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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
(Mark One)

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

For the fiscal year ended December 31, 2003

                                       OR

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

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

                           Commission File No. 0-18279
                                               -------

                        TRI-COUNTY FINANCIAL CORPORATION
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


            Maryland                                    52-1652138
------------------------------------                   ------------
(State or Other Jurisdiction of                       (I.R.S. Employer
Incorporation or Organization)                       Identification no.)

3035 Leonardtown Road, Waldorf, Maryland                   20601
----------------------------------------                  -------
(Address of Principal Executive Offices)                (Zip Code)

       Registrant's telephone number, including area code: (301) 645-5601
                                                           --------------

        Securities registered pursuant to Section 12(b) of the Act: None
                                                                    ----

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

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing  requirements  for
the past 90 days. Yes  X   No
                      ---     ---

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes     No  X
                                         ---    ---

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant was approximately $23 million based on the closing price at which the
common  stock,  $0.01  par  value,  was  sold on the  last  business  day of the
Company's most recently  completed  second fiscal quarter.  For purposes of this
calculation  only,  the shares held by directors and  executive  officers of the
registrant  and by any  stockholder  beneficially  owning  more  than  5% of the
registrant's   outstanding  common  stock  are  deemed  to  be  shares  held  by
affiliates.

Number of shares of Common Stock outstanding as of March 3, 2004: 756,737

DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the fiscal year ended
     December 31, 2003. (Part II)
2.   Portions of Proxy Statement for 2004 Annual Meeting of Stockholders.  (Part
     III)
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<PAGE>
                                     PART I

Item 1.  Business
-----------------

     Tri-County Financial  Corporation (the "Company") is a bank holding company
organized in 1989 under the laws of the State of Maryland. It presently owns all
the outstanding shares of capital stock of the Community Bank of Tri-County (the
"Bank"), a Maryland-chartered commercial bank. The Bank was originally organized
in 1950 as Tri-County Building and Loan Association of Waldorf, a mutual savings
and loan association,  and in 1986 converted to a federal stock savings bank and
adopted the name Tri-County Federal Savings Bank. In 1997, the Bank converted to
a  Maryland-chartered  commercial bank and adopted its current  corporate title.
The Company  engages in no significant  activity other than holding the stock of
the Bank and operating the business of the Bank.  Accordingly,  the  information
set forth in this  report,  including  financial  statements  and related  data,
relates primarily to the Bank and its subsidiaries.

     The Bank serves the southern Maryland counties of Charles,  Calvert and St.
Mary's,  (the  "Tri-County  area")  through its main  office and seven  branches
located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall,
and Lexington Park, Maryland.  The Bank also expects to open an office in Prince
Frederick,  Maryland in 2004. The Bank also operates  sixteen  Automated  Teller
Machines ("ATMs") including seven stand-alone  locations in the Tri-County area.
The Bank also offers bank by phone and began offering  internet banking in 2003.
The Bank is engaged in the commercial and retail banking  business as authorized
by the  banking  statutes  of the  State  of  Maryland  and  applicable  Federal
regulations,  including the acceptance of deposits, and the origination of loans
to individuals,  associations,  partnerships and  corporations.  The Bank's real
estate financing  consists of residential  first and second mortgage loans, home
equity  lines of  credit  and  commercial  mortgage  loans.  Commercial  lending
consists  of both  secured  and  unsecured  loans.  The Bank is a member  of the
Federal Reserve and Federal Home Loan Bank ("FHLB") Systems and its deposits are
insured up to applicable limits by Savings  Association  Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC").

     The  Company's  executive  offices  are located at 3035  Leonardtown  Road,
Waldorf,  Maryland.  Its  telephone  number  is (301)  645-5601.  The Bank  also
maintains a website at www.cbtc.com.
                       ------------

MARKET AREA

     The Bank considers its principal lending and deposit market area to consist
of the Southern  Maryland  counties of Charles,  Calvert and St.  Mary's.  These
counties have experienced  significant  population growth during the past decade
due to their  proximity to the rapidly  growing  Washington,  D.C. and Baltimore
metropolitan  areas.  Southern  Maryland is  generally  considered  to have more
affordable  housing than many other  Washington and Baltimore  area suburbs.  In
addition,  the area has  experienced  rapid  growth in  businesses  and  federal
facilities  located in the area. Major federal  facilities  include the Patuxent
Naval Air  Station in St.  Mary's  County.  The  Patuxent  Naval Air Station has
undergone  significant  expansion in the last several  years and is projected to
continue to expand for several more years.

     Rapid growth in our market area has been constrained by certain  government
policies, as all three counties have attempted to limit growth in certain areas.
These  policies  have  created  some  uncertainty  about  zoning  and  land  use
regulations.  In some cases,  real estate  development  work has been delayed or
cancelled as a result of these policies.  Recently,  Charles County introduced a
user fee system which would involve upfront payments in real estate development,
but would  remove  subsequent  regulatory  delays.  This  system  has not had an
appreciable  effect on the pace of residential  development.  Future  regulatory
events may adversely affect the Bank's loan growth.

LENDING ACTIVITIES

     GENERAL.  The Bank offers a wide variety of consumer and commercial  loans.
The Bank's lending  activities  include  residential  and commercial real estate
loans,  construction  loans, land acquisition and development  loans,  equipment
financing, and commercial and consumer demand and installment loans. Most of the
Bank's  customers  are  residents  of, or  businesses  located  in the  Southern
Maryland area. The Bank's primary market for commercial  loans consists of small
and medium sized businesses located in Southern Maryland. The Bank believes that
this market is responsive to the Bank's ability to provide  personal service and
flexibility. The Bank attracts customers for its consumer lending products based
upon its ability to offer service, flexibility, and competitive pricing, as well
as  by  leveraging  other  banking  relationships  such  as  soliciting  deposit
customers for loans.

                                       1
<PAGE>

     The Bank's previous savings and loan charter restricted its ability to hold
certain loan types in its portfolio.  As a result,  prior to its conversion to a
state-chartered  commercial  bank,  the  Bank's  loan  portfolio  was  primarily
comprised of residential mortgage loans. Since conversion, the Bank has moved to
diversify  its lending by adding a larger  portion of  commercial  real  estate,
commercial,  and consumer loans to its portfolio.  Management believes that this
diversification of the loan portfolio will increase the Bank's overall long-term
financial  performance.  Management  recognizes  that  these new loan  types may
increase  the Bank's risk of losses due to loan  default,  although  the Bank is
taking measures to monitor and control the increased risk of these loan types.

     RESIDENTIAL  FIRST MORTGAGE LOANS.  Prior to its conversion to a commercial
bank on March 29, 1997,  residential first mortgages made up the majority of the
Bank's loan portfolio.  Since that date,  residential  first mortgage loans have
represented a progressively smaller portion of the Bank's loan portfolio.  Since
December 31, 1997,  residential  first  mortgage  loans have decreased in dollar
amount to $43.0 million from $62.2 million, while falling as a percentage of the
loan portfolio to 19% from 50%.

     Residential  first mortgage loans made by the Bank are generally  long-term
loans, amortized on a monthly basis, with principal and interest due each month.
The initial  contractual  loan payment period for  residential  loans  typically
ranges from 10 to 30 years.  The Bank's  experience  indicates  that real estate
loans  remain   outstanding  for   significantly   shorter  periods  than  their
contractual  terms.  Borrowers  may  refinance or prepay loans at their  option,
without penalty. The Bank originates both fixed and adjustable-rate  residential
first mortgages.

     The Bank offers  fixed rate  residential  first  mortgages  on a variety of
terms  including loan periods from 10 to 30 years,  and biweekly  payment loans.
Total fixed rate loan products in our  residential  first mortgage amount to $30
million as of December 31, 2003.  Fixed-rate loans may also be packaged and sold
in the secondary market, primarily to the Federal Home Loan Mortgage Corporation
("FHLMC"),  private  mortgage  correspondents,  the  Federal  National  Mortgage
Association ("FNMA") and the Mortgage Partnership Finance program of the FHLB of
Atlanta. The Bank may also add these loans to its portfolio. Depending on market
conditions  the Bank may elect to retain the right to service the loans sold for
a payment  based upon a percentage,  (generally  0.25% of the  outstanding  loan
balance). These servicing rights may be sold to other qualified servicers. As of
December 31, 2003, the Bank serviced $54.7 million in residential mortgage loans
for various organizations.

     The Bank also offers  mortgages which are adjustable on a one,  three,  and
five-year  basis  generally  with  limitations  on  upward  adjustments  of  two
percentage  points per year and six percentage points over the life of the loan.
The Bank markets adjustable-rate loans with rate adjustments based upon a United
States Treasury bill index. As of December 31, 2003, the Bank had $13 million in
residential  mortgage loans using a U.S.  Treasury bill index.  The retention of
adjustable-rate  mortgage  loans in the Bank's loan  portfolio  helps reduce the
negative  effects of  increases  in  interest  rates on the Bank's net  interest
income.  Under certain conditions,  however, the annual and lifetime limitations
on interest rate  adjustments may limit the increases in interest rates on these
loans.  There are also  unquantifiable  credit risks  resulting  from  potential
increased  costs to the  borrower as a result of  repricing  of  adjustable-rate
mortgage loans. It is foreseeable  that during periods of rising interest rates,
the risk of default on  adjustable-rate  mortgage  loans may increase due to the
upward  adjustment of interest cost to the borrower.  In addition,  depending on
market  conditions,  the  initial  interest  rate on  adjustable-rate  loans  is
generally  lower than that on a fixed-rate  loan of similar  credit  quality and
size.

     The Bank makes  residential  first mortgage loans of up to 97% of appraised
value  or  sales  price  of  the  property,  whichever  is  less,  to  qualified
owner-occupants upon the security of single-family homes. Non-owner occupied one
to four family loans and loans secured by other than residential real estate are
generally  permitted  to a maximum  80%  loan-to-value  of the  appraised  value
depending  on the  overall  strength  of the  application.  The  Bank  currently
requires  that   substantially   all  residential   first  mortgage  loans  with
loan-to-value  ratios in excess of 80% carry private mortgage insurance to lower
the  Bank's  exposure  to  approximately  80% of the value of the  property.  In
certain  cases,  the  borrower  may  elect to  borrow  amounts  in excess of 80%
loan-to-value  in the  form of a  second  mortgage.  The  second  mortgage  will
generally  have a higher  interest  rate and shorter  repayment  period than the
first mortgage on the same property.

     All  improved  real estate  which serves as security for a loan made by the
Bank must be insured,  in the amount and by such companies as may be approved by
the Bank, against fire,  vandalism,  malicious mischief

                                       2
<PAGE>

and other hazards.  Such insurance must be maintained through the entire term of
the loan and in an amount not less than that amount  necessary to pay the Bank's
indebtedness in full.

