average                               Average
                                                       Average                       Yield/      Average                  Yield/
                                                       Balance       Interest        Cost        Balance     Interest      Cost
                                                      ----------    ----------    ----------   -----------  ----------   ----------
                <S>                                     <C>             <C>             <C>         <C>         <C>          <C>
Interest-earning assets:
   Loans receivable (1).............................  $  115,382     $  9,354          8.11%    $ 123,569    $10,415         8.43%
   Investment securities(2).........................       6,321          294          4.65         4,368        252         5.43
   Mortgage-backed securities.......................      17,745          954          5.38         5,323        361         6.78
   Short-term investments and other
    interest-earning assets.........................      10,495          162          1.54        16,685        417         2.50
                                                      ----------     --------                   ---------    -------
      Total interest-earning assets.................     149,943       10,764          7.18       149,945     11,445         7.62
Non-interest-earning assets.........................       5,382                                    6,617
                                                      ----------                                ---------
      Total assets..................................  $  155,325                                $ 156,562
                                                      ==========                                =========
Interest-bearing liabilities:
   Deposits (3).....................................  $  111,934      $ 2,867          2.56     $ 118,081      4,429         3.75
   Borrowings.......................................      21,695        1,125          5.19        18,754      1,151         6.14
                                                      ----------     --------                   ---------    -------
      Total interest-bearing liabilities............     133,629        3,992          2.99       136,835      5,580         4.08
                                                                     --------                                -------
Non-interest-bearing liabilities....................       6,499                                    5,863
                                                      ----------                                ---------
      Total liabilities.............................     140,128                                  142,698
Total Equity........................................      15,197                                   13,864
                                                      ----------                                ---------
      Total liabilities and retained earnings.......  $  155,325                                $ 156,562
                                                      ==========                                =========

Net interest income.................................                 $  6,772                                $ 5,865
                                                                     ========                                =======
Interest rate spread................................                                   4.19%                                3.54%
                                                                                     ======                               ======
Net interest margin.................................                                   4.52%                                3.90%
                                                                                     ======                               ======
Ratio of average interest-earning assets to average
   interest-bearing liabilities.....................                                 112.21%                              109.58%
                                                                                     ======                               ======
</TABLE>

-----------
(1)  Includes nonaccrual loans.
(2)  Includes investments required by law.
(3)  Includes interest-bearing escrow accounts.

                                       7
<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,
                                                      ---------------------------------
                                                         2003         vs.         2002
                                                      ---------------------------------
                                                           Increase (Decrease) Due to
                                                      ---------------------------------
                                                      Volume         Rate       Total
                                                      ---------   -----------   -------
<S>                                                     <C>             <C>       <C>
                                                               (In thousands)
Interest income:
   Loans receivable.................................  $(673)      $ (388)      $(1,061)
   Investment securities............................     70          (27)           43
   Mortgage-backed securities.......................    651          (58)          593
   Short-term investments and other
     interest-earning assets........................   (126)        (129)         (255)
                                                      -----       ------        ------
       Total interest-earning assets................    (78)        (602)         (680)
                                                      -----       ------        ------

Interest expense:
   Deposits (1).....................................   (220)      (1,341)       (1,561)
   Borrowings.......................................    167         (193)          (26)
                                                      -----       ------        ------
       Total interest-bearing liabilities...........    (53)      (1,534)       (1,587)
                                                      -----       ------        ------

Change in net interest income.......................  $ (25)      $  932       $   907
                                                      =====       ======        ======
</TABLE>
-------------------
(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.


COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND 2002

     General.  Total  assets  remained  relatively  stable,  decreasing  by $0.9
million or 0.6% to $157.8  million at June 30, 2003 from $158.7  million at June
30, 2002.  The decrease was primarily  due to and loan payoffs and  amortization
exceeding new loan production,  mainly in the residential loan portfolio. Excess
liquidity was invested in mortgage-backed securities.

     Loans Receivable.  Net loans receivable  decreased by $5.1 million or 4.03%
to $113.3  million at June 30, 2003 from $118.3  million at June 30, 2002 as the
first  mortgage  portfolio  was reduced due to the  mortgage  re-financing  wave
resulting  from record low interest  rates.  Residential  first  mortgages  have
decreased  $10.9  million.   Commercial   loans  have  increased  $3.4  million,
commercial  leases $1.6 million and consumer  loans have increased $0.8 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.

                                       8
<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,
2003, the Company had no  concentrations  of loans  exceeding 10% of gross loans
other than as disclosed below:

<TABLE>
<CAPTION>
                                                                                 At June 30,
                                                            -------------------------------------------------------
                                                                     2003                            2002
                                                            ------------------------        -----------------------
                                                            Amount               %          Amount             %
                                                            ------             -----        ------           -----
<S>                                                           <C>               <C>          <C>              <C>
                                                                              (Dollars in thousands)
Real estate loans:
   Residential (1)........................................  $   48,664        40.76%        $  59,609       47.89%
   Commercial.............................................      14,622        12.25            15,487       12.44
   Construction (2).......................................       4,266         3.57             3,332        2.68
Consumer loans:
   Home improvement.......................................       9,161         7.67             9,562        7.68
   Home equity loans......................................       3,709         3.11             3,096        2.49
   Loans secured by deposits..............................         210         0.18               231        0.19
   Other consumer loans...................................       1,984         1.66             1,345        1.08
Commercial loans:
   Commercial loans.......................................      17,564        14.70            14,159       11.38
   Commercial leases......................................      19,225        16.10            17,643       14.17
                                                            ----------       ------         ---------      ------
                                                               119,405       100.00%          124,464      100.00%
                                                                             ======                        ======
Less:
   Deferred loan origination fees, net of costs...........          96                             66
   Unearned interest consumer loans.......................         408                            290
   Unearned interest commercial loans.....................       4,356                          3,976
   Purchase accounting discount, net......................         154                            344
   Allowance for loan losses..............................       1,139                          1,438
                                                            ----------                      ---------
      Total...............................................  $  113,252                      $ 118,350
                                                            ==========                      =========
</TABLE>
--------------------
(1)      Does not include loans held for sale.
(2)      Net of loans in process.

     The  following  table  sets  forth  certain  information  at June 30,  2003
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, 2004       June 30, 2004       June 30, 2004          Total
                                   --------------       -------------       -------------       ------------
<S>                                     <C>                     <C>             <C>                     <C>
                                                                         (In thousands)

Real estate loans:
   Residential...................    $      387         $   8,049            $  40,228          $   48,664
   Commercial....................         1,094             2,463               11,065              14,622
   Construction..................         3,029             1,237                   --               4,266
Consumer loans...................        11,161             3,903                   --              15,064
Commercial loans.................        17,081            19,708                   --              36,789
                                     ----------         ---------            ---------          ----------
        Total....................    $   32,752         $  35,360            $  51,293          $  119,405
                                     ==========         =========            =========          ==========
</TABLE>
                                       9
<PAGE>

     The  following  table sets forth at June 30, 2003 the dollar  amount of all
loans  which may  reprice or are due one year or more after June 30,  2003 which
have  predetermined  interest  rates and have  floating or  adjustable  interest
rates.
<TABLE>
<CAPTION>

                                   Predetermined            Floating or
                                       Rates              Adjustable Rates           Total
                                   -------------         -----------------      -------------
<S>                                     <C>                     <C>                     <C>
                                                         (In thousands)
Real estate loans:
   Residential....................    $ 32,072              $  16,205           $  48,277
   Commercial.....................       2,810                 10,718              13,528
    Construction..................          --                  1,237               1,237
Consumer..........................       3,903                     --               3,903
Commercial........................      19,708                     --              19,708
                                      --------              ---------           ---------
   Total..........................    $ 58,493              $  28,160           $  86,653
                                      ========              =========           =========
</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  decreased to $1.9 million at June 30, 2003 from $2.2 million
at June 30, 2002, and other  investment  securities,  primarily  corporate bonds
increased  from  $2.5  million  to  $2.6  million.   Mortgage-backed  securities
increased  by $6.1  million in the year ended June 30, 2003 as excess  liquidity
was  invested  in  ten  and  fifteen  year  mortgage-backed  securities.  Equity
securities  decreased  $218,000  in the year as a result  of the  issuers  being
acquired by other financial institutions and other sales.

     The  following  table  sets  forth  the  carrying  value  of the  Company's
investments at the dates indicated.
<TABLE>
<CAPTION>

                                                                                           At June 30,
                                                                              -----------------------------------
                                                                                 2003                     2002
                                                                              ----------               ---------
<S>                                                                             <C>                       <C>
                                                                                     (Dollars in thousands)
Securities available for sale, at fair value:
   U.S. government and agency securities....................................  $  1,878                 $  2,244
   Equity securities........................................................        41                      259
   Investment securities....................................................     2,623                    2,503
   Mortgage-backed securities...............................................    19,843                   13,705
                                                                              --------                 --------
     Total securities available for sale....................................    24,385                   18,711
                                                                              --------                 --------

Investments required by law, at cost:
  FHLB of Atlanta stock.....................................................     1,010                    1,595
  FRB of Richmond stock.....................................................       308                      308
                                                                              --------                 --------
    Total investments required by law, at cost..............................     1,318                    1,903
                                                                              --------                 --------

    Total investments.......................................................  $ 25,703                 $ 20,614
                                                                              ========                 ========
</TABLE>


                                       10
<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, 2003.
<TABLE>
<CAPTION>

