[TRI-COUNTY FINANCIAL CORP. LETTERHEAD]


Dear Shareholder:

     I am  pleased  to report to you the  results of  operations  of  Tri-County
Financial Corporation and its banking subsidiary,  Community Bank of Tri-County,
for the year ended December 31, 2003. Our net income increased from 2002's level
by $478,077  to$2,445,989 or 24.29%. Basic earnings per share increased to $3.24
from $2.58 in 2002.  Diluted  earnings per share  increased to $3.07 from $2.45.
Assets increased by over $69 million or 24.65%.

     These positive  improvements from the prior year's performance came despite
current levels of a very challenging low interest rate  environment.  As you are
aware, the historically low interest rates have produced a difficult environment
to realize  any net  interest  rate  spread  appreciation.  The Bank had enjoyed
record  spreads  through the end of 2001.  Continued  historically  low interest
rates have led to declines in net interest income and net interest margin. These
decreases were partially offset by much lower noninterest expense in the current
year. The current recovery appears to be signaling a markedly different recovery
with low job creation and incredibly high productivity rates.

     In order to increase future net interest income,  the Bank has continued to
increase earning assets by leveraging its net worth.  Asset growth totaled $69.6
million in 2003.  Asset growth was  concentrated in loans and investments  which
should increase future interest income.  Loan and investment quality continue to
be monitored by the Board in its efforts to maintain high credit  quality assets
that can weather this most unusual post recessionary environment.

     Core deposit growth during 2003 exceeded 12% or $24.5 million.  In order to
continue to increase its deposit base, the Bank introduced  internet  banking in
the fourth quarter of 2003. Early results have been very promising as over 1,000
customers have signed up for this service in the first ninety days. We now offer
a full array of internet banking  services such as bill pay,  account  transfer,
automatic  deductions,  ACH and other  services.  Progress also has been made in
bringing a Prince Frederick branch to our network. We hope that Prince Frederick
will be operational by the third quarter of 2004. I believe that the best course
of action for Community Bank to increase its market share will be to continue to
grow its branch  network  while  adding  non-branch  delivery  systems  whenever
possible.

     We are excited about the many business opportunities  available in southern
Maryland, and we look forward to continuing to serve this community.  As we move
forward,  our shareholders  continue to gain from an increasing  franchise value
and earnings,  which allowed a cash dividend  increase of $.15 per share to $.70
per share, a 27% increase over the previous level.

     The  Board of  Directors  and  management  appreciate  the  support  of our
shareholders  and are committed to enhancing share value while serving the needs
of our many communities.

                                             Yours truly,

                                             /s/ Michael L. Middleton
                                             Michael L. Middleton
                                             President and Chairman

<PAGE>
SELECTED FINANCIAL DATA
-----------------------
     The following  table presents  selected  financial data for the Company and
its subsidiaries for the periods indicated.
<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                     ------------------------------------------------------------
                                                               (Dollars in thousands except per share data)
                                                       2003            2002         2001        2000        1999
                                                     ---------         ------     --------    --------    ------
<S>                                                     <C>             <C>         <C>         <C>          <C>
OPERATIONS DATA:
Net Interest Income                                 $ 10,469         $ 10,745   $  9,757    $  8,862    $  8,412
Provision for Loan Losses                                317              160        360         360         240
Noninterest Income                                     1,755            1,847      1,402       1,373       1,271
Noninterest Expense                                    8,428            9,398      6,995       6,332       6,276
Net Income                                             2,446            1,968      2,486       2,336       2,153

SHARE DATA:
Basic Net Income Per Common Share                   $   3.24         $   2.58   $   3.24    $   2.98    $   2.75
Diluted Net Income Per Common Share                     3.07             2.45       3.11        2.85        2.59
Cash Dividends Paid  Per  Common Share                  0.55             0.50       0.40        0.30        0.20

Weighted Average Common
   Shares  Outstanding:
        Basic                                        754,044          761,417    766,927     784,605     782,950
        Diluted                                      796,021          804,122    798,787     821,139     832,283

FINANCIAL CONDITION DATA:
Total Assets                                        $351,730         $282,128   $261,957    $248,339    $222,897
Loans Receivable, Net                                217,740          197,449    193,450     172,090     146,710
Total Deposits                                       227,555          203,025    183,117     167,806     155,742
Long and Short Term Debt                              94,242           48,922     50,463      54,951      44,798
Total Stockholders' Equity                            27,912           26,873     25,586      23,430      21,115

PERFORMANCE RATIOS:
Return on Average Assets                                0.78%            0.72%      0.97%       1.00%       1.00%
Return on Average Equity                                8.99%            7.50%     10.09%      10.65%      10.23%
Net Interest Margin                                     3.55%            4.20%      4.00%       3.98%       4.11%
Efficiency Ratio                                       68.95%           74.73%     62.68%      61.86%      64.81%
Dividend Payout Ratio                                  17.27%           20.04%     12.44%      10.13%       7.29%

CAPITAL RATIOS:
Average Equity to Average
  Assets                                                8.04%            9.53%      9.64%       9.37%        9.79%
Leverage Ratio                                          8.04%            9.53%      9.64%       9.61%        9.86%
Total Risk-Based Capital Ratio                         12.20%           13.77%     14.08%      13.53%       17.23%

ASSET QUALITY RATIOS:
Allowance for Loan Losses to
  Total Loans                                            1.16%           1.15%      1.16%       1.10%        1.11%
Nonperforming Loans to Total Loans                       0.17%           0.30%      0.12%       0.06%        0.26%
Allowance for Loan Losses to
 Nonperforming Loans                                   678.30%         387.60%    996.07%    1770.55%      424.94%
Net Charge-offs to Average Loans                         0.03%           0.06%      0.01%       0.05%        0.09%

</TABLE>



                                        1

<PAGE>

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

OVERVIEW

Since its conversion to a commercial bank charter in 1997, the Community Bank of
Tri County (the  "Bank") has sought to increase  total assets as well as certain
targeted loan types. The Bank feels that its ability to offer fast, flexible and
local  decision-making  in the commercial,  commercial real estate, and consumer
loan areas will  continue to attract  significant  new loans and  enhance  asset
growth.  The Bank's local focus and targeted  marketing is also directed towards
increasing its balances of consumer and business  transaction  deposit accounts.
The Bank believes  that  increases in these account types will lessen the Bank's
dependence on time deposits such as certificates of deposit to fund loan growth.
Although  management  believes  that the strategy  outlined  above will increase
financial  performance  over time, we recognize that products such as commercial
lending and  transaction  accounts  will also  increase  the Bank's  noninterest
expense.  We also  recognize  that  certain  lending and deposit  products  also
increase the possibility of losses from credit and other risks.

FORWARD-LOOKING STATEMENTS

When used in this  discussion  and elsewhere in this Annual Report on Form 10-K,
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. The Tri County Financial  Corporation
(the  "Company")  cautions  readers  not to  place  undue  reliance  on any such
forward-looking statements,  which speak only as of the date made, and to advise
readers  that  various  factors,   including   regional  and  national  economic
conditions,  unfavorable  judicial  decisions,  substantial changes in levels of
market  interest  rates,  credit  and  other  risks of  lending  and  investment
activities and  competitive  and  regulatory  factors could affect the Company's
financial  performance  and could cause the Company's  actual results for future
periods to differ materially from those anticipated or projected.

The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.

CRITICAL ACCOUNTING POLICIES

The Company's  consolidated financial statements are prepared in accordance with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP")  and the  general  practices  of the United  States  banking  industry.
Application  of  these  principles   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;
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.  Estimates,  assumptions,  and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial  statements
at fair value  warrants an  impairment  write-down  or  valuation  reserve to be
established,  or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record  valuation  adjustments  for certain assets and  liabilities are based
either on quoted  market  prices or are provided by other  third-party  sources,
when available. When these sources are not available, management makes estimates
based upon what it considers to be the best available information.

The allowance for loan losses is an estimate of the losses that may be sustained
in our loan  portfolio.  The allowance is based on two principles of accounting:
(a) Statement on Financial  Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies",  which requires that losses be accrued when they are probable of
occurring and are estimable and (b) SFAS No. 114,  "Accounting  by Creditors for
Impairment of

                                       2
<PAGE>

a Loan",  which  requires  that losses be accrued  when it is probable  that the
Company will not collect all  principal and interest  payments  according to the
contractual terms of the loan. The loss, if any, is determined by the difference
between the loan  balance  and the value of  collateral,  the  present  value of
expected future cash flows, or values observable in the secondary markets.

Our  loan  loss  allowance  balance  is  an  estimate  based  upon  management's
evaluation  of its loan  portfolio.  Generally  the  allowance is comprised of a
specific  and a  nonspecific  component.  The  specific  component  consists  of
management's evaluation of certain loans and their underlying collateral.  Loans
are  examined to  determine  the  specific  allowance  based upon their  payment
history,  economic conditions specific to the loan or borrower, or other factors
that would impact the  borrower's  ability to repay the loan on its  contractual
basis.  Management  assesses the ability of the borrower to repay the loan based
upon any  information  available.  Depending on the assessment of the borrower's
ability  to pay  the  loan  as  well  as the  type,  condition,  and  amount  of
collateral, management will establish an allowance amount specific to the loan.

In establishing a nonspecific loan loss amount,  management analyzes the current
composition  of the loan portfolio  including  changes in the amount and type of
loans.  Management also examines the Bank's history of write-offs and recoveries
within each loan category.  The state of the local and national  economy is also
considered.  Based upon these factors the Bank's loan  portfolio is  categorized
and a possible loss factor is applied to each  category.  These loss factors may
be  higher  or  lower  than the  Bank's  actual  recent  average  losses  in any
particular  loan category,  particularly  in loan  categories  where the Bank is
rapidly increasing the size of its portfolio.  Based upon these factors the Bank
will adjust the loan loss  allowance by increasing  or decreasing  the provision
for loan losses.

Management has  significant  discretion in making the judgments  inherent in the
determination  of the  provision  and  allowance  for loan losses,  including in
connection  with  the  valuation  of  collateral,   a  borrower's  prospects  of
repayment, and in establishing allowance factors on the nonspecific component of
the  allowance.  Changes in allowance  factors will have a direct  impact on the
amount of the provision,  and a  corresponding  effect on net income.  Errors in
management's perception and assessment of the global factors and their impact on
the portfolio  could result in the allowance not being  adequate to cover losses
in the portfolio,  and may result in additional  provisions or charge-offs.  For
additional information regarding the allowance for credit losses, refer to Notes
1 and 3 to the  Consolidated  Financial  Statements and the discussion under the
caption "Provision for Loan Losses" below.

In addition to the loan loss  allowance,  the Company also maintains a valuation
allowance on its foreclosed  real estate assets.  As with the allowance for loan
losses the valuation allowance on foreclosed real estate is based on SFAS No. 5,
"Accounting  for  Contingencies,"  as well as SFAS No. 144  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets." These statements require that the
Company establish a valuation allowance when it has determined that the carrying
amount of a foreclosed asset exceeds its fair value.  Fair value of a foreclosed
asset is measured by the cash flows  expected to be realized from its subsequent
disposition.  These  cash flows  should be  reduced  for the costs of selling or
otherwise disposing of the asset.

In estimating the cash flow from the sale of foreclosed real estate,  management
must make significant assumptions regarding the timing and amount of cash flows.
In cases where the real estate  acquired is undeveloped  land,  management  must
gather the best available  evidence  regarding the market value of the property,
including appraisals, cost estimates of development, and broker opinions. Due to
the highly  subjective  nature of this evidence,  as well as the limited market,
long time periods  involved,  and  substantial  risks,  cash flow  estimates are
highly  subjective  and subject to change.  Errors  regarding  any aspect of the
costs or proceeds of developing,  selling,  or otherwise disposing of foreclosed
real estate could result in the allowance  being  inadequate to reduce  carrying
costs to fair  value and may  require  an  additional  provision  for  valuation
allowances.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003,  2002
AND 2001

GENERAL. For the year ended December 31, 2003, the Company reported consolidated
net income of  $2,445,898  ($3.24  basic and $3.07  diluted  earnings per share)
compared to consolidated net income of

                                       3
<PAGE>

$1,967,821 ($2.58 basic and $2.45 diluted earnings per share) for the year ended
December 31, 2002, and  consolidated  net income of $2,485,535  ($3.24 basic and
$3.11  diluted  earnings per share) for the year ended  December  31, 2001.  The
increase in net income for 2003 compared to 2002 was primarily attributable to a
decline in  noninterest  expenses in 2003.  Noninterest  expenses were higher in
2002  than  in  2003  primarily  because  of the  establishment  of a  valuation
allowance on foreclosed real estate and expenses  incurred as a result of a core
data systems conversion in 2002. These reductions in certain noninterest expense
categories  were  partially  offset  by a decline  in net  interest  income,  an
increase in the provision for loan losses, a decline in noninterest  income, and
increases in certain  categories  of  noninterest  expenses.  For the year ended
December 31, 2003,  net interest  income  declined by $276,834 to  $10,468,526 a
decrease  of 2.58%.  The  Company  increased  its  provision  for loan losses to
$316,963  from  $160,000  in the prior year an  increase  of 98.1% or  $156,963.
Noninterest income declined to $1,754,538 for the year ended December 31, 2003 a
decrease of $92,523 or 5.01% from the prior year.  These  negative  factors were
offset by a decrease in noninterest  expense from  $9,397,600 for the year ended
December 31, 2002 to $8,427,771  for the year ended December 31, 2003, a decline
of 10.32%. Income before income taxes increased to $3,478,330 for the year ended
December  31,  2003,  an  increase  of  $443,509  or 14.61%.  Income tax expense
decreased to $1,032,432 for the year ended December 31, 2003, a decline from the
prior year of $34,568 or 3.24%.

For the year ended  December  31,  2002,  net  interest  income was  $10,745,360
compared to  $9,714,216  for the year ended  December 31,  2001,  an increase of
$1,031,144 or 10.61%.  The Company also increased  total  noninterest  income to
$1,847,061  in 2002 from  $1,401,520 in 2001, an increase of $445,541 or 31.79%.
Noninterest  expenses  increased to $9,397,600  for the year ended  December 31,
2002, compared to $6,951,851 an increase of $2,445,749 or 35.18%.  Income before
income  taxes  decreased  to  $3,034,821  for the year ended  December 31, 2002,
compared to  $3,803,885  for the year ended  December  31,  2001,  a decrease of
$769,064 or 20.22%.  Income tax expense for 2002  decreased to  $1,067,000  from
$1,318,350  for the year  ended  December  31,  2001,  a  decline  of  19.07% or
$251,350.

NET INTEREST  INCOME.  The primary  component of the Company's net income is its
net interest income which is the difference  between income earned on assets and
interest  paid on the deposits and  borrowings  used to fund them.  Net interest
income is  determined  by the spread  between the yields earned on the Company's
interest-earning  assets and the rates paid on  interest-bearing  liabilities as
well as the  relative  amounts of such  assets  and  liabilities.  Net  interest
income, divided by average interest-earning assets, represents the Company's net
interest margin.

Consolidated  net  interest  income for the year  ended  December  31,  2003 was
$10,468,526  compared to  $10,745,360  for the year ended  December 31, 2002 and
$9,714,216 for the year ended  December 31, 2001.  The $276,834  decrease in the
most recent  year was due to  decreases  in both  interest  income and  interest
expense with the decrease in interest  income of $549,063 offset by the decrease
in interest  expense of $272,229.  For the year ended  December  31,  2002,  the
$1,031,144  increase  was due to a decrease of  $1,758,039  in  interest  income
offset by a decrease  of  $2,789,183  in interest  expense for the same  period.
Changes  in the  components  of net  interest  income  due to changes in average
balances of assets and  liabilities and to changes caused by changes in interest
rates are presented in the rate volume analysis below.