     COMMERCIAL  REAL ESTATE AND OTHER  NON-RESIDENTIAL  REAL ESTATE LOANS.  The
Bank  has  increased  its  emphasis  on loans  for the  permanent  financing  of
commercial  and other  improved real estate  projects,  including,  to a limited
extent,  office  buildings,  as well  as  churches  and  other  special  purpose
projects.  As a result,  commercial real estate loans increased to $93.8 million
or 42% of the loan portfolio  during 2003. The primary  security on a commercial
real estate loan is the real  property and the leases which  produce  income for
the real property.  The Bank generally  limits its exposure to a single borrower
to 15% of the Bank's capital and frequently  participates  with other lenders on
larger projects.  Loans secured by commercial real estate are generally  limited
to 80% of appraised  value and have an initial  contractual  loan payment period
ranging  from three to 20 years.  Virtually  all of the Bank's  commercial  real
estate loans, as well as its construction  loans discussed below, are secured by
real estate located in the Bank's primary market area.

     Loans  secured by  commercial  real estate are larger and  involve  greater
risks than one to four family  residential  mortgage loans.  Because payments on
loans secured by such properties are often dependent on the successful operation
or  management  of the  properties,  repayment of such loans may be subject to a
greater  extent to adverse  conditions in the real estate market or the economy.
As a result of the  greater  emphasis  that the Bank places on  commercial  real
estate  loans  under  its  business  plan  as a  commercial  bank,  the  Bank is
increasingly exposed to the risks posed by this type of lending.

     CONSTRUCTION AND LAND DEVELOPMENT LOANS. The Bank offers construction loans
to individuals and building contractors primarily for the construction of one to
four   family   dwellings.   Loans   to   individuals   primarily   consist   of
construction/permanent  loans which have fixed  rates,  payable  monthly for the
construction  period and are  followed  by a 30-year,  fixed or  adjustable-rate
permanent  loan. The  construction/permanent  loans provide for  disbursement of
loan funds based on draw requests  submitted by the builder during  construction
and site  inspections  by  independent  inspectors.  The Bank  will  also make a
construction  loan if the borrower has a  commitment  from another  lender for a
permanent loan at the completion of the construction. These loans typically have
terms of six months.  The application  process includes the same items which are
required for other  mortgage  loans and also  requires the borrower to submit to
the  Bank  accurate  plans,  specifications,  and  costs of the  property  to be
constructed. These items are used as a basis to determine the appraised value of
the subject property.

     The Bank also  provides  construction  and land  development  loans to home
building  and real  estate  development  companies.  Generally,  these loans are
secured by the real estate under  construction  as well as by  guarantees of the
principals involved.  Draws are made upon satisfactory  completion of predefined
stages  of  construction  or  development.  The Bank  will lend up to 80% of the
appraised value.

     The Bank also offers  builders lines of credit,  which are revolving  notes
generally  secured  by real  property.  Outstanding  builders  lines  of  credit
amounted to approximately  $11.2 million at December 31, 2003. The Bank offers a
builder's  master note program in which the builder receives a revolving line of
credit at a market  rate and the Bank  obtains  security  in the form of a first
lien on home sites under construction.

     In  addition,  the Bank  offers  loans for the purpose of  acquisition  and
development of land, as well as loans on  undeveloped,  subdivided lots for home
building by individuals.  Land  acquisition and development  loans,  included in
construction  loans discussed above,  totaled $5.8 million at December 31, 2003.
Bank policy  requires  that zoning and permits  must be in place prior to making
development loans.

     The Bank's ability to originate all types of  construction  and development
loans is heavily  dependent on the continued  demand for  single-family  housing
construction  in the Bank's market areas. In the event the demand for new houses
in the Bank's  market  areas were to decline,  the Bank may be forced to shift a
portion of its lending emphasis. There can be no assurance of the Bank's ability
to continue growth and profitability in its construction  lending  activities in
the event of such a decline.

     Construction  and  land  development  loans  are  inherently  riskier  than
providing  financing on owner-occupied  real estate.  The Bank's risk of loss is
dependent  on the  accuracy of the initial  estimate of the market  value of the
completed project as well as the accuracy of the cost estimates made to complete
the project.  As these


                                       3
<PAGE>
projects may take an extended period of time to complete,  market, economic, and
regulatory conditions may change during the construction or development period.

     HOME EQUITY AND SECOND  MORTGAGE  LOANS.  The Bank has maintained a growing
level of home  equity and second  mortgage  loans in recent  years.  Home equity
loans, which totaled $15 million at December 31, 2003, are generally made in the
form of lines of credit with minimum  amounts of $5,000,  have terms of up to 20
years,  variable rates priced at prime or some margin above prime and require an
80% or 90%  loan-to-value  ratio  (including any prior liens),  depending on the
specific  loan  program.  Second  mortgage  loans  which  totaled  $4 million at
December 31, 2003 are fixed and  variable-rate  loans which have original  terms
between 5 and 15  years.  Loan-to-value  ratios of up to 80% or 95% are  allowed
depending on the specific loan program.

     These products  represent a higher risk of default than  residential  first
mortgages as in the event of  foreclosure,  the first  mortgage would need to be
paid off prior to collection of the second.  The Bank believes that its policies
and procedures are sufficient to mitigate the additional risk.

     CONSUMER AND COMMERCIAL  LOANS. The Bank has developed a number of programs
to serve the needs of its  customers  with  primary  emphasis  upon direct loans
secured  by  automobiles,  boats,  recreational  vehicles  and  trucks and heavy
equipment.  The Bank also makes home  improvement  loans and offers both secured
and unsecured lines of credit.

     The Bank also offers a variety of commercial  loan services  including term
loans, lines of credit and equipment financing.  The Bank's commercial loans are
primarily  underwritten  on the basis of the  borrower's  ability to service the
debt from income.  Such loans are generally made for terms of five years or less
at interest rates which adjust periodically.

     The higher  interest  rates and shorter loan terms  available on commercial
and consumer lending make these products  attractive to the Bank. In particular,
the consumer and  commercial  loan portfolio will increase its yield as interest
rates increase.  Consumer and commercial business loans, however, entail greater
risk than residential mortgage loans, particularly in the case of consumer loans
which  are  unsecured  or  secured  by  rapidly   depreciable   assets  such  as
automobiles.  In such  cases,  any  repossessed  collateral  may not  provide an
adequate source of repayment of the outstanding  loan balance as a result of the
greater  likelihood of damage,  loss or depreciation.  The remaining  deficiency
often does not  warrant  further  substantial  collection  efforts  against  the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing  financial  stability,  and  thus  are more  likely  to be  adversely
affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the
application  of various  Federal  and state  laws  including  Federal  and state
bankruptcy and  insolvency  laws, may limit the amount which can be recovered on
such loans.  Such loans may also give rise to claims and  defenses by a consumer
loan borrower  against an assignee such as the Bank,  and a borrower may be able
to assert  against such  assignee  claims and defenses  which it has against the
seller of the underlying collateral.


                                       4
<PAGE>

LOAN  PORTFOLIO  ANALYSIS.  Set forth  below is  selected  data  relating to the
composition of the Bank's loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>

                                                                          (Dollars In Thousands)

                                                                              At December 31,
                                       ---------------------------------------------------------------------------------------------
                                               2003                2002              2001                 2000              1999
                                               ----                ----              ----                 ----              ----
                                          Amount     %       Amount      %     Amount      %         Amount      %      Amount    %
                                          ------    ---      ------     ---    ------     ---        ------     ---     ------   ---
<S>                                     <C>         <C>     <C>       <C>     <C>       <C>         <C>       <C>       <C>    <C>

Real Estate Loans
  Commercial                            $  93,825   42.46%  $ 74,292  37.07%  $ 65,617   33.39%  $ 42,226    24.16% $ 29,947  20.08%
  Residential first mortgage               42,971   19.45%    48,976  24.44%    61,430   31.26%    67,975    38.89%   66,263  44.42%
  Construction and land development        19,599    8.87%    14,579   7.27%    18,136    9.23%    17,301     9.90%   17,142  11.49%
  Home equity and second mortgage          19,562    8.85%    19,007   9.48%    18,580    9.46%    18,637    10.66%   16,691  11.19%
Commercial loans                           30,436   13.77%    29,947  14.94%    18,539    9.44%    15,047     8.61%   10,025   6.72%
Consumer loans                              4,097    1.85%     4,623   2.31%     5,092    2.59%     5,512     3.15%    4,193   2.81%
Commercial equipment                       10,473    4.75%     9,007   4.49%    9,095     4.63%     8,098     4.63%    4,909   3.29%
                                          -------  -------   ------- -------   -------  -------   -------   -------  -------   -----
         Total loans                    $ 220,963  100.00%  $200,431 100.00%  $196,489  100.00%  $174,796   100.00% $149,170 100.00%
                                                   =======           =======            =======             =======          =======

   Less:  Deferred loan fees                  650                668               757                776                808
              Loan loss reserve             2,573              2,314             2,282              1,930              1,653
                                        ---------           --------          --------           --------           --------
        Loans receivable, net           $ 217,740           $197,449          $193,450           $172,090           $146,710
                                        ==========          =========         =========          =========          ========
</TABLE>

                                       5

<PAGE>

     LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank solicits loan applications
through its branch network,  direct  solicitation  of customers,  referrals from
customers,  and marketing by commercial and residential  mortgage loan officers.
Loans are processed and approved  according to guidelines deemed appropriate for
each product type. Loan  requirements  such as income  verification,  collateral
appraisal, credit reports, etc. vary by loan type. Loan processing functions are
generally  centralized  except for small consumer loans. Loan approval authority
is  established   by  Board  policy  and  delegated  as  deemed   necessary  and
appropriate.  Loan approval  authorities  vary by individual  with the President
having approval authority up to $750,000, Senior Vice Presidents up to $400,000,
and Business Development officers up to $150,000. Authorities may be combined up
to $1,000,000.  For residential mortgage loans, the residential loan underwriter
may approve loans up to the conforming  loan limit of $307,000.  Selected branch
personnel  may approve  secured loans up to $75,000,  and unsecured  loans up to
$50,000.  A loan  committee  consisting  of the President and two members of the
Board,  ratify all real  estate  mortgages  and  approve  all loans in excess of
$1,000,000. Depending on the loan and collateral type, conditions for protecting
the Bank's  collateral  are  specified in the loan  documents.  Typically  these
conditions  might include  requirements to maintain hazard and title  insurance,
pay property taxes, and other conditions.