                                One Year           One to              Five to              More than          Total Investment
                                or Less            Five Years          Ten Years            Ten Years              Portfolio
                            -----------------   -----------------   -----------------   -----------------  -----------------------
                            Carrying  Average   Carrying  Average   Carrying  Average   Carrying  Average  Carrying Market Average
                             Value     Yield     Value     Yield     Value     Yield     Value     Yield     Value  Value   Yield
                            --------  -------   --------  -------   --------  -------   --------  -------  -------- ------ -------
<S>                             <C>    <C>       <C>       <C>       <C>        <C>      <C>        <C>      <C>      <C>    <C>
                                                                        (Dollars in Thousands)
Securities available
  for sale:

   Mortgage-backed
    securities..........   $      --       --%  $   113     7.32%   $3,580    4.09%    $16,150     5.54%   $19,843 $19,843   5.29%
   U.S. Government &
    agency..............         612     1.99     1,266     4.40        --      --          --       --      1,878   1,878   3.61
   Corporate Securities.         806     4.96       810     5.91        --      --       1,007     5.10      2,623   2,623   5.31
   Investments required
    by law..............          --       --        --       --        --      --       1,318     4.50      1,318   1,318   4.50
   Equity securities....          41     1.83        --       --        --      --          --       --         41      41   1.83
                           ---------            -------             ------             -------             ------- -------
      Total.............   $   1,459     3.63%  $ 2,189     5.11%   $3,580    4.09     $18,475     5.44%   $25,703 $25,703   5.12%
                           =========            =======             ======             =======             ======= =======
</TABLE>

                                       11
<PAGE>
     Deposits.  Total deposits increased by $62,000 or .05% to $119.7 million at
June 30, 2003 from $119.6  million at June 30, 2002.  Interest-bearing  deposits
decreased by $0.9 million or 0.8% to $112.8 million at June 30, 2003 from $113.7
million at June 30,  2002.  As shown in the  following  table,  certificates  of
deposit decreased by $1.1 million or 1.7% to $66.1 million at June 30, 2003 from
$67.2  million at June 30,  2002.  In the same  period,  money  market  accounts
decreased by $0.4 million or 2.4%.  In the interest  bearing  deposit  category,
these  decreases were somewhat  offset by the $0.3 million  increase in interest
checking  and the  $0.3  million  increase  in  savings  accounts.  Non-interest
checking  balances  increased  by $1 million or 16.4% to $6.9  million from $5.9
million in the year ended June 30, 2003.
<TABLE>
<CAPTION>

                                                                   Year Ended June 30,
                                             -------------------------------------------------------------
                                                     2003                                    2002
                                             --------------------                    ---------------------
                                             Balance      % Total                    Balance       % Total
                                             -------      -------                    -------       -------
<S>                                           <C>          <C>                        <C>             <C>
Savings Accounts.........................    $25,006      20.90%                    $ 24,693        20.65%
NOW Checking.............................      7,533       6.30                        7,255         6.07
Money Market.............................     14,129      11.81                       14,480        12.11
Certificates of Deposit..................     66,108      55.24                       67,254        56.23
                                            --------     ------                     --------       ------
  Subtotal Interest-bearing deposits         112,776      94.25                      113,682        95.06

Non-Interest Checking......................    6,879       5.75                        5,911         4.94
                                            --------     ------                     --------       ------
  Total Deposits                            $119,655     100.00%                    $119,593       100.00%
                                            ========     ======                     ========       ======
</TABLE>

     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,
                                         -------------------------------------------------------------
                                                   2003                                 2002
                                         -------------------------          --------------------------

                                         Average          Average           Average           Average
                                         Balance            Rate            Balance             Rate
                                         -------          --------          -------           --------
<S>                                        <C>              <C>                <C>              <C>
                                                                (Dollars in thousands)

Savings Accounts......................   $ 24,336           1.01%           $ 23,272           1.68%
NOW checking..........................      7,431           0.61               6,847           1.06
Money market..........................     14,004           1.52              12,693           2.18
Certificates of deposit...............     65,533           3.61              74,459           4.95
Noninterest-bearing checking..........      6,606             --               5,045             --
                                         --------                           --------
     Total............................   $117,910                           $122,316
                                         ========                           ========
</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 6.34% of total deposits and had a
weighted average rate of 4.08%.

<TABLE>
<CAPTION>

                                                                          Certificates
                            Maturity Period                               of Deposits
                            ---------------                              --------------
<S>                             <C>                                             <C>
                                                                         (In thousands)


                            Three months or less.......................   $   1,180
                            Over three through 12 months...............       2,527
                            Over 12 months.............................       3,877
                                                                          ---------
                                Total..................................   $   7,584
                                                                          =========
</TABLE>

     Borrowings.  The  Company's  borrowings  decreased by $2.5 million to $20.2
million at June 30, 2003 from $22.7  million at June 30, 2002.  During the year,
the Company paid down $4.5 million in Federal Home Loan Bank  borrowings and the
remaining $1 million in the holding  company  loan,  and borrowed an  additional
$3.0 million for a mortgage-backed  security leverage  transaction.  At June 30,
2003,  the Bank had $19.1  million in an unused  credit line at the Federal Home
Loan Bank of Atlanta.

                                       12
<PAGE>

     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, 2003 and 2002.
<TABLE>
<CAPTION>

                                                                       At June 30,
                                                            -------------------------------
                                                               2003                2002
                                                            ----------          -----------
<S>                                                             <C>                     <C>
                                                                  (Dollars in thousands)
Amounts outstanding at end of period:
    FHLB advances......................................     $  20,200           $ 21,700
    Other borrowings...................................            --              1,000
     Purchase Accounting Discount......................           (26)              ( 84)
Weighted average rate paid on:

    FHLB advances......................................          4.82%              6.22%
    Other borrowings...................................            --%              4.97%

Maximum amount of borrowings outstanding at any month end:
    FHLB advances......................................     $  22,700            $ 22,100
    Other borrowings...................................         1,000               1,700

Approximate average borrowings outstanding with respect to:
   FHLB advances.......................................     $  21,264            $ 17,385
   Other borrowings....................................           431               1,369
</TABLE>


COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

     General.  The Company's  net income  increased by $208,000 or 18.3% to $1.3
million in the year ended June 30,  2003  compared  to $1.1  million in the year
ended June 30,  2002.  The  increase  in net income was  primarily  due to lower
funding costs offsetting lower interest income,  lower  non-interest  income and
higher operating expenses.

     Net Interest  Income.  The Company's net interest income  increased by $0.9
million  or 15.5% to $6.8  million  in the year  ended  June 30,  2003 from $5.9
million in the year ended June 30, 2002.

     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 deposit rates was responsible  for $1.3 million of the $1.6 million  decrease
in interest  expense.  This offset the $0.7 million decrease in interest income,
primarily due to lower rates earned on assets.

     The  Company's  net interest  margin  increased to 4.52% for the year ended
June 30,  2003 from 3.90% for the year  ended June 30,  2002.  The  decrease  in
yields on earning  assets of 44 basis  points  was  offset by a decrease  of 109
basis points in the cost of funds.

     Interest Income.  The Company's total interest income decreased by $680,000
or 6.0% to $10.7  million in the year ended June 30, 2003 from $11.4  million in
the year ended June 30,  2002.  The  decrease  in the yields  earned on interest
earning  assets  reduced   interest   income  by  $602,000.   Lower  volumes  of
interest-earning assets reduced interest income by $78,000.

     Interest  income on loans  decreased  $1.1 million,  or 10.2% during fiscal
year 2003.  Lower loan  volumes  were  responsible  for $673,000 of the decrease
while lower rates earned on loans was responsible for $388,000 of the decrease.

                                       13
<PAGE>

     Interest income on investment  securities  increased by $42,000 to $294,000
in fiscal year 2003 as compared  to $252,000 in fiscal year 2002.  The  increase
was the result of an increase in average  balances  offsetting a decrease in the
average yields.

     Interest income on mortgage-backed  securities increased $593,000 or 164.1%
to $954,000 in fiscal 2003 from $361,000 in the fiscal year ended June 30, 2002.
The higher average balance outstanding of mortgage-backed securities resulted in
an increase in interest  income of $651,000  that was  slightly  offset by lower
rates  earned.  The  year-to-year  increase  in the  balance of  mortgage-backed
securities was due to the purchase of $11.0 million in these  securities.  These
purchases  were  executed in order to invest the  proceeds of the payoffs in the
residential first mortgage portfolio.

     Interest income on short-term investments and other interest earning assets
decreased  $255,000  or 61.1% to $162,000 in the fiscal year ended June 30, 2003
from  $417,000 in the fiscal year ended June 30, 2002.  Lower  volumes,  as this
money was used to purchase  securities  and pay-off  borrowings  and lower rates
were equally responsible for the decline.

     Interest Expense.  The Company's interest expense decreased by $1.6 million
or 28.5% to $4.0 million in fiscal year 2003 from $5.6 million during the fiscal
year ended June 30, 2002. As shown in the rate/volume  table above, the decrease
in rates paid on  deposits  and the lower  average  balance of  interest-bearing
deposits are primarily responsible for this decrease.

     Interest  expense  on  deposits  decreased  $1.5  million  or 34.1% to $2.9
million in fiscal year 2003 from $4.4 million in fiscal  2002.  Lower rates were
responsible  for $1.3  million in the  decrease  and lower  average  balances of
interest-bearing deposits were responsible for $0.2 million of the decrease.

     Interest expense on long-term borrowings decreased $26,000 or 2.3% to $1.12
million  in the year ended  June 30,  2003 from $1.15  million in the year ended
June 30, 2002. The impact of lower volumes of borrowings  outstanding was offset
by the higher average rate on the borrowings.

     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 method utilized
for the  determination  of the allowance is described in Note 1 of the financial
statements.