During 2003, the Company's  interest rate spread decreased  because the Bank was
unable to lower the interest  rates paid on deposits and  borrowings  as quickly
and as much as the interest rates earned on loans and investments fell. Rates on
deposits,  particularly  interest bearing  transaction and money market accounts
had already  been very low in 2002,  as interest  rates fell in 2003,  the rates
paid on these deposits  decreased  slightly  while the rates on investments  and
loans  decreased  by a greater  amount.  In addition the  percentage  of funding
contributed by relatively higher cost borrowings compared to deposits increased.

The  following  table  presents  information  on  the  average  balances  of the
Company's interest-earning assets and interest-bearing  liabilities and interest
earned or paid thereon for the past three fiscal years.

                                       4
<PAGE>
<TABLE>
<CAPTION>

                                                                        (Dollars in Thousands)
                                          ---------------------------------------------------------------------------------------
                                                                    For the Year Ended December 31,
                                          ---------------------------------------------------------------------------------------
                                                     2003                          2002                         2001
                                          -----------------------------   --------------------------   --------------------------
                                                                Average                      Average                       Average
                                            Average             Yield/   Average             Yield/    Average              Yield/
                                           Balance(1) Interest   Cost    Balance(1) Interest  Cost    Balance(1) Interest   Cost
                                            -------   --------   ----    -------    --------  ----     -------   --------   ----
<S>                                          <C>        <C>      <C>       <C>       <C>      <C>        <C>      <C>        <C>
Interest-earning assets:
  Loan portfolio                          $201,440    $13,412     6.66% $195,280    $14,221    7.28% $184,370    $15,223     8.26%
  Investment securities, federal funds
   sold and interest bearing deposits       93,261      2,753     2.95%   60,637      2,493    4.11%   58,276      3,249     5.57%
                                           -------      -----     -----   ------      -----    -----   ------      -----     ----
    Total interest-earning assets          294,702     16,165     5.49%  255,917     16,714    6.53%  242,646     18,472     7.61%
                                           -------   --------     -----  -------   --------    -----  -------   --------     ----

Interest-bearing liabilities:
  Interest bearing deposits               $212,643    $ 2,869     1.35% $189,518    $ 3,453    1.82% $175,919    $ 5,935     3.37%
    Borrowings                              68,679      2,828     4.12%   48,487      2,515    5.19%   52,387      2,822     5.39%
                                           -------      -----     -----   ------      -----    -----   ------      -----     -----
    Total interest-bearing liabilities     281,322      5,696     2.02%  238,005      5,969    2.51%  228,306      8,758     3.84%
                                           =======      =====     =====  =======      =====    =====  =======      =====     =====
Net interest income                                   $10,469                       $10,745                      $ 9,714
                                                      =======                       =======                      =======
Interest rate spread                                              3.46%                        4.02%                         3.78%
                                                                  =====                        =====                         =====
Net yield on interest-earning assets                              3.55%                        4.20%                         4.00%
                                                                  =====                        =====                         =====
Ratio of average interest-earning
  assets to average interest bearing
  liabilities                                                   104.76%                      107.53%                       106.28%
                                                                =======                      =======                       =======
</TABLE>




---------
(1) Average balance includes non-accrual loans.

                                       5
<PAGE>

The table below sets forth  certain  information  regarding  changes in interest
income and  interest  expense of the Bank for the  periods  indicated.  For each
category of interest-earning asset and interest-bearing  liability,  information
is provided on changes attributable to: (1) changes in volume (changes in volume
multiplied by old rate);  and (2) changes in rate (changes in rate multiplied by
old volume). Changes in rate-volume (changes in rate multiplied by the change in
volume) have been allocated to changes due to volume.
<TABLE>
<CAPTION>

                                                        2003                                      2002
                                                       Due to                                    Due to
                                         ------------------------------------      ------------------------------------
                                           Volume         Rate       Total           Volume       Rate        Total
                                         ----------   ----------  ---------        ---------   ---------    --------
<S>                                          <C>          <C>        <C>             <C>         <C>          <C>
Interest income:
  Loan portfolio                           $ 410      $ (1,220)    $(809)          $  795     $(1,797)     $(1,002)
  Interest-earning cash and
    investment portfolio                     963          (703)      260               97        (853)        (756)
                                         --------     ---------    ------           -----     -------     --------
Total interest-earning assets            $ 1,373      $ (1,922)    $(549)           $ 892     $(2,650)    $ (1,758)
                                         ========     =========    ======           ======    ========    =========

Interest expense:
  Savings deposits and escrows             $ 312         $(897)    $(585)          $  241     $(2,723)    $ (2,482)
  FHLB advances and other
    borrowings                               831          (519)      313             (201)       (106)        (307)
                                         --------     ---------    -----            -----     -------     --------
                                         $ 1,143      $ (1,416)    $(272)           $  40     $(2,829)    $ (2,789)
                                         ========     =========    ======           ======    ========    =========
</TABLE>

PROVISION FOR LOAN LOSSES. Provision for loan losses for the year ended December
31, 2003 was  $316,963  compared to $160,000  and $360,000 for December 31, 2002
and 2001,  respectively.  The higher provision for loan losses in 2003 is due to
the  increase  in  the  size  of the  loan  portfolio  as  well  as  the  higher
concentration  of loans in types with higher  credit  risk.  These  factors were
partially  offset  by  the  Bank's  continued  low  levels  of  delinquency  and
charge-offs.  The loan  loss  allowance  and the  provision  for loan  losses is
determined  based upon an analysis of individual  loans and the  application  of
certain loss factors to different loan categories. Individual loans are analyzed
for  impairment  as  the  facts  and  circumstances   warrant.  In  addition,  a
nonspecific  component of the loan loss  allowance is added based on a review of
the  portfolio's  size and  composition.  At December 31, 2003 the allowance for
loan loss equaled 678% of  non-accrual  and past due loans  compared to 388% and
997% at December 31, 2002 and 2001, respectively. During the year ended December
31, 2003, the Company  recorded net charge-offs of $58 thousand (.03% of average
loans)  compared  to $128  thousand  (0.06% of  average  loans)  compared  to $8
thousand  (0.00% of average  loans) in net  charge-offs  during the years  ended
December 31, 2002 and 2001.

NONINTEREST  INCOME.  Noninterest  income  decreased to $1,754,538  for the year
ended December 31, 2003 compared to  $1,847,061,  for the prior year, a decrease
of 5.01%. Noninterest income for the year ended December 31, 2002 represented an
increase of 31.79% from the  December 31, 2001 total of  $1,401,520.  Changes in
noninterest  income  over the past  three  years  have  been the  result of wide
fluctuations in certain  noninterest income categories,  (gain on sale of loans,
other  income,  and loan fees) and an  increase  in income  from Bank Owned Life
Insurance ("BOLI") in the current year. Gain on sale of loans  held-for-sale has
been highly variable  reflecting the overall interest rate environment.  Gain on
the sale of loans increased from $187,304 in 2001 to 499,304 and 505,435 in 2002
and 2003 respectively.

Loan appraisal,  credit and miscellaneous charges are highly variable; from 2002
to 2003, these charges increased to $261,387 an increase of 46.02%. The increase
was due to the  increase  in  loan  activity,  particularly  in  commercial  and
commercial real estate  lending.  In 2002,  these charges  decreased to $179,006
from the 2001 level of  $226,641 a decrease  of 21.02%  despite a high volume of
loan transactions. This decrease was caused by the market trends towards low and
no cost residential mortgage loan products.

                                       6
<PAGE>

As rates decrease,  the Bank's volume of fixed rate mortgage lending  increases,
which in turn has provided a higher volume of loan sales and gains.  In 2002 and
2003,  interest rates decreased from 2001 levels and income from gain on sale of
mortgage  loans  increased to $505,435 and $499,304  respectively  from the 2001
level of $187,304. In percentages,  income from the sales of mortgages increased
by 166.57% from 2001 to 2002 and increased by a further 1.23% in 2003.  The Bank
may elect to add more fixed rate residential  mortgage loans to its portfolio in
the future,  which would  negatively  impact its income from the gain on sale of
mortgage loans.  Income from BOLI increased to $230,607 in 2003 from none in the
two prior  years.  The  income  from BOLI  income in 2003 was the  result of the
purchase of BOLI in 2003.  Service  charges and fees are primarily  generated by
the Bank's ability to attract and retain transaction-based  deposit accounts and
by loan  servicing  fees net of  amortization  of and  valuation  allowances  on
mortgage  servicing  rights.  In 2003,  service  charges  and fees  declined  to
$695,128 from 2002's level of $1,041,662,  a decline of $346,534 or 33.27%. This
decline was  primarily  caused by an increase  in the  amortization  of mortgage
servicing rights and valuation allowances. Service charges and fees increased to
$1,041,662  for the year ended  December 31, 2002 as compared to $953,496 in the
prior year.  The  increase  for the year ended  December 31, 2002 from the prior
year was $88,166, or 9.3%. The Bank hopes to increase its service charge and fee
revenues in the future by increasing  the level of  transaction-based  accounts.
Finally, other noninterest income decreased from 2002 to 2003 and increased from
2001 to 2002. For the year ended December 31, 2003, other noninterest income was
$61,981, a decrease of $65,108 from the prior year total of $127,089.

NONINTEREST EXPENSES.  Noninterest expenses for the year ended December 31, 2003
totaled $8,427,771, a decrease of $969,829 or 10.32% from the prior year. Salary
and  employee  benefits  increased  by 11.21% to  $4,702,181  for the year ended
December  31, 2003  compared to  $4,228,050  for the prior  year.  The  increase
reflects  growth in the Bank's  workforce to fully staff  branches as well as an
increasing need for highly skilled  employees due to the higher complexity level
of the Bank's business.  Expenses also included certain supplemental  retirement
benefits which were funded by the BOLI income.  Occupancy  expense  decreased to
$750,567  compared to $831,148 and  $689,575 in the two prior  years.  Occupancy
expenses  decreased  in 2003 by  $80,513 or 9.70% from 2002 as the result of the
elimination of certain  nonrecurring  expenses in 2002. These expenses  included
repair work as well as the costs of  temporary  facilities  needed  prior to the
opening  of the  Bank's  Charlotte  Hall  branch.  Occupancy  expenses  in  2002
increased  from  2001 due to the  expenses  noted  above as well as the costs of
adding the  Charlotte  Hall branch.  Advertising  decreased  from 2002 levels to
$308,951 for the year ended  December 31, 2003 compared to $338,216 and $301,975
in the two prior  years,  respectively.  Most  advertising  costs were  incurred
attempting  to build our  transaction  deposit  base.  Data  processing  expense
decreased  to  $403,967  from the prior  year total of  $568,095  a decrease  of
28.89%.  The Bank incurred  significant  costs related to its conversion in this
category in 2002. These costs included training, consulting, and transition fees
related to the  conversion  process.  These  factors led to the increase in data
processing  expense from 2001 to 2002 totaling $276,696 or 94.95%.  The increase
in data processing expense from 2001 to 2002 is also reflective of the Company's
additional transaction based deposit accounts and an increase in overall deposit
volume.  Loss on disposal of obsolete  equipment  totaled $65,104 in 2002. These
expenses  related to the write-off of certain  equipment  that could not support
the new core data system.  Depreciation  of furniture,  fixtures,  and equipment
increased  from $263,535 in 2001, to $339,184 in 2002, to $507,236 in 2003.  The
increase from 2001 to 2002 reflects the Bank's opening of certain locations,  an
adjustment of shorter useful lives assigned to new assets, and additional assets
purchased to facilitate the data processing conversion. In 2003, depreciation of
furniture,  fixtures,  and equipment  again increased due to the large amount of
equipment  purchased  in  the  prior  year.  Telephone  communications  expenses
decreased  to  $166,553 in 2003,  a decrease  of  $179,006 or 51.80%.  Telephone
communications expenses decreased in 2003 because 2002 expenses included certain
data processing conversion costs. Expenses similarly increased from 2001 to 2002
because of the 2002  conversion  costs.  In 2002,  the Bank recorded a valuation
allowance of $972,889 on its foreclosed real estate. No valuation  allowances on
foreclosed assets were recorded in 2001 or 2003. ATM expenses  decreased in 2003
by $38,012 or 12.18% from  $312,200 in 2002 to  $274,188 in 2003.  ATM  expenses
were  $254,175 in 2001.  The increase in 2002 was related to  conversion  costs.
Office supplies expense also decreased in 2003 from 2002 (by $159,408 or 54.85%)
because  of  conversion  related  expenses  in 2002.  From  2001 to 2002  office
supplies  expense  increased  from  $253,545 to $290,636 or by 14.63%,  with the
increase  in 2002 being  related to the  conversion  expenses  mentioned  above.
Office equipment expenses decreased to $129,849 in 2003 from $247,171 in 2002, a
decrease  of  $117,322  or

                                       7
<PAGE>

47.47%.  This decrease relates to higher expenses incurred during the conversion
process in 2002, as well as the reduction of ongoing  equipment costs related to
the old data processing system.

INCOME TAX  EXPENSE.  During the year  ended  December  31,  2003,  the  Company
recorded income tax expense of $1,032,432 compared to expenses of $1,067,000 and
$1,318,350  in the two prior years.  The  Company's  effective tax rates for the
years  ended  December  31,  2003,  2002,  and 2001 were  29.7%,  35% and 34.7%,
respectively.  The  2003  effective  tax rate  declined  due to an  increase  in
non-taxable  income and a slight decrease in state taxes. The slight increase in
the tax rate during 2002 from 2001 was primarily  attributable to an increase in
certain non-deductible costs.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND 2002

In 2003,  the Bank began to increase  asset  growth to increase its net interest
income  and  net  income.  The  asset  growth  was  concentrated  in  investment
securities and loans.  This asset growth was funded  primarily by an increase in
borrowed  funds.  Cash balances were also invested in the increased  balances of
loans and  investments.  The Bank intends to continue to increase its asset size
in 2004. In 2003, the Company's total assets increased  $69,556,297,  or 24.65%,
to $351,729,992 as of December 31, 2003 from  $282,173,695 at December 31, 2002.
The increase in assets was primarily in investment  securities held to maturity,
loans, and investment in BOLI and loans.  These increases in assets were for the
purpose of increasing net interest income and  noninterest  income to offset the
lower interest rate spread  realized in 2003.  Cash and due from banks decreased
by $7,674,126 or 76.79%.  Interest-bearing deposits with banks also decreased by
41.29% or  $6,267,519.  These declines were used to fund increases in investment
securities held to maturity.  Fed funds sold increased by $574,660 or 158.09% to
$938,166.  Federal  funds  balances  vary  greatly  from month to month and this
fluctuation is not unusual.  Investment  securities available for sale decreased
by $3,536,039 or 8.45%,  the decline was due to payments on existing  securities
which more than offset  current  year  purchases.  Investments  held to maturity
increased by  $58,763,368  or 2067.82%.  This  increase was due to the Company's
effort to build investment  balances to increase net interest  income.  Stock in
the Federal Home Loan Bank  increased due to stock  purchases  made necessary by
increased Federal Home Loan Bank borrowing levels.  Loans held for sale declined
by $787,787 or 62.39%,  as current loan production is  increasingly  held in the
Bank's  portfolio.  Loans receivable  increased by $20,290,871or  10.28%, as the
Bank continued to build assets in 2003 to increase net interest income.

Premises  and  equipment  decreased  slightly to  $5,580,189  from  $5,736,395 a
decrease  of 2.72%  or  $156,206.  This  decrease  was due to a slower  level of
purchases  of  premises  and  equipment   combined  with  shorter  asset  lives.
Foreclosed  real estate  declined  by $9,250 due to  collections  on  foreclosed
properties.  BOLI  increased  due to the purchase of the  policies in 2003,  and
other  assets  increased  slightly to  $3,146,247  due to an increase in certain
prepaid tax accounts.