     Depending on market conditions,  mortgage loans may be originated primarily
with the intent to sell to third parties such as FNMA or FHLMC.  During the year
2003, the Bank sold $17 million of mortgage loans which were  originated  during
the year  generating  $505 thousand in income.  In order to comply with internal
and  regulatory  limits  on loans to one  borrower,  the  Bank  routinely  sells
portions of commercial  and commercial  real estate loans to other lenders.  The
Bank also  routinely  buys  portions of loans,  whole  loans,  or  participation
certificates  from other lenders.  The Bank only purchases  loans or portions of
loans after reviewing loan documents, underwriting support, and other procedures
as necessary.  Purchased  loans are subject to the same  regulatory and internal
policy requirements as other loans in the Bank's portfolio.

     LOANS TO ONE BORROWER.  Under  Maryland  law, the maximum  amount which the
Bank is permitted to lend to any one borrower and their  related  interests  may
generally not exceed 10% of the Bank's  unimpaired  capital and surplus which is
defined to include the Bank's capital, surplus, retained earnings and 50% of its
reserve for possible loan losses. Under this authority, the Bank would have been
permitted  to lend up to $4.0  million to any one borrower at December 31, 2003.
By interpretive  ruling of the  Commissioner of Financial  Regulation,  Maryland
banks have the option of lending up to the amount that would be permissible  for
a  national  bank which is  generally  15% of  unimpaired  capital  and  surplus
(defined to include a bank's total capital for regulatory  capital purposes plus
any loan loss  allowances  not  included  in  regulatory  capital).  Under  this
formula,  the Bank would have been  permitted  to lend up to $4.6 million to any
one  borrower at December 31, 2003.  At December  31, 2003,  the largest  amount
outstanding to any one borrower and their related interests was $3.4 million.

     LOAN COMMITMENTS.  The Bank does not normally negotiate standby commitments
for the construction and purchase of real estate.  Conventional loan commitments
are granted for a one-month period.  The total amount of the Bank's  outstanding
commitments  to originate  loans at December 31, 2003,  was  approximately  $2.9
million,  excluding  undisbursed  portions of loans in process.  It has been the
Bank's experience that few commitments expire unfunded.


                                       6
<PAGE>

     MATURITY  OF  LOAN  PORTFOLIO.  The  following  table  sets  forth  certain
information  at December 31, 2003  regarding the dollar amount of loans maturing
in the Bank's  portfolio based on their  contractual  terms to maturity.  Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>

                                                             (Dollars in Thousands)

                                                               Due after 1
                                                                 through
                                            Due within 1       5 years from     Due more than
                                             year after         December 31,     5 years from
                                         December 31, 2003         2003        December 31, 2003    Total
                                         -----------------         ----        -----------------    -----
<S>                                             <C>                <C>                  <C>           <C>
Real Estate Loans

  Commercial                                 $ 7,717              $16,763          $ 69,346       $ 93,825
  Residential first mortgage                   2,244                9,248            31,479         42,971
  Construction                                 8,678                7,994             2,927         19,599
  Home equity and second mortgage             16,085                1,770             1,707         19,562
Commercial loans                              29,904                  532                --         30,436
Consumer loans                                 1,333                2,763                --          4,096
Commercial equipment                           2,257                7,886               330         10,473
                                             -------              -------          --------       --------
         Total loans                         $68,217              $46,956          $105,789       $220,963
                                             =======              =======          ========       ========
</TABLE>

The following table sets forth the dollar amount of all loans due after one year
from December 31, 2003 which have predetermined interest rates and have floating
or adjustable interest rates.
<TABLE>
<CAPTION>

                                                     (Dollars in Thousands)

                                                         Floating or
                                      Fixed Rates     Adjustable Rates         Total
                                      -----------     ----------------        -------
<S>                                     <C>                  <C>               <C>
Real Estate Loans
  Commercial                           $ 7,672            $ 78,436           $ 86,108
  Residential first mortgage            27,742              12,986             40,727
  Construction                           3,257               7,664             10,921
  Home equity and second mortgage        3,477                  --              3,477
Commercial loans                            --                 532                532
Consumer loans                           2,763                  --              2,763
Commercial equipment                     7,446                 770              8,216
                                       -------            --------           --------
                                       $52,357            $100,388           $152,745
                                       =======            ========           ========
</TABLE>

     DELINQUENCIES. The Bank's collection procedures provide that when a loan is
15 days delinquent,  the borrower is contacted by mail and payment is requested.
If the  delinquency  continues,  subsequent  efforts will be made to contact the
delinquent borrower and obtain payment. If these efforts prove unsuccessful, the
Bank  will  pursue  appropriate  legal  action  including  repossession  of  the
collateral and other actions as deemed necessary. In certain instances, the Bank
will attempt to modify the loan or grant a limited  moratorium  on loan payments
to enable the borrower to reorganize his financial affairs.

     NON-PERFORMING  ASSETS AND ASSET  CLASSIFICATION.  Loans are  reviewed on a
regular  basis and are placed on a  non-accrual  status when,  in the opinion of
management,  the  collection  of  additional  interest is doubtful.

                                       7
<PAGE>

Residential  mortgage  loans  are  placed  on  non-accrual  status  when  either
principal  or interest  is 90 days or more past due unless  they are  adequately
secured and there is  reasonable  assurance of full  collection of principal and
interest.  Consumer  loans  generally are charged off when the loan becomes more
than 120 days delinquent.  Commercial  business and real estate loans are placed
on  non-accrual  status  when the  loan is 90 days or more  past due or when the
loan's  condition puts the timely  repayment of principal and interest in doubt.
Interest  accrued and unpaid at the time a loan is placed on non-accrual  status
is charged against  interest income.  Subsequent  payments are either applied to
the outstanding  principal balance or recorded as interest income,  depending on
management's assessment of the ultimate collectibility of the loan.

     Real estate  acquired by the Bank as a result of  foreclosure or by deed in
lieu of foreclosure  is classified as foreclosed  real estate until such time as
it is sold.  When such  property is acquired,  it is recorded at its fair market
value.  Subsequent to foreclosure,  the property is carried at the lower of cost
or fair value less selling  costs.  Additional  write-downs  as well as carrying
expenses  of the  foreclosed  properties  are charged to expenses in the current
period.  The  Bank  had  foreclosed  real  estate  with a fair  market  value of
approximately $706 thousand at December 31, 2003.

FORECLOSED REAL ESTATE

     Foreclosed  real  estate is  recorded  net of a  valuation  allowance.  The
allowance  is  adjusted  as  circumstances  require.  These  adjustments  in the
allowance  include  changes in the value of the  property as well as the sale or
disposal of the foreclosed property.  The largest portion of the foreclosed real
estate, $476 thousand,  is related to one development project.  This project was
acquired  in July  2001 by deed in lieu of  foreclosure.  The  project  is being
developed in two phases.  Preliminary  approvals  have been obtained for phase 1
and this portion of the project was sold in 2002.  Phase 2 is under  contract to
sell and will be sold when  preliminary  approval  from the  county is  granted.
Total  sales  price  for Phase 2 would be $1.7  million.  Under the terms of the
agreement,  the buyer is responsible for all development  costs  associated with
both phases.  The sales agreement  provides for a minimal ($25 thousand) payment
to the Bank should the buyer decide to not complete its purchase of Phase 2. The
Bank did not provide financing for the sales agreement or subsequent development
work. Based upon these facts and  circumstances  the Bank recognized the sale of
Phase 1 for accounting  purposes.  The Bank determined that no sales recognition
on the agreement to sell Phase 2 is  appropriate at this time. The amount of the
remaining  allowance  and  total  carrying  value  of  Phase  2 is  periodically
evaluated  for possible  impairment.  Other  properties in the  foreclosed  real
estate  section of the balance  sheet  consist of various  properties  currently
being marketed by the Bank.

                                       8
<PAGE>

DELINQUENT AND NONACCRUAL LOANS

     The  following  table sets  forth  information  with  respect to the Bank's
non-performing  loans for the dates indicated.  At the dates shown, the Bank had
no  impaired  loans  within the meaning of  Statement  of  Financial  Accounting
Standards No. 114 and 118.
<TABLE>
<CAPTION>

                                                                         At December 31,
                                                 ------------------------------------------------------------
                                                 2003         2002       2001        2000       1999
                                                 ----         ----       ----        ----       ----
<S>                                              <C>          <C>        <C>          <C>       <C>
                                                                     (Dollars in Thousands)


Restructured Loans                             $   --       $   --     $   --    $    --      $   --
                                               ------       ------     ------    -------      ------

Accruing loans which are contractually
 past past due 90days or more:

Real Estate Loans
  Commercial                                       --           --          --         --         --
  Residential first mortgage                       --           --          --         --         --
  Construction and land development                --           --          --         --         --
  Home equity and second mortgage                  --           --          25        102        171
Commercial loans                                   --           --          --         --         --
Consumer loans                                     --           --          --         --         --
Commercial equipment                               --           --          --         --         --
                                               ------       ------     -------   --------     ------
     Total                                         --           --          25        102        171
                                               ------       ------     -------   --------     ------

Loans accounted for on a nonaccrual basis:

Real Estate Loans
  Commercial                                       --           --          --         --         --
  Residential first mortgage                      275          278         134         --         20
  Construction and land development                --           --          --         --         --
  Home equity and second mortgage                  --           49          --         --         --
Commercial loans                                  103          269          --         --         --
Consumer loans                                      1            1          70          7        198
Commercial equipment                               --           --          --         --         --
                                                   --           --          --         --         --
     Total                                        379          597         204          7        218
                                               ------       ------     -------   --------     ------

Total non-performing loans                       $379         $597        $229       $109       $389
                                               ======       ======     =======   ========     ======
Non-performing loans to total loans              0.17%        0.30%       0.12%      0.06%      0.26%
                                               ======       ======     =======   ========     ======
Allowance for loan losses to
 non-performing loans                          678.33%      387.60%     996.51%  1,770.64%    424.94%
                                               ======       ======     =======   ========     ======
</TABLE>

     For a detailed  discussion of  foreclosed  real estate at December 31, 2003
see the "Foreclosed Real Estate" section discussed  previously.  During the year
ended December 31, 2003,  gross interest  income of $41 thousand would have been
recorded on loans  accounted  for on a  non-accrual  basis if the loans had been
current throughout the period.  During the year 2003, the Company recognized $12
thousand in interest on these loans.

                                       9
<PAGE>

     At December 31, 2003, there were no loans  outstanding not reflected in the
above table as to which known  information  about  possible  credit  problems of
borrowers  caused  management  to have serious  doubts as to the ability of such
borrowers to comply with present loan repayment terms.