     The  provision for loan losses was $531,000 in fiscal year 2003, a decrease
of $ 29,000 or 5.2%  from the  fiscal  year  2002  provision  of  $560,000.  Net
charge-offs  for  the  year  increased  193.3%  to  $830,000,  with  significant
increases in commercial loan and commercial  equipment leases and a reduction in
consumer loan charge-offs.  The Company's allowance for loan losses decreased as
a percentage of total loans  outstanding to 1.00% at June 30, 2003 from 1.20% at
June 30, 2002.  This decrease  resulted  from the high level of net  charge-offs
experienced in the year. The Company's allowance for loan losses as a percentage
of  non-performing  loans was 348.3% at June 30,  2003 as  compared to 206.5% at
June 30, 2002.

The following table shows the activity in the allowance for loan losses in the
years ended June 30 2003 and 2002:

<TABLE>
<CAPTION>

                                                                        Year Ended June 30,
                                                                  -----------------------------
                                                                     2003               2002
                                                                  ---------          ----------
<S>                                                                     <C>                <C>
                                                                       (Dollars in thousands)

Balance at beginning of period.................................  $   1,438          $   1,161
Loans charged off:
   Real estate mortgage........................................         --                 --
   Commercial Loan.............................................        499                 28
   Commercial Lease............................................        320                128

                                       14
<PAGE>

   Consumer....................................................        145                201
                                                                 ---------          ---------
      Total charge-offs........................................        964                357
Recoveries:
   Real estate mortgage........................................         --                 12
   Commercial Loan.............................................         37                 10
   Commercial Lease............................................         55                 16
   Consumer....................................................         42                 36
                                                                 ---------          ---------
      Total recoveries.........................................        134                 74
                                                                 ---------          ---------
Net loans charged off..........................................        830                283
Provision for loan losses......................................        531                560
                                                                 ---------          ---------
Balance at end of period.......................................  $   1,139          $   1,438
                                                                 =========          =========
Ratio of net charge-offs to average
   loans outstanding during the period.........................       0.72%              0.23%
                                                                 =========          =========
Ratio of loan loss reserve to non-performing loans.............     348.32%            206.48%
                                                                 =========          =========
</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>
                                                       As of June 30, 2003             As of June 30, 2002
                                                     ----------------------       ---------------------------
                                                                    % of                            % of
                                                                 Loans to                         Loans to
                                                     Amount      Total Loans      Amount          Total Loans
                                                     ------      -----------      ------          -----------
<S>                                                     <C>             <C>          <C>                <C>
                                                                             (Dollars in thousands)
Real estate mortgage:
   Residential.....................................  $    88          40.8%       $   111             47.9 %
   Commercial......................................       71          12.2            255             12.4
   Construction....................................      121           3.6             50              2.7
Consumer and other.................................      114          12.6            227             11.4
Commercial Business................................      205          14.7            275             11.4
Commercial Lease...................................      248          16.1            380             14.2
Unallocated........................................      291            --            140               --
                                                     -------        ------        -------           ------
     Total allowance for loan losses...............  $ 1,139        100.00%       $ 1,438           100.00%
                                                     =======        ======        =======           ======
</TABLE>

     The following  table sets forth  information  with respect to the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>

                                                                           At June 30,
                                                                 ----------------------------
                                                                    2003               2002
                                                                 ----------         ---------
<S>                                                                <C>                 <C>
                                                                         (In thousands)
Loans accounted for on a non-accrual basis: (1)
    Real estate:
       Residential.............................................  $      90          $     285
       Commercial..............................................         --                 --
       Construction............................................         --                 --
    Consumer...................................................         44                 --
    Commercial Loan/Lease......................................        193                411
                                                                 ---------          ---------
       Total...................................................  $     327          $     696
                                                                 =========          =========
Accruing loans which are contractually past due
   90 days or more.............................................  $      --          $      --
                                                                  --------           --------
       Total...................................................  $      --          $      --
                                                                  --------           --------

       Total non-performing loans..............................  $     327          $     696
                                                                 =========          =========

                                       15
<PAGE>

Percentage of total loans......................................       0.29%              0.58 %
                                                                 =========          =========
Other non-performing assets (2)................................  $      19          $     128
                                                                 =========          =========
</TABLE>
-------------
(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 and equipment 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.


     At June 30, 2003, real estate and consumer  non-accrual  loans consisted of
one  residential  real estate first  mortgage loan with a balance of $90,000,  a
second mortgage on this same property  totaling  $20,000 and an unrelated second
mortgage  with  a  balance  of  $24,000.  Non-accrual  loans  also  include  two
commercial  loans totaling  $131,000 of which $77,000 is guaranteed by the Small
Business   Administration  and  three  commercial  lease  transactions  totaling
$62,000.

     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 $950,000  loan on  undeveloped  land that was not
delinquent.  The property is under  contract of sale.  The borrowers are keeping
the loan current with funds from other sources.  A preliminary  estimate is that
sales  proceeds will result in a shortfall to the Bank's lien after  transaction
costs.  The Bank  does  however,  have  liens on other  properties  owned by the
borrowers.  Once further  information  on the sales contract is received and the
additional collateral analyzed, a charge, if necessary will be taken against the
Bank's allowance for loan losses.

     At June 30, 2003, the Company had $19,000 in repossessed  construction  and
warehouse  equipment.  The Company  believes that proceeds from the sale of this
equipment will be adequate to pay-off the balance.

     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  decreased  by  $298,000  or 34.4% to  $568,000  in  fiscal  year 2003 as
compared to $866,000 in fiscal year 2002. The decrease was primarily a result of
the  $337,000  gain on the sale of loans  recognized  in the year ended June 30,
2002. This was a one-time sale of residential mortgages.  In the year ended June
30, 2003,  the Bank  recognized  gains of $14,000 on loans  originated for sale.
Gains on sale of investments of $139,000 were  recognized in the year ended June
30,  2003 as compared  to  $174,000  in the year ended June 30,  2002.  Fees and
service charges  increased  $49,000 or 14.8% due to primarily to higher balances
of transaction accounts.

     Non-interest  Expense. The Company's total noninterest expense increased by
$361,000,  or 8.3%,  to $4.7 million  during  fiscal  2003,  as compared to $4.4
million in fiscal 2002. The Company experienced a $109,000,  or 4.2% increase in
compensation  and employee  benefits  expense  during fiscal 2003, a $217,000 or
114.1% increase in  professional  fees, a $32,000 or 13.9% decrease in equipment
expenses,  a $24,000 or 12.2%  increase in occupancy  costs.  a $19,000 or 13.8%
decrease  in  advertising  expense  and a  $41,000  or 5.9%  increase  in  other
operating  expenses.  Salaries and benefits expense  increased  primarily due to
regular salary  increases,  increased  benefit costs and small staff  additions.
Professional  fees  increased  primarily  due to costs related to the workout of
problem loans. Of the $217,000  increase in professional fees experienced in the
year ended June 30, 2003,  $176,000 are directly  attributable  to assistance in
working  out  problem  loans.   The  majority  of  the  remaining   increase  is
attributable  to the  cost of a  consultant  hired  to  assist  the  Company  in
selecting  a new  core-processing  vendor.  This  decision  has been  made and a
conversion  is scheduled for October 2003.  Equipment  and  maintenance  expense
decreased primarily to the hiring of an internal information  technology person.
Of  the  $41,  000  increase  in  other  operating  expenses,   $37,000  can  be
attributable  to one  fraudulent  check.  The Bank is pursuing  legal  action to
recover this amount.

                                       16
<PAGE>

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  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.

     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 $24.4
million as of June 30, 2003. 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.

     The Bank's interest rate  sensitivity,  as measured by the repricing of its
interest  sensitive assets and liabilities at June 30, 2003, is presented in the
following  table.  The table was  derived  using  assumptions  which  management
believes to be reasonable.

                                       17
<PAGE>
     The following table sets forth the amounts of  interest-earning  assets and
interest-bearing  liabilities  outstanding at June 30, 2003 that are expected to
mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
                                            Three        Over Three      Over One     Over Five     Over Ten     Over
                                           Months      Months Through     Through      Through       Through    Twenty
                                           or Less        One Year      Five Years    Ten Years   Twenty Years   Years    Total
                                           -------        --------      ----------    ---------   ------------  -------   -----
<S>                                             <C>        <C>              <C>          <C>             <C>       <C>     <C>
                                                                                (Dollars in thousands)
Rate sensitive assets:
   Loans receivable..................... $  39,513        $ 27,009      $  46,587    $   4,868      $  1,321    $  107   $119,405
   Mortgage-Backed  securities..........     3,245           2,632          9,281        3,190         1,307       188     19,843
   Investment securities................        47             540          2,954           --         1,001                4,542
   Short-term investments and other
       interest-earning assets .........    12,948              96            288           --            --        --     13,332
                                         ---------        --------      ---------    ---------      --------   -------   --------
        Total...........................    55,753          30,277         59,110        8,058         3,629       295    157,122
                                         ---------        --------      ---------    ---------      --------   -------   --------

Rate sensitive liabilities:
   Deposits ............................    28,936          26,184         54,000        9,248         1,077        210   119,655
   Borrowings...........................     4,000           3,000          5,100        8,100            --         --    20,200
                                         ---------        --------      ---------    ---------      --------   --------  --------
        Total...........................    32,936          29,184         59,100       17,348         1,077        210   139,855
                                         ---------        --------      ---------    ---------      --------   --------  --------

Interest sensitivity gap................ $  22,817        $  1,093      $      10    $  (9,290)     $  2,552   $     85
                                         =========        ========      =========    =========      ========   ========
Cumulative interest sensitivity gap..... $  22,817        $ 23,910      $  23,920    $  14,630      $ 17,182     17,267
                                         =========        ========      =========    =========      ========   ========
Ratio of cumulative gap to total assets.     14.46%          15.15%         15.16%        9.27%        10.89%     10.94%
                                         =========        ========      =========    =========      ========   ========
</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,  2003,  the Bank had the  following  estimated  sensitivity  profile for net
interest income and fair value of equity:
<TABLE>
<CAPTION>

                                                       + 200 basis points        -100 basis points         Policy Limit
                                                       ------------------        -----------------         ------------
          <S>                                                   <C>                     <C>                     <C>
         % Change in Net Interest Income                          -0.8 %                   -3.5 %        plus or minus 10.0%
         % Change in Fair Value of Equity                        -10.0 %                   -1.3 %        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, 2003,  the Company's  cash on hand,  interest  bearing  deposits and
Federal funds sold totaled $14.2 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  $1.6  million and $4.7  million,  respectively.  Certificates  of
deposit  that are  scheduled  to mature  in less than one year at June 30,  2003
totaled $34.0 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  $418,000 for the payment of common and preferred
dividends.  The only source of funds for the holding  company is dividends

                                       19
<PAGE>

from the Bank. The amount of dividends  that can be paid to the holding  company
from the bank is limited by the earnings of the bank.