Deposits increased to $227,554,568 at December 31, 2003 compared to $203,025,112
for the prior year.  The total increase of 12.08% was  concentrated  in interest
bearing account types which offset a decrease in noninterest  bearing  deposits.
Short  and long term  debt  increased  as the  Company  sought to add  assets to
increase  net  interest  income  offsetting  a decline in interest  spread.  The
increases  in  short  and  long  term  debt  were  $30,438,987  and  $14,881,176
respectively or 4046.13% and 30.89% which  increased  balances in these accounts
to $31,191,285 and $63,051,176 respectively. The proceeds of this debt were used
to purchase investments and fund loans as noted above.

The Company experienced a $1,039,145, or 3.87%, increase in stockholders' equity
for the year ended December 31, 2003. The increase in  stockholders'  equity was
attributable to the retention of earnings from the period $2,445,898,  less cash
dividends  $422,361.  Equity was also increased by the exercise of stock options
totaling  $200,551  and  activity  in the  ESOP  shares  resulting  in a gain of
$63,435. These increases were partially offset by unrealized losses on available
for sale investment in the amount of $496,821 and the repurchase of common stock
in the amount of $769,720.



                                       8
<PAGE>

ASSET/LIABILITY MANAGEMENT

Net interest income,  the primary component of the Company's net income,  arises
from the difference between the yield on interest-earning assets and the cost of
interest-bearing  liabilities  and  the  relative  amounts  of such  assets  and
liabilities.  The Company manages its assets and liabilities by coordinating the
levels of and gap between  interest-rate  sensitive  assets and  liabilities  to
control  changes in net interest  income and in the economic value of its equity
despite changes in market interest rates.

Among other tools used to monitor  interest  rate risk is a "gap"  report  which
measures the dollar difference between the amount of interest-earning assets and
interest-bearing  liabilities  subject to repricing  within a given time period.
Generally,  during a period of rising  interest  rates,  a negative gap position
would adversely affect net interest income, while a positive gap would result in
an  increase  in net  interest  income.  While,  conversely,  during a period of
falling  interest  rates,  a negative  gap would  result in an  increase  in net
interest income and a positive gap would adversely  affect net interest  income.
The following sets forth the Bank's gap position at December 31, 2003:
<TABLE>
<CAPTION>

                                                         Over 3 to 12         Over 1
                                           0-3 Months        Months       through 5 Years    Over 5 Years
                                           ----------    ------------     ---------------    -------------
<S>                                             <C>           <C>              <C>             <C>
                                                             (amounts in thousands)
Assets:
Cash and due from banks                     $  2,319          $     --        $       --         $     --
Interest-bearing deposits                      8,912                --                --               --
Fed Funds sold                                   938                --                --               --
Securities                                     7,332            10,921            34,611           47,031
Loans held for sale                              475                --                --               --
Loans                                         55,447            12,770            46,956          105,789
                                           ---------       -----------       -----------       ----------
Total Assets                                $ 75,423        $   23,692        $   81,567        $ 152,820
                                           =========       ===========       ===========       ==========
Liabilities:
Noninterest bearing deposits                $ 29,270        $       --        $       --        $      --
Interest bearing demand deposits              29,674                --                --               --
Money market deposits                         44,473                --                --               --
Savings                                       34,671                --                --               --
Certificates of deposit                       12,730            44,867            31,869               --
Short-term debt                               31,191                --                --               --
Long-term debt                                    88                --            32,074           30,889
                                          ----------       -----------       -----------       ----------
Total Liabilities                          $ 182,098        $   44,867        $   63,943        $  30,889
                                          ==========       ===========       ===========       ==========
Gap                                        $(106,675)       $  (21,175)       $   17,624        $ 121,931
Cumulative Gap                             $(106,675)       $ (127,850)       $ (110,225)       $  11,705
Cumulative Gap as a percentage of
total assets                                  -30.33%           -36.35%           -31.34%            3.33%
</TABLE>

The foregoing  analysis assumes that the Bank's assets and liabilities move with
rates at  their  earliest  repricing  opportunities  based  on  final  maturity.
Mortgage-backed securities are assumed to mature during the period in which they
are  estimated to prepay and it is assumed that loans and other  securities  are
not called nor do they prepay prior to maturity. Certificates of deposit and IRA
accounts  are  presumed to

                                       9
<PAGE>

reprice at  maturity.  NOW and savings  accounts  are assumed to reprice  within
three months  although it is the Company's  experience that such accounts may be
less sensitive to changes in market rates.

As noted above the Bank, has a substantial excess of liabilities over assets
repricing or maturing within one year. This would indicate that the Bank's net
interest income would decline if interest rates were to increase. A decrease in
net interest income as a result of a general increase in rates is likely, but
the Bank has the ability to moderate the effect of a general increase in
interest rates by controlling increases in rates on transaction accounts, using
available cash to reduce the amounts in particularly rate sensitive liability
accounts, and increasing total assets through increased leverage. In addition,
the analysis above substantially understates the amount of loan prepayments the
Bank has historically experienced even in periods of rising interest rates.

LIQUIDITY AND CAPITAL RESOURCES

The Company  currently has no business  other than that of the Bank and does not
currently have any material funding commitments. The Company's principal sources
of liquidity are cash on hand and dividends  received from the Bank. The Bank is
subject to various regulatory restrictions on the payment of dividends.

The Bank's  principal  sources of funds for  investments  and operations are net
income,  deposits from its primary market area,  principal and interest payments
on loans,  interest received on investment securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or  purchase  of loans  and the  payment  of  maturing  deposits.  Deposits  are
considered  the  primary  source of funds  supporting  the  Bank's  lending  and
investment activities. The Bank also uses borrowings from the FHLB of Atlanta to
supplement  deposits.  The  amount  of FHLB  advances  available  to the Bank is
limited to the lower of 35% of Bank assets or the amount supportable by eligible
collateral  including FHLB stock,  current residential first mortgage loans, and
certain securities.

The Bank's most liquid  assets are cash,  cash  equivalents,  and federal  funds
sold. The levels of such assets are dependent on the Bank's operating  financing
and  investment  activities at any given time.  The variations in levels of cash
and cash  equivalents  are  influenced by deposit flows and  anticipated  future
deposit flows.

Cash, cash equivalents,  and  interest-bearing  deposits as of December 31, 2003
totaled  $12,169,798,  a decrease of $13,366,985  (52.34%) from the December 31,
2001 total of  $25,536,783.  This  decrease was due to the Bank's  investment in
securities as noted above.

The  Company's  principal  sources  of cash flows are its  financing  activities
including  deposits  and  borrowings.   During  the  year  2003,  all  financing
activities provided  $68,939,687 in cash compared to $17,747,865 during 2002 and
$9,823,609  during 2001.  The increase in cash flows from  financing  activities
during the most recent  period was  principally  due to an increase in borrowing
activity in 2003. The proceeds of long term  borrowing  increased to $15,000,000
in 2003  compared to  $920,000  in 2002,  and  $12,250,000  in 2001.  Short-term
borrowing  provided a net increase in cash of  $30,438,987 in 2003 compared to a
use of  cash  in 2002  of  $1,061,019.  During  2003,  net  deposit  growth  was
$24,529,456 compared to $19,908,578 in 2002. The Company also receives cash from
its operating activities which provided $2,347,573 in cash during 2003, compared
to cash flows of $4,159,722 and $5,012,228  during 2002 and 2001,  respectively.
The decrease in operating cash flows during 2003 was primarily due to a decrease
in accrued expenses and other liabilities.

The Company's principal use of cash has been in investing  activities  including
its investments in loans for portfolio,  investment securities and other assets.
During  the year  ended  December  31,  2002,  the  Company  invested a total of
$78,961,386  in its investing  activities  compared to  $18,364,135  in 2002 and
$9,750,117  in 2001.  The  principal  reason  for the  increase  in cash used in
investing  activities  was an increase in the purchase of  investments  over the
proceeds of sales, redemptions, and principal reductions.

Federal banking regulations require the Company and the Bank to maintain
specified levels of capital. At December 31, 2003 the Company was in compliance
with these requirements with a leverage ratio of

                                       10
<PAGE>

8.04%, a Tier 1 risk-based  capital ratio of 11.17% and total risk-based capital
ratio of 12.20%. At December 31, 2003, the Bank met the criteria for designation
as a well-capitalized depository institution under FRB regulations.

OFF BALANCE SHEET ARRANGEMENTS

In the normal  course of its  business  the Bank has  committed  to make  credit
available to its borrowers under various loan and other agreements provided that
certain  terms and  conditions  are met.  For a discussion  of these  agreements
including collateral and other arrangements see Note 10 to the Company's Audited
Financial Statements dated December 31, 2003.

CONTRACTUAL OBLIGATIONS

In the normal course of its business,  the Bank commits to make future  payments
to others to satisfy  contractual  obligations.  These  commitments  include the
following:  commitments to repay short and long term borrowings, and commitments
incurred under  operating  lease  agreements.  These  commitments are summarized
below:
<TABLE>
<CAPTION>
PAYMENTS DUE BY PERIOD                                            LESS                                    MORE THAN
(IN 000'S)                                                        THAN          1-3           3-5             5
                                                    TOTAL        1 YEAR        YEARS         YEARS          YEARS
                                                    ------       ------        -----         -----          -----
<S>                                                   <C>          <C>          <C>           <C>            <C>
Long Term Debt Obligations                         $ 63,051       $   88      $ 32,074            --       $ 30,889
Short Term Debt Obligations                          31,191       31,191            --            --             --
Deposits                                            227,555      195,684        18,539        13,332             --
Purchase obligations                                  1,401          501           720           180             --
Operating Lease Obligations                           1,208          181           543           293            192
                                                     ------     --------      --------      --------       --------
                                                   $324,406     $227,645      $ 51,876      $ 13,805       $ 31,081
                                                   ========     ========      ========      ========       ========
</TABLE>


IMPACT OF INFLATION AND CHANGING PRICES

The consolidated  financial  statements and notes thereto  presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial  position and operating results in terms of
historical  dollars without  considering the changes in the relative  purchasing
power of money over time due to  inflation.  Unlike most  industrial  companies,
nearly all of the Company's assets and liabilities are monetary in mature.  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  prices of goods and
services.

MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
----------------------------------------------------------------------------

MARKET  INFORMATION.  The following table sets forth high and low bid quotations
reported on the OTC  Bulletin  for the  Company's  common stock for each quarter
during  2002  (beginning  January  30,  2002) and  2003.  These  quotes  reflect
inter-dealer prices without retail mark-up,  mark-down or commission and may not
necessarily reflect actual transactions.
<TABLE>
<CAPTION>

          2002                                        High             Low
                                                      ----             ---
             <S>                                      <C>              <C>
          Fourth Quarter                              $39.38           $36.50
          Third Quarter                                37.00            30.25
          Second Quarter                               30.25            28.00
          First Quarter                                28.50            23.40
</TABLE>


                                       11
<PAGE>
<TABLE>
<CAPTION>

          2003                                        High             Low
                                                      ----             ---
           <S>                                        <C>              <C>
          Fourth Quarter                              $43.00           $39.00
          Third Quarter                                40.00            39.00
          Second Quarter                               39.00            37.00
          First Quarter                                39.00            37.00
</TABLE>


HOLDERS.  The number of  stockholders  of record of the Company at December  31,
2003 was 529.

DIVIDENDS.  The Company has paid annual cash dividends since 1994. During fiscal
years  2003 and 2002,  the  Company  paid  cash  dividends  of $0.55 and  $0.50,
respectively.  On February 4, 2004, the Board of Directors  declared a $0.70 per
share cash dividend to be  distributed on April 12, 2004 to holders of record as
of March 22, 2004.

The  Company's  ability  to  pay  dividends  is  governed  by the  policies  and
regulations of the FRB,  which  prohibit the payment of dividends  under certain
circumstances  dependent  on  the  Company's  financial  condition  and  capital
adequacy.  The  Company's  ability to pay  dividends  is also  dependent  on the
receipt of dividends from the Bank.

Federal  regulations impose certain  limitations on the payment of dividends and
other capital  distributions by the Bank. The Bank's ability to pay dividends is
governed by the Maryland Financial  Institutions Code and the regulations of the
FRB. Under the Maryland Financial Institution Code, a Maryland bank (1) may only
pay dividends from undivided  profits or, with prior  regulatory  approval,  its
surplus  in excess of 100% of  required  capital  stock and (2) may not  declare
dividends  on its common  stock  until its  surplus  funds  equals the amount of
required  capital  stock or, if the  surplus  fund does not equal the  amount of
capital stock, in an amount in excess of 90% of net earnings.

Without the  approval  of the FRB, a state  member bank may not declare or pay a
dividend if the total of all dividends  declared during the year exceeds its net
income  during the current  calendar  year and retained net income for the prior
two years. The Bank is further prohibited from making a capital  distribution if
it would not be adequately capitalized thereafter. In addition, the Bank may not
make a capital  distribution  that would  reduce its net worth  below the amount
required to maintain the liquidation  account established for the benefit of its
depositors at the time of its conversion to stock form.


                                       12
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION

BOARD OF DIRECTORS


                                 [PHOTO OF FULL
                        BOARD OF DIRECTORS APPEARS HERE]
                 [INDIVIDUAL PHOTOS OF DIRECTORS APPEAR BELOW]


Michael L. Middleton           C. Marie Brown              H. Beaman Smith
President and                  Executive Vice President    Secretary/Treasurer
Chairman of the Board          Chief Operating Officer     President
                                                           Accoware Systems


Herbert N. Redmond, Jr.        James R. Shepherd
Senior Vice President          Business Development Officer
D.H. Steffens Company          Calvert County Department of Economic Development


Louis P. Jenkins, Jr.          A. Joseph Slater, Jr.
Partner                        President
Louis P. Jenkins, P.A.         Southern Maryland Electric Cooperative

<PAGE>
TRI-COUNTY FINANCIAL CORPORATION

BANK RISK ASSESSMENT TEAM


                                    [PHOTO OF
                     BANK RISK ASSESSMENT TEAM APPEARS HERE]

                    [INDIVIDUAL PHOTOS OF TEAM APPEAR BELOW]

Michael L. Middleton           C. Marie Brown              Gregory C. Cockerham
President and                  Executive Vice President    Executive Vice
Chairman of the Board          Chief Operating Officer     President
                                                           Chief Lending Officer

William J. Pasenelli           David D. Vaira              John H. Buckmaster
Executive Vice President       Senior Vice President       Vice President
Chief Financial Officer        Controller                  Commercial Loan
                                                           Officer

Paige Watkins                  David Sjogren               Megan Pierce
Vice President                 Compliance Officer          Sales Manager
Credit Administrator


Nancy Hayden
Director of Information Technology

<PAGE>
TRI-COUNTY FINANCIAL CORPORATION

SENIOR MANAGEMENT TEAM


                                   [PHOTO OF
                      SENIOR MANAGEMENT TEAM APPEARS HERE]
                    [INDIVIDUAL PHOTOS OF TEAM APPEAR BELOW]


Michael L. Middleton           C. Marie Brown
President and                  Executive Vice President
Chairman of the Board          Chief Operating Officer


Gregory C. Cockerham           William J. Pasenelli
Executive Vice                 Executive Vice President
President                      Chief Financial Officer
Chief Lending Officer


SHAREHOLDER RELATIONS
---------------------

Christy Lombardi

<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                               REPORT ON AUDITS OF
                        CONSOLIDATED FINANCIAL STATEMENTS

                               FOR THE YEARS ENDED
                        DECEMBER 31, 2003, 2002, AND 2001


<PAGE>



                                TABLE OF CONTENTS






INDEPENDENT AUDITORS' REPORT



CONSOLIDATED FINANCIAL STATEMENTS                              Page
                                                               ----


        Balance Sheets                                           4


        Statements of Income                                     5


        Statements of Changes in Stockholders' Equity            6


        Statements of Cash Flows                               7 - 8



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     9 - 34


<PAGE>

                       [LETTERHEAD OF STEGMAN & COMPANY]

                          Independent Auditors' Report







Audit Committee of the
Board of Directors and Stockholders
Tri-County Financial Corporation


     We have audited the accompanying  consolidated balance sheets of Tri-County
Financial  Corporation  as of  December  31,  2003  and  2002,  and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 2003.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
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
Tri-County  Financial  Corporation  as of December  31,  2003 and 2002,  and the
results  of its  consolidated  operations  and cash  flows for each of the three
years in the period ended  December  31, 2003,  in  conformity  with  accounting
principles generally accepted in the United States of America.