     The  following  table  sets forth an  analysis  of  activity  in the Bank's
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>

                                                   2003         2002         2001        2000       1999
                                                   ----         ----         ----        ----       ----
<S>                                                <C>          <C>          <C>         <C>        <C>
                                                                     (Dollars in Thousands)

Balance at beginning of period                    $2,314        $2,282       $1,930     $1,653      $1,540
                                                  ======        ======       ======     ======      ======

Charge-offs:

Real Estate Loans

  Commercial

  Residential first mortgage                          --            --           --         56          --

  Construction and land development                   --            36           --         --          --

  Home equity and second mortgage                     --            21           --         --          --

Commercial loans                                      35            59           --         33         102

Consumer loans                                         2            15           39          6          32

Commercial equipment                                  24            --           --         --          --
                                                  ------        ------       ------     ------      ------

    Total Charge-offs:                                61           131           39         95         134
                                                  ------        ------       ------     ------      ------

Recoveries:

Real Estate Loans

  Commercial                                          --            --           --         --          --

  Residential first mortgage                          --            --           --         --          --

  Construction and land development                   --            --           --         --          --

  Home equity and second mortgage                     --            --           --         --          --

Commercial loans                                      --            --           --         --          --

Consumer loans                                        --             3           31         --          --

Commercial equipment                                   2            --           --         12           7
                                                  ------        ------       ------     ------      ------

     Total Recoveries                                  2             3           31         12           7
                                                  ------        ------       ------     ------      ------

     Net charge-offs                                  58           128            8         83         127


Provision for Possible Loan Losses                   317           160          360        360         240
                                                  ------        ------       ------     ------      ------

Balance at End of Period                          $2,573        $2,314       $2,282     $1,930      $1,653
                                                  ======        ======       ======     ======      ======

Ratio of net charge-offs to average loans
outstanding during the year                         0.03%         0.06%        0.00%      0.05%       0.09%
                                                  ======        ======       ======     ======      ======

</TABLE>


                                       10
<PAGE>

     The  following  table  allocates  the  allowance  for loan  losses  by loan
category  at the  dates  indicated.  The  allocation  of the  allowance  to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>

                                                            (Dollars in Thousands)
                                                                At December 31,
                                  -------------------------------------------------------------------------
                                            2003                    2002                      2001
                                  ----------------------  -------------------------  ----------------------
                                              Percent                  Percent of               Percent of
                                              of Loans                  Loans in                 Loans in
                                              in Each                     Each                     Each
                                              Category                  Category                 Category
                                              to Total                  to Total                 to Total
                                     Amount     Loans       Amount        Loans       Amount       Loans
                                     ------   ---------     ------     ----------     ------     ---------
<S>                                   <C>       <C>          <C>          <C>          <C>          <C>
Real Estate Loans:

  Commercial                          $1,409      42.46%      $1,077         37.07%     $  923       33.39%
  Residential first mortgage              64      19.45%         118         24.44%        160       31.26%
  Construction and land development      281       8.87%         211          7.27%        355        9.23%
  Home equity and second mortgage        244       8.85%         276          9.48%        373        9.46%
Commercial loans                         381      13.77%         434         14.94%        186        9.44%
Consumer loans                            63       1.85%          68          2.31%        102        2.59%
Commercial equipment                     131       4.74%         130          4.49%        183        4.63%
                                      ------     ------       ------        ------      ------      ------
  Total  allowance for loan losses    $2,573     100.00%      $2,314        100.00%     $2,282      100.00%
                                      ======     ======       ======        ======      ======      ======
<CAPTION>
                                                (Dollars in Thousands)
                                                    At December 31,
                                    ------------------------------------------------
                                             2000                    1999
                                    ----------------------   ----------------------
                                                Percent                  Percent of
                                               of Loans                  Loans in
                                                in Each                     Each
                                                Category                  Category
                                                to Total                  to Total
                                       Amount     Loans       Amount        Loans
                                       ------   ---------     ------     ----------
<S>                                     <C>      <C>         <C>           <C>
Real Estate Loans:
  Commercial                         $  645       24.16%      $  399         20.08%
  Residential first mortgage            192       38.89%         632         44.42%
  Construction and land development     285        9.90%         164         11.49%
  Home equity and second mortgage       394       10.66%         159         11.19%

Commercial loans                        138        8.61%         178          6.72%
Consumer loans                          111        3.15%          55          2.81%
Commercial equipment                    165        4.63%          66          3.29%
                                     ------      ------       ------        ------
  Total  allowance for loan
   losses                            $1,930      100.00%      $1,653        100.00%
                                     ======      ======       ======        ======
</TABLE>

                                       11
<PAGE>

     The Bank closely  monitors the loan  payment  activity of all its loans.  A
loan loss  provision  is provided by a regular  accrual.  The Bank  periodically
reviews the  adequacy of the  allowance  for loan losses based on an analysis of
the loan portfolio,  the Bank's historical loss experience,  economic conditions
in the Bank's  market  area,  and a review of selected  individual  loans.  Loan
losses are  charged  off  against the  allowance  when the  uncollectibility  is
confirmed.  Subsequent  recoveries,  if any, are credited to the allowance.  The
Bank  believes it has  established  its  existing  allowance  for loan losses in
accordance with generally  accepted  accounting  principles and is in compliance
with appropriate regulatory guidelines.  However, the establishment of the level
of the  allowance  for  loan  losses  is  highly  subjective  and  dependent  on
incomplete  information as to the ultimate  disposition  of loans.  Accordingly,
there can be no assurance that actual losses may vary from the amounts estimated
or that the  Bank's  regulators  will  not  require  the  Bank to  significantly
increase or decrease its allowance for loan losses, thereby affecting the Bank's
financial condition and earnings.

INVESTMENT ACTIVITIES

     The  Bank  maintains  a  portfolio  of  investment  securities  to  provide
liquidity  as well as a source of  earnings.  The Bank's  investment  securities
portfolio consists  primarily of mortgage-backed  and other securities issued by
U.S.  Government-sponsored  enterprises  ("GSEs")  including FHLMC and FNMA. The
Bank also has smaller holdings of privately issued  mortgage-backed  securities,
U.S. Treasury obligations,  and other equity and debt securities. As a member of
the Federal Reserve and FHLB Systems, the Bank is also required to invest in the
stock of the Federal Reserve Bank of Richmond and FHLB of Atlanta, respectively.

     The  following  table  sets  forth  the  carrying  value  of the  Company's
investment  securities  portfolio  and FHLB of Atlanta and Federal  Reserve Bank
stock at the dates indicated.  At December 31, 2003, their market value was $104
million.
<TABLE>
<CAPTION>

                                                                      At December 31,
                                               -------------------------------------------------------------
                                                    2003                 2002                   2001
                                                    ----                 ----                   ----
<S>                                                 <C>                  <C>                    <C>
                                                                      (In thousands)
Asset-backed securities:

     FHLMC and FNMA                              $ 84,764               $ 29,200            $ 26,084
     Other                                          7,284                  7,930               8,993
                                                 --------               --------            --------
          Total asset-backed securities            92,048                 37,130              35,077


FHLMC and FNMA Stock                                  756                    734                 727
Bond mutual funds                                   2,838                  3,962                  --
U.S. Treasury bills                                   300                    300                 300
Other Investments                                   3,954                  2,542               1,989
                                                 --------               --------            --------
     Total investment securities                   99,895                 44,668              38,093
          FHLB and Federal Reserve Bank stock       4,777                  2,737               3,036
                                                 --------               --------            --------
     Total investment securities and FHLB and
        Federal Reserve Bank stock               $104,672               $ 47,405            $ 41,129
                                                 ========               ========            ========
</TABLE>

                                       12
<PAGE>

     The  maturities  and  weighted  average  yields for  investment  securities
available for sale and held to maturity at December 31, 2003 are shown below.
<TABLE>
<CAPTION>

                                                                   After One           After Five
                                          One Year or Less     Through Five Years   Through Ten Years     After Ten Years
                                         ------------------    ------------------  ------------------  ------------------
                                         Carrying   Average    Carrying   Average  Carrying   Average  Carrying   Average
                                          Value      Yield      Value      Yield     Value     Yield     Value     Yield
                                          -----      -----      -----      -----     -----     -----     -----     -----
  <S>                                      <C>         <C>       <C>        <C>       <C>       <C>       <C>       <C>
                                                                   (Dollars in thousands)
Investment securities available for sale:
     Corporate equity securities          $  546     5.01%     $   --        --    $    --        --     $    --       --

     Asset-backed securities               9,295     4.41%     15,731      4.38%     5,389      4.31%      4,488     4.38%
     Mutual Funds                          2,846     2.19%         --        --         --        --          --       --
                                          ------    -----     -------     -----    -------      ----     -------     ----
       Total investment securities
        available for sale               $12,687     3.94%    $15,731      4.38%   $ 5,389      4.31%    $ 4,488     4.38%
                                         =======    =====     =======     =====    =======      ====     =======     ====


Investment securities held-to- maturity:

     Asset-backed securities             $ 5,231     4.37%    $17,727      4.37%   $14,938      4.35%    $19,456     4.37%
     Treasury bills                          300     1.22%         --        --         --        --          --       --
     Other investments                        34     6.57%      1,153      4.49%     2,766      3.13%         --       --
                                         -------    -----     -------     -----    -------      ----     -------     ----
      Total investment securities
         held-to-maturity                $ 5,565     4.21%    $18,880      4.38%   $17,704      4.16%    $19,456     4.37%
                                         =======    =====     =======     =====    =======      ====     =======     ====
</TABLE>

     The Bank's investment policy provides that securities that will be held for
indefinite  periods of time,  including  securities that will be used as part of
the Bank's asset/liability  management strategy and that may be sold in response
to changes in interest rates, prepayments and similar factors, are classified as
available for sale and accounted  for at fair value.  Management's  intent is to
hold securities reported at amortized cost to maturity. Certain of the Company's
securities  are issued by private  issuers  (defined as an issuer which is not a
government or a government  sponsored entity).  The Company has no investment in
any one issuer that is greater  than a 10% equity  interest  as of December  31,
2003. For further information regarding the Company's investment securities, see
Note 2 of Notes to Consolidated Financial Statements.

DEPOSITS AND OTHER SOURCES OF FUNDS

     GENERAL. The funds needed by the Bank to make loans are primarily generated
by deposit accounts  solicited from the communities  surrounding its main office
and seven branches in the southern  Maryland area.  Consolidated  total deposits
were $228  million as of December 31, 2003.  The Bank uses  borrowings  from the
FHLB of Atlanta and other sources to supplement funding from deposits.

