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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 20-F

(Mark One)

|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|o |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934

OR

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|  |  |                                                                                     
|  |  | For the fiscal year ended December 31, 2002                                         

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number: 000-49742

The Bank of Bermuda Limited

(Exact Name of Registrant as Specified in Its Charter)

N/A

(Translation of Registrants Name into English)

Bermuda

(Jurisdiction of Incorporation or Organization)

6 Front Street
Hamilton HM 11
Hamilton HM DX, Bermuda(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange On Which Registered
|                    |  |                                          
|None                |  | None                                     

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

Common Shares, par value Bermuda
$1.00 per share(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:

None(Title of Class)

Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report.

As of December 31, 2002, 28,990,928 common shares, par value Bermuda $1.00
per share, were outstanding.

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 for 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.

Yesx   Noo

Indicate by check mark which financial statement item the registrant has
elected to follow.

Item 17o   Item 18x





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TABLE OF CONTENTS



|           |                                                                                       |  |  |  |  |  |  | 
|---------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I    
|           | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|           | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|           | ITEM 3. KEY INFORMATION                                                              
|           | ITEM 4. INFORMATION ON THE COMPANY                                                   
|           | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|           | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|           | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|           | ITEM 8. FINANCIAL INFORMATION                                                        
|           | ITEM 9. THE OFFER AND LISTING                                                        
|           | ITEM 10. ADDITIONAL INFORMATION                                                      
|           | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|           | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|PART II   
|           | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|           | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|           | ITEM 15. CONTROLS AND PROCEDURES                                                     
|           | ITEM 16. [RESERVED]                                                                  
|PART III  
|           | ITEM 17. FINANCIAL STATEMENTS                                                        
|           | ITEM 18. FINANCIAL STATEMENTS                                                        
|           | ITEM 19. EXHIBITS                                                                    
|SIGNATURES



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TABLE OF CONTENTS

|         |  |                                                                              |  |     
|-------- |  | ---------------------------------------------------------------------------- |  | ----
|         |  |                                                                              |  | Page
|         |  | PART I                                                                       |  |     
|Item 1.  |  | Identity of Directors, Senior Management and Advisers                        |  | 2   
|Item 2.  |  | Offer Statistics and Expected Timetable                                      |  | 2   
|Item 3.  |  | Key Information                                                              |  | 2   
|Item 4.  |  | Information on the Company                                                   |  | 8   
|Item 5.  |  | Operating and Financial Review and Prospects                                 |  | 40  
|Item 6.  |  | Directors, Senior Management and Employees                                   |  | 70  
|Item 7.  |  | Major Shareholders and Related Party Transactions                            |  | 80  
|Item 8.  |  | Financial Information                                                        |  | 81  
|Item 9.  |  | The Offer and Listing                                                        |  | 83  
|Item 10. |  | Additional Information                                                       |  | 85  
|Item 11. |  | Quantitative and Qualitative Disclosures About Market Risk                   |  | 94  
|Item 12. |  | Description of Securities Other than Equity Securities                       |  | 97  
|         |  | PART II                                                                      |  |     
|Item 13. |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 97  
|Item 14. |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 97  
|Item 15. |  | Controls and Procedures                                                      |  | 98  
|Item 16. |  | [Reserved]                                                                   |  | 98  
|         |  | PART III                                                                     |  |     
|Item 17. |  | Financial Statements                                                         |  | 98  
|Item 18. |  | Financial Statements                                                         |  | 98  
|Item 19. |  | Exhibits                                                                     |  | 98  





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PRESENTATION OF INFORMATION

All references in this annual report to U.S. dollars, US$ and $ are
to United States dollars. Unless we indicate otherwise, all financial
information contained in this annual report is presented in U.S. dollars and
has been prepared in accordance with accounting principles generally accepted
in the United States.

Certain monetary amounts, percentages and other figures included in this
annual report have been subject to rounding adjustments. As a result, figures
shown as totals in tables may not be the arithmetic aggregation of the figures
that precede them, and figures expressed as percentages in the text may not
total 100% or, as applicable, when aggregated may not be the arithmetic
aggregation of the percentages that precede them.

Unless we indicate otherwise, all share figures and per share data contained in this annual report reflect:



| |  |  | a 1-for-10 stock dividend paid on September 15, 1999 to all shareholders of record as of August 31, 1999;
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | a 1-for-7 stock dividend paid on August 31, 2000 to all shareholders of record as of August 18, 2000; and
|
| |  |  | a 1-for-10 stock dividend paid on January 15, 2002 to all shareholders of record as of December 31, 2001.

You should rely only on the information contained herein. We have not
authorised any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. You should assume that the information appearing herein is
accurate only as of the date it was filed with the Securities and Exchange
Commission. Our business, financial condition, results of operations and
prospects may have changed since that date.

CERTAIN DEFINITIONS

In this annual report, all references to Bank, we, us and our
refer to The Bank of Bermuda Limited and, unless the context requires
otherwise, to its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this annual report that are not
historical facts, including, without limitation, certain statements contained
in Item 4. Information on the Company, Item 5. Operating and Financial
Review and Prospects and Item 11. Quantitative and Qualitative Disclosures
About Market Risk, are statements of future expectations and other
forward-looking statements that are based on managements current views and
assumptions and involve known and unknown risks and uncertainties that could
cause actual results, performance or events to differ materially from those
expressed or implied in such statements. Some of these forward-looking
statements can be identified by the use of forward-looking words such as
believes, expects, may, will, should, seeks, strives,
approximately, intends, plans, estimates or anticipates or the
negative of those words or other comparable terminology. Forward-looking
statements involve inherent risks and uncertainties and are not guarantees of
future performance or results. You should not rely on any forward-looking
statements in this annual report. A number of important factors could cause
actual results to differ materially from those in the forward-looking
statements, including those referred to in Item 3. Key InformationRisk
Factors and elsewhere in this annual report. Actual results, performance or
events may differ materially from those in such statements due to, without
limitation:



| |  |  | changes in securities market valuations;                             
| | - |  | ---------------------------------------------------------------------
|
| |  |  | changes in foreign exchange rates;                                   
|
| |  |  | fluctuations in interest rates;                                      
|
| |  |  | inflation;                                                           
|
| |  |  | volatility and volume of securities transactions in emerging markets;
|
| |  |  | volatility of currency markets;                                      

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| |  |  | changes in savings rates or investment behaviour;                                                     
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | changing pension requirements in target markets, including the Mandatory Provident Funds in Hong Kong;
|
| |  |  | government regulations, including banking regulations;                                                
|
| |  |  | local economic conditions; and                                                                        
|
| |  |  | competition in the geographic and business areas in which we conduct our operations.                  

The forward-looking statements are made as of the date of this annual
report, and we assume no obligation to update the forward-looking statements,
or to update the reasons why actual results could differ from those projected
in the forward-looking statements.

ENFORCEABILITY OF CIVIL LIABILITIES UNDER
UNITED STATES FEDERAL SECURITIES LAWS

We are organised under the laws of Bermuda. In addition, all of our
directors and executive officers and our accountants reside outside the United
States and all or a substantial portion of our assets and their assets are
located outside the United States. Therefore, it may be difficult for
investors to effect service of process within the United States upon those
persons or to recover against us or those persons on judgments of courts in the
United States, including judgments based on civil liabilities provisions of the
United States federal securities laws.

We have been advised by Conyers Dill & Pearman, our Bermuda counsel, that
the United States and Bermuda do not have a treaty providing for reciprocal
recognition and enforcement of judgments in civil and commercial matters. We
also have been advised by Conyers Dill & Pearman that there is doubt as to
whether the courts of Bermuda would enforce (1) judgments of United States
courts based on the civil liability provisions of the United States federal
securities laws obtained in actions against us or our directors and executive
officers and (2) original actions brought in Bermuda against us or our
directors and executive officers based solely upon the United States federal
securities laws. A Bermuda court may, however, impose civil liability on us or
our directors or executive officers in a suit brought in the Supreme Court of
Bermuda provided that the facts alleged constitute or give rise to a cause of
action under Bermuda law. Certain remedies available under the laws of United
States jurisdictions, including certain remedies under the United States
federal securities laws, would not be allowed in Bermuda courts to the extent
that they are contrary to public policy.




PART I




ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.




ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.




ITEM 3. KEY INFORMATION

Selected Financial Data

In the table below, we provide you with summary historical data of the
Bank. We have derived this information from our Consolidated Financial
Statements. Our Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States and have
been audited by KPMG. You should read the following financial information in
conjunction with the more detailed information contained in Item 5. Operating
and Financial Review and Prospects and our Consolidated Financial Statements
and the notes to our Consolidated Financial Statements, each included in this
annual report. Historical results are not necessarily indicative of future
results.