                                        /s/ Stegman & Company




Baltimore, Maryland
February 13, 2004



<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002
<TABLE>
<CAPTION>

                                                      ASSETS

                                                                                2003                2002
<S>                                                                             <C>                 <C>
Cash and due from banks                                                   $  2,319,300        $  9,993,426
Interest-bearing deposits with banks                                         8,912,332          15,179,851
Federal  funds sold                                                            938,166             363,506
Investment securities available for sale - at fair value                    38,290,074          41,826,113
Investment securities held to maturity - at amortized cost                  61,605,175           2,841,807
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost           4,776,850           2,736,750
Loans held for sale                                                            474,880           1,262,667
Loans receivable - net of allowance for loan losses
of $2,572,799 and $2,314,074, respectively                                 217,740,153         197,449,282
Premises and equipment, net                                                  5,580,189           5,736,395
Foreclosed real estate                                                         706,764             716,014
Accrued interest receivable                                                  1,318,318           1,042,453
Investment in bank owned life insurance                                      5,921,544                  --
Other assets                                                                 3,146,247           3,025,431
                                                                          ------------        ------------
         TOTAL ASSETS                                                     $351,729,992        $282,173,695
                                                                          ============        ============

                                       LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:

    Noninterest-bearing deposits                                            29,270,007          33,045,310
    Interest-bearing deposits                                              198,284,561         169,979,802
                                                                          ------------         -----------
       Total deposits                                                      227,554,568         203,025,112
    Short-term borrowings                                                   31,191,285             752,298
    Long-term debt                                                          63,051,176          48,170,000
    Accrued expenses and other liabilities                                   2,021,053           3,353,520
                                                                          ------------         -----------
       Total liabilities                                                   323,818,082         255,300,930
                                                                          ------------         -----------
STOCKHOLDERS' EQUITY:

Common stock - par value $.01; authorized - 15,000,000 shares;
issued 753,278 and 759,778 shares, respectively                                  7,533               7,598
Additional paid in capital                                                   7,975,036           7,716,906
Retained earnings                                                           20,071,630          18,817,615
Accumulated other comprehensive income (loss)                                   (3,130)            493,691
Unearned ESOP shares                                                          (139,159)           (163,045)
                                                                          ------------         -----------
Total stockholders' equity                                                  27,911,910          26,872,765
                                                                          ------------         -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                 351,729,992         282,173,695
                                                                          ============         ===========

See notes to consolidated financial statements
</TABLE>

                                       4
<PAGE>

                        TRI-COUNTY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
<TABLE>
<CAPTION>

                                                                           2003           2002            2001
                                                                           ----           ----            ----
<S>                                                                        <C>            <C>             <C>
INTEREST INCOME:
   Interest and fees on loans                                          13,411,904     14,221,247     15,223,463
   Taxable interest and dividends on investment securities              2,688,451      2,388,095      3,172,515
   Interest on deposits with banks and federal funds sold                  64,570        104,646         76,049
                                                                       ----------     ----------     ----------
        Total interest income                                          16,164,925     16,713,988     18,472,027
                                                                       ----------     ----------     ----------
INTEREST EXPENSE:
   Interest on deposits                                                 2,868,709      3,453,443      5,935,478
   Interest on short term borrowings                                    2,731,983          7,634        259,558
   Interest on long term debt                                              95,707      2,507,551      2,562,775
                                                                       ----------     ----------     ----------
        Total interest expenses                                         5,696,399      5,968,628      8,757,811
                                                                       ----------     ----------     ----------

NET INTEREST INCOME                                                    10,468,526     10,745,360      9,714,216

PROVISION FOR LOAN LOSSES                                                 316,963        160,000        360,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                    10,151,563     10,585,360      9,354,216
                                                                       ----------    -----------      ---------
NONINTEREST INCOME:
  Loan appraisal, credit, and miscellaneous charges                       261,387        179,006        226,641
  Net gain on sale of loans held for sale                                 505,435        499,304        187,304
  Income from bank owned life insurance                                   230,607             --             --
  Service charges                                                         695,128      1,041,662        953,496
  Other                                                                    61,981        127,089         34,079
                                                                       ----------    -----------      ---------
        Total noninterest income                                        1,754,538      1,847,061      1,401,520
                                                                       ----------    -----------      ---------
NONINTEREST EXPENSE:
   Salary and employee benefits                                         4,702,181      4,228,050      3,827,491
   Occupancy expense                                                      750,567        831,148        689,575
   Advertising                                                            308,951        338,216        301,975
   Data processing expense                                                403,967        568,095        291,399
   Loss on disposal of obsolete equipment                                      --         65,104             --
   Depreciation of furniture, fixtures, and equipment                     507,236        339,184        263,535
   Telephone communications                                               166,553        345,559        127,958
   Valuation allowance on foreclosed real estate                               --        972,889             --
   ATM expenses                                                           274,188        312,200        254,175
   Office supplies                                                        131,228        290,636        253,545
   Office equipment expenses                                              129,849        247,171        211,316
   Other                                                                1,053,051        859,348        730,882
                                                                       ----------     ----------      ---------
        Total noninterest expense                                       8,427,771      9,397,600      6,951,851
                                                                       ----------     ----------     ----------
INCOME BEFORE INCOME TAXES                                              3,478,330      3,034,821      3,803,885
Income tax expense                                                      1,032,432      1,067,000      1,318,350
                                                                       ----------     ----------     ----------
NET INCOME                                                              2,445,898      1,967,821      2,485,535
                                                                       ==========     ==========     ==========
INCOME PER COMMON SHARE
   Basic                                                                    $3.24          $2.58          $3.24
   Diluted                                                                  $3.07          $2.45          $3.11
   Cash Dividend per Share                                                  $0.55          $0.50          $0.40
</TABLE>


See notes to consolidated financial statements

                                       5
<PAGE>

                        TRI-COUNTY FINANCIAL CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
<TABLE>
<CAPTION>
                                                                                         Accumulated
                                                                                            Other        Unearned
                                                      Common    Paid-in     Retained    Comprehensive      ESOP
                                                       Stock    Capital     Earnings    Income (Loss)     Shares       Total
                                                      ------    -------     --------    -------------    --------     -------
<S>                                                     <C>       <C>         <C>          <C>              <C>        <C>

BALANCES, JANUARY 1, 2001                            $  7,777  $7,500,865  $16,175,708   $    (114,929)   $(139,599) $23,429,822
  Comprehensive income:
    Net Income                                              -           -    2,485,535               -            -    2,485,535
     Unrealized gains on investment securities
       net of tax of $343,599                               -           -            -         670,442            -      670,442
                                                                                                                         -------
        Total comprehensive income                                                                                     3,155,977
  Cash dividend  $0.40 per share                            -           -    (309,204)               -            -     (309,204)
  Excess of fair market value over cost
    of leveraged ESOP shares released                       -      12,964            -               -            -       12,964
  Exercise of stock options                                56      31,761            -               -            -       31,817
  Repurchase of common stock                             (248)          -     (673,672)              -            -     (673,920)
  Net change in unearned ESOP shares                      (17)          -            -               -      (60,981)     (60,998)
                                                     --------  ----------  -----------   -------------    ---------  -----------
BALANCES, DECEMBER 31, 2001                             7,568   7,545,590   17,678,367         555,513     (200,580)  25,586,458

  Comprehensive income:
    Net Income                                              -           -    1,967,821               -            -    1,967,821
     Unrealized losses on investment securities
       net of tax of $24,455                                -           -            -        (61,822)            -      (61,822)
                                                                                                                       ---------
        Total comprehensive income                                                                                     1,905,999
  Cash dividend  $0.50 per share                            -           -    (385,129)               -            -     (385,129)
  Excess of fair market value over cost
    of leveraged ESOP shares released                       -      10,445            -               -            -       10,445
  Exercise of stock options                               133     160,871            -               -            -      161,004
  Repurchase of common stock                            (123)           -    (443,444)                                  (443,567)
  Net change in unearned ESOP shares                      20            -            -               -       37,535        37,555
                                                    ---------   ---------   ----------       ---------    ---------    ----------
BALANCES, DECEMBER 31, 2002                             7,598   7,716,906   18,817,615         493,691    (163,045)   26,872,765

  Comprehensive income:
    Net Income                                              -           -    2,445,898               -            -    2,445,898
     Unrealized losses on investment securities
       net of tax of $268,756                                                                (496,821)                  (496,821)
                                                                                                                       ---------
Total comprehensive income                                                                                             1,949,077
  Cash dividend  $0.55 per share                                             (422,361)                                  (422,361)
  Excess of fair market value over cost                                                                                        -
    of leveraged ESOP shares released                              39,533                                                 39,533
  Exercise of stock options                               116     200,435                                                200,551
  Repurchase of common stock                            (197)                (769,522)                                  (769,719)
  Net change in unearned ESOP shares                       16                                                23,886       23,902
  Tax benefit for exercise of nonqualified
   stock options                                                   18,162                                                 18,162
                                                    ---------   ---------   ----------       ---------    ---------    ----------
BALANCES, DECEMBER 31, 2003                         $   7,533  $7,975,036 $20,071,630     $    (3,130)   $ (139,159) $27,911,910
                                                    =========   ========= ===========     ============   ==========  ===========
</TABLE>

See notes to consolidated financial statements

                                       6
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECMBER 31, 2003, 2002, AND 2001
<TABLE>
<CAPTION>
                                                                               2003             2002          2001
                                                                               ----             ----          ----
<S>                                                                            <C>              <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

  Net income                                                                 $  2,445,898  $  1,967,821   $ 2,485,535
    Adjustments to reconcile net income to net
      cash provided by operating activities:
       Valuation allowance on foreclosed real estate                                   --       972,889
       Provision for loan losses                                                  316,963       160,000       360,000
       Depreciation and amortization                                              663,134       445,558       396,400
       Net amortization of premium/discount on
        mortgage backed securities and investments                                447,503        48,426        66,146
       Deferred income tax benefit                                                (22,219)     (399,000)     (205,000)
       Increase in federal funds sold                                            (574,660)     (363,506)
       (Increase) decrease in accrued interest receivable                        (275,865)        6,948       304,257
       Decrease in deferred loan fees                                             (17,849)      (90,291)      (18,131)
       (Decrease) increase in accrued expenses and other liabilities           (1,332,467)      562,539       638,249
       Increase in other assets                                                   (51,385)     (319,625)   (1,006,157)
       Loss (gain) on disposal of premises and equipment                           12,241        76,315        (8,386)
       Origination of loans held for sale                                     (16,792,123)  (23,376,262)   (9,752,097)
       Proceeds from sale of loans held for sale                               18,085,345    24,967,214    11,938,716
       Gain on sales of loans held for sale                                      (505,435)     (499,304)     (187,304)
                                                                             ------------   -----------   -----------
       Net cash provided by operating activities                                2,399,081     4,159,722     5,012,228
                                                                             ------------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Net increase (decrease) in interest-bearing deposits with banks             6,267,519    (7,501,693)   (1,702,844)
    Purchase of investment securities available for sale                      (65,726,882)  (30,740,615)   (2,246,225)
    Proceeds from sale, redemption or principal payments
     of investment securities available for sale                               67,772,952    24,692,742    23,423,736
    Purchase of investment securities held to maturity                        (64,384,597)   (2,375,053)   (1,345,703)
    Proceeds from maturities or principal payments
     of investment securities held to maturity                                  5,898,120     1,822,600       770,717
    Net (purchase) redemption  of FHLB and Federal Reserve stock               (2,040,100)      298,800            --
    Loans originated or acquired                                             (172,289,356)  (86,078,892)  (96,149,353)
    Principal collected on loans                                              151,699,369    82,009,912    70,448,931
    Purchase of premises and equipment                                           (528,169)   (1,106,504)   (1,334,396)
    Proceeds from disposal of premises and equipment                                9,000       281,084         8,963
    Purchase of Bank owned life insurance policies                             (5,700,000)           --            --
    Sale (acquisition) of foreclosed real estate                                    9,250        333,484   (1,623,943)
                                                                             ------------   ------------   ----------
    Net cash used in investing activities                                     (79,012,894)   (18,364,135)  (9,750,117)
                                                                             ------------   ------------   ----------
</TABLE>

                                       7

<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
              FOR THE YEARS ENDED DECMBER 31, 2003, 2002, AND 2001
<TABLE>
<CAPTION>

                                                                               2003            2002            2001
                                                                               ----            ----            ----
<S>                                                                            <C>             <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in deposits                                             $   24,529,456     $19,908,578    $15,310,535
    Net increase (decrease) in short-term borrowings                         30,438,987      (1,061,019)   (11,737,586)
    Dividends paid                                                             (422,361)       (385,129)      (309,204)
    Exercise of stock options                                                   218,713         161,004         31,817
    Net change in unearned ESOP shares                                           63,435          47,999        (48,033)
    Repurchase of common stock                                                 (769,719)       (443,568)      (673,920)
    Proceeds from long-term borrowings                                       15,000,000         920,000     12,250,000
    Payments of long-term borrowings                                           (118,824)     (1,400,000)    (5,000,000)
                                                                         --------------     -----------    -----------
    Net cash provided by financing activities                                68,939,687      17,747,865      9,823,609

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (7,674,126)      3,543,452      5,085,720
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                9,993,426       6,449,974      1,364,254
                                                                         --------------     -----------    ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $    2,319,300     $ 9,993,426    $ 6,449,974
                                                                         ==============     ===========    ===========
Supplementary cash flow information: Cash paid during the year for:
    Interest                                                             $    5,647,280     $ 6,225,058    $ 9,015,483
    Income taxes                                                              1,715,369       2,110,500      1,431,000

Noncash transfer from loans to foreclosed real estate                                --              --      1,276,070
</TABLE>


See notes to consolidated financial statements.

                                       8
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation and Consolidation
     ---------------------------------------

     The consolidated  financial  statements  include the accounts of Tri-County
Financial  Corporation  and  its  wholly  owned  subsidiary,  Community  Bank of
Tri-County  (the "Bank") and the Bank's  wholly owned  subsidiaries,  Tri-County
Investment   Corporation  and  Community  Mortgage   Corporation  of  Tri-County
(collectively,   the  "Company").  All  significant  intercompany  balances  and
transactions have been eliminated in consolidation. The accounting and reporting
policies of the Company conform with accounting principles generally accepted in
the  United  States of  America  and to general  practices  within  the  banking
industry.  Certain  reclassifications  have  been  made  to  amounts  previously
reported to conform with classifications made in 2003.

     Use of Estimates
     ----------------

     In  preparing   consolidated   financial   statements  in  conformity  with
accounting  principles  generally  accepted  in the  United  States of  America,
management  is  required  to make  estimates  and  assumptions  that  affect the
reported  amounts of assets and  liabilities as of the date of the balance sheet
and  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those  estimates.  Material  estimates that are
particularly  susceptible to  significant  change in the near term relate to the
determination of the allowance for loan losses,  and the valuation of foreclosed
real estate and deferred tax assets.