     DEPOSITS. The Bank's deposit products include savings, money market, demand
deposit,  IRA, SEP,  Christmas  clubs and time deposit  accounts.  Variations in
service charges,  terms and interest rates are used to target specific  markets.
Ancillary  products  and  services  for deposit  customers  include safe deposit
boxes,   travelers   checks,   night   depositories,   automated   clearinghouse
transactions,  wire transfers,  ATMs, and online and telephone banking. The Bank
is a member of JEANIE,  Cirrus and STAR ATM networks.  The Bank has occasionally
used deposit  brokers to obtain funds.  At year end 2003,  no brokered  deposits
were held.

                                       13
<PAGE>

     The  following  table  sets forth for the  periods  indicated  the  average
balances  outstanding  and  average  interest  rates for each major  category of
deposits.
<TABLE>
<CAPTION>
                                                   2003                       2002                        2001
                                          ------------------------    ----------------------      ----------------------
                                            Average     Average        Average     Average         Average     Average
                                            Balance       Rate         Balance      Rate           Balance      Rate
                                            -------     -------        -------     -------         -------     -------
<S>                                          <C>          <C>           <C>          <C>            <C>           <C>
                                                                     (Dollars in thousands)
Savings                                      $ 32,772       0.21%       $ 23,334      0.86%         $ 19,723      2.01%
Interest-bearing demand and money
  market accounts                              67,346       0.66%         73,668      0.47%           72,052      2.35%
Certificates of deposit                        82,248       2.75%         70,885      4.10%           70,453      5.45%
                                          -----------       -----        -------      -----          -------      -----
  Total interest-bearing deposits             182,366       1.57%        167,887      2.06%          162,228      3.65%
Noninterest-bearing demand deposits            30,277                     21,631                      13,691
                                          -----------                    -------                     -------
                                             $212,643       1.35%       $189,518      1.82%         $175,919      3.37%
                                          ===========       =====       ========      =====         ========      =====
</TABLE>

     The  following  table  indicates the amount of the Bank's  certificates  of
deposit and other time  deposits of more than $100,000 by time  remaining  until
maturity as of December 31, 2003.
<TABLE>
<CAPTION>

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

    Three months or less....................................   $     4,402
    Three through six months................................         1,112
    Six through twelve months...............................        14,493
    Over twelve months......................................         6,862
                                                               -----------
           Total............................................   $    26,869
                                                               ===========
</TABLE>

     BORROWINGS. Deposits are the primary source of funds for the Bank's lending
and investment  activities and for its general business purposes.  The Bank uses
advances from the FHLB of Atlanta to supplement its supply of lendable funds and
to meet deposit withdrawal  requirements.  Advances from the FHLB are secured by
the Bank's stock in the FHLB, a portion of the Bank's residential mortgage loans
and its eligible  investments.  Generally the Bank's  ability to borrow from the
FHLB of Atlanta is limited by its  available  collateral  and also by an overall
limitation of 35% of assets.  Other short-term debt consists of notes payable to
the U.S.  Treasury on  Treasury,  Tax and Loan  accounts.  Long-term  borrowings
consist of  adjustable-rate  advances  with rates based upon  LIBOR,  fixed-rate
advances and convertible  advances.  Information  about borrowings for the years
indicated (which consisted almost entirely of FHLB advances) is as follows:
<TABLE>
<CAPTION>
                                                                                  At or for the
                                                                              Year Ended December 31,
                                                                          ------------------------------
                                                                            2003        2002       2001
                                                                           ------      ------     ------
          <S>                                                               <C>         <C>          <C>
                                                                              (Dollars in thousands)
Long term amounts outstanding at end of period                             $63,051    $48,170   $48,650
Weighted average rate on outstanding long-term                               4.55%      4.99%     5.41%
Short-term borrowing outstanding at end of period                           31,191        752     1,813
Weighted average rate on outstanding short-term                              1.15%      0.89%     1.83%
Maximum outstanding short-term debt at any month end                        40,000      6,500    15,725
Average outstanding short-term debt                                          7,568        680     6,213
Approximate average rate paid on short term debt                             1.26%      1.04%     5.75%
</TABLE>

                                       14

<PAGE>

     For more information  regarding the Bank's borrowings,  see Note 8 of Notes
to Consolidated Financial Statements.

SUBSIDIARY ACTIVITIES

     Under the Maryland Financial Institutions Code, commercial banks may invest
in  service  corporations  and in other  subsidiaries  that  offer the  public a
financial,  fiduciary or  insurance  service.  In April 1997,  the Bank formed a
wholly owned subsidiary,  Community Mortgage Corporation of Tri-County, to offer
mortgage banking,  brokerage, and other services to the public. This corporation
was inactive until 2001. At that time, the Bank transferred a property which was
acquired by deed in lieu of foreclosure to this  subsidiary in order to complete
development  of this  parcel.  In August  1999,  the Bank formed a wholly  owned
subsidiary,  Tri-County  Investment  Corporation to hold and manage a portion of
the Bank's investment portfolio.

COMPETITION

     The Bank faces strong  competition in the attraction of deposits and in the
origination of loans.  Its most direct  competition for deposits and loans comes
from other banks,  savings and loan  associations,  and federal and state credit
unions located in its primary market area.  There are currently 15  FDIC-insured
depository  institutions operating in the Tri-County area including subsidiaries
of several  regional and  super-regional  bank holding  companies.  According to
statistics  compiled by the FDIC,  the Bank was ranked  sixth in deposit  market
share in the Tri-County area as of June 30, 2002, the latest date for which such
data is  available.  The  Bank  faces  additional  significant  competition  for
investors'  funds  from  mutual  funds,  brokerage  firms,  and other  financial
institutions.

     The Bank competes for loans by providing competitive rates,  flexibility of
terms,  and  service.  It competes  for  deposits by offering  depositors a wide
variety of account types,  convenient office locations,  and competitive  rates.
Other services  offered  include  tax-deferred  retirement  programs,  brokerage
services,  safe deposit boxes,  and  miscellaneous  services.  The Bank has used
direct mail, billboard and newspaper advertising to increase its market share of
deposits,  loans and other  services in its market  area.  It  provides  ongoing
training for its staff in an attempt to ensure high quality service.

                           SUPERVISION AND REGULATION

REGULATION OF THE COMPANY

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

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

                                       15
<PAGE>

     Effective  September  29,  1995,  the  Riegle-Neal  Interstate  Banking and
Branching  Efficiency  of 1994 (the  "Riegle-Neal  Act")  authorized  the FRB to
approve an application of an adequately  capitalized and adequately managed bank
holding  company to acquire control of, or acquire all or  substantially  all of
the assets of, a bank located in a state other than such holding  company's home
state,  without  regard to whether the  transaction is prohibited by the laws of
any state.  The FRB may not approve the  acquisition of a bank that has not been
in existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state.  The Riegle-Neal Act also prohibits the FRB
from  approving  such  an  application  if the  applicant  (and  its  depository
institution  affiliates)  controls or would control more than 10% of the insured
deposits  in the  United  States or 30% or more of the  deposits  in the  target
bank's home state or in any state in which the target  bank  maintains a branch.
The  Riegle-Neal  Act does not  affect  the  authority  of  states  to limit the
percentage  of  total  insured  deposits  in the  state  which  may be  held  or
controlled by a bank or bank holding  company to the extent such limitation does
not  discriminate   against   out-of-state  banks  or  bank  holding  companies.
Individual  states  may  also  waive  the  30%  state-wide  concentration  limit
contained in the Riegle-Neal  Act. Under Maryland law, a bank holding company is
prohibited from acquiring  control of any bank if the bank holding company would
control more than 30% of the total  deposits of all depository  institutions  in
the State of Maryland unless waived by the Commissioner of Financial Regulation.

     Additionally,  the  federal  banking  agencies  are  authorized  to approve
interstate  merger  transactions  without regard to whether such  transaction is
prohibited  by the law of any  state,  unless the home state of one of the banks
opted out of the  Riegle-Neal  Act by adopting a law after the date of enactment
of the  Riegle-Neal  Act and prior to June 1, 1997 which applies  equally to all
out-of-state  banks  and  expressly  prohibits  merger  transactions   involving
out-of-state  banks.  The State of Maryland  did not pass such a law during this
period. Interstate acquisitions of branches will be permitted only if the law of
the state in which the branch is located permits such  acquisitions.  Interstate
mergers  and branch  acquisitions  will also be subject  to the  nationwide  and
statewide insured deposit concentration amounts described above.

     The BHCA also prohibits a bank holding  company,  with certain  exceptions,
from  acquiring  direct or indirect  ownership or control of more than 5% of the
voting  shares of any company  which is not a bank or bank holding  company,  or
from engaging  directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing  services for its subsidiaries.  The
principal  exceptions to these prohibitions  involve certain non-bank activities
which,  by  statute  or by FRB  regulation  or order,  have been  identified  as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution,  mortgage company, finance company, credit card
company or factoring  company;  performing  certain data processing  operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance;  leasing property
on a full-payout,  non-operating basis; selling money orders,  travelers' checks
and United States Savings Bonds; real estate and personal  property  appraising;
providing  tax  planning  and  preparation  services;  and,  subject  to certain
limitations, providing securities brokerage services for customers.

     Effective  with the  enactment  of the  Gramm-Leach-Bliley  Act (the "G-L-B
Act") on November 12, 1999, bank holding  companies whose financial  institution
subsidiaries  are well  capitalized  and  well  managed  and  have  satisfactory
Community  Reinvestment  Act  records  can  elect to become  "financial  holding
companies"  which  are  permitted  to engage  in a  broader  range of  financial
activities  than are  permitted to bank  holding  companies.  Financial  holding
companies  are  authorized  to engage  in,  directly  or  indirectly,  financial
activities.  A  financial  activity  is an activity  that is: (i)  financial  in
nature;  (ii)  incidental to an activity  that is financial in nature;  or (iii)
complementary  to a  financial  activity  and that  does  not pose a safety  and
soundness  risk. The G-L-B Act includes a list of activities  that are deemed to
be financial in nature.  Other  activities  also may be decided by the FRB to be
financial in nature or incidental  thereto if they meet  specified  criteria.  A
financial  holding company that intends to engage in a new activity to acquire a
company to engage in such an activity  is  required to give prior  notice to the
FRB.  If the  activity  is not  either  specified  in the  G-L-B  Act as being a
financial  activity or one that the FRB has  determined by rule or regulation to
be financial in nature, the prior approval of the FRB is required.