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|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |          |  
|----------------------------------------------------- | ------------------- | - | ------------ | -------- | ------------ | - | ---------- | -------- | ---- | - | ------------------ | -------- | ---- | - | -------- | -------- | - | - | -------- | -------- | - | - | -------- | -------- | -
|                                                      |                     |   |              |          |              |   |            |          |      |   | Six Months         |          |      |   |          |          |   |   |          |          |   |   |         
|                                                      |                     |   | Year Ended   |          | Ended        |   | Year Ended
|                                                      |                     |   | December 31, |          | December 31, |   | June 30,  
|                                                      |                     |   |              |          |              |   |           
|                                                      |                     |   | 2002         |          | 2001         |   | 2000       |          | 2000 |   | 1999               |          | 1998
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |     
|                                                      |                     |   |              |          |              |   |            |          |      |   | (US$ in thousands) |          |      |   |          |          |   |   |         
|Operating Results:                                    |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|Non-Interest Income                                   |                     | $ | 264,256      |          |              | $ | 256,977    |          |      | $ | 124,383            |          |      | $ | 234,674  |          |   | $ | 197,796  |          |   | $ | 204,163  |         
|Net Interest Income                                   |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|                                                      | Interest Income     |   |              | 300,771  |              |   |            | 487,212  |      |   |                    | 327,581  |      |   |          | 558,253  |   |   |          | 512,947  |   |   |          | 581,154  |  
|                                                      | Interest Expense    |   |              | (124,997 | )            |   |            | (289,538 | )    |   |                    | (222,816 | )    |   |          | (376,044 | ) |   |          | (369,061 | ) |   |          | (447,704 | )
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|                                                      | Net Interest Income |   |              | 175,774  |              |   |            | 197,674  |      |   |                    | 104,765  |      |   |          | 182,209  |   |   |          | 143,886  |   |   |          | 133,450  |  
|Recovery/(provisions) for Loan
Losses                 |                     |   | 1,971        |          |              |   | (2,662     | )        |      |   | (2,589             | )        |      |   | (916     | )        |   |   | (374     | )        |   |   | (7,857   | )       
|Other Income/(Loss)                                   |                     |   | 3,524        |          |              |   | (1,936     | )        |      |   | 6,441              |          |      |   | 5,207    |          |   |   | 10,416   |          |   |   | 6,323    |         
|Gains/(Losses) on Marketable
Securities               |                     |   | (24,528      | )        |              |   | (6,245     | )        |      |   | (12,967            | )        |      |   | (2,162   | )        |   |   | 2,213    |          |   |   | (25,227  | )       
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|Total Revenue                                         |                     |   | 420,997      |          |              |   | 443,808    |          |      |   | 220,033            |          |      |   | 419,012  |          |   |   | 353,937  |          |   |   | 310,852  |         
|Operating Expenses                                    |                     |   | (337,106     | )        |              |   | (376,960   | )        |      |   | (162,076           | )        |      |   | (304,820 | )        |   |   | (275,373 | )        |   |   | (243,594 | )       
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|Net Income from Operations,
before Income Taxes       |                     |   | 83,891       |          |              |   | 66,848     |          |      |   | 57,957             |          |      |   | 114,192  |          |   |   | 78,564   |          |   |   | 67,258   |         
|Income Taxes                                          |                     |   | (6,233       | )        |              |   | (6,771     | )        |      |   | (3,228             | )        |      |   | (8,138   | )        |   |   | (4,928   | )        |   |   | (8,229   | )       
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|Net Income from Operations,
after Income Taxes        |                     |   | 77,658       |          |              |   | 60,077     |          |      |   | 54,729             |          |      |   | 106,054  |          |   |   | 73,636   |          |   |   | 59,029   |         
|Cumulative Effect of a Change
in Accounting Principle |                     |   |             |          |              |   |           |          |      |   | 1,517              |          |      |   |         |          |   |   |         |          |   |   |         |         
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         
|Net Income                                            |                     | $ | 77,658       |          |              | $ | 60,077     |          |      | $ | 56,246             |          |      | $ | 106,054  |          |   | $ | 73,636   |          |   | $ | 59,029   |         
|                                                      |                     |   |              |          |              |   |            |          |      |   |                    |          |      |   |          |          |   |   |          |          |   |   |          |         

|                    |                                       |  |                  |            |              |  |            |            |      |  |                                        |            |      |  |   |            |   |  |   |           |   |  |   |            |  
|------------------- | ------------------------------------- |  | ---------------- | ---------- | ------------ |  | ---------- | ---------- | ---- |  | -------------------------------------- | ---------- | ---- |  | - | ---------- | - |  | - | --------- | - |  | - | ---------- | -
|                    |                                       |  | As at or for the
|                    |                                       |  |                 
|                    |                                       |  |                  |            |              |  |            |            |      |  | Six Months                             |            |      |  |   |            |   |  |   |           |   |  |  
|                    |                                       |  | Year Ended       |            | Ended        |  | Year Ended
|                    |                                       |  | December 31,     |            | December 31, |  | June 30,  
|                    |                                       |  |                  |            |              |  |           
|                    |                                       |  | 2002             |            | 2001         |  | 2000       |            | 2000 |  | 1999                                   |            | 1998
|                    |                                       |  |                  |            |              |  |            |            |      |  |                                        |            |     
|                    |                                       |  |                  |            |              |  |            |            |      |  | (US$ in thousands, except percentages) |            |      |  |   |            |   |  |  
|Balance Sheet Data: |                                       |  |                  |            |              |  |            |            |      |  |                                        |            |      |  |   |            |   |  |   |           |   |  |   |           
|                    | Cash and Deposits with
Banks          |  | $                | 4,677,011  |              |  | $          | 3,570,005  |      |  | $                                      | 4,850,264  |      |  | $ | 4,446,741  |   |  | $ | 4,351,619 |   |  | $ | 6,524,021  |  
|                    | Marketable Securities                 |  |                  | 4,369,898  |              |  |            | 5,467,875  |      |  |                                        | 4,693,762  |      |  |   | 3,983,585  |   |  |   | 3,463,971 |   |  |   | 3,149,645  |  
|                    | Loans less allowance for
loan losses  |  |                  | 1,768,349  |              |  |            | 1,477,577  |      |  |                                        | 1,514,019  |      |  |   | 1,580,910  |   |  |   | 1,437,311 |   |  |   | 950,298    |  
|                    | Total Assets                          |  |                  | 11,089,968 |              |  |            | 10,808,019 |      |  |                                        | 11,373,759 |      |  |   | 10,350,573 |   |  |   | 9,557,251 |   |  |   | 10,897,219 |  
|                    | Customer Deposits                     |  |                  | 10,165,189 |              |  |            | 9,943,466  |      |  |                                        | 10,509,922 |      |  |   | 9,478,593  |   |  |   | 8,731,532 |   |  |   | 9,469,362  |  
|                    | Capital
Stock(1)                      |  |                  | 413,434    |              |  |            | 452,168    |      |  |                                        | 331,906    |      |  |   | 203,934    |   |  |   | 105,756   |   |  |   | 102,967    |  
|                    | Total Shareholders Equity            |  |                  | 662,193    |              |  |            | 629,383    |      |  |                                        | 626,447    |      |  |   | 604,033    |   |  |   | 484,112   |   |  |   | 443,948    |  
|Ratios:             |                                       |  |                  |            |              |  |            |            |      |  |                                        |            |      |  |   |            |   |  |   |           |   |  |   |           
|                    | Non-Interest Income to
Total Revenues |  |                  | 62.8       | %            |  |            | 57.9       | %    |  |                                        | 56.5       | %    |  |   | 56.0       | % |  |   | 55.9      | % |  |   | 65.7       | %
|                    | Return
on Equity(2)                   |  |                  | 11.9       | %            |  |            | 9.5        | %    |  |                                        | 18.3       | %    |  |   | 19.4       | % |  |   | 16.0      | % |  |   | 14.2       | %
|                    | Return
on Assets(2)                   |  |                  | 0.7        | %            |  |            | 0.5        | %    |  |                                        | 1.0        | %    |  |   | 1.1        | % |  |   | 0.8       | % |  |   | 0.6        | %
|                    | Net Loans to Assets                   |  |                  | 15.9       | %            |  |            | 13.7       | %    |  |                                        | 13.3       | %    |  |   | 15.3       | % |  |   | 15.0      | % |  |   | 8.7        | %
|                    | Tier 1 Ratio                          |  |                  | 14.9       | %            |  |            | 15.3       | %    |  |                                        | 14.1       | %    |  |   | 13.5       | % |  |   | 13.1      | % |  |   | 12.5       | %
|                    | Total Capital Ratio                   |  |                  | 15.4       | %            |  |            | 15.8       | %    |  |                                        | 14.5       | %    |  |   | 13.8       | % |  |   | 13.9      | % |  |   | 13.4       | %
|                    | Equity to Assets                      |  |                  | 6.0        | %            |  |            | 5.8        | %    |  |                                        | 5.5        | %    |  |   | 5.8        | % |  |   | 5.1       | % |  |   | 4.1        | %
|                    | Tangible Equity to
Tangible Assets    |  |                  | 5.9        | %            |  |            | 5.7        | %    |  |                                        | 5.4        | %    |  |   | 5.7        | % |  |   | 4.9       | % |  |   | 4.1        | %



---

|(1) |  | Reflects a 1-for-10 stock dividend paid on September 15, 1999
to all shareholders of record as of August 31, 1999, a 1-for-7 stock
dividend paid on August 31, 2000 to all shareholders of record as of
August 18, 2000 and a 1-for-10 stock dividend paid on January 15,
2002 to all shareholders of record as of December 31, 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Percentages based on average quarter-end balances.
|--- |  | --------------------------------------------------