     Nature of Operations
     --------------------

     The Company, through its bank subsidiary,  conducts full service commercial
banking operations  throughout the Southern Maryland area. Its primary financial
deposit products are savings,  transaction,  and term certificate accounts.  Its
primary  lending  products are mortgage loans on residential,  construction  and
commercial real estate and various types of consumer and commercial lending.

     Significant Group Concentrations of Credit
     ------------------------------------------

     Most of the Company's  activities take place in the Southern  Maryland area
comprising St. Mary's, Charles, and Calvert counties. Note 2 discusses the types
of securities the Company  invests in. Note 3 discusses the type of lending that
the Company engages in. The Company does not have any significant  concentration
to any one customer or industry.

     Cash and Cash Equivalents
     -------------------------

     For  purposes of the  consolidated  statements  of cash flows,  the Company
considers  all

                                       9
<PAGE>

highly liquid debt instruments with original  maturities when purchased of three
months or less to be cash  equivalents.  These instruments are presented as cash
and due from banks.

     Investment Securities
     ---------------------

     Investments Trading -- Investment  securities that are held principally for
resale in the near term are  classified  as trading  assets and are  recorded at
fair value with changes in fair value  recorded in earnings.  The Company had no
trading assets during the periods presented.

Investments   Available-for-Sale   --  Marketable  equity  securities  and  debt
securities  not  classified  as  held-to-maturity  or trading are  classified as
available-for-sale.  Securities  available-for-sale  are acquired as part of the
Company's  asset/liability  management  strategy  and may be sold in response to
changes in interest  rates,  loan demand,  changes in prepayment  risk and other
factors.   Securities   available-for-sale  are  carried  at  fair  value,  with
unrealized  gains or losses based on the difference  between  amortized cost and
fair value  reported  as  accumulated  other  comprehensive  income,  a separate
component of  stockholders'  equity,  net of deferred  tax.  Realized  gains and
losses,  using the specific  identification  method,  are included as a separate
component of noninterest income.  Related interest and dividends are included in
interest  income.  Declines in the fair value of  individual  available-for-sale
securities  below their cost that are other than temporary result in write-downs
of the  individual  securities  to  their  fair  value.  Factors  affecting  the
determination of whether an other-than-temporary impairment has occurred include
a downgrading of the security by a rating agency, a significant deterioration in
the financial  condition of the issuer,  or that  management  would not have the
intent and ability to hold a security for a period of time  sufficient  to allow
for any anticipated recovery in fair value.

Investments   Held-to-Maturity   and  Other  Equity  Securities  --  Investments
held-to-maturity  are those  securities  which the  Company  has the ability and
positive  intent to hold until  maturity.  Securities  so  classified at time of
purchase   are   recorded   at  cost.   The   carrying   values  of   securities
held-to-maturity  are adjusted for premium  amortization and discount accretion.
Declines in the fair value of individual held-to-maturity securities below their
cost that are other  than  temporary  result in  write-downs  of the  individual
securities to their fair value.  Factors  affecting the determination of whether
an other than  temporary  impairment  has occurred  include a downgrading of the
security by the rating  agency,  a  significant  deterioration  in the financial
condition of the issuer, or that management would not have the ability to hold a
security for a period of time sufficient to allow for any  anticipated  recovery
in fair value.

Investment  in other  equity  securities  represents  Federal  Reserve  Bank and
Federal Home Loan Bank of Atlanta stock are recorded at cost and are  considered
restricted as to marketability.


     Loans Held for Sale
     -------------------

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

     Loans Receivable
     ----------------

     The Company grants mortgage, commercial, and consumer loans to customers. A

                                       10
<PAGE>

substantial  portion of the loan portfolio is  represented  by loans  throughout
Southern Maryland. The ability of the Company's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in this area.

     Loans  that  management  has  the  intent  and  ability  to  hold  for  the
foreseeable  future or until maturity or payoff  generally are reported at their
outstanding  unpaid principal  balances adjusted for charge-offs,  the allowance
for loan losses,  and any deferred fees or costs on originated  loans.  Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct  origination  costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.

     The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Consumer loans are charged-off no later than 120 days
past due. In all cases,  loans are placed on  nonaccrual  or  charged-off  at an
earlier date if collection of principal or interest is considered doubtful.

     All  interest  accrued  but not  collected  from  loans  that are placed on
nonaccrual or charged-off is reversed against  interest income.  The interest on
these loans is accounted for on the cash-basis or  cost-recovery  method,  until
qualifying for return to accrual.  Loans are returned to accrual status when all
principal and interest amounts  contractually due are brought current and future
payments are reasonably assured.

     Allowance for Loan Losses
     -------------------------

     The  allowance  for loan  losses is  established  as  probable  losses  are
estimated  to have  occurred  through a  provision  for loan  losses  charged to
earnings. Loan losses are charged against the allowance when management believes
that the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
if any, are credited to the allowance.

     The allowance for loan losses is evaluated on a regular basis by management
and is based upon  management's  periodic  review of the  collectibility  of the
loans in light of  historical  experience,  the  nature  and  volume of the loan
portfolio,  adverse  situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This  evaluation is  inherently  subjective  as it requires  estimates  that are
susceptible to significant revision as more information becomes available.

     The  allowance  for  loan  loss  consists  of a  specific  component  and a
nonspecific component.  The components of allowance for loan losses represent an
estimation done pursuant to either SFAS No. 5 "Accounting for Contingencies", or
SFAS No. 114  "Accounting by Creditors for  Impairment of a Loan".  The specific
component of the allowance for loan losses reflects  expected  losses  resulting
from analysis developed through specific credit allocations for individual loans
and  historical  loss  experience for each loan  category.  The specific  credit
allocations  are based on a regular  analysis  of all loans over a  fixed-dollar
amount  where  the  internal  credit  rating  is at  or  below  a  predetermined
classification.

     The   nonspecific   portion  of  the  allowance  is  determined   based  on
management's  assessment  of general  economic  conditions,  as well as specific
economic factors in the individual  markets in which the Company operates.  This
determination  inherently  involves a higher risk of  uncertainty  and considers
current  risk  factors  that  may not  have  yet  manifested  themselves  in the
Company's  historical  loss factors used to determine the specific  component of
the allowance and it  recognizes  knowledge of the portfolio may be  incomplete.
The  nonspecific  allowance  that is based  upon  historical  loss  factors,  as

                                       11

<PAGE>

     Foreclosed Real Estate
     -----------------------

     Assets acquired through,  or in lieu of, loan foreclosure are held for sale
and  are  initially   recorded  at  fair  value  at  the  date  of  foreclosure,
establishing  a new  cost  basis.  Subsequent  to  foreclosure,  valuations  are
periodically  performed by management and the assets are carried at the lower of
carrying  amount or fair  value less cost to sell.  Revenue  and  expenses  from
operations  and changes in the valuation  allowance are included in  noninterest
expense.


     Transfers of Financial Assets
     -----------------------------

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

     Income Taxes
     ------------

     The  Company  files a  consolidated  federal  income  tax  return  with its
subsidiaries.  Deferred  tax assets and  liabilities  are  determined  using the
liability (or balance  sheet)  method.  Under this method,  the net deferred tax
asset or  liability  is  determined  based on the tax  effects of the  temporary
differences  between the book and tax bases of the various  balance sheet assets
and liabilities and gives current recognition to changes in tax rates and laws.

     Earnings Per Share
     ------------------

     Basic  earnings  per common  share  represents  income  available to common
stockholders divided by the weighted average number of common shares outstanding
during the period.  Diluted earnings per share reflects additional common shares
that would have been  outstanding if potential  dilutive  common shares had been
issued,  as well as any  adjustment to income that would result from the assumed
issuance.  Potential  common  shares  that may be issued by the  Company  relate
solely to outstanding stock options, and are determined using the treasury stock
method.

     Stock-Based Compensation
     ------------------------

     Stock based  compensation  is recognized  using the intrinsic value method.
For disclosure purposes, pro forma net income and earnings per share effects are
provided as if the fair value method had been applied.

     The Company  has a stock  option and  incentive  plan to attract and retain
personnel  and  provide  incentive  to  employees  to promote the success of the
business. In addition, the Company has a stock option plan for its directors. At
December 31, 2003, 36,666 shares of stock have been authorized and are available
for grants of options under the plans. The exercise price for options granted is
set at the discretion of the Board of Directors, but is not less than the market
value of the shares as of the date of grant.  An  option's

                                       13
<PAGE>

maximum  term is ten years  and the  options  generally  vest  immediately  upon
issuance.

     The  Company  applies  APB  Opinion  25  and  related   Interpretations  in
accounting for the stock option plan. Accordingly, no compensation cost has been
recognized.  Had  compensation  cost for the  Company's  stock  option plan been
determined  based upon fair values at the grant dates for awards  under the plan
consistent  with the method  prescribed  by SFAS Nos. 123 and 148, the Company's
net income and  earnings  per share  would have been  adjusted  to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>

                                                                      2003                2002          2001
                                                                      ----                ----          ----
<S>                                                                   <C>                 <C>             <C>
Net income, as reported                                            $   2,445,898      $1,967,821    $2,485,535
Less pro forma stock-based compensation expense
 determined under the fair value method, net of related
 tax effects                                                            (141,000)       (217,187)     (226,251)
                                                                   -------------      ----------    ----------
Pro forma net income                                               $   2,304,898      $1,750,634    $2,259,284
                                                                   =============      ===========   ==========
Earnings per share as reported
  Basic                                                            $        3.24      $     2.58    $     3.24
  Diluted                                                                   3.07            2.45          3.11

Pro forma earnings per share
  Basic                                                                     3.05            2.30          2.95
  Diluted                                                                   2.89            2.18          2.83
</TABLE>

For the purpose of computing the pro forma  amounts  indicated  above,  the fair
value of each option on the date of grant is estimated  using the  Black-Scholes
option pricing model with the following  weighted-average  assumptions  used for
the grants:
<TABLE>
<CAPTION>
                                                                           2003             2002             2001
                                                                           ----             ----             ----
<S>                                                                        <C>              <C>                <C>
Dividend Yield                                                              2.17%            1.41%           1.30%
Expected volatility                                                        17.24%           35.00%          15.00%
Risk - free interest rate                                                   4.29%            4.82%           4.91%
Expected lives (in years)                                                     10               10              10
Weighted average fair value                                               $10.22           $17.24          $11.06
</TABLE>


New Accounting Standards
------------------------

     In April 2003, the Financial Accounting Standards Board issued Statement of
Financial  Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging  Activities".  SFAS  No.  149  amends  and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities under SFAS No. 133,  "Accounting for Derivative  Instruments
and Hedging  Activities".  The Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging  relationships  designated after
June 30, 2003. There was no material impact on the Company's financial condition
or results of operations upon adoption of this Statement.

     In May 2003, the Financial  Accounting Standards Board issued SFAS No. 150,
"Accounting  for Certain  Financial  Instruments  with  Characteristics  of Both
Liabilities and Equity".  SFAS No. 150

                                       14
<PAGE>

establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both a liability and equity. It
requires that an issuer classify certain  financial  instruments as a liability,
although the financial instrument may previously have been classified as equity.
This Statement is effective for financial  instruments  entered into or modified
after May 31, 2003 and  otherwise  is  effective  at the  beginning of the first
interim period  beginning  after June 15, 2003.  There was no material impact on
the Company's financial condition or results of operations upon adoption of this
Statement.

In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45,  "Guarantor's  Accounting and Disclosure  Requirements  for  Guarantees,
Including  Indirect  Guarantees of  Indebtedness  of Others"  ("FIN 45"),  which
covers guarantees such as standby letters of credit, performance guarantees, and
direct or indirect  guarantees of the indebtedness of others, but not guarantees
of funding.  FIN 45 requires a guarantor  to  recognize,  at the  inception of a
guarantee,  a liability in an amount  equal to the fair value of the  obligation
undertaken in issuing the guarantee,  and requires  disclosure about the maximum
potential  payments that might be required,  as well as the  collateral or other
recourse obtainable.  The recognition and measurement  provisions of FIN 45 were
effective on a prospective  basis after  December 31, 2002,  and its adoption by
the Company on January 1, 2003 has not had a significant effect on the Company's
consolidated financial statements.

2.   INVESTMENT SECURITIES

     The  amortized  cost and  estimated  fair values of  securities  with gross
unrealized losses and gains are:
<TABLE>
<CAPTION>
                                                                                December 31, 2003
                                             -------------------------------------------------------------------------
                                                                        Gross            Gross
                                                    Amortized         Unrealized        Unrealized      Estimated Fair
Securities available for sale                         Cost              Gains            Losses            Values
                                                      ----              -----            ------            ------
<S>                                                   <C>               <C>               <C>               <C>
Asset-backed securities issued by GSE's:          $  34,902,854       $  102,973        $  309,722       $ 34,696,105
                                                  -------------       ----------        ----------       ------------
Total debt securities available for sale             34,902,854          102,973           309,722         34,696,105
Corporate equity securities                             546,010          250,423            40,000            756,433
Bond mutual funds                                     2,845,950               --             8,415          2,837,535
                                                  -------------       ----------        ----------       ------------
Total securities available for sale               $  38,294,814       $  353,396        $  358,137       $ 38,290,074
                                                  =============       ==========        ==========       ============

Securities held-to-maturity
Asset-backed securities issued by:
       GSE's                                      $  50,067,413       $  103,018        $  646,379       $ 49,524,052
       Other                                          7,284,039               --                --          7,284,039
                                                     ----------       ----------        ----------       ------------
Total debt securities held-to-maturity               57,351,452          103,018           646,379         56,808,091

U.S. Government obligations                             300,000               --               249            299,751
Other investments                                     3,953,723          157,750                --          4,111,473
                                                  -------------       ----------        ----------       ------------
Total securities held-to-maturity                 $  61,605,175       $  260,768        $  646,628       $ 61,219,315
                                                  =============       ==========        ==========       ============
</TABLE>

<TABLE>
<CAPTION>
                                                                        December 31, 2002
                                             -------------------------------------------------------------------------
                                                                         Gross            Gross
                                                    Amortized         Unrealized        Unrealized      Estimated Fair
Securities available for sale                          Cost              Gains            Losses            Values
                                                       ----              -----            ------            ------
<S>                                                    <C>              <C>                <C>               <C>
Asset-backed securities issued by:
       GSE's                                      $  28,597,630       $  601,972          $     --       $ 29,199,602
       Other                                          7,826,724          104,014               919          7,929,819
                                                  -------------       ----------          --------       ------------

Total debt securities available for sale             36,424,354          705,986               919         37,129,421
Corporate equity securities                             509,010          244,971            20,000            733,981

                                       15
<PAGE>

Bond mutual funds                                     3,962,711               --                --          3,962,711
                                                 --------------       ----------        ----------       ------------
Total securities available for sale              $   40,896,075       $  950,957        $   20,919       $ 41,826,113
                                                 ==============       ==========        ==========       ============

Securities held-to-maturity
U.S. Government obligations                      $      300,000       $        -        $    1,760       $    298,240
Other investments                                     2,541,807           16,269                --          2,558,076
                                                 --------------       ----------        ----------       ------------
Total securities held-to-maturity                $    2,841,807       $   16,269        $    1,760       $  2,856,316
                                                 ==============       ==========        ==========       ============
</TABLE>

Other investments  consist of certain CD strip instruments whose market value is
estimated  based on market  returns on  similar  risk and  maturity  instruments
because no active market exists for these instruments.  At December 31, 2003 and
2002, U.S. Government obligations with a carrying value of $300,000 were pledged
to secure public unit deposits and for other  purposes  required or permitted by
law. In addition, at December 31, 2003 and 2002, certain other securities with a
carrying value of $6,441,000 and $5,047,000, respectively were pledged to secure
certain  deposits.  At December 31, 2003,  securities  with a carrying  value of
$68,500,000  were pledged as collateral  for advances from the Federal Home Loan
Bank of Atlanta.