     At June 30, 2003,  the Company  exceeded  all  regulatory  minimum  capital
requirements.  The table  below  presents  certain  information  relating to the
Company's regulatory compliance at June 30, 2003.
<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>
                                                                         (Dollars in thousands)

 Total Capital (to Risk Weighted Assets)..   $  14,416          14.58 %  $  7,912       8.0%  $   9,890    10.0%
 Tier 1 Capital (to Risk Weighted Assets).      13,277          13.43       3,956       4.0       5,934     6.0
 Tier 1 Capital (to Average Assets).......      13,277           8.56       6,205       4.0       7,756     5.0
</TABLE>


CONTINGENCIES AND OFF-BALANCE SHEET ITEMS

The  Company  is party to  financial  instruments  with  off-balance  sheet risk
including  commitments  to extend  credit  under both new  facilities  and under
existing lines of credit.  Commitments to fund loans  typically  expire after 60
days,  commercial  lines of credit are subject to annual reviews and home equity
lines of credit are generally for a term of 20 years. These instruments contain,
to varying  degrees,  credit  and  interest  rate risk in excess of the  amounts
recognized in the consolidated balance sheets.

Off-balance sheet financial  instruments whose contract amounts represent credit
and interest rate risk are summarized as follows:
<TABLE>
<CAPTION>

                                                                       June 30, 2003             June 30, 2002
                                                                       -------------             -------------
<S>                                                                        <C>                         <C>
                                                                                (dollars in thousands)

Commitments to originate new loans..................................         $1,566               $4,512
Undisbursed lines of credit.........................................          4,720                3,878
Financial standby letters of credit.................................            958                  669
</TABLE>

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated  Financial  Statements and Notes thereto  presented herein
have been prepared in accordance with accounting  principles  generally accepted
in The United  States of America,  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.


                                       20
<PAGE>

                    [LETTERHEAD OF ANDERSON ASSOCIATES LLP]


  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, 2003 and 2002, 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,  2003.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Patapsco  Bancorp,  Inc. and  Subsidiaries as of June 30, 2003 and 2002, 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, 2003, in conformity  with accounting
principles generally accepted in the United States of America.


                                        /s/ Anderson Associates LLP




  August 6, 2003
  Baltimore, Maryland

                                       21
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>

June 30, 2003 and 2002
========================================================================================================================
                                                                                       2003                  2002
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                     <C>
ASSETS
Cash:
      On hand and due from banks                                                 $   2,193,246              3,660,638
      Interest bearing deposits                                                      5,488,697              7,464,183
Federal funds sold                                                                   6,525,000              3,732,000
Investment securities at fair value (note 2)                                         4,541,938              5,005,955
Mortgage-backed securities at fair value (note 3)                                   19,843,414             13,705,241
Loans receivable, net (note 4)                                                     113,251,659            118,349,734
Investment required by law, at cost  (note 9)                                        1,318,350              1,903,350
Property and equipment, net (note 5)                                                   997,646              1,056,806
Goodwill (note 13)                                                                   1,869,691              1,869,691
Deferred taxes (note 8)                                                                356,332                699,125
Accrued interest, prepaid expenses and other assets                                  1,418,868              1,288,860
------------------------------------------------------------------------------------------------------------------------
                                                                                  $157,804,841            158,735,583
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
      Interest bearing deposits (note 6)                                          $112,776,166            113,682,321
      Noninterest bearing deposits                                                   6,878,914              5,910,312
      Borrowings (note 7)                                                           20,174,389             22,616,019
      Accrued expenses and other liabilities                                         2,070,113              1,925,523
------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                  141,899,582            144,134,175

Temporary equity - ESOP shares subject to put option(note 11)                          776,996                671,724

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; 99,734 and 100,166 outstanding
         at June 30, 2003 and June 30, 2002, respectively                                  997                  1,002
       Additional paid-in-capital                                                    2,494,695              2,505,495
      Common stock $0.01 par value; authorized 4,000,000 shares; issued and
        outstanding 412,634 shares at June 30, 2003 and
        373,613 shares at June 30, 2002                                                  4,126                  3,736
      Additional paid-in capital                                                     3,081,676              2,020,324
      Contra equity - Employee Stock Option Plan (ESOP)                                (55,532)              (119,537)
      Deferred compensation - Rabbi Trust                                              (77,544)               (77,544)
       Obligation under Rabbi Trust                                                    249,976                249,976
      Retained earnings, substantially restricted                                    9,070,227              9,207,460
      Accumulated other comprehensive income, net of taxes                             359,642                138,772
------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity - including Temporary Equity                             15,905,259             14,601,408
Commitments (notes 4, 5, 7, 10 and 11)
------------------------------------------------------------------------------------------------------------------------
                                                                                  $157,804,841            158,735,583
========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       22
<PAGE>

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income
Years Ended June 30, 2003 and 2002
<TABLE>
<CAPTION>

==================================================================================================================
                                                                                    2003              2002
------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>
Interest income:
      Loans receivable (note 4)                                                $  9,353,840       10,415,229
      Mortgage-backed securities                                                    953,881          361,170
      Investment securities                                                         294,458          251,639
      Federal funds sold and other investments                                      162,014          416,693
------------------------------------------------------------------------------------------------------------------
Total interest income                                                            10,764,193       11,444,731
------------------------------------------------------------------------------------------------------------------

Interest expense:
      Deposits                                                                    2,867,683        4,422,358
      Interest on short term borrowing                                                   --            6,597
      Interest on long term debt                                                  1,124,719        1,150,842
------------------------------------------------------------------------------------------------------------------
Total interest expense                                                            3,992,402        5,579,797
------------------------------------------------------------------------------------------------------------------

Net interest income                                                               6,771,791        5,864,934
Provision for losses on loans (notes 1 and 4)                                       530,600          560,000
------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans                           6,241,191        5,304,934
------------------------------------------------------------------------------------------------------------------

Noninterest income:
      Fees and service charges                                                      384,314         334,836
      Net (loss) on sales of other real estate owned                                 (3,071)             --
      Gain on sale of investment and mortgage-backed
        securities (notes 2 and 3)                                                  138,489         174,470
       Gain on sale of loans held-for-sale                                           14,167         337,025
      Other                                                                          34,038          19,788
------------------------------------------------------------------------------------------------------------------
Total noninterest income                                                            567,937         866,119
------------------------------------------------------------------------------------------------------------------

Noninterest expenses:
      Compensation and employee benefits                                          2,718,139       2,609,419
      Insurance                                                                      71,095          62,733
      Professional fees                                                             406,471         189,826
      Equipment expenses                                                            201,405         233,781
      Net occupancy costs                                                           221,124         197,133
      Advertising                                                                   117,282         135,989
      Data processing                                                               217,856         203,948
      Other                                                                         723,428         682,852
------------------------------------------------------------------------------------------------------------------
Total noninterest expenses                                                        4,676,800       4,315,681
------------------------------------------------------------------------------------------------------------------

Income before income taxes                                                        2,132,328       1,855,372
Income tax provision (note 8)                                                       787,546         718,458
------------------------------------------------------------------------------------------------------------------
Net income                                                                       $1,344,782       1,136,914
------------------------------------------------------------------------------------------------------------------

Net income per share of common stock (note 1):
      Basic                                                                      $     2.81           2.38
      Diluted                                                                          2.41           2.08
==================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       23
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2003 and 2002
<TABLE>
<CAPTION>

================================================================================================================================
                                                                                                           Temp.
                                                                                                           Equity
                                                            Additional                                     ESOP
                                                             Paid-In                Additional   Contra-   Shares    Contra-
                                                 Preferred   Capital      Common      Paid-In   Equity     Subject   Equity
                                                   Stock    Preferred      Stock      Capital     ESOP     to Put      MRP
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>      <C>            <C>        <C>       <C>        <C>
Balance at July 1, 2001                          $  1,061   2,650,733      3,330    1,009,626   (185,695)  620,311   (60,610)