     The Maryland  Financial  Institutions Code prohibits a bank holding company
from  acquiring  more  than 5% of any  class of  voting  stock of a bank or bank
holding  company   without  the  approval  of  the   Commissioner  of  Financial
Regulation, except as otherwise expressly permitted by federal law or in certain
other limited situations.  The Maryland Financial Institutions Code additionally
prohibits  any person  from  acquiring  voting  stock in a bank or

                                       16
<PAGE>

bank holding company  without 60 days' prior notice to the  Commissioner if such
acquisition  will give the person  control of 25% or more of the voting stock of
the bank or bank holding  company or will affect the power to direct or to cause
the direction of the policy or  management of the bank or bank holding  company.
Any doubt whether the stock acquisition will affect the power to direct or cause
the direction of policy or management shall be resolved in favor of reporting to
the  Commissioner.  The Commissioner may deny approval of the acquisition if the
Commissioner  determines it to be  anti-competitive or to threaten the safety or
soundness of a banking  institution.  Voting stock acquired in violation of this
statute may not be voted for five years.

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

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

     CAPITAL REQUIREMENTS. The FRB has established capital requirements, similar
to the capital  requirements for state member banks, for bank holding  companies
with  consolidated  assets of $150 million or more. As of December 31, 2003, the
Company's levels of consolidated  regulatory  capital exceeded the FRB's minimum
requirements.

     SARBANES-OXLEY ACT OF 2002 AND RELATED  REGULATIONS.  On July 30, 2002, the
Sarbanes-Oxley Act of 2002 ("SOX") was signed into law. SOX contains  provisions
addressing  corporate  and  accounting  fraud which both amended the  Securities
Exchange Act of 1934,  as amended (the "Act") and directed the SEC to promulgate
rules.  SOX provided for the  establishment  of a new Public Company  Accounting
Oversight Board ("PCAOB"), to enforce auditing, quality control and independence
standards for firms that audit public reporting  companies and will be funded by
fees from all public reporting companies.  It is unlawful for any person that is
not a registered  public  accounting  firm ("RPAF") to audit a public  reporting
company.  Under  the  Act,  a RPAF is  prohibited  from  performing  statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial  officer,  comptroller,  chief accounting  officer or any person
serving in equivalent  positions has been employed by such firm and participated
in the audit of such company  during the  one-year  period  preceding  the audit
initiation date. The SEC has prescribed rules requiring inclusion of an internal
control   report  and   assessment   by  management  in  the  annual  report  to
shareholders.  SOX  requires  the RPAF that issues the audit report to attest to
and report on management's  assessment of the Company's  internal  controls.  In
addition,  SOX requires that each  financial  report  required to be prepared in
accordance with (or reconciled to) generally accepted accounting  principles and
filed  with  the SEC  reflect  all  material  correcting  adjustments  that  are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC. SOX requires chief executive  officers
and chief financial officers, or their equivalent, to certify to the accuracy of
periodic reports filed with the SEC, subject to civil and criminal  penalties if
they knowingly or willfully violate this certification requirement.

     SOX also  increases  the  oversight  and  authority of audit  committees of
publicly traded companies. SOX imposed higher standards for auditor independence
and restricts  provisions of consulting  services by auditing firms to companies
they audit. Any non-audit  services (subject to a 5% de minimis exception) being
provided  to an  audit  client  require  pre-approval  by  the  Company's  audit
committee  members.  Audit committee  members must be independent and are barred
from accepting consulting,  advisory or other compensatory fees from the issuer.
In

                                       17
<PAGE>

addition,  all public reporting  companies must disclose whether at least one
member of the committee is an audit committee  "financial expert" (as such terms
is defined by the SEC rules) and if not, why not.

     Due to SOX, longer prison terms will be applied to corporate executives who
violate federal  securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended,  and bonuses
issued  to  top  executives  prior  to  restatement  of  a  company's  financial
statements  are now  subject  to  disgorgement  if such  restatement  was due to
corporate  misconduct.  Executives  are  also  prohibited  from  trading  during
retirement  plan  "blackout"  periods,  and  loans  to  company  executives  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited in a fund for the benefit of harmed investors.

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

REGULATION OF THE BANK

     GENERAL.  The Bank is a Maryland  commercial bank and its deposit  accounts
are insured by the SAIF of the FDIC. The Bank is a member of the Federal Reserve
and FHLB Systems. The Bank is subject to supervision, examination and regulation
by  Commissioner  of  Financial   Regulation  of  the  State  of  Maryland  (the
"Commissioner") and the FRB and to Maryland and federal statutory and regulatory
provisions   governing   such   matters  as  capital   standards,   mergers  and
establishment  of branch offices.  The Bank is required to file reports with the
Commissioner  and the FRB concerning its activities and financial  condition and
will be required to obtain  regulatory  approvals prior to entering into certain
transactions,  including  mergers with,  or  acquisitions  of, other  depository
institutions.

     As an institution with federally insured  deposits,  the Bank is subject to
various regulations promulgated by the FRB, including Regulation B (Equal Credit
Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund
Transfers),  Regulation P (Privacy),  Regulation W (Transactions  Between Member
Banks and Their  Affiliates),  Regulation  Z (Truth in Lending),  Regulation  CC
(Availability  of Funds and  Collection  of Checks) and  Regulation DD (Truth in
Savings).

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

     CAPITAL  ADEQUACY.  The FRB has established  guidelines with respect to the
maintenance of appropriate levels of capital by bank holding companies and state
member banks, respectively.  The regulations impose two sets of capital adequacy
requirements:  minimum leverage rules,  which require bank holding companies and
member banks to maintain a specified  minimum  ratio of capital to total assets,
and risk-based capital rules, which require the maintenance of specified minimum
ratios of capital to "risk-weighted" assets.

     The regulations of the FRB require bank holding  companies and state member
banks,  respectively,  to maintain a minimum  leverage ratio of "Tier 1 capital"
(as defined in the  risk-based  capital  guidelines  discussed in the  following
paragraphs)  to total assets of 3.0%.  Although  setting a minimum 3.0% leverage
ratio,  the  capital  regulations  state that only the  strongest  bank  holding
companies and banks,  with composite  examination  ratings of 1 under the rating
system used by the federal bank regulators,  would be permitted to operate at or
near such minimum level of capital.  All other bank holding  companies and banks
are expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio,  depending on the  assessment  of an  individual  organization's  capital
adequacy by its primary regulator. Any bank or bank holding company experiencing
or anticipating  significant  growth would be expected to maintain  capital well
above the minimum  levels.  In addition,  the FRB has  indicated  that  whenever
appropriate,  and in  particular  when a bank  holding  company  is  undertaking
expansion,  seeking to engage in new  activities or otherwise  facing unusual or
abnormal  risks,  it will  consider,  on a case-by-case  basis,  the level of an
organization's   ratio  of  tangible  Tier  1  capital   (after   deducting  all
intangibles) to total assets in making an overall assessment of capital.
                                       18
<PAGE>

     The risk-based  capital rules of the FRB require bank holding companies and
state member banks, respectively,  to maintain minimum regulatory capital levels
based  upon a  weighting  of their  assets  and  off-balance  sheet  obligations
according  to risk.  Risk-based  capital is  composed  of two  elements:  Tier 1
capital  and  Tier 2  capital.  Tier 1  capital  consists  primarily  of  common
stockholders'   equity,   certain  perpetual  preferred  stock  (which  must  be
noncumulative  in the case of  banks),  and  minority  interests  in the  equity
accounts of consolidated  subsidiaries;  less all intangible assets,  except for
certain  servicing  assets,  purchased credit card  relationships,  deferred tax
assets  and  credit  enhancing  interest-only  strips.  Tier 2 capital  elements
include,  subject to certain limitations,  the allowance for losses on loans and
leases;  perpetual  preferred  stock that does not qualify as Tier 1 capital and
long-term  preferred  stock with an original  maturity of at least 20 years from
issuance;  hybrid capital  instruments,  including  perpetual debt and mandatory
convertible  securities;  and subordinated debt and intermediate-term  preferred
stock.

     The risk-based  capital  regulations assign balance sheet assets and credit
equivalent  amounts of off-balance  sheet  obligations to one of four broad risk
categories  based  principally on the degree of credit risk  associated with the
obligor.  The assets and off-balance sheet items in the four risk categories are
weighted  at 0%,  20%,  50% and  100%.  These  computations  result in the total
risk-weighted  assets. The risk-based capital  regulations require all banks and
bank holding  companies  to maintain a minimum  ratio of total  capital  (Tier 1
capital plus Tier 2 capital) to total risk-weighted  assets of 8%, with at least
4% as Tier 1 capital.  For the purpose of calculating  these ratios:  (i) Tier 2
capital  is  limited  to no more  than  100% of Tier 1  capital;  and  (ii)  the
aggregate amount of certain types of Tier 2 capital is limited. In addition, the
risk-based capital regulations limit the allowance for loan losses includable as
capital to 1.25% of total risk-weighted assets.

     FRB regulations and guidelines additionally specify that state member banks
with significant exposure to declines in the economic value of their capital due
to changes in  interest  rates may be required  to  maintain  higher  risk-based
capital ratios. The federal banking agencies, including the FRB, have proposed a
system for measuring  and assessing the exposure of a bank's net economic  value
to changes in interest rates. The federal banking  agencies,  including the FRB,
have stated their intention to propose a rule  establishing an explicit  capital
charge for interest rate risk based upon the level of a bank's measured interest
rate risk  exposure  after more  experience  has been gained  with the  proposed
measurement  process.  FRB  regulations  do not  specifically  take into account
interest rate risk in measuring the capital adequacy of bank holding companies.

     The FRB has issued regulations which classify state member banks by capital
levels and which authorize the FRB to take various prompt corrective  actions to
resolve the  problems  of any bank that fails to satisfy the capital  standards.
Under such  regulations,  a well  capitalized bank is one that is not subject to
any  regulatory  order or directive to meet any specific  capital level and that
has or exceeds the following capital levels: a total risk-based capital ratio of
10%, a Tier 1  risk-based  capital  ratio of 6%, and a leverage  ratio of 5%. An
adequately capitalized bank is one that does not qualify as well capitalized but
meets or exceeds the following capital requirements:  a total risk-based capital
ratio of 8%, a Tier 1 risk-based  capital  ratio of 4%, and a leverage  ratio of
either  (i) 4% or (ii) 3% if the  bank  has the  highest  composite  examination
rating.  A bank not  meeting  these  criteria  is treated  as  undercapitalized,
significantly undercapitalized,  or critically undercapitalized depending on the
extent to which the bank's  capital  levels are below these  standards.  A state
member  bank that  falls  within  any of the three  undercapitalized  categories
established by the prompt corrective action regulation will be subject to severe
regulatory sanctions.  As of December 31, 2003, the Bank was well capitalized as
defined by the FRB's regulations.