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|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |      |        | 
|-------------------------------------------------- | ----------------------------------------------------- | ------- | ----- | ------------ | ------ | ------------ | ----- | --------------------------------------------------------- | ------ | ---- | ----- | ---------- | ------ | ---- | ----- | ---- | ------ | - | ----- | ---- | ------ | - | ----- | ---- | ------ | 
|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       | Six Months |        |      |       |      |        |   |       |      |        |   |       |     
|                                                   |                                                       |         |       | Year Ended   |        | Ended        |       | Year Ended                                               
|                                                   |                                                       |         |       | December 31, |        | December 31, |       | June 30,                                                 
|                                                   |                                                       |         |       |              |        |              |       |                                                          
|                                                   |                                                       |         |       | 2002         |        | 2001         |       | 2000                                                      |        | 2000 |       | 1999       |        | 1998
|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |     
|                                                   |                                                       |         |       |              |        |              |       | (US$ in thousands, except percentages and per share data) |        |      |       |           
|Net Income per Common Share(1):                    |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |     
|Basic                                              |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |     
|                                                   | Net Income from Operations,
after Income Taxes        |         | $     | 2.62         |        |              | $     | 2.00                                                      |        |      | $     | 1.82       |        |      | $     | 3.61 |        |   | $     | 2.59 |        |   | $     | 2.08 |       
|                                                   | Cumulative Effect of a Change
in Accounting Principle |         |       |             |        |              |       |                                                          |        |      |       | 0.05       |        |      |       |     |        |   |       |     |        |   |       |     |       
|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |      |       
|                                                   | Net Income                                            |         | $     | 2.62         |        |              | $     | 2.00                                                      |        |      | $     | 1.87       |        |      | $     | 3.61 |        |   | $     | 2.59 |        |   | $     | 2.08 |       
|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |      |       
|Diluted                                            |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |     
|                                                   | Net Income from Operations,
after Income Taxes        |         | $     | 2.53         |        |              | $     | 1.91                                                      |        |      | $     | 1.76       |        |      | $     | 3.53 |        |   | $     | 2.52 |        |   | $     | 2.03 |       
|                                                   | Cumulative Effect of a Change
in Accounting Principle |         |       |             |        |              |       |                                                          |        |      |       | 0.05       |        |      |       |     |        |   |       |     |        |   |       |     |       
|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |      |       
|                                                   | Net Income                                            |         | $     | 2.53         |        |              | $     | 1.91                                                      |        |      | $     | 1.81       |        |      | $     | 3.53 |        |   | $     | 2.52 |        |   | $     | 2.03 |       
|                                                   |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |      |       
|Dividends Per Share(1)                             |                                                       | $       | 1.080 |              |        | $            | 0.981 |                                                           |        | $    | 0.937 |            |        | $    | 1.006 |      |        | $ | 0.853 |      |        | $ | 0.695 |     
|Dividend Payout Ratio                              |                                                       |         | 42.7  | %            |        |              | 51.4  | %                                                         |        |      | 51.8  | %          |        |      | 28.5  | %    |        |   | 33.8  | %    |        |   | 34.2  | %   
|Dividends Per Share Excluding
Special Dividends(1) |                                                       | $       | 1.080 |              |        | $            | 0.981 |                                                           |        | $    | 0.460 |            |        | $    | 0.644 |      |        | $ | 0.780 |      |        | $ | 0.695 |     
|Dividend Payout Ratio Excluding
Special Dividends  |                                                       |         | 42.7  | %            |        |              | 51.4  | %                                                         |        |      | 25.4  | %          |        |      | 18.2  | %    |        |   | 31.0  | %    |        |   | 34.2  | %   
|Weighted Average Shares
Outstanding(1)             |                                                       |         |       |              |        |              |       |                                                           |        |      |       |            |        |      |       |      |        |   |       |      |        |   |       |     
|                                                   |                                                       | Basic   |       |              | 29,601 |              |       |                                                           | 29,977 |      |       |            | 30,060 |      |       |      | 29,355 |   |       |      | 28,437 |   |       |      | 28,359 | 
|                                                   |                                                       | Diluted |       |              | 30,691 |              |       |                                                           | 31,386 |      |       |            | 31,142 |      |       |      | 30,029 |   |       |      | 29,190 |   |       |      | 29,072 | 



---

|(1) |  | Reflects a 1-for-10 stock dividend paid on September 15, 1999 to
all shareholders of record as of August 31, 1999, a 1-for-7 stock
dividend paid on August 31, 2000 to all shareholders of record as of
August 18, 2000 and a 1-for-10 stock dividend paid on January 15, 2002
to all shareholders of record as of December 31, 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Risk Factors



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the financial markets experience a downturn or if there is a decrease
in the value of foreign currencies relative to the U.S. dollar, our fee
income will decline, which will have an adverse effect on our results of
operations.

Unlike a more traditional bank that relies primarily on lending activities
to generate revenues and profits, we derive a significant portion of our
revenue from non-interest income. As a result, our businesses are
significantly affected by conditions in the financial markets and economic
conditions generally, both in Bermuda and throughout the world. Because the
fees that we charge for our custodial, trust and investment management services
are partially based on the value of our clients assets, our revenues and
profits will typically decline in the event of a market downturn in the United
States or other foreign jurisdictions. Declines in foreign currencies relative
to the U.S. dollar would also decrease the value of these assets in U.S. and
Bermuda dollar terms thereby decreasing our fee income and negatively affecting
our revenues and profits. See Item 5. Operating and Financial Review and
ProspectsFinancial Condition.



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we rely on sub-custodians in various locations outside of Bermuda,
their failure to satisfactorily perform their duties could create
liability or damage our reputation, which could adversely affect our
results of operations.

In the markets in which we conduct business around the world, our global
fund services business uses sub-custodians to provide settlement of trades and
to facilitate the transfer of funds. Because we accept full liability for the
selection of sub-custodians and most of the activities performed by the
sub-custodian and its staff on our behalf and on behalf of our customers, the
failure of a sub-custodian to properly perform its services to us and to our
clients could subject us to liability or could adversely affect our

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##### Table of Contents



reputation, which could adversely affect our results of operations. See
Item 4. Information on the CompanyRisk ManagementCredit Risk.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we are not supported by a central bank from which we can borrow
funds, if we experience liquidity shortages, we may not be able to pay our
depositors when requested, which could cause our business to fail.

Unlike many jurisdictions, there is no central bank or similar
governmental agency in Bermuda from which we may borrow funds if we experience
liquidity shortages. There is also no central bank or similar governmental
agency in Bermuda that insures bank deposits, such as the Federal Deposit
Insurance Corporation in the United States. Therefore, if we experience a
severe liquidity shortage and we do not have the assets to pay our depositors
when requested, our business could fail. See Item 5. Operating and Financial
Review and ProspectsFinancial ConditionLiquidity and Capital Resources.



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because an important part of our business is servicing the needs of
international businesses based in Bermuda, changes in Bermudas political
or economic stability that impair its position as an international
business centre could adversely affect our results of operations.

A significant portion of our revenues are generated by servicing the needs
of international businesses that are based in Bermuda. Because Bermudas
attraction as an international business centre is dependent on Bermudas
political and economic stability, instability could cause a loss of
international business which could adversely affect our results of operations.
For example, Bermuda is the oldest self-governing overseas territory of the
United Kingdom. However, the status of Bermuda as a British overseas territory
continues to be a matter of public debate and consideration. If Bermuda
elected to become independent of Britain, it could affect the business
communitys perception of Bermuda as a stable and secure business environment,
which could result in international businesses reducing or eliminating their
operations in Bermuda. This, in turn, could result in loss of business for the
Bank.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in Bermudas tax policies or reputation could cause our clients to
eliminate or reduce their activities in Bermuda, which would adversely
affect our revenues and results of operations.

Bermuda has made a public commitment to address any deficiencies in its
tax regime and to abandon those elements that the Organisation for Economic
Co-operation and Development, or the OECD, considers objectionable. This could
require Bermuda to implement measures, including possible legislation, to meet
OECD requirements. If Bermuda were to fail to implement these measures, or if
OECD requirements change in a way not acceptable to Bermuda, Bermuda could then
be identified as a tax haven, whose tax policies were intended to
attract assets from individuals and entities seeking to escape
taxation in their home countries, by the OECD and face potential economic sanctions
from OECD members, which could cause clients to eliminate or reduce their
operations and/or banking activities in Bermuda, resulting in a potential loss
of revenue for the Bank. See Item 4. Information on the CompanyRegulation
and SupervisionThe Organisation for Economic Co-operation and Development.



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to pay dividends to non-Bermuda residents and the transfer of
our common shares to non-Bermudians could be impaired by Bermudian
regulations.

The present policy of Bermudas Controller of Foreign Exchange is



| |  |  | to permit the conversion of Bermuda dollars and payment of
dividends in foreign currency to shareholders who are non-residents
of Bermuda, provided that all payments are processed through an
authorised dealer, including, for this purpose, the Bank; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to permit the free transferability of the shares of Bermuda
companies where the shares are listed on an appointed stock
exchange, which includes the Nasdaq National Market and the Bermuda
Stock Exchange.                                                 

However, if the Controller of Foreign Exchange were to change these
policies, our ability to pay dividends to non-Bermuda residents in U.S. dollars
could be impaired and each transfer of our common shares to or from
non-residents of Bermuda for the purposes of exchange control could require
specific approval by the Controller of Foreign Exchange, and the value of your
common shares could be adversely affected. See Item 10. Additional
InformationExchange Controls.

- 5 -



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| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could lose our exemption from a requirement that 60% of our common
shares and 60% of the total voting rights attached to our common shares be
owned and exercisable by Bermudians and, as a result, the liquidity
and market value of our common shares could be adversely affected.

In December 2000, the Minister of Finance of Bermuda issued a licence
allowing us to carry on business in Bermuda without complying with the
provisions of the Third Schedule to the Companies Act 1981. The Third Schedule
would otherwise require that:



| |  |  | the Bank be controlled by Bermudians;                                            
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | 60% of our shares be beneficially owned by Bermudians; and                       
|
| |  |  | at least 60% of the total voting rights in the Bank be exercisable by Bermudians.

If we lose this exemption at a time when less than 60% of our shares are
owned by Bermudians, it is unclear how the provisions of the Third Schedule to
the Companies Act 1981 would be enforced because there is no precedent for the
revocation of this type of licence. Among the actions the Minister of Finance
could consider are ordering us to limit the transferability of our
common shares to non-Bermudians until the
ownership of our common shares by Bermudians reaches 60%, which would have
an adverse effect on the liquidity and market value of our common
shares. See Item 4. Information on the
CompanyRegulation and SupervisionRegulation and Supervision in
BermudaCompanies Act 1981.



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Bermuda-based credit portfolios are subject to various risks that
could adversely affect the value of these portfolios which would in turn
adversely affect our results of operations.

We consider that our Bermuda commercial lending and retail loan
portfolios, which include consumer and personal loans, mortgages and credit
cards, represent Bermuda risk. For instance, a significant portion of our
lending is for the purpose of purchasing, or is secured by, Bermuda real
estate. As a result of our high exposure to Bermuda risk, and in particular
Bermuda real estate, the value of our loan portfolios generally fluctuate with
changes in the strength of the Bermuda real estate market. These Bermuda-based
portfolios are also subject to economic risk, emanating primarily from the
United States. The U.S. economy has a direct and significant impact on Bermuda
and, as a result, on the credit risk of our Bermuda-based borrowers. Bermuda
does not have a diverse economy and deterioration of one of its key industries
would be especially harmful to the overall economy. The two primary industries
in Bermuda are tourism and international business. In the past few years,
Bermuda has experienced a decline in the number of tourists. We believe that
this decline is due in part to the economic downturn in the U.S. and was
exacerbated by the September 11th terrorist attacks. If Bermudas tourism
industry continues to decline, our Bermuda-based portfolios could be further
negatively impacted. International business, now Bermudas largest revenue
generator, is subject to many other external economic and regulatory-related
factors that could significantly impact Bermuda. See Item 5. Operating and
Financial Review and ProspectsFinancial Condition for a description of these
factors.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Shareholders of a Bermudian company will not have access to the same
remedies and legislative frameworks as shareholders of a company
incorporated in a United States jurisdiction.