Gross  unrealized  losses and fair  value by length of time that the  individual
available-for-sale securities have been in a continuous unrealized loss position
at December 31, 2003 are as follows:
<TABLE>
<CAPTION>
                                                                  Continuous unrealized losses
                                                                          existing for
                                                     ------------------------------------------------------------
                                                                                                         Total
                                                                     Less than 12    More Than 12     unrealized
                                                     Fair Value          months          Months          Losses
                                                     ----------      ------------    ------------     ----------
<S>                                                     <C>              <C>              <C>            <C>
Asset-backed securities issued by GSE's:           $  30,130,035      $ 309,722       $      --      $  309,722
Corporate equity securities                              500,000             --          40,000          40,000
Bond mutual funds                                      2,837,535          8,415              --           8,415
                                                   -------------      ---------       ---------      ----------
                                                   $  33,467,570      $ 318,137       $  40,000      $  358,137
                                                   =============      =========       =========      ==========
</TABLE>

The  available-for-sale  investment  portfolio has a fair value of approximately
$38.3 million of which  approximately  $33.5 million of the securities have some
unrealized losses from their purchase price. Of these securities,  $30.1million,
or 90%, are mortgage backed securities issued by GSE's, $2.8 million or 8.5% are
short  duration  mutual  fund  shares,  and $500  thousand  or 1.5%  are  equity
securities.  The unrealized  losses that exist in the mortgage backed securities
and mutual fund shares are the result of market  changes in interest rates since
the original purchase.

The bond mutual fund  shares have a modest  duration  and are backed by one year
adjustable rate mortgage backed securities.  The asset backed securities have an
average  duration of 3.3 years and are  guaranteed  by their issuer as to credit
risk. Total unrealized  losses on these  investments are minimal  (approximately
1%).  We  believe  that the  losses  in the  equity  securities  are  temporary.
Persistent  losses may require a  reevaluation  of these  losses.  These factors
coupled  with the fact the Company has both the intent and ability to hold these
investments  for a  period  of time  sufficient  to  allow  for any  anticipated
recovery  in  fair  value  substantiates  that  the  unrealized  losses  in  the
available-for-sale portfolio are temporary.

Gross  unrealized  losses and fair  value by length of time that the  individual
held-to-maturity  securities have been in a continuous  unrealized loss position
at December 31, 2003 are as follows:

                                       16

<PAGE>

<TABLE>
<CAPTION>
                                                                 Continuous unrealized losses
                                                                         existing for
                                                    -------------------------------------------------------------
                                                                  Less than 12    More Than 12   Total unrealized
                                                    Fair Value        months         Months         Losses
                                                    ----------    ------------   --------------  ---------------
      <S>                                               <C>          <C>                <C>          <C>
Asset-backed securities issued by GSE's:          $ 32,065,546      $ 646,379          --           $   646,379
U.S. Government obligations                            298,240          1,760          --                 1,760
Corporate equity securities                                 --             --          --                    --
                                                  ------------      ---------    --------           -----------
                                                  $ 32,363,786      $ 646,379          --           $   648,139
                                                  ============      =========    ========           ===========
</TABLE>

The  held-to-maturity  investment  portfolio  has a fair value of  approximately
$61.2 million of which  approximately  $32.4 million of the securities have some
unrealized losses from their purchase price. Of these securities,  $32.1million,
or 99%, are mortgage  backed  securities  issued by GSE's and the remainder is a
short  duration U.S.  Treasury note.  The  U.S.Treasury  note will mature within
three months from the balance sheet date at full face value. The remaining asset
backed securities have a duration of approximately 5 years, are guaranteed as to
payment by the issuer,  and have  minimal  losses  compared  to  carrying  value
(approximately  2%). The  unrealized  losses that exist are the result of market
changes in interest  rates since the original  purchase.  These factors  coupled
with the Company's intent and ability to hold these  investments for a period of
time   sufficient  to  allow  for  any   anticipated   recovery  in  fair  value
substantiates that the unrealized losses in the  held-to-maturity  portfolio are
temporary.

            The scheduled maturities of debt securities at December 31, 2003 are
as follows:
<TABLE>
<CAPTION>
                                                     Available for Sale                    Held to Maturity
                                             ------------------------------------ -----------------------------------
                                                Amortized            Fair            Amortized            Fair
                                                   Cost              Value              Cost             Value
                                             ----------------- ------------------ ----------------- -----------------
<S>                                                 <C>              <C>               <C>                  <C>
Within one year                                    $2,845,950         $2,837,535       $   300,000       $   299,751
Over one year through five years                           --                 --         3,953,723         4,111,473
Over five years through ten years                          --                 --                --                --
                                                   ----------      -------------       -----------       -----------
                                                    2,845,950          2,837,535         4,253,723         4,411,224
Mortgage-backed securities                         34,902,854         34,696,105        57,351,452        56,808,091
                                                  -----------      -------------       -----------       -----------
                                                  $37,748,804      $  37,533,640       $61,605,175       $61,219,315
                                                  ===========      =============       ===========       ===========
</TABLE>



     There were no sales of  investment  securities  available  for sale  during
2003, 2002, or 2001.  Asset-backed  securities are comprised of  mortgage-backed
securities  as well as mortgage  derivative  securities  such as  collateralized
mortgage obligations and real estate mortgage investment conduits.  The Bank had
no holdings of private issuers in excess of 10% of capital at December 31, 2003.

                                       17
<PAGE>
3. LOANS RECEIVABLE

     Loans receivable at December 31, 2003 and 2002 consist of the following:
<TABLE>
<CAPTION>
                                                     2003                        2002
                                                     ----                        ----
<S>                                                  <C>                         <C>
Commercial real estate                           $ 93,824,812                 $ 74,291,593
Residential first mortgages                        42,971,076                   48,975,989
Residential construction                           19,598,992                   14,578,702
Second mortgage loans                              19,561,771                   19,007,265
Commercial lines of credit                         30,435,729                   29,947,327
Consumer loans                                      4,096,926                    4,623,447
Commercial equipment                               10,473,403                    9,006,639
                                                 ------------                 ------------
                                                  220,962,709                  200,430,961
                                                 ------------                 ------------
Less:
   Deferred loan fees, net                            649,756                      667,605
   Allowance for loan losses                        2,572,799                    2,314,074
                                                 ------------                 ------------
                                                    3,222,556                    2,981,679
                                                 ------------                 ------------
                                                 $217,740,153                 $197,449,282
                                                 ============                 ============
</TABLE>

     The  following  table sets forth the  activity  in the  allowance  for loan
losses:
<TABLE>
<CAPTION>

                                                                       2003             2002             2001
                                                                       ----             ----             ----
<S>                                                                     <C>            <C>              <C>
Balance January 1,                                                  $ 2,314,074      $2,281,581       $1,929,531

Add:
   Provision charged to operations                                      316,963         160,000          360,000
   Recoveries                                                             2,446           2,795           31,417
Less:
   Charge-offs                                                           60,684         130,302           39,367
                                                                    -----------       ---------       ----------
Balance, December 31                                                $ 2,572,799       2,314,074       $2,281,581
                                                                    ===========       =========       ==========
</TABLE>

     No loans included within the scope of SFAS No. 114 were identified as being
impaired at December 31, 2003 or 2002 and for the years then ended.

                                       18
<PAGE>

     Loans on which the  recognition  of interest has been  discontinued,  which
were not included  within the scope of SFAS No. 114,  amounted to  approximately
$380,000,  $597,000,  and  $207,000  at  December  31,  2003,  2002,  and  2001,
respectively.  If interest  income had been  recognized on  nonaccrual  loans at
their stated rates during 2003, 2002, and 2001,  interest income would have been
increased by approximately $11,626, $33,320, and $10,480 respectively. Income in
the amount of  $29,066  was  recognized  on these  loans in 2003.  No income was
recognized for these loans in 2002 and 2001, respectively.

     Included in loans receivable at December 31, 2003 and 2002, is $593,452 and
$1,022,846 due from officers and directors of the Bank.  These loans are made in
the ordinary course of business at  substantially  the same terms and conditions
as those prevailing at the time for comparable  transactions  with outsiders and
are not  considered  to  involve  more than the normal  risk of  collectibility.
Activity in loans  outstanding  to  officers  and  directors  is  summarized  as
follows:


                                                   2003               2002
                                                   ----               ----
Balance, beginning of year                      $1,022,846          $1,223,840
New loans made during year                         528,106              60,001
Repayments made during year                       (931,108)           (260,995)
Reductions due to change in directors              (26,392)                 --
                                                 ---------           ---------
Balance, end of year                            $  593,452          $1,022,846
                                                ==========          ==========



                                       19
<PAGE>

4. LOAN SERVICING

     Loans  serviced  for others and not  reflected  in the  balance  sheets are
$54,660,488  and  $73,205,838  at  December  31,  2003 and  2002,  respectively.
Servicing loans for others generally  consists of collecting  mortgage payments,
maintaining  escrow accounts,  disbursing  payments to investors and foreclosure
processing.  Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees. The following  table presents the activity of the mortgage
servicing rights ("MSR").
<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                                 ------------------------------------------------
                                                                     2003              2002              2001
                                                                     ----              ----              ----
<S>                                                                  <C>                                  <C>
Balance at beginning of the year                                 $ 780,408        $    525,075     $     486,956
Additions                                                          284,327             303,333           182,119
Amortization                                                      (177,795)            (48,000)         (144,000)
Application of valuation allowance to permanentlty impaired
 MSR's                                                            (210,000)                 --                --
                                                                 ---------        ------------     -------------
                                                                   676,940        $    780,408     $     525,075
                                                                 =========        ============     =============
Valuation allowance for impairment
Balance at beginning of the year                                 $      --                  --                --
Additions                                                          210,000                  --                --
Application of valuation allowance to
permanentlty impaired MSR's                                       (210,000)                 --                --
                                                                 ---------        ------------     -------------
                                                                 $       -                  --                --
                                                                 =========        ============     =============
</TABLE>


5. FORECLOSED ASSETS

     Foreclosed assets are presented net of an allowance for losses. An analysis
of the allowance for losses on foreclosed assets is as follows:
<TABLE>
<CAPTION>
                                                                            Years ended December 31,
                                                              ------------------------------------------------------
                                                                        2003                 2002         2001
                                                                        ----                 ----         ----
<S>                                                                     <C>                  <C>           <C>
Balance at beginning of year                                          $ 972,899            $       -     $   -
Provision for losses                                                          -              972,899         -
Charge-offs                                                                   -                    -         -
Recoveries                                                                    -                    -         -
                                                                     ----------           ----------     -----
Balance at end of year                                                $ 972,899            $ 972,899     $   -
                                                                     ==========           ==========     =====
</TABLE>

                                       20
<PAGE>
Expenses applicable to foreclosed assets include the following:
<TABLE>
<CAPTION>

                                                                            Years ended December 31,
                                                              ----------------------------------------------
                                                                    2003              2002         2001
                                                                    ----              ----         ----
<S>                                                                  <C>          <C>                <C>
Net gain on sale of foreclosed real estate                     $            --     $  (64,755)     $    --
Provision for losses                                                        --        972,889           --
Operating expenses                                                      10,153         12,176        6,253
                                                               ---------------     ----------      -------
                                                               $        10,153      $ 920,310      $ 6,253
                                                               ===============     ==========      =======
</TABLE>

6. PREMISES AND EQUIPMENT

     A summary of premises  and  equipment  at December  31, 2003 and 2002 is as
follows:
                                                    2003                 2002
                                                    ----                 ----

Land                                          $    1,368,077        $  1,399,311
Building and improvements                          4,619,671           4,322,963
Furniture and equipment                            2,574,424           2,367,380
Automobiles                                          124,388             111,881
                                             ----------------    ---------------
Total cost                                         8,686,560           8,201,535
Less accumulated depreciation                      3,106,371           2,465,141
                                             ----------------     --------------
Premises and equipment, net                   $    5,580,189        $  5,736,394
                                             ===============      ==============

     Certain bank  facilities are leased under various  operating  leases.  Rent
expense  was  $197,157,   $211,200,   and  $242,387  in  2003,  2002  and  2001,
respectively.  Future minimum rental commitments under noncancellable  operating
leases are as follows:

     2004                                               $  181,362
     2005                                                  180,912
     2005                                                  180,462
     2006                                                  179,562
     2007                                                  113,112
     Thereafter                                            192,000
                                                        ----------
     Total                                              $1,027,410
                                                        ==========

                                       21

<PAGE>
7.    DEPOSITS

     Deposits at December 31 consist of:

                                             2003                2002
                                             ----                ----
Noninterest-bearing demand              $ 29,270,007          $ 33,045,310
Interest-bearing:
   Demand                                 29,674,110            22,440,453
   Money market deposits                  44,473,200            39,781,718
   Savings                                34,670,884            30,675,167
   Certificates of deposit                89,466,367            77,082,464
                                         -----------           -----------
Total interest-bearing                   198,284,561           169,979,801
                                        ------------           -----------

Total deposits                         $ 227,554,568         $ 203,025,112
                                      ==============         =============

     The aggregate  amount of time deposits in denominations of $100,000 or more
at December 31, 2003 and 2002 were $26,869,000 and $18,790,000, respectively.

At December 31, 2003, the scheduled maturities of time deposits are as follows
(in 000's):

          2004               $57,597
          2005                14,386
          2006                 4,153
          2007                 8,293
          2008                 5,039
                           ---------
                             $89,466


                                       22
<PAGE>
8. SHORT TERM BORROWINGS AND LONG-TERM DEBT

     The Bank's  long-term  debt consists of advances from the Federal Home Loan
Bank of Atlanta. The Bank classifies debt based upon original maturity, and does
not  reclassify  debt to short term status during its life.  These include fixed
rate, adjustable rate, and convertible  advances.  Rates and maturities on these
advances are as follows:
<TABLE>
<CAPTION>

                                                Fixed      Adjustable      Fixed Rate
                                                 Rate         Rate        Convertible
                                                -----      -----------    -----------
<S>                                             <C>             <C>               <C>
                   2003
Highest rate                                     5.43%          1.96%           6.25%
Lowest rate                                      1.00%          1.96%           3.27%
Weighted average rate                            3.94%          1.96%           5.15%
Matures through                                   2022           2005            2011

                   2002
Highest rate                                     5.43%          2.49%           6.25%
Lowest rate                                      1.00%          2.49%           4.62%
Weighted average rate                            4.69%          2.49%           5.42%
Matures through                                   2022           2005            2011
</TABLE>

     The Bank's  fixed rate debt  generally  consists of advances  with  monthly
interest  payments and principal  due at maturity.  The Bank's  adjustable  rate
long-term debt adjusts quarterly based upon a margin over the three month London
Interbank Offered Rate ("LIBOR"). The margin is set at 80 basis points. The debt
has a minimum  interest of .80% and a maximum  rate of 5.30%.  The Bank's  fixed
rate,  convertible,  long-term debt is callable by the issuer,  after an initial
period ranging from six months to five years.  These advances become callable on
dates  ranging  from 2004 to 2005.  Depending on the  specific  instrument,  the
instrument is callable  either  continuously  after the initial period  (Bermuda
option)  or  only  at  the  date  ending  the  initial  period  (European).  The
contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>

                                                    December 31,
                                                        2003                                           2002
                     ---------------------------------------------------------------------------- ------------
                           Fixed           Adjustable        Fixed Rate
                            Rate              Rate           Convertible            Total              Total
                           -----           ----------        -----------            -----              -----
<S>                         <C>               <C>               <C>                   <C>               <C>
Due in 2004          $    88,000       $       --         $         --         $     88,000      $    88,000
Due in 2005               74,000        5,000,000           10,000,000           15,074,000       15,074,000
Due in 2006           12,000,000               --                   --           12,000,000        7,000,000
Due in 2007            5,000,000               --                   --            5,000,000               --
Due in 2008                   --               --                   --                   --               --
Thereafter               889,176               --           30,000,000           30,889,176       25,920,000
                     -----------       ----------         ------------         ------------      -----------
                     $18,051,176       $5,000,000         $ 40,000,000         $ 63,051,176      $48,082,000
                     ===========       ==========         ============         ============      ===========
</TABLE>

                                       23

<PAGE>

     From time to time, the Bank also has daily advances outstanding,  which are
classified as short-term debt. These advances are repayable at the Bank's option
at any time and reprice daily.  These  advances  totaled  $31,000,000  and $0 at
December  31,  2003 and 2002,  respectively.  The rate on the short term debt at
December 31, 2003 was 1.15%.