 Comprehensive income
    Net income                                          -           -          -            -          -                   -
    Adjustment  to   unrealized   net  holding
        gains on available-for-sale portfolios,
        net (note 1)                                    -           -          -            -          -                   -
  Reclassification    adjustments   for   gains
    included in net income, net of taxes
    of $67,555                                          -           -          -            -          -                   -
     Comprehensive income                               -           -          -            -          -                   -
  Compensation under stock-based benefit plans          -           -          -       42,538     66,158              60,610
  Cash dividends declared ($0.56 per share)             -           -          -            -          -                   -
  Common Stock Dividend                                                      334      872,579
  Options exercised                                     -           -         33       57,374          -                   -
  Purchase of preferred stock                         (23)    (55,615)
  Transfer to temporary equity                          -           -          -      (51,413)         -     51,413        -
  Obligation under Rabbi Trust                          -           -          -            -          -                   -
  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)   671,724        -
  Comprehensive income
    Net income                                          -           -          -            -          -                   -
    Adjustment  to   unrealized   net  holding
     gains available-for-sale portfolios, net
     (note 1)                                           -           -          -            -          -                   -
  Reclassification    adjustments   for   gains
   included in net income, net of taxes of $51,444
     Comprehensive income                               -           -          -            -          -                   -
  Compensation under stock-based benefit plans          -           -          -        68,799    64,005                   -
  Cash dividends declared ($0.56 per share)             -           -          -             -         -                   -
  Common Stock Dividend                                                      376     1,070,568
  Options exercised                                     -           -         10        16,456         -                   -
  Transfer to temporary equity                          -           -          -      (105,272)        -    105,272        -
  Conversion of Preferred to Common                    (5)    (10,800)         4        10,801         -                   -
--------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003                              997   2,494,695      4,126     3,081,676   (55,532)   776,996        -
=================================================================================================================================
<CAPTION>

===================================================================================================================================
                                                                                        Accumulated
                                                                                            Other
                                                                                        Comprehensive          Total
                                                  Rabbi          Retained                Income, Net        Stockholders'
                                                  Trust          Earnings                 of Taxes             Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>                     <C>                     <C>
Balance at July 1, 2001                          (77,544)         9,331,919               131,689            13,424,820

 Comprehensive income
    Net income                                         -          1,136,914                     -                     -
    Adjustment  to   unrealized   net  holding
        gains on available-for-sale portfolios,
        net (note 1)                                   -                  -               113,998                     -
  Reclassification    adjustments   for   gains
    included in net income, net of taxes
    of $67,555                                         -                  -              (106,915)
     Comprehensive income                              -                  -                     -             1,143,997
  Compensation under stock-based benefit plans         -                  -                     -               169,306
  Cash dividends declared ($0.56 per share)            -           (388,460)                    -              (388,460)
  Common Stock Dividend                                            (872,913)
  Options exercised                                    -                  -                     -                57,407
  Purchase of preferred stock                                                                                   (55,638)
  Transfer to temporary equity                         -                  -                     -                     -
  Obligation under Rabbi Trust                   249,976                  -                     -               249,976
  Conversion of Preferred to Common                    -                  -                     -                     -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002                         172,432          9,207,460               138,772            14,601,408
  Comprehensive income
    Net income                                         -          1,344,782                     -                     -
    Adjustment  to   unrealized   net  holding
     gains available-for-sale portfolios, net
     (note 1)                                          -                  -               308,215                     -
  Reclassification    adjustments   for   gains
   included in net income, net of taxes of $51,444                                        (87,345)
     Comprehensive income                              -                  -                     -             1,565,652
  Compensation under stock-based benefit plans         -                  -                     -               132,804
  Cash dividends declared ($0.56 per share)            -           (411,071)                    -              (411,071)
  Common Stock Dividend                                          (1,070,944)                    -                     -
  Options exercised                                    -                  -                     -                16,466
  Transfer to temporary equity                         -                  -                     -                     -
  Conversion of Preferred to Common                    -                  -                     -                     -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003                         172,432          9,070,227               359,642            15,905,259
===================================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       24

<PAGE>



PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2003 and 2002

<TABLE>
<CAPTION>

========================================================================================================================
                                                                                    2003                       2002
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                       <C>
Cash flows from operating activities:
     Net income                                                                $ 1,344,782                  1,136,914
     Adjustments to reconcile net income to net
          cash provided by operating activities:
               Depreciation                                                        183,036                    149,715
               Provision for losses on loans                                       530,600                    560,000
               Provision for loss on foreclosed real estate                             --                     10,000
               Non-cash compensation under stock-based benefit plans               132,804                    169,306
               Amortization of premiums and discounts, net                         (74,831)                   142,330
               Deferred loan origination fees, net of costs                        170,157                     19,971
               Proceeds from sale of loans-held-for-sale                         1,439,074                 10,251,164
               Disbursements on loans held for sale                             (1,424,907)                        --
               Gain on sale of investment securities                              (138,489)                  (174,470)
               Gain on sale of loans held-for-sale                                 (14,167)                  (337,025)
               Loss on sale of real estate owned                                     3,071                         --
               (Decrease) increase in accrued interest, deferred taxes,
                prepaid expenses and other assets                                  (54,670)                   425,150
               Increase (decrease) in accrued expenses and other liabilities       144,590                   (915,968)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                        2,241,050                  1,185,923
------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Purchase of certificate of deposit                                                 --                    (99,000)
     Purchase of investment securities                                          (2,718,308)                (4,755,665)
     Proceeds from sale/redemption of investment securities                      3,321,961                  2,004,510
     Purchase of mortgage-backed-securities                                    (12,361,805)               (10,000,000)
     Principal repayments on mortgage-backed securities                          6,538,565                  2,023,423
     Loan principal disbursements, net of repayments                             4,556,707                  8,834,366
     Proceeds from sale of real estate owned                                       124,839                         --
     Redemption of investment required by law                                      585,000                         --
     Purchases of property and equipment                                          (123,876)                   (13,096)
------------------------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities                            $   (76,917)                 8,245,702
------------------------------------------------------------------------------------------------------------------------
</TABLE>

(Continued)








See accompanying notes to consolidated financial statements.








                                       25
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

Years ended June 30, 2003 and 2002

<TABLE>
<CAPTION>


====================================================================================================================
                                                                                    2003                2002
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                   <C>
Cash flows from financing activities:
    Net increase (decrease) in deposits                                        $      80,594         (4,347,744)
    Purchase of preferred stock                                                           --            (55,638)
    Stock options exercised                                                           16,466             57,407
    Net decrease in borrowings                                                    (2,500,000)        (1,100,000)
    Dividends paid                                                                  (411,071)          (388,460)
--------------------------------------------------------------------------------------------------------------------
Net cash(used in) provided by financing activities                                (2,814,011)        (5,834,435)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                (649,878)         3,597,190
Cash and cash equivalents at beginning of year                                    14,373,821         10,776,631
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                         $13,723,943         14,373,821
====================================================================================================================


The Following is a Summary of Cash and Cash Equivalents:
     Cash on hand and due from banks                                             $ 2,193,246          3,660,638
     Interest bearing deposits in other banks                                      5,488,697          7,464,183
     Federal funds sold                                                            6,525,000          3,732,000
--------------------------------------------------------------------------------------------------------------------
                                                                                  14,206,943         14,856,821
         Less - Certificates of deposit maturing in 90 days or more
                      included in interest bearing deposits in other banks          (483,000)          (483,000)
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents reflected on the Statement of Cash Flows               $13,723,943         14,373,821
====================================================================================================================


Supplemental information:
     Interest paid on savings deposits and borrowed funds                        $ 3,992,402          5,579,797
     Income taxes paid                                                               760,400            820,400
     Preferred stock converted to common stock                                        10,805             89,659
     Common Stock Dividend                                                         1,070,945            872,913
     Transfer ESOP shares to temporary capital                                       105,273             51,413
====================================================================================================================
</TABLE>




See accompanying notes to consolidated financial statements.











                                       26


<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002


(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,  primarily in the Greater  Baltimore
     Metropolitan area.  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.

     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

                                       27


<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

     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.

     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.

     ALLOWANCE FOR LOAN LOSSES

     The  allowance for loan losses  ("allowance")  represents an amount that in
     the judgment of management,  will be adequate to absorb  probable losses on
     outstanding loans and leases that may become  uncollectible.  The allowance
     represents an estimate made based upon two  principals of  accounting:  (1)
     Statement of Financial  Accounting  Standards ("SFAS") No.5 "Accounting for
     Contingencies", that requires losses to be accrued when their occurrence is
     probable and estimable,  and (2) SFAS No. 114  "Accounting by Creditors for
     Impairment of a Loan",  that requires losses be accrued when it is probable
     that the lender will not collect all  principal  and interest due under the
     original  term of the loan.  The adequacy of the  allowance  is  determined
     through careful  evaluation of the loan portfolio.  This  determination  is
     inherently  subjective  and  requires  significant   estimates,   including
     estimated  losses on pools of  homogeneous  loans based on historical  loss
     experience and  consideration of the current economic  environment that may
     be subject to change.  Loans and leases  deemed  uncollectible  are charged
     against the allowance and recoveries of previously  charged-off amounts are
     credited  to it.  The  level  of the  allowance  is  adjusted  through  the
     provision for loan loss that is recorded as a current period expense.

     The methodology for assessing the appropriateness of the allowance includes
     a specific allowance, a formula allowance and a nonspecific allowance.  The
     specific  allowance is for risk rated credits on an individual  basis.  The
     formula  allowance  reflects  historical  losses  by credit  category.  The
     nonspecific  allowance  captures  losses whose impact on the portfolio have
     occurred but have yet to be recognized in either the specific  allowance or
     the formula  allowance.  The factors used in  determining  the  nonspecific
     allowance include trends in  delinquencies,  trends in volumes and terms of
     loans,  the size of  loans  relative  to the  allowance,  concentration  of
     credits,  the  quality  of  the  risk  identification   system  and  credit
     administration and local and national economic trends.

     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

                                       28


<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

     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.

     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 AND OTHER REPOSSESSED ASSETS

     Real estate acquired through foreclosure (REO) and other repossessed assets
     are  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 property are charged against income
     in the current  period,  while costs relating to improving such real estate
     are  capitalized  until a  salable  condition  is  reached.  REO,  which is
     included in other assets  totaled $0 and $127,910 at June 30, 2003 and June
     30, 2002,  respectively.  Other repossessed assets, which are also included
     in other assets totaled  $18,760 and $0 at June 30, 2003 and June 30, 2002,
     respectively.