We are incorporated under the laws of Bermuda. As a result, the rights of
holders of our common shares will be governed by Bermuda law, including the
Companies Act 1981, the Bank of Bermuda Act 1890 and our bye-laws. The rights of
shareholders under Bermuda law differ from the rights of shareholders of
companies incorporated in United States jurisdictions. In addition, because
the United States and Bermuda do not have a treaty providing for reciprocal
recognition and enforcement of judgments in civil and commercial matters, there
is doubt as to whether remedies available under the laws of United States
jurisdictions, including remedies under the United States federal securities
laws, would be allowed in Bermuda courts given that these remedies might be
considered contrary to public policy. See Enforceability of Civil Liabilities
Under United States Federal Securities Laws.

Not only are the laws in Bermuda different from, and sometimes
incompatible with, laws in the United States, but the processes by which they
are established are also different. If you are not familiar with the Bermudian
legislative process and the factors and individuals influencing the political
environment, you should not make assumptions about the status of various legal
and political issues. The status of laws currently in place, and areas not
currently governed, are subject to change. Your interests could be adversely
affected if significant regulations are added or deleted from Bermudas
existing statutory framework.

- 6 -



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| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of Bermuda law, our bye-laws and our shareholder rights plan
could adversely affect your rights as a holder of our common shares or
prevent or delay a change in control.

Under the provisions of the Banks and Deposit Companies Act 1999, or BDCA,
and a licence we have received under the Companies Act 1981, your rights as a
holder of common shares could be impaired if you become a shareholder
controller, which is defined as a person who acquires control over more than
10% of the voting power of our common shares. The BDCA prohibits a person from
becoming a shareholder controller of the Bank without receiving the approval of
the Bermuda Monetary Authority, or BMA. In addition, no shareholder controller
may increase the number of common shares over which he has control of voting
rights by any multiple of 10% without the approval of the BMA. If you become a
shareholder controller, or as a shareholder controller increase your control
over voting rights of our common shares without this approval, the BMA may
impose one or more of the following restrictions:



| |  |  | voiding any transfer of, or agreement to transfer, shares controlled by you;   
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | cancelling the voting rights in respect of your shares;                        
|
| |  |  | disallowing the issuance of any further shares to you; and                     
|
| |  |  | except in liquidation, not allowing the payment of any sums due on your shares.

In addition to these restrictions, under the provisions of a new bye-law
we adopted as required by the licence issued to us pursuant to the Companies
Act 1981, if you acquire more than 40% of our outstanding common shares, you
cannot exercise the voting rights attached to shares in excess of the 40%
unless you have the consent of the Minister of Finance to hold those shares.
See Item 4. Information on the CompanyRegulation and SupervisionRegulation
and Supervision in BermudaCompanies Act 1981.

Provisions of our bye-laws and shareholder rights plan may also
discourage, delay or prevent acquisitions of our shares by certain persons or a
merger, change of management or other change of control that a shareholder may
consider favourable. In addition, these provisions could limit the price that
investors might be willing to pay in the future for our common shares. See
Item 10. Additional InformationShareholder Rights Plan.



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Your investment in our common shares could have adverse tax consequences
if we were classified as a passive foreign investment company.

An investment in our common shares could have material and adverse tax
consequences to United States taxpayers. If you are a United States taxpayer,
you will be subject to adverse tax treatment if the United States Internal
Revenue Service classifies us as a passive foreign investment company, or
PFIC. Although we believe that we are not a PFIC, our determination that we
are not a PFIC assumes that certain regulations proposed by the United States
Internal Revenue Service will be adopted in final form. Our determination that
we are not a PFIC also depends upon whether our holdings of passive assets
remain at a level that will not cause us to become a PFIC. In addition, since
the nature of our income, assets and activities may change, we cannot be
certain that we will not be classified by the United States Internal Revenue
Service as a PFIC for the current or any future taxable year. See Item 10.
Additional InformationTaxationUnited States Federal Income Tax
Considerations for a discussion of these tax consequences.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The value of your common shares could be adversely affected if Bermuda
authorities withdraw or materially amend legislation placing the Bermuda
dollar in parity with the United States dollar.

As
a result of an order issued under the Bermuda Monetary Authority Act
1969,
since 1981 one Bermuda dollar is equivalent to one United States dollar.
However, we cannot assure you that this parity will continue. In the event
that the Governor of Bermuda, pursuant to the Bermuda Monetary
Authority Act 1969,
issues an order that materially affects the Bermuda Dollar Parity Order 1981,
the value of your common shares could be adversely affected.

- 7 -



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##### Table of Contents






ITEM 4. INFORMATION ON THE COMPANY

Business Overview

For almost 70 years, we have provided fiduciary, administration, asset
management, banking and custody services to international clients. We focus on
servicing clients that require more specialised expertise, including
alternative investment vehicles and high net worth private clients with
international wealth management and cross-border investment needs. We believe
that our approach and expertise allow us to differentiate ourselves from
commodity-type service providers who provide more generic services and compete
primarily on the basis of price and their ability to service higher transaction
volumes. We provide customised services and the ability to work with our
clients to address regulatory, tax and legal issues affecting their financial
affairs in and across different jurisdictions through coordinated services from
multiple international locations. We believe that we have developed a
reputation for integrity and customer service, based on our long-standing
client relationships.

Our business is organised into four client-focused business divisions that
operate across our network of international offices. Each of our four business
divisions has developed a specialised set of services that we believe provides
a framework for our continued growth:



| |  |  | Global fund servicesprovides a tailored mix of fund
administration products, banking and global custody services to
segments of the investment industry with developing and complex
needs, including alternative investment vehicles such as hedge funds,
emerging market funds, funds of funds and private equity funds.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Private client servicesprovides internationally coordinated
private trust and investment services to high net worth individuals
and families.                                                                                                                                                                            
|
| |  |  | Corporate bankingprovides cash management services to offshore
insurance management companies, multi-national corporations and local
Bermuda-based companies.                                                                                                                                                            
|
| |  |  | Community bankingprovides a broad range of banking services to
Bermuda residents.                                                                                                                                                                                                                                        

Revenues and expenses that do not relate directly to these divisions are
included in the Other category, such as proprietary trading income, return on
investment of unallocated capital and certain corporate expenses.

The following table shows the contribution by each of our four business
divisions to our total revenue and net income for the years ended December 31,
2002 and 2001:

|                             |  |          |         |          |  |           |        |           |  |                                        |        |       |  |   |        |   |  |   |         |    |  |   |         |  
|---------------------------- |  | -------- | ------- | -------- |  | --------- | ------ | --------- |  | -------------------------------------- | ------ | ----- |  | - | ------ | - |  | - | ------- | -- |  | - | ------- | -
|                             |  | Global   |         | Private  |  |           |        |           |  |                                        |        |       |  |   |        |   |  |   |         |   
|                             |  | Fund     |         | Client   |  | Corporate |        | Community |  |                                        |        |       |  |   |        |  
|                             |  | Services |         | Services |  | Banking   |        | Banking   |  | Other                                  |        | Total
|                             |  |          |         |          |  |           |        |           |  |                                        |        |      
|                             |  |          |         |          |  |           |        |           |  | (US$ in thousands, except percentages) |        |       |  |   |        |   |  |  
|Year Ended December 31, 2002 |  |          |         |          |  |           |        |           |  |                                        |        |       |  |   |        |   |  |   |         |    |  |   |         |  
|Revenue                      |  | $        | 190,525 |          |  | $         | 89,954 |           |  | $                                      | 54,598 |       |  | $ | 74,380 |   |  | $ | 11,540  |    |  | $ | 420,997 |  
|Revenue Contribution         |  |          | 45.2    | %        |  |           | 21.4   | %         |  |                                        | 13.0   | %     |  |   | 17.7   | % |  |   | 2.7     | %  |  |   | 100.0   | %
|Net Income                   |  | $        | 16,331  |          |  | $         | 11,277 |           |  | $                                      | 27,766 |       |  | $ | 14,199 |   |  | $ | 8,085   |    |  | $ | 77,658  |  
|Net Income Contribution      |  |          | 21.0    | %        |  |           | 14.5   | %         |  |                                        | 35.8   | %     |  |   | 18.3   | % |  |   | 10.4    | %  |  |   | 100.0   | %
|Year Ended December 31, 2001 |  |          |         |          |  |           |        |           |  |                                        |        |       |  |   |        |   |  |   |         |    |  |   |         |  
|Revenue                      |  | $        | 189,235 |          |  | $         | 99,418 |           |  | $                                      | 62,548 |       |  | $ | 79,121 |   |  | $ | 13,486  |    |  | $ | 443,808 |  
|Revenue Contribution         |  |          | 42.7    | %        |  |           | 22.4   | %         |  |                                        | 14.1   | %     |  |   | 17.8   | % |  |   | 3.0     | %  |  |   | 100.0   | %
|Net Income/(Loss)            |  | $        | 24,233  |          |  | $         | 20,632 |           |  | $                                      | 38,800 |       |  | $ | 21,512 |   |  | $ | (45,100 | )  |  | $ | 60,077  |  
|Net Income Contribution      |  |          | 40.3    | %        |  |           | 34.3   | %         |  |                                        | 64.6   | %     |  |   | 35.8   | % |  |   | (75.0   | %) |  |   | 100.0   | %

History and Development of the Bank

The Bank of Bermuda Limited was established in 1889 in Bermuda, and
formally incorporated in 1891, by local merchants to support the financial
requirements of their businesses and to provide general banking services to
individuals. We have evolved as Bermuda has grown from a largely agrarian
community to a successful financial and banking centre and a popular tourist
destination.