     Under the terms of an Agreement  for Advances and Security  Agreement  with
Blanket  Floating  Lien  (the  "Agreement"),   the  Company  maintains  eligible
collateral consisting of 1 - 4 unit residential first mortgage loans, discounted
at 75% of the unpaid principal  balance,  equal to 100% at December 31, 2003, of
its total  outstanding  long and short  term  Federal  Home Loan Bank  advances.
During 2002 and 2003,  the Bank entered into  addendums  to the  Agreement  that
expanded the types of eligible collateral under the Agreement to include certain
commercial  real estate and second  mortgage  loans.  These loans are subject to
eligibility  rules,  and  collateral  values are discounted at 50% of the unpaid
loan principal  balance.  In addition,  only 50% of total collateral for Federal
Home Loan Bank advances may consist of commercial real estate loans. In addition
the Bank has  pledged  its  Federal  Home  Loan  Bank  stock of  $4,702,600  and
securities with a carrying value of $68,500,000 as additional collateral for its
advances. Based upon our understanding of current borrowing rules at the Federal
Home Loan Bank of Atlanta, the Bank is limited to total advances of up to 35% of
assets or $123  million.  The Bank had  sufficient  collateral  to  borrow  this
amount.

     Other short-term debt consists of notes payable to the U.S. Treasury, which
are Federal treasury tax and loan deposits  accepted by the Bank and remitted on
demand to the  Federal  Reserve  Bank.  At  December  31,  2003 and  2002,  such
borrowings were $191,285 and $752,298,  respectively.  The Bank pays interest on
these  balances at a slight  discount to the federal  funds rate.  The notes are
secured  by  investment  securities  with an  amortized  cost  of  approximately
$5,948,600 and $786,700 at December 31, 2003 and 2002, respectively.

9. INCOME TAXES

     Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
                                                       2003                   2002                    2001
                                                       ----                   ----                    ----
<S>                                                     <C>                   <C>                      <C>
Current
   Federal                                      $     961,686       $       1,312,000       $      1,409,350
   State                                               92,965                 154,000                114,000
                                               --------------       -----------------       ----------------
                                                    1,054,651               1,466,000              1,523,350
                                               --------------       -----------------       ----------------
Deferred
   Federal                                            (19,561)               (327,000)              (168,000)
   State                                               (2,658)                (72,000)               (37,000)
                                               --------------       -----------------       ----------------
                                                      (22,219)               (399,000)              (205,000)
                                               --------------       -----------------       ----------------
Total Income Tax Expense                        $   1,032,432       $       1,067,000       $      1,318,350
                                               ==============       =================       ================

</TABLE>


                                       24


<PAGE>

     Total income tax expense differed from the amounts computed by applying the
federal  income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
                                                         2003                               2002                         2001
                                                         ----                               ----                         ----
                                                                                                    Percent                  Percent
                                                               Percent of                           of Pre                    of Pre
                                                                Pre Tax                              Tax                       Tax
                                                Amount           Income            Amount           Income        Amount      Income
                                                ------           ------            ------           ------        ------      ------
<S>                                             <C>                <C>             <C>                <C>          <C>          <C>
Expected income tax expense at
  federal tax rate                               $  1,182,632        34.0%         $  1,031,839       34.0%       $1,293,321   34.0%

State taxes net of federal benefit                     59,603         1.7%               61,666        2.0%           77,000    2.0%

Nondeductible expenses                                 14,130         0.4%               20,908        0.7%            5,233    0.1%

Nontaxable income                                   (213,613)        -6.1%             (109,198)      -3.6%          (34,716)  -0.9%

Other                                                (10,320)        -0.3%               61,785        2.0%          (22,488)  -0.6%
                                                 -----------         ----         -------------        ----       ----------   -----
                                                 $ 1,032,432         29.7%        $   1,067,000        35.2%      $1,318,350   34.7%
                                                 ===========         ====         =============        =====      ==========   =====
</TABLE>

     The net deferred tax assets in the accompanying  balance sheets include the
following components:
<TABLE>
<CAPTION>
                                                                           2003            2002
                                                                           ----            ----
<S>                                                                     <C>               <C>
Deferred tax assets:
   Deferred fees                                                    $      9,612     $    22,147
   Allowance for loan losses                                             960,130         795,953
   Deferred compensation                                                 152,838         118,709
   Valuation allowance on foreclosed real estate                         375,730         375,730
   Unrealized loss on investment
     securities available for sale                                         1,612              --
                                                                    ------------     -----------
                                                                       1,499,922       1,312,539
                                                                    ------------     -----------

Deferred tax liabilities:
   FHLB stock dividends                                                  152,896         152,896
   Depreciation                                                          261,057          97,505
   Unrealized gain on investment
     securities available for sale                                            --         267,144
                                                                    ------------    ------------
                                                                         413,953         517,545
                                                                    ------------    ------------

                                                                    $  1,085,969    $    794,994
                                                                    ============    ============
</TABLE>

            Retained earnings at December 31, 2003, includes approximately $1.2
million of bad debt deductions allowed for federal income tax purposes (the
"base year tax reserve") for which no deferred

                                       25
<PAGE>

income tax has been  recognized.  If, in the  future,  this  portion of retained
earnings is used for any purpose other than to absorb bad debt losses,  it would
create  income for tax  purposes  only and income  taxes would be imposed at the
then prevailing  rates. The unrecorded  income tax liability on the above amount
was approximately $753,479 at December 31, 2003.

     Prior to January  1, 1996,  the Bank  computed  its tax bad debt  deduction
based upon the  percentage  of taxable  income method as defined by the Internal
Revenue Code. The bad debt deduction  allowable  under this method equaled 8% of
taxable  income  determined  without  regard to the bad debt  deduction and with
certain  adjustments.  The tax bad  debt  deduction  differed  from the bad debt
expense used for financial accounting purposes.

     In August 1996, the Small Business Job Protection Act (the "Act")  repealed
the percentage of taxable  income method of accounting  for bad debts  effective
for years beginning after December 31, 1995. The Act required the Bank to change
its method of computing  reserves for bad debts to the experience  method.  This
method is  available  to banks with assets less than $500 million and allows the
Bank to maintain a tax reserve for bad debts and to take bad debt deductions for
reasonable additions to the reserve. As a result of this change, the Bank has to
recapture  into  income a portion of its  existing  tax bad debt  reserve.  This
recapture occurs ratably over a six-taxable year period, beginning with the 1998
tax year. For financial  reporting  purposes,  this recapture does not result in
additional tax expense as the Bank adequately  provided  deferred taxes in prior
years. Furthermore,  this change does not require the Bank to recapture its base
year tax reserve.

10. COMMITMENTS AND CONTINGENCIES

     The Bank is party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These financial  instruments are commitments to extend credit. These instruments
may, but do not necessarily, involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial  instrument is represented by the  contractual  amount of those
instruments.  The Bank uses the same credit policies in making commitments as it
does for on-balance-sheet loans receivable.

     As of December 31, 2003 and 2002, in addition to the undisbursed portion of
loans receivable of approximately $8,907,000 and $6,031,000,  respectively,  the
Bank had outstanding loan commitments  approximating  $2,871,000 and $1,927,000,
respectively.

     Standby letters of credit written are conditional commitments issued by the
Bank  to  guarantee  the  performance  of a  customer  to a third  party.  These
guarantees are issued primarily to support construction borrowing  arrangements.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.  The Bank holds cash or
a secured interest in real estate as collateral to support those commitments for
which  collateral is deemed  necessary.  Standby  letters of credit  outstanding
amounted  to  $9,538,000   and   $5,698,000  at  December  31,  2003  and  2002,
respectively.  In  addition  to  the  commitments  noted  above,  customers  had
approximately  $28,600,000  and  $10,100,000  available under lines of credit at
December 31, 2003 and 2002, respectively.

                                       26
<PAGE>
11. STOCK OPTION AND INCENTIVE PLAN

     The Company  has a stock  option and  incentive  plan to attract and retain
personnel  and  provide  incentive  to  employees  to promote the success of the
business. In addition, the Company has a stock option plan for its directors. At
December 31, 2003, 36,666 shares of stock have been authorized and are available
for grants of options under the plans. The exercise price for options granted is
set at the discretion of the Board of Directors, but is not less than the market
value of the shares as of the date of grant.  An  option's  maximum  term is ten
years and the options generally vest immediately upon issuance.

The following tables summarize activity in the plan:

<TABLE>
<CAPTION>
                                               2003                        2002                       2001
                                      -----------------------     -----------------------     ----------------------
                                                  Weighted                    Weighted                   Weighted
                                                  Average                      Average                    Average
                                                   Exercise                   Exercise                   Exercise
                                        Shares      Price          Shares       Price          Shares      Price
                                      ----------- -----------     ---------- ------------     --------- ------------
<S>                                       <C>         <C>            <C>           <C>           <C>           <C>
Outstanding at beginning of year         97,601       $21.46         99,679        $18.99        91,036       $16.89
Granted                                  16,815        41.46         12,595         31.67        20,448        26.57
Exercised                               (11,620)       17.23        (14,078)        12.92        (7,105)       10.28
Forfeitures                                  --           --           (595)        26.26        (4,700)       24.41
                                        -------       ------        -------        ------       -------       ------
Outstanding at end of year              102,796       $25.21         97,601        $21.46        99,679       $18.99
                                        =======       ======        =======        ======       =======       ======
</TABLE>



Options outstanding are all currently exercisable and are summarized as follows:

                                        Weighted
                                        Average        Weighted
              Number                   Remaining       Average
            Outstanding               Contractual      Exercise
         December 31, 2003                Life          Price
         -----------------            -----------      ----------
             25,167                     2 years          $10.28
             19,246                     5 years           24.23
              7,624                     6 years           26.60
             14,732                     7 years           26.65
             14,250                     8 years           26.70
              7,976                     9 years           39.00
             13,801                    10 years           42.00
             ------                                       -----
            102,796                                      $25.21
            =======                                      ======



12. EMPLOYEE BENEFIT PLANS

            The Bank has an Employee Stock Ownership Plan (ESOP) which covers
substantially all of the

                                       27
<PAGE>

Bank's  employees.  The ESOP acquires  stock of the Bank's  parent  corporation,
Tri-County  Financial  Corporation.   The  Company  accounts  for  its  ESOP  in
accordance  with AICPA  Statement of Position  93-6.  Accordingly,  unencumbered
shares held by the ESOP are treated as  outstanding  in  computing  earnings per
share. Shares issued to the ESOP but pledged as collateral for loans obtained to
provide funds to acquire the shares are not treated as  outstanding in computing
earnings  per share.  Dividends  on ESOP shares are  recorded as a reduction  of
retained earnings. The ESOP may acquire in the open market up to 195,700 shares.
At December 31, 2003, the Plan owns 55,929 shares.

     The  Company  also has a 401(k)  plan.  The Bank  matches a portion  of the
employee  contributions.  This  ratio is  determined  annually  by the  Board of
Directors.  During 2001 and 2002 one-half of an employee's first 6% deferral was
matched.  In 2003,  the  Company  matched  one-half of the  employee's  first 8%
deferral.  All employees who have completed one year of service and have reached
the age of 21 are covered under this defined  contribution  plan.  Contributions
are determined at the  discretion of management and the Board of Directors.  For
the years ended December 31, 2003,  2002, and 2001, the Company charged $81,000,
$108,000, and $93,000, against earnings to fund the Plans.

     In  addition,  the Bank has a  separate  nonqualified  retirement  plan for
non-employee directors. Directors are eligible for a maximum benefit of $3,500 a
year for ten years following  retirement from the Board of Community Bank of Tri
County.  The maximum  benefit is earned at 15 years of service as a non-employee
director.  Full vesting  occurs after 2 years of service.  Expense  recorded for
this plan was $24,000,  $11,000,  and $7,000 for the years  ending  December 31,
2003, 2002, and 2001 respectively.

13. REGULATORY MATTERS

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the table  below) of  tangible  and core  capital  (as  defined  in the
regulations)  to total adjusted assets (as defined),  and of risk-based  capital
(as defined) to risk-weighted assets (as defined).  Management  believes,  as of
December  31,  2003,  that the Company  and the Bank meet all  capital  adequacy
requirements to which they are subject.

     As of December  31,  2003,  the most recent  notification  from the Federal
Reserve categorized the Bank as well-capitalized  under the regulatory framework
for prompt corrective  action. To be categorized as  well-capitalized,  the Bank
must maintain minimum total risk-based,  Tier 1 risk-based,  and Tier 1 leverage
ratios as set forth in the table.  There are no  conditions or events since that
notification  that management  believes have changed the Company's or the Bank's
category.

                                       28
<PAGE>

     The Company's and the Bank's actual capital amounts and ratios for 2003 and
2002 are presented in the tables below:
<TABLE>
<CAPTION>

                                                                                      To be considered well
                                                                                        capitalized under
                                                               Required for capital          prompt
                                                Actual           adequacy purposes      corrective action
                                                ------           -----------------      -----------------
<S>                                             <C>                    <C>                     <C>
At December 31, 2003
  Total capital (to risk weighted
   assets)
    The Company                          30,488     12.20%   $  19,992      8.00%
    The Bank                             29,193     11.73%   $  19,912      8.00%   $ 24,890      10.00%

  Tier 1capital (to risk weighted
   assets)
    The Company                          27,915     11.17%       9,996      4.00%
    The Bank                             26,630     10.70%       9,956      4.00%   $ 14,934       6.00%

  Tier 1capital (to average assets)
    The Company                          27,915      8.04%      13,881      4.00%
    The Bank                             26,630      7.70%      13,841      4.00%   $ 17,302       5.00%

At December 31, 2002
  Total capital (to risk weighted
   assets)
    The Company                          28,769     13.77%      16,715      8.00%
    The Bank                             26,966     12.96%      16,647      8.00%   $ 20,809      10.00%

  Tier 1 capital (to risk weighted
   assets)
    The Company                          26,379     12.63%       8,357      4.00%
    The Bank                             24,576     11.81%       5,324      4.00%   $ 12,485       6.00%

  Tier 1capital (to average assets)
    The Company                          26,379      9.53%      11,069      4.00%
    The Bank                             24,576      8.96%      10,966      4.00%   $ 13,708       5.00%
</TABLE>

14. EARNINGS PER SHARE

            The calculations of basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>

                                                                2003                 2002                2001
                                                           ----------------    -----------------    ----------------
<S>                                                             <C>                  <C>                     <C>
Basic earnings per share
  Net income                                                   $ 2,445,898          $ 1,967,821         $ 2,485,535
  Average common shares outstanding                                754,044              761,417             766,927
  Net income per common share - basic                            $    3.24            $    2.58           $    3.24

Diluted earnings per share
  Net income                                                   $ 2,445,898          $ 1,967,821         $ 2,485,535
  Average common shares outstanding                                754,044              761,417             766,927
  Stock option adjustment                                           41,977               42,705              31,860
  Average common shares outstanding - diluted                      796,021              804,122             798,787
  Net income per common share - diluted                          $    3.07            $    2.45           $    3.11

</TABLE>

No antidilutive options were outstanding at December 31, 2003 or 2001. At
December 31,2002, 4,962

                                       29
<PAGE>

antidilutive options were excluded from the calculation.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value amounts have been  determined by the Company using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment  is  necessarily  required  to  interpret  market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not  necessarily  indicative  of the amounts the Company  could realize in a
current  market  exchange.  The  use  of  different  market  assumptions  and/or
estimation  methodologies may have a material effect on the estimated fair value
amounts.  Therefore,  any  aggregate  unrealized  gains or losses  should not be
interpreted  as a forecast of future  earnings or cash flows.  Furthermore,  the
fair values disclosed  should not be interpreted as the aggregate  current value
of the Company.