     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.  Shares outstanding and
     per share  numbers  have been  restates  to reflect  the 10%  common  stock
     dividends issued in December of 2002 and 2001.

<TABLE>
<CAPTION>

                                                     -----------------------------------------------------------------------
                                                                                   YEAR ENDED
                                                     -----------------------------------------------------------------------
                                                              JUNE 30, 2003                          JUNE 30, 2002
                                                        BASIC              DILUTED             BASIC            DILUTED
----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                 <C>                  <C>             <C>
Net income                                           $1,344,782          1,344,782          1,136,914         1,136,914
Preferred Stock Dividends                               187,294                 --            186,373                --
Net Income Available to Common                        1,157,489          1,344,782            950,541         1,136,914
Weighted average shares outstanding                     411,662            411,662            399,223           399,223

</TABLE>

<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002
<TABLE>
<CAPTION>


<S>                                                         <C>                 <C>               <C>           <C>
    Diluted securities:
    Preferred Stock                                          --            120,930                 --           124,907

    MRP shares                                               --                 --                 --               575

    Options                                                  --             25,526                 --            21,744
----------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares                         411,662           558,118            399,223           546,449
----------------------------------------------------------------------------------------------------------------------------
Per share amount                                      $     2.81              2.41               2.38              2.08
============================================================================================================================
</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  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
     unallocated shares are recorded as a reduction of debt.

     ADVERTISING COSTS

     The Company expenses advertising costs as they are incurred.

     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>

                                                                                2003
                                          -------------------------------------------------------------------
                                           AMORTIZED        UNREALIZED       UNREALIZED             FAIR
                                               COST             GAINS            LOSSES            VALUE
  -----------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>                     <C>
  Equity securities                       $    47,951                 --           7,189           40,762
  Corporate Bonds                           2,600,000             26,160           2,961        2,623,199
  U.S. Government and Agency                1,854,489             23,488              --        1,877,977
  -----------------------------------------------------------------------------------------------------------
                                          $ 4,502,440             49,648          10,150        4,541,938
  ===========================================================================================================

                                          -------------------------------------------------------------------
                                                                             2002
                                          -------------------------------------------------------------------
  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
  ===========================================================================================================
</TABLE>


                                                     30
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

     The equity investments have no stated maturity. The scheduled maturities of
     other investments available for sale at June 30, 2003 are as follows:
<TABLE>
<CAPTION>

                                                                                      2003
                                                                       AMORTIZED                   FAIR
                                                                         COST                     VALUE
   ----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                         <C>
     Due in one to five years                                        $2,204,489                2,229,076
     Due after five through ten years                                 1,250,000                1,265,480
     Due after ten years                                              1,000,000                1,006,620
                                                        -----------------------------------------------------
                                                                     $4,454,489                4,501,176
   ==========================================================================================================
</TABLE>

     Accrued interest receivable balances at June 30, 2003 and 2002 were $44,521
     and $34,500, respectively.

     In fiscal year 2003, the Company  received  proceeds of $2,320,847 from the
     sale of corporate, government and agency and equity securities resulting in
     gross gains of $138,489.

     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.

(3)  MORTGAGE-BACKED SECURITIES

     Mortgage-backed   securities,   classified   as   available-for-sale,   are
     summarized as follows as of June 30:
<TABLE>
<CAPTION>

                                                                               2003
                                           ----------------------------------------------------------------
                                               AMORTIZED     UNREALIZED      UNREALIZED            FAIR
                                                   COST          GAINS           LOSSES            VALUE
-----------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>             <C>
Government National Mortgage
  Association (GNMA)                       $ 1,846,108         110,774            --         1,956,882
Federal National Mortgage
  Association (FNMA)                         9,355,351         242,982         5,466         9,592,867
Federal Home Loan Mortgage
  Corporation (FHLMC)                        8,094,937         198,728            --         8,293,665
                                           ----------------------------------------------------------------
                                           $19,296,396         552,484         5,466        19,843,414
============================================================================================================
                                                                               2002
                                           ----------------------------------------------------------------

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
============================================================================================================
</TABLE>

     Accrued interest  receivable at June 30, 2003 and June 30, 2002 was $87,947
     and $68,729, respectively.

     There were no sales of mortgage-backed securities in 2003 or 2002.

(4)  LOANS RECEIVABLE

     Loans receivable and accrued interest  receivable thereon are summarized as
     follows as of June 30:
<TABLE>
<CAPTION>

                                                                               2003                   2002
   -----------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                     <C>
   Real estate secured by first mortgage:
        Residential                                                        $48,664,287             59,609,316
        Commercial                                                          14,622,038             15,487,336
        Construction, net of loans in process                                4,266,488              3,331,977
   -----------------------------------------------------------------------------------------------------------------
                                                                            67,552,813             78,428,629

</TABLE>
                                       31
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

<TABLE>
<CAPTION>
<S>                                                                             <C>                     <C>
   Home improvement loans                                                     9,160,788              9,562,248
   Commercial loans                                                          17,563,591             14,158,551
   Home equity loans                                                          3,709,040              3,096,376
   Commercial leases                                                         19,224,610             17,643,326
   Loans secured by deposits                                                    209,890                230,956
   Consumer loans                                                             1,984,357              1,344,524
   -----------------------------------------------------------------------------------------------------------------
                                                                            119,405,089            124,464,610

   -----------------------------------------------------------------------------------------------------------------
                                                                                2003                   2002
   Less:
        Deferred loan origination fees, net of costs                       $     96,078                 66,162
        Unearned interest consumer loans                                        408,489                290,314
        Unearned interest commercial leases                                   4,356,278              3,975,799
        Purchase accounting discount, net                                       153,594                344,528
        Allowance for loan losses                                             1,138,991              1,438,073
   -----------------------------------------------------------------------------------------------------------------
   Loans receivable, net                                                   $113,251,659            118,349,734
   =================================================================================================================
</TABLE>

Accrued interest  receivable on loans was $585,000 and $693,000 at June 30, 2003
and 2002, 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, 2003 and 2002 were  $36,850 and  $35,400,
respectively.

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.

The purchase  accounting  discount results from the November 2000 acquisition of
Northfield  Bancorp and its  subsidiary,  Northfield  Federal  Savings Bank. The
purchase  discount was  determined  by comparing  the fair market  values of the
loans  purchased to their carrying  values on the books of the acquired  entity,
before  consideration  of  uncollectibility.  Fair market values were determined
through  the use of a  discounted  cash-flow  analysis.  The  discount  is being
amortized against interest income using the level-yield method.

Impairment of loans having recorded investments of $327,037 and $696,477 at June
30, 2003 and 2002  respectively  has been recognized in conformity with SFAS No.
114.  The average  recorded  investment  in impaired  loans during 2003 and 2002
respectively  was  $959,968  and  $686,650.  There was an  allowance  for losses
related to those  loans of  $261,000  and $ 154,000  at June 30,  2003 and 2002,
respectively.  The amount of interest  that would have been recorded on impaired
loans at June  30,  2003 and  2002,  respectively  had the  loans  performed  in
accordance   with  their  terms  was   approximately   $119,128   and   $57,950,
respectively. The actual interest income recorded on these loans during 2003 and
2002 was $55,500 and $32,960, respectively. The Company is not obligated to lend
any additional monies to the aforementioned impaired loans.

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,  2003  loans  classified  special  mention,  substandard  and
doubtful totaled approximately $2,573,000,  $410,300 and $160,600. No loans were
classified loss at June 30, 2003.

                                       32
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

The activity in the  allowance  for loan losses is summarized as follows for the
years ended June 30:
<TABLE>
<CAPTION>

                                                                                    2003                      2002
   ---------------------------------------------------------------------------------------------------------------------
  <S>                                                                                <C>                        <C>
   Balance at beginning of year                                                 $1,438,073             $ 1,160,612
   Provision for losses on loans                                                   530,600                 560,000
   Charge-offs                                                                    (963,643)               (356,537)
   Recoveries                                                                      133,961                  73,998
   ---------------------------------------------------------------------------------------------------------------------
   Balance at end of year                                                      $ 1,138,991             $ 1,438,073
   =====================================================================================================================
</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, 2003 and
2002 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.

Outstanding commitments to extend credit, which generally expire within 60 days,
are as follows:
<TABLE>
<CAPTION>

                                                                                       2003
                                                                                FIXED RATE               FLOATING RATE
   <S>                                                                            <C>                           <C>
   Commercial business and lease loans                                         $1,215,978                  350,000
   Undisbursed lines of credit                                                         --                4,719,716
   ======================================================================================================================


                                                                                       2002
   ----------------------------------------------------------------------------------------------------------------------
   Commercial business and lease loans                                          1,661,796                 2,800,000
   Home Equity Loans                                                                   --                    50,000
   Undisbursed lines of credit                                                         --                 3,878,098
   ======================================================================================================================
</TABLE>

Standby  letters of credit are  conditional  commitments  issued by  Patapsco to
guarantee  the  performance  of a customer  to a third  party.  The credit  risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers.  Patapsco holds collateral supporting
those commitments for which collateral is deemed necessary.

As of June 30,  2003 and June 30,  2002,  Patapsco  had  outstanding  letters of
credit of $958,308 and $669,194, respectively.

As of June 30, 2003 and 2002,  Patapsco was  servicing  loans for the benefit of
others, approximately $3,222,235 and $1,225,252, respectively.