- 8 -



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Beginning in the early 1930s, we began to attract international business
to Bermuda by establishing a trust department. This allowed us to act in a
fiduciary capacity for international clients wishing to have their assets held
in an offshore location. We experienced an increase in business in the early
1950s with the increase of captive insurance companies incorporating in
Bermuda. Captives are corporate entities created and controlled by either a
parent company, professional association or a group of businesses with the sole
purpose to provide insurance for that parent, association or group, as an
alternative to purchasing insurance from the external market. More recently,
business opportunities have arisen as a result of the development of the
Bermuda reinsurance market.

As the offshore mutual fund industry developed in the late 1960s, we began
providing banking, custodial and specialised services to this industry.
Providing these services has not only contributed significantly to our
revenues, but has also been an important factor supporting the development of
our international network of offices.

In the late 1960s, we began establishing a physical presence outside
Bermuda, and established a representative office in London and subsidiary
operations in Guernsey. In 1974, we opened an office in Hong Kong and, in the
years that followed, our international network expanded to include the Isle of
Man, New York, the Cayman Islands, Dublin and Luxembourg. Our acquisition of
the institutional trust business, including custody and administrative
services, from the Standard Chartered Group in 1993 allowed us to significantly
expand our operations in Hong Kong and establish a strategic presence in
Singapore. In 1994, we acquired the private trust subsidiaries of Standard
Chartered Group, which included Jersey, New Zealand and Cook Islands
operations.

In the late 1990s, we organised ourselves into the four business divisions
described above, focused on meeting the needs of our key client groups by
leveraging services provided across our international network on a globally
co-ordinated basis.

Our head office is located at 6 Front Street, Hamilton HM 11, Bermuda and
our telephone number is (441) 295-4000.

Strategic Plan

Long-term Strategy

Our strategy is to compete in markets where we believe long-term trends
drive demand for our services and we have a sustainable competitive advantage.
We believe that the consolidation of the banking industry in recent years has
resulted in greater opportunities for us to differentiate ourselves from our
competition by developing close client relationships that enable us to
establish a deep understanding of client needs and offer customised solutions
that larger commodity-type service providers do not provide. The elements of
our long-term strategy include the following:



| |  |  | delivering high quality integrated products and services, customised to meet the needs of our client base;
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | developing selected market niches in recurring fee-based businesses;                                      
|
| |  |  | leveraging advances in technology to develop improved products and increase efficiency; and               
|
| |  |  | attracting and retaining highly qualified personnel with specialised skills.                              

Current Initiatives

Underlying our long-term strategy is our goal to build upon and strengthen
our position as a provider of financial services. Our key current initiatives
include the following:



| |  |  | Capitalising on global trends by growing our global fund and
private client services businesses in select target markets. We
believe that, in recent years, these businesses have been supported
by several strong global trends. These trends include the growth of
the alternative fund industry, an aging population in developed
countries, growing interest in cross-border investing, an increasing
number of international high net worth individuals and families and
increasing regulatory requirements that create demand for
high-quality service providers. We plan to continue to strengthen
our competitive positioning in markets that benefit from these
trends. In particular:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  |  | we are continuing to invest in technology and
highly-skilled people to strengthen our appeal to independent
and emergent investment managers with skills-based strategies,
which include those managing alternative
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 9 -



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| |   |  | investment vehicles such as hedge funds and funds of funds. We
are also increasing our presence in locations, such as Dublin
and New York, that are centres for the alternative fund
industry, and are augmenting our sales teams there.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we have an established position as a service provider
to the Hong Kong pension fund industry, which has benefited from
government mandated pension requirements in recent years. The
investment in people and systems to support the government
mandated pension business was substantially completed in late
2000. We plan to maintain our position in this market and
benefit from increased revenues as fund asset values accumulate
over time. We also plan to leverage our established name in the
Far East marketplace to actively grow our alternative asset
client base in this market. We are introducing new technology
in the Far East that will significantly improve our servicing
capability to this market.
|
| |  |  | our private client services division is increasing
its sales teams in target geographic markets where it believes
that its fiduciary expertise, notably in multi-jurisdictional
and offshore structures, provides a competitive advantage and
where it has strong relationships with intermediaries. For
example, in 2002 we obtained regulatory approval to add client
relationship managers to our London office as we plan to
increase our presence with the UK resident non-domiciled market.
We have assigned client relationship managers who are dedicated
to each targeted geographic market and have individual sales
targets on which their incentive compensation is based.                                    
|

| |  |  | Targeting clients who have complex needs and who will benefit
from our specialised approach. We intend to continue to target
clients who have complex needs and who will benefit from our
specialised approach. In particular, as described above, we will
continue to focus our business development activities on independent
and emergent fund managers with skills-based strategies, including
those managing alternative investment vehicles such as hedge funds
and funds of funds. We believe that this is a growing market niche
with specialised requirements that fits well with our ability as a
smaller provider to develop client-focused services. Our strategy is
to achieve growth by focusing on profitable relationships and
investing in client relationships and markets that we believe will
allow us to achieve above-average returns.                                                                                                                                                                                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Enhancing and expanding our product and service offerings to
capitalise on market opportunities. We believe that by building on
our reputation as a provider of trust services, we can offer
additional wealth management services to our high net worth clients.
To achieve that goal, we intend to continue enhancing our product and
service offerings in order to deepen our client relationships and
increase our cross-selling of investment services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Automating and expanding services.We believe that
developments in technology will allow us to further reduce costs
through increased automation, expand our ability to service clients
anywhere in the world and improve our products and services. In
2002, we successfully launched two new banking products: EasyLink
Online and GlobalConnect. Easylink Online is an internet-based
banking solution for our community banking customers that offers
real-time access to bank accounts and services. Since the initial
launch of the product, we have continued to expand its functionality
and volume has continued to grow. GlobalConnect is an internet-based
banking product designed for our corporate banking clients that
offers online account maintenance, straight-through international
money transfer payments in multiple currencies and automated sweep
facilities into the Banks proprietary funds. GlobalConnect also
allows clients to make electronic payments, perform online deposit
dealing and execute foreign exchange trades securely over the
internet.
|
| |  |  | Maintaining our traditional Bermuda banking business and
cross-selling higher margin products and services to this market. We
are focused on maintaining our Bermuda-based community banking
business by emphasising personal service and fostering long-term
relationships. We also aim to increase the number of products and
services offered to this market by providing more accessible
investment products and adding to our credit offerings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Our Business Divisions

We market our products and services through four business divisions:
Global Fund Services, Private Client Services, Corporate Banking (previously
named Corporate Cash Management) and Community Banking (previously named Retail
Client Services).

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\

Global Fund Services

Our global fund services division, or GFS, provides a broad range of
tailored products and services to an international and diverse base of over 600
fund managers. GFS targets markets where we believe long-term trends drive
demand for its services and where we believe we have a sustainable competitive
advantage. For instance, GFS is building on its position as a leading service
provider to the traditional fund business in Asia-Pacific and, on a global
basis, focusing on growing its market position serving independent and emergent
fund managers with skills-based strategies. We believe that this is a growing
market niche with specialised requirements that fits well with our ability as a
smaller provider to develop client-focused services. These managers are
currently focused on alternative investment vehicles, such as hedge funds and
funds of funds. Our GFS division is developing its presence in jurisdictions
that attract these funds, including New York and Dublin, and investing in
technology that meets the needs of this market. GFS offers a tailored mix of
fund administration products, banking and global custody services, as described
on page 14.

Our GFS division generated revenues of $190.5 million in 2002, $189.2
million in 2001 and $179.0 million in 2000, representing 45.2%, 42.7%, and
40.5%, respectively, of our total revenue. Its revenues are geographically
diverse, with 34.0% of its total revenue generated from North America, 31.1%
from Europe and 34.9% from Asia-Pacific in 2002.

Among our more than 600 clients are some of the worlds leading fund
managers, including Orbis Investment Management Limited, SPARX Investment and
Research, Schroders Investment Management Limited, Jupiter Asset Management
Limited, Banco Santander (Suiza) S.A., Sloane Robinson Investment Management
Limited, Meditor Capital Management Limited, Alliance Capital Management,
Fidelity Investment Management Limited and Pioneer Alternative Investment
Management.

Private Client Services

Our private client services division, or PCS, provides high net worth
individuals and families, defined by us to be those with at least one million
dollars in investable assets, with a range of private trust and investment
services. PCS targets international clients with cross-border financial
requirements and provides an integrated approach to their financial affairs in
an increasingly complex regulatory and tax environment. The divisions
strategy is to attract business through its strong reputation as a quality
fiduciary in well-regarded jurisdictions and to complement its fiduciary
services with a range of wealth management solutions to meet its client needs.
We believe that we have a strong reputation for expertise in offshore and
cross-border structures, which enables our clients to structure their financial
affairs appropriately given the regulatory and fiscal considerations in the
various jurisdictions in which they and their families live and work, and that
ongoing global trends drive demand for our services. These trends include the
increasingly international nature of high net worth individuals and families
and the current environment of increased regulatory scrutiny, which strengthens
the appeal of reputable providers. The trust and investment services offered
by the PCS division are described on page 14.

Our PCS division has over 5,000 client relationships and generated
revenues of $90.0 million in 2002, $99.4 million in 2001 and $109.1 million in
2000, representing 21.4%, 22.4% and 24.7%, respectively, of our total revenue.
Of the divisions 2002 revenue, 46.8% was generated from North America, 30.7%
from Europe and 22.5% from Asia-Pacific.

We have built teams of relationship managers, supported by product
specialists, dedicated to managing and developing all of our client
relationships. These teams focus on priority geographic markets so that they
can increase their specific market expertise, develop a referral network and
achieve specified new business targets.