     BRANCHING.   Maryland  law  provides   that,   with  the  approval  of  the
Commissioner, Maryland banks may establish branches within the State of Maryland
without geographic restriction and may establish branches in other states by any
means permitted by the laws of such state or by federal law. The Riegle-Neal Act
authorizes the FRB to approve interstate  branching de novo by state banks, only
in states which specifically allow for such branching.  The Riegle-Neal Act also
required the appropriate federal banking agencies to prescribe regulations which
prohibit any  out-of-state  bank from using the interstate  branching  authority
primarily  for the  purpose of deposit  production.  These  regulations  include
guidelines to ensure that interstate  branches  operated by an out-of-state bank
in a host  state  are  reasonably  helping  to  meet  the  credit  needs  of the
communities which they serve.

     DIVIDEND LIMITATIONS. Pursuant to the Maryland Financial Institutions Code,
Maryland banks may only pay dividends from undivided  profits or, with the prior
approval  of the  Commissioner,  their  surplus  in excess  of 100% of  required
capital stock. The Maryland  Financial  Institutions  Code further restricts the
payment of dividends

                                       19
<PAGE>

by prohibiting a Maryland bank from declaring a dividend on its shares of common
stock until its surplus fund 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.

     DEPOSIT  INSURANCE.  The Bank is  required to pay  semi-annual  assessments
based on a percentage  of its insured  deposits to the FDIC for insurance of its
deposits by the Savings Association  Insurance Fund ("SAIF").  Under the Federal
Deposit  Insurance Act, the FDIC is required to set semi-annual  assessments for
SAIF-insured  institutions to maintain the designated  reserve ratio of the SAIF
at 1.25% of estimated  insured  deposits or at a higher  percentage of estimated
insured  deposits  that the FDIC  determines  to be  justified  for that year by
circumstances  raising a significant  risk of  substantial  future losses to the
SAIF.  In the event  that the SAIF  should  fail to meet its  statutory  reserve
ratio,  the FDIC would be required to set semi-annual  assessment rates for SAIF
members that are  sufficient  to increase the reserve  ratio to 1.25% within one
year or in  accordance  with  such  other  schedule  that  the  FDIC  adopts  by
regulation to restore the reserve ratio in not more than 15 years.

     Under the risk-based  deposit  insurance  assessment  system adopted by the
FDIC, the assessment rate for an insured depository  institution  depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations. Based
on the data reported to  regulators  for the date closest to the last day of the
fourth month  preceding the  semi-annual  assessment  period,  institutions  are
assigned  to one of  three  capital  groups  --  "well  capitalized,  adequately
capitalized or  undercapitalized."  Within each capital group,  institutions are
assigned to one of three  subgroups on the basis of  supervisory  evaluations by
the institution's  primary  supervisory  authority and such other information as
the FDIC determines to be relevant to the institution's  financial condition and
the risk posed to the  deposit  insurance  fund.  Under the  current  assessment
schedule,  well  capitalized  banks with the best  supervisory  ratings  are not
required  to pay any  premium for deposit  insurance.  All  SAIF-insured  banks,
however,  are  required  to pay  assessments  to the FDIC to help fund  interest
payments  on  certain  bonds  issued  by the  Financing  Corporation,  an agency
established by the federal government to finance takeovers of insolvent thrifts.

     TRANSACTIONS  WITH AFFILIATES.  A state member bank or its subsidiaries may
not engage in "covered transactions" with any one affiliate in an amount greater
than 10% of such bank's capital stock and surplus, and for all such transactions
with all  affiliates a state member bank is limited to an amount equal to 20% of
capital  stock  and  surplus.  All  such  transactions  must  also  be on  terms
substantially  the same, or at least as favorable,  to the bank or subsidiary as
those provided to a non-affiliate.  The term "covered  transaction" includes the
making of loans,  purchase of assets,  issuance of a guarantee and similar other
types of  transactions.  An  affiliate  of a state member bank is any company or
entity which controls or is under common control with the state member bank and,
for  purposes  of the  aggregate  limit on  transactions  with  affiliates,  any
subsidiary that would be deemed a financial  subsidiary of a national bank. In a
holding company context, the parent holding company of a state member bank (such
as the Company) and any companies  which are  controlled by such parent  holding
company are  affiliates of the state member bank.  The BHCA further  prohibits a
depository  institution from extending credit to or offering any other services,
or fixing or varying the  consideration for such extension of credit or service,
on the  condition  that the  customer  obtain some  additional  service from the
institution or certain of its affiliates or not obtain  services of a competitor
of the institution, subject to certain limited exceptions.

     LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Loans to
directors,  executive officers and principal stockholders of a state member bank
must be made on substantially  the same terms as those prevailing for comparable
transactions with persons who are not executive officers,  directors,  principal
stockholders  or  employees  of the bank  unless the loan is made  pursuant to a
compensation or benefit plan that is widely  available to employees and does not
favor  insiders.  Loans  to  any  executive  officer,   director  and  principal
stockholder  together  with  all  other  outstanding  loans to such  person  and
affiliated  interests  generally  may not exceed  15% of the  bank's  unimpaired
capital  and  surplus  and  all  loans  to  such  persons  may  not  exceed  the
institution's  unimpaired  capital and

                                       20
<PAGE>

unimpaired  surplus.  Loans  to  directors,  executive  officers  and  principal
stockholders,  and their  respective  affiliates,  in excess of the  greater  of
$25,000 or 5% of capital  and  surplus  (up to  $500,000)  must be  approved  in
advance  by a  majority  of  the  board  of  directors  of  the  bank  with  any
"interested"  director not  participating in the voting.  State member banks are
prohibited  from paying the  overdrafts  of any of their  executive  officers or
directors  unless  payment  is  made  pursuant  to  a  written,   pre-authorized
interest-bearing  extension of credit plan that  specifies a method of repayment
or transfer of funds from another  account at the bank.  In  addition,  loans to
executive  officers may not be made on terms more  favorable than those afforded
other borrowers and are restricted as to type, amount and terms of credit.

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

PERSONNEL

     As of  December  31,  2003,  the Bank  had 94  full-time  employees  and 14
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining agreement. The Bank believes its employee relations are good.

EXECUTIVE OFFICERS

     The executive officers of the Company are as follows:

     MICHAEL  L.  MIDDLETON  (56 years  old) is  President  and Chief  Executive
Officer of the  Company  and the Bank.  He joined the Bank in 1973 and served in
various  management  positions until 1979 when he became  president of the Bank.
Mr. Middleton is a Certified  Public  Accountant and holds a Masters of Business
Administration.  As  President  and Chief  Executive  Officer  of the Bank,  Mr.
Middleton is responsible  for the overall  operation of the Bank pursuant to the
policies and  procedures  established  by the Board of Directors.  Since January
1996,  Mr.  Middleton  has served on the Board of  Directors of the Federal Home
Loan Bank of Atlanta,  and currently serves as its Chairman,  and also serves as
its  Board  Representative  to the  Council  of  Federal  Home Loan  Banks.  Mr.
Middleton  also  serves on the  board of the  Baltimore  Branch  of the  Federal
Reserve Bank of Richmond.

     C. MARIE  BROWN (61 years old) has been  employed  with the Bank since 1972
and has served as Chief Operating  Officer since 1999.  Prior to her appointment
as Chief  Operating  Officer,  Ms. Brown served as Senior Vice  President of the
Bank.  She is a supporter of the  Handicapped  and Retarded  Citizens of Charles
County,  of  Zonta  and  serves  on  various  administrative  committees  of the
Hughesville  Baptist  Church and the board of the Charles  County Chapter of the
American Red Cross.

     H. BEAMAN SMITH (58 years old) was the Treasurer of the Company in 1998 and
became  Secretary-Treasurer  in  January  1999  and has been  the  president  of
Accoware, a computer software company, since 1989. Prior to that time, Mr. Smith
was a  majority  owner of the  Smith's  Family  Honey  Company  in Bryans  Road,
Maryland.  Mr. Smith is a Vice President of Fry Plumbing  Company of Washington,
D.C., a Trustee of the Ferguson  Foundation,  a member of the Bryans Road Sports
Council and the Treasurer of the Moyaone Association.

     GREGORY C.  COCKERHAM  (49 years old) joined the Bank in November  1988 and
has served as Chief Lending  Officer  since 1996.  Prior to his  appointment  as
Senior Vice President,  Mr.  Cockerham served as Vice President of the Bank. Mr.
Cockerham has been in banking for 22 years.  He is a Paul Harris Fellow with the
Rotary Club of Charles County and serves on various civic boards in the County.

     WILLIAM  J.  PASENELLI  (45 years old)  joined the Bank as Chief  Financial
Officer in April 2000.  Prior to joining the Bank, Mr.  Pasenelli had been Chief
Financial  Officer of Acacia  Federal  Savings Bank,  Annandale,

                                       21
<PAGE>

Virginia  since 1987.  Mr.  Pasenelli is a member of the  American  Institute of
Certified Public Accountants,  the DC Institute of Certified Public Accountants,
and other civic groups.

ITEM 2.   PROPERTY
------------------

     The following table sets forth the location of the Bank's offices,  as well
as certain additional  information  relating to these offices as of December 31,
2003.

                                    Year
                                  Facility           Leased          Approximate
 Office                          Commenced             or              Square
Location                         Operation           Owned             Footage
---------                        ---------           ------          -----------
MAIN OFFICE
3035 Leonardtown Road               1974             Owned                16,500
Waldorf, Maryland

BRANCH OFFICES
22730 Three Notch Road              1992             Owned                 2,500
Lexington Park, Maryland

25395 Point Lookout Rd.             1961             Owned                 2,500
Leonardtown, Maryland

101 Drury Drive                     2001             Owned                 2,645
La Plata, Maryland

10321 Southern Md. Blvd.            1991             Leased                1,400
Dunkirk, Maryland

8010 Matthews Road                  1996             Owned                 2,500
Bryans Road, Maryland

20 St. Patrick's Drive              1998             Leased (Land)         2,840
Waldorf, Maryland                                    Owned (Building)

30165 Three Notch Road              2001             Leased (Land)         2,500
Charlotte Hall, Maryland                             Owned (Building)

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

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

     Neither the Company, the Bank, nor company and any subsidiary is engaged in
any legal  proceedings  of a material  nature at the present time.  From time to
time  the  Bank is a party  to  legal  proceedings  in the  ordinary  course  of
business.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2003.

                                       22
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE  REGISTRANT'S  COMMON  EQUITY,  RELATED  SECURITY  HOLDER
MATTERS SMALL BUSINESS
--------------------------------------------------------------------------------

     The information  contained under the section captioned "Market and Dividend
Information" in the Company's  Annual Report to Stockholders for the fiscal year
ended  December  31, 2003 (the  "Annual  Report")  filed as Exhibit 13 hereto is
incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The information  contained under the section captioned  "Selected Financial
Data" in the Annual Report is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition" of the Annual Report is incorporated herein
by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------

     Not applicable since the registrant qualified as a small business issuer.