(5) PROPERTY AND EQUIPMENT

     Property and equipment are summarized as follows at June 30:
<TABLE>
<CAPTION>
                                                                                                              ESTIMATED
                                                                     2003                 2002               USEFUL LIVES
   --------------------------------------------------------------------------------------------------------------------------
    <S>                                                         <C>                     <C>                     <C>
   Land                                                      $   173,404               153,404                      --
   Building and improvements                                   1,128,749             1,055,803                  40 years
   Leasehold improvements                                        117,249               117,249              3 - 10 years
   Furniture, fixtures and equipment                           1,744,321             1,675,473              3 - 10 years
   ------------------------------------------------------------------------------------------------      --------------------
   Total, at cost                                              3,163,723             3,001,929

   Less accumulated depreciation                               2,166,077             1,945,123
   ------------------------------------------------------------------------------------------------
   Property and equipment, net                               $   997,646             1,056,806
   ================================================================================================
</TABLE>
                                       33

<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002


Rent  expense  was $60,036 and $58,053 in the years ended June 30, 2003 and June
30, 2002, respectively.

At June 30, 2003, the minimal rental commitments under noncancellable  operating
leases are as follows:

        Year ended June 30,

                        2004     62,374
                        2005     45,150
                        2006     45,150

(6) DEPOSITS

     The  aggregate   amount  of  jumbo   certificates,   each  with  a  minimum
     denomination of $100,000,  was  approximately  $7,584,000 and $7,601,000 in
     2003 and 2002, respectively.

     At June 30, 2003, the scheduled maturities of certificates are as follows:
<TABLE>
<CAPTION>
<S>                                                                                                     <C>
   Under 12 months                                                                                   $ 33,774,000
   12 months to 24 months                                                                              18,492,000
   24 months to 36 months                                                                               4,056,000
   36 months to 48 months                                                                               4,992,000
   48 months to 60 months                                                                               2,081,000
   Greater than 60 months                                                                               2,868,000
   ----------------------------------------------------------------------------------------------------------------------
                                                                                                     $ 66,263,000
   ======================================================================================================================
</TABLE>

(7) BORROWINGS

     At  June  30,  2003  and  2002,  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 $39.3 and $38.3 million,  respectively.  At
     June 30, 2003, and 2002 the Bank has a Federal Funds accommodation with the
     Bankers  Bank of Atlanta,  GA of $4.9 million and $3.0,  respectively.  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's  borrowing  outstanding  of $1 million at June 30,
     2002 with the Bankers  Bank of Atlanta,  GA. has been paid off. At June 30,
     2003, all  borrowings  are at fixed rates.  At June 30, 2002, the rate on a
     $1million borrowing was adjustable.

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

<TABLE>
<CAPTION>
                                                2003                                    2002
-----------------------------------------------------------------------------------------------------------------------------
                                                           Weighted                                       Weighted
                                           Balance       Average Rate                    Balance       Average Rate
-----------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                     <C>                       <C>                     <C>
Under 12 months                      $  4,000,000            4.45%                     4,500,000            5.55%
12 months to 24 months                  3,000,000            4.42                      4,000,000            4.45
24 months to 36 months                  2,100,000            5.74                      3,000,000            4.42
36 months to 48 months                         --              --                      2,100,000            5.74
48 months to 60 months                         --              --                             --
60 months to 120 months
                                       11,100,000            4.89                      9,100,000            5.32
-----------------------------------------------------------------------------------------------------------------------------
                                     $ 20,200,000            4.82%                    22,700,000            5.13%
=============================================================================================================================
</TABLE>

                                       34

<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002


(8) INCOME TAXES

The provision for income taxes is composed of the following for the years ended
June 30:
<TABLE>
<CAPTION>
                                                                                         2003                  2002
   --------------------------------------------------------------------------------------------------------------------------
    <S>                                                                                 <C>                     <C>
   Current:
          Federal                                                                    $485,127              477,385
          State                                                                        99,152              106,592
   --------------------------------------------------------------------------------------------------------------------------
                                                                                      584,279              583,977
   --------------------------------------------------------------------------------------------------------------------------
   Deferred:
          Federal                                                                     164,685              109,487
          State                                                                        38,582               24,994
   --------------------------------------------------------------------------------------------------------------------------
                                                                                      203,267              134,481
   --------------------------------------------------------------------------------------------------------------------------
                                                                                    $ 787,546              718,458
   ==========================================================================================================================
</TABLE>

The net deferred tax assets consist of the following at June 30:
<TABLE>
<CAPTION>
                                                                                         2003                     2002
   --------------------------------------------------------------------------------------------------------------------------
   <S>                                                                                  <C>                       <C>
   Allowance for losses on loans                                                    $  439,879                  555,384
   Deferred compensation                                                               266,862                  256,105
   Purchase accounting adjustment                                                       72,690                  167,358
   Other, net                                                                            8,064                   20,922
                                                                                    ----------                 --------
         Total deferred tax assets                                                      787,495                 999,769


   Unrealized holding gains                                                           (226,845)                 (87,319)
   Federal Home Loan Bank stock dividends                                             (133,311)                (133,311)
   Accumulated depreciation                                                            (53,350)                 (65,350)
   Other,net                                                                           (17,657)                 (14,664)
                                                                                    ----------                 --------
         Total deferred tax liabilities                                               (431,163)                (300,644)
   --------------------------------------------------------------------------------------------------------------------------
   Net deferred tax assets                                                          $  356,332                  699,125
   ==========================================================================================================================
</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>
                                                                                        2003                        2002
   --------------------------------------------------------------------------------------------------------------------------
  <S>                                                                                   <C>                             <C>
   Tax at statutory rate                                                            $  724,992                     630,826
   State income taxes, net of Federal income tax benefit                                90,905                      86,847
   Other                                                                               (28,351)                        785
   --------------------------------------------------------------------------------------------------------------------------
   Income tax provision                                                             $  787,546                     718,458
   ==========================================================================================================================
</TABLE>

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.

                                       35

<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

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, 2003 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.  In  addition,  the Bank and the  Company  must
maintain minimum capital and other  requirements of regulatory  authorities when
declaring or paying dividends.  The Bank and the Company have complied with such
capital requirements.

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, 2003, that
Patapsco meets all capital adequacy requirements to which it is subject.

As of June 30,  2003,  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, 2003:
       Total Capital (to Risk
          Weighted Assets)                 $14,416         14.58%        $7,912          8.00%         $ 9,890        10.00%
       Tier I Capital (to Risk
          Weighted Assets)                  13,277         13.43%         3,956          4.00%           5,934         6.00%
       Tier I Capital (to Average
          Assets)                           13,277          8.56%         6,205          4.00%           7,756         5.00%
   As of June 30, 2002:
       Total Capital (to Risk
          Weighted Assets)                 $13,109         13.48%        $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%
   =============================================================================================================================
</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.


                                       36

<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

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.  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 $776,984.

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,  2003 and 2002  compensation  expense  recognized
related to the ESOP and  Patapsco's  contribution  to the ESOP was  $142,287 and
$131,356, respectively.

The ESOP shares were as follows as of June 30:
<TABLE>
<CAPTION>

                                                                                               2003              2002
   --------------------------------------------------------------------------------------------------------------------------
   <S>                                                                                          <C>             <C>
   Shares released and allocated                                                            37,138              34,835
   Unearned shares                                                                           6,078               9,961
   --------------------------------------------------------------------------------------------------------------------------
                                                                                            43,216              44,796
   ==========================================================================================================================
   Fair value of unearned shares                                                         $ 188,418             284,387
   ==========================================================================================================================
</TABLE>

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,  2003 and 2002 was $35,200 and  $77,613,
respectively.

                                       37
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

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.  As a result of the 1997  return of capital
distribution,  the two 10% stock  dividends paid by the Company and shares being
exercised,  this plan  currently  holds  37,824  shares with a weighted  average
exercise price of $15.45.

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 25,000
shares at $25.88 per share.  The shares and fair  values  have been  adjusted to
28,093  and $20.96  for the  effect of the two 10% stock  dividends  paid by the
Company in December  2001 and 2002.  As of June 30,  2003,  5,619 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 2001                     42,600                 $15.32           34,542               15.32
Granted                                        30,156                  20.96               --                  --
Exercised                                      (3,710)                 15.32
Cancelled                                        (817)                 20.96
-----------------------------------------------------------------------------------------------------------------------
Outstanding at end of 2002                     68,229                  17.83           35,438               15.37
Granted                                            --                     --
Exercised                                        (968)                 17.02
Cancelled                                      (1,344)                 20.96
-----------------------------------------------------------------------------------------------------------------------
Outstanding at end of 2003                     65,917                  17.80           41,142               17.77
=======================================================================================================================
</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,  no stock option based employee  compensation  cost is reflected in
net income, as all options granted under these plans had an exercise price equal
to the market value of the  underlying  common  stock on the date of grant.  The
following  table  illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition  provisions of FASB Statement
No. 123.
<TABLE>
<CAPTION>
                                                                                     Year Ended June 30,
                                                                        2003                                 2002
                                                                      ----------                           ----------
<S>                                                                     <C>                                     <C>
Net Income as reported                                                $1,344,782                           $1,136,914
Deduct: Total stock option based employee
compensation expense determined under
fair value based method for all awards, net of
related tax effects                                                      (34,926)                              (4,945)
                                                                      ----------                           ----------
Proforma Net Income                                                   $1,309,856                           $1,131,969
</TABLE>


                                       38
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002
<TABLE>
<CAPTION>
<S>                                                                     <C>                     <C>
Earnings per share:
         Basic - as reported                                           $2.81                     $2.38
         Basic - pro forma                                              2.73                      2.37

         Diluted - as reported                                         $2.41                     $2.08
         Diluted - pro forma                                            2.35                      2.07
</TABLE>

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 were 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, 2003
and 2002,  compensation  expense  related to the MRP and SAP was $0 and  $8,700,
respectively. At June 30, 2003, the MRP plan had been terminated.