Corporate Banking

Our corporate banking division primarily provides cash management services
to offshore insurance management companies, multi-national corporations and
local Bermuda-based companies. To a lesser extent, the division provides
investment management services, foreign exchange services and corporate credit
facilities to these entities. The divisions products and services are
described further beginning on page 14. The corporate banking division is a leading
provider of banking services to the captive insurance industry. Insurance
management companies provide administrative services to captive insurance and
reinsurance companies established by U.S. and European corporations. These
management companies generally require relatively high levels of personal
service, while the parent companies of offshore subsidiaries require cash
management, investment management, foreign exchange and corporate credit
facilities. Our other corporate banking clients include trading,
telecommunications, shipping, foreign sales and investment holding companies,
as well as local Bermuda companies.

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Our corporate banking division has over 8,000 clients. Approximately 18%
of these relationships are with insurance companies. As of December 31, 2002,
we managed approximately $4.7 billion of cash, of which approximately $3.4
billion is derived from the Bermuda insurance industry. We believe that we
have an advantage relative to our domestic Bermuda competitors because we have
the highest credit rating among financial institutions based in Bermuda.

Corporate banking generated revenues of $54.6 million in 2002, $62.5
million in 2001 and $58.6 million in 2000, representing 13.0%, 14.1% and 13.3%,
respectively, of our total revenue. Of the divisions total revenue in 2002,
90.5% was generated in North America and 9.5% in Europe.
Despite improved operating efficiency, the spread compression on our customer
liabilities has reduced our overall interest earnings. The spread compression
has reduced the liabilities margins from 1.49% in 2001 to 1.07% in 2002. For
the year ended December 31, 2002, we derived 89% of net corporate banking
revenues, excluding investment losses, from net interest earnings, with the
remainder from banking fees.

Following the events of September 11th, there was a significant decline in
insurance industry capacity and a number of new insurance/reinsurance companies
have formed in Bermuda to take advantage of the supply and demand imbalance.
We have been successful in acquiring a significant share of these companies as
clients and hope to develop long-term relationships with them.

Recently, our corporate banking division has focused on capitalising upon
opportunities created in the online banking industry. In 2002, we launched
GlobalConnect, a web-based banking service which provides our clients with
online account maintenance, straight-through international money transfer
payments in multiple currencies and automated sweep facilities. GlobalConnect
also permits clients to make local payments and deposits and to execute foreign
exchange trades securely over the internet. These enhancements to our
automated environment have increased the capacity of our assistant relationship
managers, allowing them to focus on providing value-added financial solutions.

Community Banking

Operating only in Bermuda, our community banking division provides Bermuda
residents with a broad range of personal banking, investment and credit
products. Community banking delivers these products through multiple channels,
including eight branches, a network of automated teller machines (ATMs), a
call centre, automated telephone banking and EasyLink Online, a web-based
banking service. The products and services offered by our community banking
division are described beginning on page 14.

As of December 31, 2002, we had approximately 41% of the market based on
total Bermuda dollar deposits and 37% of the market based on total Bermuda
dollar loans and mortgages, according to data published by the Bermuda Monetary
Authority. In 2002, our community banking division averaged $1.72 billion in
customer deposits and $0.93 billion in loans and mortgages, while generating
net income of $14.2 million. Interest earnings contributed 73% of the
divisions total revenues, while fees accounted for 27%.

Community banking generated revenues of $74.4 million in 2002, $79.1
million in 2001 and $87.1 million in 2000, representing 17.7%, 17.8% and 19.7%,
respectively, of our total revenue.

Community banking is differentiated in the market by its ability to
provide its clients real-time access to banking accounts regardless of channel
used, whether our eight branches, our ATM network, our call centre, our
automated telephone banking system, or our web-based banking service, Easylink
Online.

We launched the Investment Centre in July 2002 in order to make investment
products and services easier and more accessible to clients. The Investment
Centre, located in our head office, caters to walk-in clients in need of
brokerage and mutual fund services, and also acts as a referral base for
clients in need of other bank services. During the year, we also introduced
the All Points Investment Savings Plan, a long-term investment plan that has a
lower initial investment requirement than our other investment products.

Our Product Divisions

The Banks four business divisions are closely supported by three product
divisions: banking and lending products, capital market products and
securities products. These support divisions:



| |  |  | provide consistency and efficiency in product management and delivery across the Bank;
| | - |  | --------------------------------------------------------------------------------------

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| |  |  | centralise development of product expertise; and                                                 
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | allow each of the business divisions to focus on building relationships and serving client needs.

Banking and Lending Products

The banking and lending products division, or BLP, is responsible for
management of our current and savings accounts, loan and mortgage accounts,
credit cards, letters of credit, and all cash management products, including
electronic banking services. BLP works primarily with clients of our corporate
and community banking divisions.

In support of these products and our corporate and community banking
divisions, in the past year, BLP has taken responsibility for the preparation
and approval of loans to the Banks domestic corporate, small business and
personal lending clients. In addition, BLP manages product development,
including user needs analysis, the gathering of competitive research, product
design, user acceptance testing and upon product completion, user training.

Capital Markets Products

The capital markets products division brings together the Banks treasury
activities with its proprietary mutual fund products and its Bermuda-based
securities brokerage business. Our treasury activities include the management
of our foreign exchange activity and our liquid and other financial assets,
with the exception of our loan portfolio.

We can provide 24-hour treasury transaction capabilities in approximately
50 currencies through our affiliates in Bermuda, Europe and Asia-Pacific. In
2002, we introduced an automated payments service for our Bermuda clients,
which handles foreign currency payments for selected currencies through our
Bermuda banking system. Also during 2002, we introduced a foreign exchange
overlay service for clients who wish to hedge their long-term foreign exchange
exposures using a systematic approach.

Our mutual fund products are marketed under the brand name of All Points.
We continually expand and refine our range of investment products and
customised services to meet our clients evolving needs. Our products are
built on the principle of carefully selecting third-party money managers who
meet the criteria we have set for managing our funds. Access to these mutual
funds allows our customers to take advantage of the expertise and experience of
these money managers. These products include a variety of equity, alternative
asset and fixed income products designed for our client groups. We also offer
internally managed money funds, which provide individual and institutional
clients with short duration cash equivalent investments.

The following table sets forth the amount of net assets we had in our
family of funds as of December 31, 2002:

|                                           |  |                   |         |               |  |                |  | 
|------------------------------------------ |  | ----------------- | ------- | ------------- |  | -------------- |  | 
|Family of Funds                            |  | Net Assets        |         | Date Launched
|                                           |  |                   |         |              
|                                           |  | (US$ in millions) |         |               |  |               
|All Points Corporate Money Funds           |  | $                 | 4,636.4 |               |  | December 1997 
|All Points Global Cash Funds               |  |                   | 604.9   |               |  | November 1993 
|All Points Fund of FundsAlternative Class |  |                   | 132.8   |               |  | November 1999 
|All Points Fund of Funds                   |  |                   | 122.1   |               |  | June 1998     
|All Points Absolute Return Funds           |  |                   | 20.9    |               |  | January 2002  
|All Points Index Funds                     |  |                   | 17.2    |               |  | September 1994
|All Points Managed Portfolios              |  |                   | 7.8     |               |  | October 2002  
|All Points Multi-Manager                   |  |                   | 838.4   |               |  | May 1999      
|                                           |  |                   |         |               |  |                |  | 
|Total                                      |  | $                 | 6,380.5 |               |  |                |  | 
|                                           |  |                   |         |               |  |                |  | 

Our Bermuda-based securities brokerage operates under the name Bermuda
International Securities Limited. We also offer our clients a mutual fund
trade execution service for third-party mutual funds.

Capital market products was formed to bring together our capital markets
facing activities in order to maximise our buying power. In addition, the
capital markets products division supports our business divisions by ensuring
that all clients can access our full range of investment and foreign exchange
products. We are focused on supplying a range of products from the global
capital markets that satisfies the needs of our clients.

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Securities Products

The securities products division was created in 2002 to deliver cost
effective, automated and industry standard securities products and services to
the Banks global business divisions and their clients. The divisions
products encompass all elements of the securities trade life cycle from trade
execution to settlement, custody, corporate actions and securities lending.
The division intends to source, create and deliver securities products
solutions that are competitive, innovative, and continually improved in
accordance with business and client requirements at a transfer price that
achieves profitability targets. The division intends to work towards the
delivery of web-enabled securities products with core functionality to be
applied across all of the Banks businesses.

Products and Services

With the support of our three product divisions, we provide our clients
with the following products and services:

trust and related:



| |  |  | fund administration products for collective investment
vehicles, including accounting and valuation, administration,
registrar and transfer agency, shareholder services and corporate
management;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | global custody services, including trade settlement, compliance
and reporting; and                                                                                                                
|
| |  |  | private trust services, including a range of fiduciary, estate
planning and related services, such as financial planning.                                                                         

investment:



| |  |  | discretionary and directed investment management, brokerage and
execution, mutual funds and other investment vehicles; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | financial and retirement planning services.                                                                               

foreign exchange:



| |  |  | competitive spot and forward pricing in all major and many
emerging market currencies with non-deliverable forward dealing where
forward markets are illiquid or regulations prevent a free flow of
capital to hedge currency risk;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | foreign exchange option strategies to hedge asset and corporate
revenue flows and to allow clients to profit from moving markets;                                                                                                  
|
| |  |  | collateralised trading facilities;                                                                                                                                                                                                 
|
| |  |  | research in the form of daily analysis of market movements made available to clients by fax or e-mail; and                                                                                                                         
|
| |  |  | interest rate management through forward rate agreements or interest rate swaps.                                                                                                                                                   

banking:



| |  |  | a full range of corporate banking products and deposit
services, including cash management, interest-bearing sub accounts,
checking facilities, electronic funds transfers, automated standing
order payments, direct deposits, loans and deposit products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | personal banking services, including checking and savings accounts;                                                                                                                                                                                        
|
| |  |  | corporate credit facilities;                                                                                                                                                                                                                               

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##### Table of Contents





| |  |  | commercial and personal loans and mortgages;                                            
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | personal and corporate MasterCard and Visa credit cards; and                            
|
| |  |  | credit card transaction servicing, including transactions for
local Bermudian merchants.

Our International Network

Our main office is based in Bermuda. We also have other offices located in
North America, as well as offices located in Europe and Asia-Pacific, that are
an integral part of our operations.