ITEM 8.  FINANCIAL STATEMENTS
-----------------------------

     The  Consolidated  Financial  Statements,  Notes to Consolidated  Financial
Statements  and   Independent   Auditors'   Report  in  the  Annual  Report  are
incorporated herein by reference.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

     Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES
---------------------------------

     As of the end of the  period  covered  by this  report,  management  of the
Company  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation  of  the  Company's  principal  executive  officer  and  principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures.  Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and  procedures  are  effective  in  ensuring  that  information  required to be
disclosed  by the  Company  in  reports  that it  files  or  submits  under  the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported,  within the time periods  specified in the Securities and Exchange
Commission's  rules  and  forms.  It  should  be noted  that the  design  of the
Company's  disclosure  controls  and  procedures  is based in part upon  certain
reasonable  assumptions about the likelihood of future events,  and there can be
no reasonable  assurance  that any design of disclosure  controls and procedures
will  succeed  in  achieving  its  stated  goals  under  all  potential   future
conditions,  regardless of how remote, but the Company's principal executive and
financial  officers have  concluded that the Company's  disclosure  controls and
procedures are, in fact, effective at a reasonable assurance level.

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

                                       23
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     For information  concerning the Company's directors,  the identification of
the Audit Committee and the audit committee  financial  expert,  the information
contained under the section  captioned  "Proposal I -- Election of Directors" in
the Company's  definitive  proxy statement for the Company's 2004 Annual Meeting
of Stockholders (the "Proxy Statement") is incorporated herein by reference. For
information  concerning  the  executive  officers of the Company,  see "Item 1 -
Business -  Executive  Officers"  under Part I of this Annual  Report,  which is
incorporated herein by reference.

     For  information  regarding  compliance  with Section 16(a) of the Exchange
Act,  the  information  contained  under the section  captioned  "Section  16(a)
Beneficial   Ownership   Reporting   Compliance"  in  the  Proxy   Statement  is
incorporated herein by reference.

     The  Company has  adopted a Code of Ethics  that  applies to the  Company's
principal executive officer,  principal financial officer,  principal accounting
officer and Controller,  as well as all of its officer  directors and employees,
which is included herewith as Exhibit 14.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

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

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------

     (a)  SECURITY OWNERSHIP OF CERTAIN OWNERS

     The information  required by this item is incorporated  herein by reference
to the  sections  captioned  "Proposal I -- Election of  Directors"  and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.

     (b)  SECURITY OWNERSHIP OF MANAGEMENT

     Information  required by this item is  incorporated  herein by reference to
the  section  captioned  "Proposal  I --  Election  of  Directors"  in the Proxy
Statement.

     (c)  CHANGES IN CONTROL

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



                                       24
<PAGE>

     (d)  EQUITY COMPENSATION PLANS

     The Company has adopted a variety of  compensation  plans pursuant to which
equity may be awarded to participants  including the Company's 1995 Stock Option
and Incentive  Plan and the 1995 Stock Option Plan for  Non-Employee  Directors.
The Bank's Executive Incentive  Compensation Plan provides for grants of options
under the 1995 Stock Option and Incentive Plan if certain  performance  criteria
are met. The following table sets forth certain  information with respect to the
Company's Equity Compensation Plans as of December 31, 2003.
<TABLE>
<CAPTION>
                                       (a)                              (b)                             (c)
                                                                                             Number of securities
                                                                                             remaining  available
                                                                                             for future issuance
                             Number of securities to be      Weighted-average exercise    under equity compensation
                             issued  upon exercise             price of outstanding       plans (excluding securities
Plan Category                options, warrants, and rights   options, warrants and rights  reflected in column (a)
-------------                -----------------------------   ----------------------------  --------------------------
<S>                                     <C>                              <C>                             <C>
Equity compensation
 plans approved by
 security holders                        92,396                   $           25.18                      30,024

Equity compensation plans
  not approved by security
  holders (1)                            10,400                   $           25.49                       6,642
                                        -------                   -----------------                      ------
Total                                   102,796                   $           25.21                      36,666 (2)
                                        =======                   =================                      ======
</TABLE>

(1)  Consists of the 1995 Stock  Option Plan for  Non-Employee  Directors  which
     provides grants of non-incentive options to directors who are not employees
     of the Company or its  subsidiaries.  Options are granted under the plan at
     an exercise price equal to their fair market value at the date of grant and
     have a term of ten  years.  Options  are  generally  exercisable  while  an
     optionee serves as a director or within one year thereafter.
(2)  The 1995 Stock  Option and  Incentive  Plan and 1995 Stock  Option Plan for
     Non-Employee  Directors each provide for a proportionate  adjustment to the
     number of shares reserved  thereunder in the event of a stock split,  stock
     dividend reclassification, recapitalization or similar event.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

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

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

     The information  required by this item is incorporated  herein by reference
to the section captioned  "Relationship with Independent  Auditors" in the Proxy
Statement.


                                       25
<PAGE>
                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

     (1) Financial Statements.  The following  consolidated financial statements
         ---------------------
are incorporated by reference from Item 7 hereof:

         Independent Auditors' Report
         Consolidated Balance Sheets as of December 31, 2003 and 2002
         Consolidated Statements of Income for the Years Ended December 31,
          2003, 2002 and 2001
         Consolidated Statements of Changes in Stockholders' Equity for the
          Years Ended December 31, 2003, 2002 and 2001
         Consolidated Statements of Cash Flows for the Years Ended December 31,
           2003, 2002 and 2001
         Notes to Consolidated Financial Statements

     (2) Financial  Statement  Schedules.  All schedules for which  provision is
         ---------------------------------
made in the  applicable  accounting  regulations  of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the  required  information  is included in the  consolidated
financial statements and related notes thereto.

     (3)  Exhibits.  The  following is a list of exhibits  filed as part of this
          ---------
Annual Report on Form 10-K and is also the Exhibit Index.

     No.         Description
     ---         -----------

     3.1    Articles of Incorporation of Tri-County Financial Corporation*
     3.2    Amended and Restated Bylaws of Tri-County Financial Corporation ****
     10.1 + Tri-County  Financial  Corporation  1995 Stock Option and  Incentive
            Plan, as amended **
     10.2 + Tri-County  Financial   Corporation  1995  Stock  Option  Plan  for
             Non-Employee Directors, as amended ***
     10.3 + Employment  Agreements with C. Marie Brown, as amended,  and Gregory
            C. Cockerham ****
     10.4 + Restated Employment Agreement with Michael L. Middleton.
     10.5 + Guaranty  Agreements with Michael L.  Middleton,  C. Marie Brown and
            Gregory C. Cockerham **
     10.6 + Executive Incentive Compensation Plan **
     10.7 + Executive Compensation Plan 2003 Amendment
     10.8 + Employment Agreement with William J. Pasenelli **
     10.9 + Retirement Plan for Directors **
     10.10+ Split  Dollar  Agreements  with  Michael L.  Middleton  and C. Marie
            Brown **
     10.11+ Guaranty Agreement with William J. Pasenelli *****
     10.12+ Split Dollar Agreement with William J. Pasenelli *****
     10.13+ Salary Continuation Agreement with Michael L. Middleton
     10.14+ Salary Continuation Agreement with C. Marie Brown
     10.15+ Salary Continuation Agreement with Gregory C. Cockerham
     10.16+ Salary Continuation Agreement with William J. Pasenelli
     13     Annual Report to Stockholders for fiscal year ended December 31,
             2003
     14     Code of Ethics
     21     Subsidiaries of the Registrant
     23     Consent of Stegman & Company
     31.1   Rule 13a-14a Certification of Chief Executive Officer
     31.2   Rule 13a-14a Certification of Chief Financial Officer
     32     Certification pursuant to 18 U.S.C. Section 1350

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

                                       26
<PAGE>

     +     Management  contract or compensatory  plan required to be filed as an
           exhibit pursuant to Item 14(c).
     *     Incorporated by reference to the Registrant's Registration  Statement
           on Form S-4 (No. 33-31287).
     **    Incorporated by reference to the Registrant's Form 10-K for the
           fiscal year ended December 31, 2000.
     ***   Incorporated by reference to the Registrant's Registration  Statement
           on Form S-8 (File No. 333-70800).
     ****  Incorporated by reference to  Registrant's Annual Report on Form 10-K
           for the fiscal year ended December 31, 1998
     ***** Incorporated by reference to  Registrant's Annual Report on Form 10-K
           for the fiscal year ended December 31, 2001

          (b)  REPORTS ON FORM 8-K. No reports on Form 8-K have been filed
               --------------------
               during the last quarter of the fiscal year covered by this
               report.

          (c)  EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
               ---------
               either  filed  as part  of this  Annual  Report  on Form  10-K or
               incorporated by reference herein.

          (d)  FINANCIAL  STATEMENTS AND SCHEDULES  EXCLUDED FROM ANNUAL REPORT.
               -----------------------------------------------------------------
               There are no other financial  statements and financial  statement
               schedules  which were excluded from the Annual Report pursuant to
               Rule 14a-3(b)(1) which are required to be included herein.


                                       27
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  TRI-COUNTY FINANCIAL CORPORATION


Date: March 22, 2004              By: /s/ Michael L. Middleton
                                      ------------------------------------------
                                      Michael L. Middleton
                                      President and Chief Executive Officer
                                      (Duly Authorized Representative)


     Pursuant to the  requirement of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


By: /s/ Michael L. Middleton                    By: /s/ William J. Pasenelli
    -------------------------------------           ----------------------------
    Michael L. Middleton                            William J. Pasenelli
    (Director, President and Chief                  (Chief Financial and
    Executive Officer)                               Accounting Officer)

Date: March 22, 2004                            Date: March 22, 2004


By: /s/ C. Marie Brown                          By:  /s/ Herbert N. Redmond, Jr.
    -------------------------------------            ---------------------------
    C. Marie Brown                                   Herbert N. Redmond, Jr.
    (Director and Chief Operating Officer)           (Director)

Date: March 22, 2004                            Date: March 22, 2004


By: /s/ H. Beaman Smith                         By:  /s/ A. Joseph Slater
    -------------------------------------            ---------------------------
    H. Beaman Smith                                  A. Joseph Slater
    (Director and Secretary/Treasurer)               (Director)

Date: March 22, 2004                            Date: March 22, 2004


By: /s/ Louis P. Jenkins, Jr.                   By: /s/ James R. Shepard
    -------------------------------------           ----------------------------
    Louis P. Jenkins, Jr.                           James R. Shepard
    (Director)                                      (Director)

Date: March 22, 2004                            Date: March 22, 2004