<TABLE>
<CAPTION>
                                                           December 31, 2003                December 31, 2002
                                                           -----------------                -----------------
                                                                       Estimated                       Estimated
                                                       Carrying           Fair          Carrying          Fair
                                                        Amount           Value           Amount          Value
                                                       --------        ---------        --------       ---------
<S>                                                     <C>                <C>             <C>            <C>
Assets:
  Cash and cash equivalents                            $ 2,319,300      $  2,319,300    $ 9,993,426     $ 9,933,426
  Interest bearing deposits with banks                   8,912,332         8,912,332     15,179,851      15,179,851
  Federal funds sold                                       938,166           938,166        363,506        363,506
  Investment securities and stock in FHLB
    and FRB                                            104,672,099       104,281,498     47,404,670      47,419,179
  Loans receivable, net                                217,740,153       226,213,642    197,449,282     200,839,805
  Loans held for sale                                      474,880           482,003      1,262,667       1,287,920

Liabilities:
  Savings, NOW, and money market accounts              138,088,201       138,088,201    125,942,648     125,942,648
  Time certificates                                     89,466,367        91,095,780     77,082,464      78,811,495
  Long-term debt and other borrowed funds               94,242,461        97,940,064     48,922,298      53,801,600

</TABLE>


     At December 31, 2003 and 2002, the Company had outstanding loan commitments
and standby letters of credit of $12.4 million and $13.1 million,  respectively.
Based on the short-term lives of these instruments, the Company does not believe
that  the fair  value of these  instruments  differs  significantly  from  their
carrying values.

Valuation Methodology
---------------------

     Cash and Cash  Equivalents  - For cash and cash  equivalents,  the carrying
amount is a reasonable estimate of fair value.

     Investment  Securities - Fair values are based on quoted  market  prices or
dealer  quotes.  If a  quoted  market  price  is not  available,  fair  value is
estimated using quoted market prices for similar securities.

     Mortgage-Backed  Securities - Fair values are based on quoted market prices
or dealer  quotes.  If a quoted  market  price is not  available,  fair value is
estimated using quoted market prices for similar securities.

                                       30
<PAGE>

     Loans  Receivable  and  Loans  Held for Sale - For  conforming  residential
first-mortgage  loans,  the market  price for loans  with  similar  coupons  and
maturities  was  used.  For  nonconforming  loans  with  maturities  similar  to
conforming  loans,  the coupon was adjusted for credit risk. Loans which did not
have quoted market prices were priced using the discounted cash flow method. The
discount rate used was the rate  currently  offered on similar  products.  Loans
priced using the discounted cash flow method included  residential  construction
loans,  commercial  real estate loans,  and consumer  loans.  The estimated fair
value  of  loans  held for  sale is  based  on the  terms  of the  related  sale
commitments.

     Deposits - The fair value of checking accounts,  saving accounts, and money
market accounts was the amount payable on demand at the reporting date.

     Time Certificates - The fair value was determined using the discounted cash
flow  method.  The  discount  rate was equal to the rate  currently  offered  on
similar products.

     Long-Term  Debt and Other  Borrowed  Funds - These  were  valued  using the
discounted  cash flow method.  The discount rate was equal to the rate currently
offered on similar borrowings.

     Off-Balance sheet instruments - The Company charges fees for commitments to
extend credit.  Interest rates on loans for which these commitments are extended
are  normally  committed  for  periods of less than one month.  Fees  charged on
standby  letters  of credit  and other  financial  guarantees  are  deemed to be
immaterial  and these  guarantees  are  expected to be settled at face amount or
expire unused. It is impractical to assign any fair value to these commitments.

     The  fair  value  estimates   presented   herein  are  based  on  pertinent
information  available to management as of December 31, 2003 and 2002.  Although
management  is not aware of any  factors  that  would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  for  purposes  of these  financial  statements  since  that  date and,
therefore,  current  estimates of fair value may differ  significantly  from the
amount presented herein.

                                       31
<PAGE>

16. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY

Financial information pertaining only to Tri-County Financial Corporation is as
follows:
<TABLE>
<CAPTION>

Balance Sheets
                                 ASSETS
                                                                                 2003                  2002
                                                                                 ----                  ----
<S>                                                                              <C>                   <C>
Cash-noninterest bearing                                                    $   298,364           $   301,927
Cash-interest bearing                                                           255,108               838,142
Investment securities available for sale                                         33,152                32,436
Investment in wholly owned subsidiary                                        26,627,098            25,069,624
Other assets                                                                    957,544               884,984
                                                                            -----------           -----------

                              TOTAL ASSETS                                  $28,171,266           $27,127,113
                                                                            ===========           ===========
Other liabilities                                                           $   259,356           $   254,348

Stockholders' equity
  Common stock                                                                    7,533                 7,598
  Surplus                                                                     7,975,036             7,716,906
  Retained earnings                                                          20,071,630            18,817,615
  Total accumulated other comprehensive income (loss)                            (3,130)              493,691
  Unearned ESOP shares                                                         (139,159)             (163,045)
                                                                          -------------          ------------
Total stockholders' equity                                                   27,911,910            26,872,765

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                $  28,171,266          $ 27,127,113
                                                                          =============          ============
</TABLE>

   CONDENSED STATEMENTS OF INCOME:
<TABLE>
<CAPTION>

                                                       -------------------------------------------------------------
                                                                         Year Ended December 31,
                                                       -------------------------------------------------------------
                                                              2003                  2002                2001
                                                              ----                  ----                ----
<S>                                                             <C>                  <C>                  <C>
Dividends from subsidiary                                     $    500,000         $   1,000,000       $  2,250,000
Interest income                                                     10,356                18,644             26,929
Miscellaneous expenses                                            (174,595)             (154,995)          (167,787)
                                                              ------------         -------------       ------------
Income before income taxes and equity in                           335,761               863,649          2,109,142
  undistributed net income of subsidiary
Federal and state income tax benefit                                55,841                46,000             40,650
Equity in undistributed net income of subsidiary                 2,054,296             1,058,172            335,743
                                                              ------------         -------------       ------------
NET INCOME                                                   $   2,445,898         $   1,967,821       $  2,485,535
                                                             =============         =============       ============

</TABLE>


                                       32
<PAGE>

Condensed Statements of Cash Flows:
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  --------------------------------------------------
                                                                        2003              2002            2001
                                                                        ----              ----            ----
<S>                                                                     <C>               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                         $  2,445,898       $ 1,967,821     $2,485,535
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Equity in undistributed earnings of subsidiary                     (2,054,296)       (1,058,172)      (335,743)
    Increase in current assets                                            (72,560)         (147,776)      (611,564)
    Increase in current liabilities                                         5,008            14,222          3,600
                                                                     ------------       -----------     ----------
      Net cash provided by operating activities                           324,050           730,095      1,541,828
                                                                     ------------       -----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Net decrease (increase) in interest-bearing deposits                    583,034            87,379       (645,521)
  Purchase of investment securities available for sale                       (714)               --        (76,903)
  Maturity or redemption of investment securities
    available for sale                                                         --            79,146             --
                                                                     ------------       -----------     ----------
      Net cash provided (used) by investing activities                    582,320           166,525       (722,424)
                                                                     ------------       -----------     ----------

CASH FLOWS FROM FINANCING ACTIVITIES:

  Dividends paid                                                         (422,361)         (385,129)      (309,204)
  Exercise of stock options                                               218,713           161,004         31,817
  Net change in ESOP loan                                                  63,435            48,000       (48,034)
  Redemption of common stock                                             (769,720)         (443,568)      (673,920)
                                                                     ------------       -----------     ----------
      Net cash used in financing activities                              (909,933)         (619,693)      (999,341)
                                                                     ------------       -----------     ----------
(DECREASE) INCREASE  IN CASH                                               (3,563)          276,927       (179,937)
CASH AT BEGINNING OF YEAR                                                 301,927            25,000        204,937
                                                                     ------------       -----------     ----------
CASH AT END OF YEAR                                                  $    298,364       $   301,927     $   25,000
                                                                     ============       ===========     ==========
</TABLE>

                                       33
<PAGE>

17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

     A summary of selected  consolidated  quarterly  financial  data for the two
years ended December 31, 2003 is reported as follows:

<TABLE>
<CAPTION>
                                                                2003
                                      ---------------------------------------------------------
                                         Fourth         Third         Second         First
                                        Quarter        Quarter       Quarter        Quarter
                                        -------        -------       -------        -------
<S>                                       <C>           <C>             <C>             <C>
Interest and dividend income            $4,112,111     $4,210,624    $3,923,796     $3,918,384
Interest expense                         1,524,537      1,431,824     1,378,744      1,361,294
                                        ----------     ----------    ----------     ----------
Net interest income                      2,587,574      2,778,800     2,545,052      2,557,090
Provision for loan loss                    171,623         31,013       108,941          5,386
                                        ----------     ----------    ----------     ----------
Net interest income after provision      2,415,951      2,747,787     2,436,111      2,551,704

Noninterest income                         580,039        332,762       453,793        387,954
Noninterest expense                      2,163,566      2,190,164     2,125,494      1,948,547


Income before income taxes                 832,424        890,385       764,410        991,111
Provision for income taxes                 133,667        293,550       255,215        350,000
Net income                              $  698,757      $ 596,835     $ 509,195      $ 641,111
                                        ==========      =========     =========      =========

Earnings per common share

Basic                                         0.93          0.79           0.68          0.84
                                             =====         =====          =====         =====
Diluted                                       0.87          0.75           0.65          0.80
                                             =====         =====          =====         =====
<CAPTION>

                                                               2002
                                     ---------------------------------------------------------
                                          Fourth         Third         Second         First
                                          Quarter       Quarter        Quarter       Quarter
                                          -------       -------        -------       -------
<S>                                          <C>        <C>             <C>             <C>
Interest and dividend income             $4,057,309    $4,281,934     $4,207,146    $4,167,599
Interest expense                          1,438,465     1,484,376      1,495,799     1,549,988
                                         ----------    ----------     ----------    ----------
Net interest income                       2,618,844     2,797,558      2,711,347     2,617,611
Provision for loan loss                      30,000        30,000         30,000        70,000
                                         ----------    ----------     ----------    ----------
Net interest income after provision       2,588,844     2,767,558      2,681,347     2,547,611

Noninterest income                          713,006       386,913        349,793       397,349
Noninterest expense                       2,025,764     2,033,746      3,408,796     1,929,294


Income before income taxes                1,276,086     1,120,725      (377,656)     1,015,666
Provision for income taxes                  446,000       391,000      (134,600)       364,600
                                         ----------    ----------    ----------     ----------
Net income                                $ 830,086     $ 729,725     $(243,056)     $ 651,066
                                         ==========    ==========    ===========    ==========
Earnings per common share

Basic                                          1.09          0.96          (0.32)         0.86
                                              =====         =====         ======         =====

Diluted                                        1.03          0.91          (0.32)         0.82
                                              =====         =====         ======         =====

</TABLE>



                                       34
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

CORPORATE INFORMATION:     Tri-County Financial Corporation
                           Community Bank of Tri-County
--------------------------------------------------------------------------------
DIRECTORS OF BOTH
                              Michael L. Middleton
                              Chairman of the Board

   C. Marie Brown             James R. Shepherd           Louis P. Jenkins, Jr.
Herbert N. Redmond, Jr.     A. Joseph Slater, Jr.         H. Beaman Smith

--------------------------------------------------------------------------------
                    OFFICERS OF COMMUNITY BANK OF TRI-COUNTY

                              Michael L. Middleton
                      President and Chief Executive Officer

      C. Marie Brown           Gregory C. Cockerham      William J. Pasenelli
Executive Vice President      Executive Vice President     Executive Vice
Chief Operating Officer        Chief Lending Officer      President Chief
                                                        Chief Financial Officer
<TABLE>
<CAPTION>
<S>                                     <C>                      <C>                     <C>
         David D. Vaira           John H. Buckmaster          Paige Watkins            H. Beaman Smith
     Senior Vice President          Vice President            Vice President         Secretary/Treasurer
</TABLE>

--------------------------------------------------------------------------------
COUNSEL
<TABLE>
<CAPTION>
           <S>                                                  <C>
         Corporate:                                           Local Counsel:
         Semmes, Bowen & Semmes                               Louis P. Jenkins, Esq.
         250 West Pratt Street                                P.O. Box 280
         Baltimore, Maryland  21201                           La Plata, Maryland  20646
         (410) 539-5040                                       (301) 934-9571

         Special Counsel:                                     Auditors:
         Gary R. Bronstein, Esq.                              Stegman & Company
         Muldoon Murphy Faucette & Aguggia LLP                405 East Joppa Road, Suite 200
         5101 Wisconsin Avenue, NW, Suite 500                 Baltimore, Maryland  21286
         Washington, DC 20016                                 (410) 823-8000
         (202) 362-0840
</TABLE>

FORM 10-K

A copy of Form 10-K, including financial statements as filed with the Securities
and Exchange  Commission will be furnished  without charge to stockholders as of
the record date upon written request to H. Beaman Smith,  Secretary,  Tri-County
Financial Corporation, P.O. Box 38, Waldorf, Maryland 20604.

STOCK TRANSFER AGENT:                       STOCK TRANSACTIONS AND INQUIRIES:
The Bank of New York                        Christy Lombardi
Shareholder Relations Dept.                 Community Bank of Tri-County
P.O. Box 11258                              P.O. Box 38
Church Street Station                       Waldorf, Maryland 20604
New York, New York 10286                    1-888-745-BANK, ext.1037
1-800-524-4458                              Fax (301) 885-1437
http://www.stockbny.com                     clombardi@cbtc.com

ANNUAL MEETING:
                             May 5, 2004, 10:00 a.m.
                          Community Bank of Tri-County
                              2nd Floor Board Room
                              3035 Leonardtown Road
                                Waldorf, Maryland



<PAGE>
Main Office                                 St. Patrick's Drive Branch
-----------                                 --------------------------
3035 Leonardtown Road                       20 St. Patrick's Drive
P.O. Box 38                                 Waldorf, MD  20603
Waldorf, MD  20604                          301.932.4424
301.645.5601

Bryans Road Branch                          Charlotte Hall Branch
------------------                          ---------------------
8010 Matthews Road                          30165 Three Notch Road
P.O. Box 522                                P.O. Box 472
Bryans Road, MD  20616                      Charlotte Hall, MD 20622
301.375.6118                                301.884.5724

Dunkirk Branch                              La Plata Branch
--------------                              ---------------
10321 Southern Maryland Boulevard           101 Drury Drive
P. O. Box 373                               P.O. Box 1810
Dunkirk, MD  20754                          La Plata, MD  20646
301.855.6363                                301.932.1653

Leonardtown Branch                          Lexington Park Branch
------------------                          ---------------------
25395 Point Lookout Road                    22730 Three Notch Road
P.O. Box 241                                P.O. Box 561
Leonardtown, MD  20650                      California, MD  20619
301.475.5046                                301.862.1900