The following table presents the geographic contribution to our revenues
for the periods presented:

|                    |                     |   |              |         |              |   |            |         |      |   |                    |         |  |   |         |         |  |   |         |         | 
|------------------- | ------------------- | - | ------------ | ------- | ------------ | - | ---------- | ------- | ---- | - | ------------------ | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                    |                     |   |              |         |              |   |            |         |      |   | Six Months         |         |  |   |         |         |  |   |        
|                    |                     |   | Year Ended   |         | Ended        |   | Year Ended
|                    |                     |   | December 31, |         | December 31, |   | June 30,  
|                    |                     |   |              |         |              |   |           
|                    |                     |   | 2002         |         | 2001         |   | 2000       |         | 2000 |   | 1999              
|                    |                     |   |              |         |              |   |            |         |      |   |                   
|                    |                     |   |              |         |              |   |            |         |      |   | (US$ in thousands) |         |  |   |         |         |  |   |        
|Bermuda             |                     | $ | 221,455      |         |              | $ | 245,155    |         |      | $ | 117,428            |         |  | $ | 225,260 |         |  | $ | 190,103 |        
|Other North America |                     |   | 14,274       |         |              |   | 10,383     |         |      |   | 12,880             |         |  |   | 21,126  |         |  |   | 17,855  |        
|                    |                     |   |              |         |              |   |            |         |      |   |                    |         |  |   |         |         |  |   |         |        
|                    | Total North America |   |              | 235,729 |              |   |            | 255,538 |      |   |                    | 130,308 |  |   |         | 246,386 |  |   |         | 207,958 | 
|Hong Kong           |                     |   | 74,520       |         |              |   | 76,208     |         |      |   | 35,770             |         |  |   | 70,983  |         |  |   | 54,325  |        
|Other Asia-Pacific  |                     |   | 12,866       |         |              |   | 11,783     |         |      |   | 5,618              |         |  |   | 10,002  |         |  |   | 7,040   |        
|                    |                     |   |              |         |              |   |            |         |      |   |                    |         |  |   |         |         |  |   |         |        
|                    | Total Asia-Pacific  |   |              | 87,386  |              |   |            | 87,991  |      |   |                    | 41,388  |  |   |         | 80,985  |  |   |         | 61,365  | 
|Europe              |                     |   | 97,882       |         |              |   | 100,279    |         |      |   | 48,337             |         |  |   | 91,641  |         |  |   | 84,614  |        
|                    |                     |   |              |         |              |   |            |         |      |   |                    |         |  |   |         |         |  |   |         |        
|                    | Total Bank          |   | $            | 420,997 |              |   | $          | 443,808 |      |   | $                  | 220,033 |  |   | $       | 419,012 |  |   | $       | 353,937 | 
|                    |                     |   |              |         |              |   |            |         |      |   |                    |         |  |   |         |         |  |   |         |        

North America

Our North America region includes our home base, Bermuda, as well as New
York and a small presence in the Cayman Islands. In 2002, our North American
operations contributed 56.0% of our total revenue, and 64.3% of our net income.
Our operations in Bermuda generated 93.9% of our revenue from North America in
2002.

All of our business divisions are active in our Bermuda head office
location. Our banking divisions, Corporate Banking and Community Banking,
together generate more than half of our total North American revenues from our
Bermuda home base. Our Corporate Banking division provides its full range of
products and services to its Bermuda client base, which includes the
Bermuda-based insurance industry, other multinational companies and local
Bermuda corporations. Our Community Banking division operates solely in
Bermuda where it provides local residents with personal banking, investment,
and lending products. Our Global Fund Services and Private Client Services
divisions service from Bermuda both locally-based and overseas clients and
offer their full range of products and services.

Our New York presence is through our subsidiary, Bank of Bermuda (New
York) Limited, or Bank of BermudaNY, a limited-purpose trust company whose
principal business is the provision of valuation and accounting services to
foreign and domestic investment vehicles. Our New York office is a developing
centre for our Global Fund Services business and we are introducing technology
and building capacity to grow our alternative fund business from this location.
Currently, traditional fund clients represent approximately one third of our
GFS North American business and the remaining two thirds is represented by
alternative asset clients, such as hedge funds, emerging market funds, funds of
funds and private equity funds.

In the Cayman Islands, we service investment funds and provide banking,
trust and investment services to private clients.

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Europe

Our offices in Europe are located in a number of financial centres. In
2002, our European operations contributed 23.2% of our total revenue, and 17.0%
of our net income. Our GFS division currently generates approximately 65% of
our total revenues in Europe, with our PCS division contributing approximately
30% and Corporate Banking accounting for the remainder.

Our locations in Guernsey and the Isle of Man service clients of each of
our three international business divisions and offer their full range of
products and services. Our office in Jersey provides clients access to our GFS
and PCS businesses. Our offices in Dublin and Luxembourg are currently largely
focused on our Global Fund Services business. Our existing fund administration
business in Europe is divided between traditional and alternative funds, and we
believe that the development of the hedge fund industry is an important trend
that will be a driver of future growth in this region. We have added staff to
our sales teams in Europe, focusing particularly on the development of the
Dublin office.

In 1996, we acquired Le Masurier, James and Chinn Limited, a stock
brokerage company in Jersey, to augment our investment service delivery in
Europe. In 1998, we opened an office in Stirling, Scotland to provide global
information systems support to our businesses. Our strategic location in
Stirling allows our information systems division to work closely with our
offices around the world as the time difference between Stirling and our other
offices allows interaction during office hours. In February 2002 we received a
banking licence from the Central Bank of Ireland and have incorporated a new
subsidiary, Bank of Bermuda (Europe) PLC, to offer banking services from our
Dublin office.

Asia-Pacific

Our Asia-Pacific region includes offices in Hong Kong, Singapore, the Cook
Islands and New Zealand. In 2002, our Asia-Pacific operations contributed
20.8% of our total revenue, and 18.7% of our net income. Our operations in
Hong Kong generated 85.3% of our revenue from the Asia-Pacific region in 2002.
Global Fund Services generates approximately 75% of our total Asia-Pacific
revenue, with Private Client Services contributing the remainder.

Our existing GFS client base in the Asia-Pacific region largely consists
of traditional funds, including pension funds. In 2000, we were appointed to
service funds that represented 24% of contributions to new Hong Kong
government-mandated pension funds known as Mandatory Provident Funds, or MPF.
This new pension fund market complemented our established pension fund business
in Hong Kong. The investment in people and systems to support the MPF business
was substantially completed in late 2000, and contributions to the new MPF
funds began in early 2001. We expect the related revenues to build over time,
as they are based on the fund asset values, which steadily accumulate as
contributions are received. The current rate of MPF contribution flows is
approximately $750.0 million per annum.

Our Singapore office also provides trust services to both corporate and
private clients in the Asia-Pacific region. In addition, we have a leading
position in the small, but growing Singapore fund industry.

Our business units in the Cook Islands and New Zealand provide private
trust services. In the Cook Islands, company management is also undertaken on
a selective basis in conjunction with these trustee appointments.

Although the ongoing growth of pension funds is a key driver of our
current growth in the Asia-Pacific region, we anticipate that alternative asset
management products will form a larger part of our strategy in the region going
forward. In 2003, we plan to introduce technology in the Asia-Pacific region
to further improve our servicing capability to this market. Specifically, the
Bank will implement Advent Softwares Geneva real-time global portfolio
accounting system and Advent Partner partnership accounting system.

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The following chart summarises and outlines some key information for each
of the offices in our international network as of December 31, 2002:

|              |                           |          |                       |          |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  |       |  |  |  |      | 
|------------- | ------------------------- | -------- | --------------------- | -------- | ------- | ------- | --------- | ------- | --------- | --------- | --------- | --------- | ---------- |  |  | - |  |  |  | ----- |  |  |  | ---- | 
|              |                           |          | Client Group Serviced |          |         |         |           |         |           |           |          
|              |                           |          |                       |          |         |         |           |         |           |           |          
|              |                           |          | Global                |          | Private |         |           |         |           |           |           |           |            |  |  |   |  |  |  |       | 
|              |                           |          | Fund                  |          | Client  |         | Corporate |         | Community |           | Number of |           | Operations
|Office        |                           | Services |                       | Services |         | Banking |           | Banking |           | Employees |           | Commenced
|              |                           |          |                       |          |         |         |           |         |           |           |           |          
|North America |                           |          |                       |          |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  |       |  |  |  |     
|              | Bermuda                   |          |                       | x        |         |         |           | x       |           |           |           | x         |            |  |  | x |  |  |  | 1,192 |  |  |  | 1889 | 
|              | The Cayman Islands        |          |                       | x        |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 11    |  |  |  | 1988 | 
|              | New York                  |          |                       | x        |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  | 85    |  |  |  | 1983 | 
|Europe        |                           |          |                       |          |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  |       |  |  |  |     
|              | Dublin                    |          |                       | x        |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  | 197   |  |  |  | 1991 | 
|              | Guernsey, Channel Islands |          |                       | x        |         |         |           | x       |           |           |           | x         |            |  |  |   |  |  |  | 175   |  |  |  | 1973 | 
|              | Isle of Man               |          |                       | x        |         |         |           | x       |           |           |           | x         |            |  |  |   |  |  |  | 111   |  |  |  | 1972 | 
|              | Jersey, Channel Islands   |          |                       |          |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 56    |  |  |  | 1972 | 
|              | London                    |          |                       | x        |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 30    |  |  |  | 1968 | 
|              | Luxembourg                |          |                       | x        |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 185   |  |  |  | 1987 | 
|              | Stirling, Scotland(1)     |          |                       |          |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  | 127   |  |  |  | 1998 | 
|Asia-Pacific  |                           |          |                       |          |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  |       |  |  |  |     
|              | Cook Islands              |          |                       | x        |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 19    |  |  |  | 1994 | 
|              | Hong Kong                 |          |                       | x        |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 644   |  |  |  | 1974 | 
|              | New Zealand               |          |                       |          |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 2     |  |  |  | 1994 | 
|              | Singapore                 |          |                       | x        |         |         |           | x       |           |           |           |           |            |  |  |   |  |  |  | 125   |  |  |  | 1993 | 
|Other         |                           |          |                       |          |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  |       |  |  |  |     
|              | Bahrain                   |          |                       | x        |         |         |           |         |           |           |           |           |            |  |  |   |  |  |  | 2     |  |  |  | 1997 | 