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  $55,000 and $54,000 for the years ended June 30,
2003 and 2002, respectively.

(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, 2003 and 2002.

The  carrying  value  and  estimated  fair  value of  financial  instruments  is
summarized as follows at June 30:
<TABLE>
<CAPTION>

                                                                      2003                                2002
                                                       ----------------------------------   ----------------------------------
                                                           CARRYING                            CARRYING
                                                             VALUE         FAIR VALUE            VALUE         FAIR VALUE
------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                 <C>             <C>
Assets:
   Cash and interest-bearing deposits                  $ 7,682,000         7,682,000         11,125,000      11,125,000
   Federal funds sold                                    6,525,000         6,525,000          3,732,000       3,732,000
   Investment securities                                 4,542,000         4,542,000          5,006,000       5,006,000
   Mortgage-backed securities                           19,843,000        19,843,000         13,705,000      13,705,000
   Loans receivable, net                               113,252,000       118,947,000        118,350,000     128,000,000

Liabilities:
   Deposits                                            119,655,000       120,599,000        119,593,000     120,382,000
   Borrowings                                           20,174,000        21,163,000         22,616,000      22,003,000
   Advance payments by borrowers for
      taxes, insurance and ground rents                    937,000           937,000          1,147,000       1,147,000
Off balance sheet instruments:
   Commitments to extend credit                                 --                --                 --              --
==============================================================================================================================

</TABLE>
                                       39
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

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 market values provided from external sources.

LOANS

Loans were segmented into  portfolios  with similar  financial  characteristics.
Loans  were also  segmented  by type  such as  residential  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 loans was  calculated by  discounting  anticipated  cash flows
based on weighted  average  contractual  maturity,  weighted  average coupon and
current loan origination rate.

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.

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 interest rate risk in excess
of the amount recognized

                                       40
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002

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.

(13)     INTANGIBLE ASSETS - GOODWILL

On November 13, 2000, the Company acquired Northfield Bancorp, Inc. ("Northfield
Bancorp"),  the holding company for Northfield Federal Savings Bank, a federally
chartered  savings bank.  Holders of  outstanding  shares of Northfield  Bancorp
received  $12.50 in cash and .24 shares of newly issued Patapsco  Bancorp,  Inc.
Series A Noncumulative Convertible Perpetual Preferred Stock.

The combination  was accounted for under the purchase method of accounting,  and
accordingly,  the net assets were recorded at their estimated fair values at the
date of  acquisition,  November 13, 2000.  The  Company  recorded  discounts  of
$1,343,912  on assets and  $172,247  on  liabilities  and  premiums of $6,131 on
assets and $230,543 on liabilities. The excess purchase price over the estimated
fair value of the  underlying net assets of $1,958,072 was allocated to goodwill
and, prior to the issuance of SFAS 142, "Goodwill and Other Intangible  Assets,"
was being amortized over 15 years, using the straight-line method.

The  Company  adopted  SFAS  142 on July 1,  2002  and  ceased  amortization  of
goodwill. Goodwill subjected to an initial test for impairment as of November 1,
2001. The Company also performed an annual test for impairment as of November 1,
2002. As a result of both the initial and annual assessment reviews, the Company
determined  that there was no impairment of goodwill at either date. The Company
will continue to review Goodwill on an annual basis for impairment and as events
occur or circumstances change.

(14)   CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

Summarized  financial  information  for the Company are as follows as of and for
the years ended June 30:
<TABLE>
<CAPTION>

STATEMENTS OF FINANCIAL CONDITION                                                2003                    2002
-------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                     <C>
Cash                                                                     $   524,870                  476,295
Investment securities                                                         40,762                  259,288
Equity in net assets of the bank                                          13,633,251               13,971,932
Note receivable - bank                                                        55,531                  119,536
Accounts receivable - Bank                                                   563,686                        0
Other assets                                                                 120,407                  133,021
-------------------------------------------------------------------------------------------------------------------
Total Assets                                                             $14,928,507               14,960,072
===================================================================================================================
</TABLE>

                                       41
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2003 and 2002


<TABLE>
<CAPTION>
<S>                                                                             <C>                     <C>
====================================================================================================================
Borrowed Money                                                            $         0             $ 1,000,000
Accrued expenses and other liabilities                                        416,035                  390,776
Stockholders' equity                                                       14,512,472               13,569,296
--------------------------------------------------------------------------------------------------------------------
Total Liabilities & Stockholders Equity                                   $14,928,507              $14,960,072
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S>                                                                             <C>                     <C>
STATEMENTS OF INCOME                                                           2003                     2002
--------------------------------------------------------------------------------------------------------------------
Income:
     Loans receivable                                                      $   5,678                    17,783
     Cash deposits                                                             1,370                     1,363
     Investment Income                                                         2,756                     4,254
     Gain on sale of Investments                                              84,650                         0
--------------------------------------------------------------------------------------------------------------------
      Total Revenue                                                           94,454                    23,400
--------------------------------------------------------------------------------------------------------------------
      Interest Expense                                                        18,236                    68,474
--------------------------------------------------------------------------------------------------------------------
      Noninterest Expense                                                     40,019                    75,832
--------------------------------------------------------------------------------------------------------------------
Net income before equity in net income
   of subsidiary and income taxes                                             36,199                  (120,906)
Net income of subsidiary                                                   1,319,620                 1,211,239
--------------------------------------------------------------------------------------------------------------------
Income before income tax provision                                         1,355,819                 1,090,333
Income tax provision                                                          11,037                   (46,581)
--------------------------------------------------------------------------------------------------------------------
Net income                                                                $1,344,782                $1,136,914
=====================================================================================================================
</TABLE>


<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS                                                       2003                      2002
--------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                       <C>
Operating activities:
     Net income                                                               $1,344,782                 1,136,914
     Adjustments to reconcile net income to net cash provided by operating
        activities:
             Equity in net income of subsidiary                               (1,319,620)               (1,211,239)
             Gain on sale of equity investments                                  (84,650)                       --
             Increase in accounts receivable                                    (563,686)                       --
             Decrease (increase) in other assets                                  28,987                   (57,492)
             Increase in accrued expenses and other liabilities                   25,259                    59,770
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                       (568,928)                  (72,047)
--------------------------------------------------------------------------------------------------------------------
Investing activities:
     Proceeds from sale of equity securities                                     267,009                        --
     Purchase of equity securities                                                (6,575)                   (6,673)
     Additional investment in subsidiary                                          (2,230)                       --
     Dividends received from subsidiary                                        1,689,900                   779,400
     Repayment of note receivable                                                 64,004                    66,158
--------------------------------------------------------------------------------------------------------------------
Net provided by investing activities                                           2,012,108                   838,885
--------------------------------------------------------------------------------------------------------------------
Financing activities:
--------------------------------------------------------------------------------------------------------------------
     Repayment of borrowed funds                                              (1,000,000)                 (700,000)
     Options exercised                                                            16,466                    57,408
     Purchase of preferred stock                                                       0                   (55,638)
     Cash dividend paid                                                         (411,071)                 (388,460)
--------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                         (1,394,605)               (1,086,691)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents                                       48,575                  (319,853)
Cash and equivalents, beginning of year                                          476,295                   796,148
--------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year                                            $   524,870                $  476,295
====================================================================================================================
</TABLE>


<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002


(15)    RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, FASB issued SFAS 145 "Rescission of FASB Statements No. 4,44, and
64,  Amendment  of FASB  Statement  No. 13,  and  Technical  Corrections".  This
Statement  requires,  among  other  things,  that  gains and losses on the early
extinguishments  of debt be  classified as  extraordinary  only if they meet the
criteria for  extraordinary  treatment set forth in Accounting  Principals Board
Opinion No. 30. The provisions of this Statement related to  classifications  of
gains and losses on the early  extinguishments  of debt are effective for fiscal
years beginning after May 15, 2002.

In April  2003,  FASB  issued  SFAS No.  149,  "Amendment  of  Statement  133 on
Derivative   Instruments  and  Hedging   Activities."  This  Statement  improves
financial reporting by requiring that contracts with comparable  characteristics
be accounted for similarly.  In particular,  this Statement (1) clarifies  under
what  circumstances  a  contract  with  an  initial  net  investment  meets  the
characteristics  of a derivative  discussed in paragraph  6(b) of Statement 133,
(2) clarifies when a derivative contains a financing  component,  (3) amends the
definition   of  an   underlying   to  conform  it  to  language  used  in  FASB
Interpretation No. 45, "Guarantor's  Accounting and Disclosure  Requirements for
Guarantees,  Including Indirect  Guarantees of Indebtedness of Others",  and (4)
amends  certain other  existing  pronouncements.  Those  changes  result in more
consistent  reporting on contracts as either derivatives or hybrid  instruments.
This Statement is effective for contracts and hedging relationships entered into
or modified after June 30, 2003.

In May  2003,  FASB  issued  SFAS No.  150  "Accounting  for  Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances).  This Statement is effective
for financial instruments entered into or modified after May 31, 2003.

The  above  accounting  pronouncements  will not have a  material  impact on the
consolidated financial statements.


                                       43


<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       Senior Vice-President - Treasurer
                                            Administration                                 Chief Financial Officer

JOHN W. McCLEAN                              ALAN HERBST                                   LAURENCE S. MITCHELL
Vice President - Real Estate Lending         Vice President - Consumer Lending             Senior Vice-President -  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 600                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,  2003 AS
GENERAL COUNSEL                             ANNUAL MEETING                                 FILED   WITH  THE   SECURITIES   AND
Nolan Plumhoff & Williams                   The 2003 Annual  Meeting of  Stockholders      EXCHANGE    COMMISSION,    WILL   BE
Suite 700, Nottingham Centre                will be held on October  23, 2003 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  2003  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>