---

|(1) |  | Our Stirling office provides global information systems support.
|--- |  | ----------------------------------------------------------------

Capital Expenditures and Divestitures

The following are our principal capital expenditures for the three years
ended December 31, 2002:



| |  |  | In 1999, we commenced the renovation of our head office located
at 6 Front Street, Hamilton, Bermuda. This project is estimated to
cost $18.1 million and we had incurred costs of $11.0 million at
December 31, 2002.                                                                                                                                                                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In 2001, we began a project to install a new accounting and
reporting system for GFS. The estimated cost of the project is $13.6
million and we had incurred costs of $8.1 million at December 31,
2002.                                                                                                                                                                                                                                                                              
|
| |  |  | In 2002, we began a project to upgrade our banking and treasury
systems. The estimated cost of the project is $28.6 million and we
had incurred costs of $2.9 million at December 31, 2002.                                                                                                                                                                                                                                                                                           
|
| |  |  | We are investing in a data-warehouse based Management
Information System that will enable detailed individual client and
product profitability reporting to facilitate decision-making and
management processes. It will also improve forecasting and planning
capabilities and automate the production of business analyses that
are currently generated manually. The estimated cost of the project
is $12.8 million and we had incurred costs of $3.1 million at
December 31, 2002.
|
| |  |  | On an ongoing basis, we replace or upgrade our information
systems. Capital expenditures for systems-related projects was $12.1
million for fiscal year ended December 31, 2002, $17.7 million for
fiscal year ended December 31, 2001, $8.4 million for the six months
ended December 31, 2000 and $11.3 million for fiscal year ended June
30, 2000.                                                                                                                                

There have been no significant divestitures during the three years ended
December 31, 2002. However, see Item 5. Operating and Financial Review and
ProspectsConsolidated Results of OperationsYear Ended December 31, 2001
Compared with the (unaudited) Year Ended December 31, 2000Other
Income/(Loss)First Ecommerce Data Services (FEDS) for a

- 17 -



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##### Table of Contents



discussion of the sale of our interest in First Ecommerce Data Services
and Item 5. Operating and Financial Review and ProspectsResults of
OperationsYear Ended December 31, 2001 Compared with the (unaudited) Year
Ended December 31, 2000Gains/(Losses) on Available for Sale Marketable
Securities for a discussion of the sale of our interest in First Ecom.com and
the London Stock Exchange, respectively. In addition, see Properties for a
discussion of the sale of our office building in Guernsey and the planned sale
of our office building in the Cayman Islands.

Competition

Internationally, we face substantial competition in every line of products
and services we offer. In addition to deposit taking institutions, we face
competition from investment banking companies, advisory firms, insurance
companies, private trustees, law firms and brokers. Many of these competitors
are household names worldwide and have substantially greater resources than we
have. Our principal international competitors for GFS clients include a number
of major global financial institutions. The most significant competition to
our PCS division comes from many prominent international money managers and
international private banking organisations. We compete on the basis of a
number of factors, including the quality of our products and services, our
reputation, our international network of offices in leading financial centres
and price.

There are only four licenced banks in Bermuda. In addition to us, there
are The Bank of N. T. Butterfield & Son Limited, Bermuda Commercial Bank
Limited and Capital G Bank. The Bank of N. T. Butterfield & Son Limited
competes with us in several jurisdictions outside of Bermuda, including the
Cayman Islands and Guernsey, and provides a full range of banking
services in Bermuda. Bermuda Commercial Bank Limited does not have any
operations outside of Bermuda and does not conduct any retail banking business,
but competes with us in Bermuda for our Bermuda-based corporate banking
business. Capital G Bank competes with our community banking division in
Bermuda. There are approximately 36 licenced trust companies in Bermuda, some
of which are subsidiaries of major international banking institutions. There
are also a number of corporations providing corporate trust services from
Bermuda. We compete directly with all of these organisations.

Risk Management

We group the many forms of risk we face into three broad categories:



| |  |  | credit riskarising when others fail to fulfil commitments they have made to us;                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | operational riskarising from our day-to-day business activities; and                                                                                                                                        
|
| |  |  | market riskresulting from the interest rate and foreign
exchange risk from our core borrowing, lending and investment
activities. See Item 11. Quantitative and Qualitative Disclosures
About Market Risk.

We have adopted a consolidated approach to risk management through the
creation of three levels of oversight, which includes the risk management
committee, the risk management division, and the risk management working
groups.

The risk management committee provides high-level oversight on exposure
and control mechanisms. This responsibility includes evaluating the adequacy
of steps taken by the Banks management, business groups and support functions
to identify, monitor, measure and control risk.

The risk management division identifies and evaluates areas or activities
considered to be high risk from a corporate perspective, provides central
co-ordination of balance sheet management, strategic liquidity and other
issues, manages the Banks global policies and practices, provides oversight
for treasury activities, and leverages appropriate resources throughout the
organisation to enhance the risk management process. This team also recommends
and assists in implementing corrective measures.

The risk management division, working with other areas of the Bank, seeks
to establish and maintain an effective risk management process and structure,
assess business risk across products, services and at the institutional level,
develop business risk management strategies, develop and implement risk
management capabilities, monitor and report risk management performance,
continuously improve business risk management processes and institutional risk
management capabilities.

The risk management working groups consist of the credit policy committee,
the asset and liability committee, the market risk committee and the compliance
officers operating working group.

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Credit Risk

Credit risk is inherent in our client lending activities and our capital
market activities. Management of credit risk is a primary responsibility of
our business divisions, with overall responsibility and oversight assigned to
our credit risk management unit, which exercises this role through the
established credit structure in accordance with policies established by our
credit policy committee. The credit policy committee is chaired by the chief
credit officer, who reports to our head of risk management.

In addition to approving credit policies and guidelines, the credit policy
committee ratifies the limits of lending authority that are delegated to the
heads of the various credit portfolios, as well as the conditions under which
these limits may be exercised. Upon the recommendation of the portfolio head,
the chief credit officer may delegate limits to subordinates on the basis of
need, experience and qualifications. Individual credit authority is limited to
specified amounts, transaction types, risk categories and collateral structures
within specified portfolios. Credit decisions involving commitment exposures
in excess of the specified individual limits are approved within credit risk
management and by the respective business head, depending on the transaction
size.

Business units are responsible for assigning the risk ratings to obligors
and conducting annual reviews of the credit relationship. Validating the
consistency and accuracy of the risk ratings applied and evaluating the
business units underwriting and risk management of credit exposures are a key
part of the periodic credit reviews performed by the credit review team. The
credit review unit, which is comprised of credit officers and reports to the
chief credit officer, conducts on-site, in-depth credit reviews in the Bermuda
and overseas lending units and issues written reports of their findings
including a rating methodology of key credit process elements of the reviewed
portfolio, along with management comments from the lending unit reviewed.
Frequently, review teams are supplemented by a guest reviewer from another
business unit who joins the team for a specific review. This broadens the
skills base of each review team and provides credit training for the guest
reviewers. The credit risk management department tracks corrective action
being taken by the relevant business units on an ongoing basis.

On a quarterly basis, our credit risk management department examines
impaired and delinquent loans to analyse the adequacy of specific provisions
and adjusts provisions as they deem necessary, in accordance with our
provisioning policies. The unit also plays an active oversight role and works
with the lending units on an ongoing basis to establish remedial action
strategies for impaired loans and monitors the implementation of those plans.

The credit risk management unit has overall responsibility for the
management and monitoring of country risk exposures, as well as establishing
appropriate policies and guidelines. In addition, individual overseas offices
have responsibility for monitoring exposures within specific regions.

Our day-to-day capital markets products operations include investments in
money market and other debt instruments, interest rate and foreign exchange
trading on behalf of clients, and international money transfers. These
activities give rise to substantial daily settlements between us and other
financial institutions and other counterparties, in addition to the credit risk
of the investment and money market portfolio. Counterparty limits are assigned
and closely monitored by the capital markets credit team, which reports to the
head of capital markets products and to the chief credit officer.

Our global custody operations also generate credit risk. Our GFS client
base often invests in emerging markets and we believe that our experience in
emerging market funds management is one of our key strengths. We have
developed a comprehensive sub-custodial network for our emerging markets
business. Sub-custodians are subject to strict selection criteria.

In these emerging markets, our clients, and not us, are generally
responsible for local custody risks. Where we appoint a sub-custodian under
the specific direction of the client, we will typically negotiate to reduce our
potential level of liability. We do not accept liability for losses arising
from political and sovereign events, war and insurrection or acts of God,
unless the client can demonstrate that we failed to make reasonable efforts to
protect the clients assets or it is defined as our responsibility under local
law. In addition, we generally do not accept liability for any loss caused by
reason only of the liquidation, bankruptcy or insolvency of any agent,
sub-custodian or delegate that is not affiliated with us.

Operational Risk

The financial and business industry has historically focused on market and
credit risk. However, recent events in the industry have shown that
institutions need to pay equal attention to operational risk. Operational risk
is the exposure created by deficiencies or failures in internal processes,
systems or information flows that may result in an unexpected loss. External
events may also directly or
- 19 -Table of Contents

indirectly create operational risk. The time horizon for this type of
risk is wide and often difficult to quantify. Losses may affect business
relationships, which could result in legal or regulatory actions. In other
circumstances, operational risks can give rise to credit and market risk.

Our operational risk management processes are integrated directly into our
businesses and operate as a regular process across risk types, business lines
and into business strategic plans. These processes must be periodically
re-evaluated within the ever-changing context of regulatory statutes, industry
best practices and the markets in which we conduct business.

The execution of operational risk processes is the responsibility of all
Bank staff through awareness and application of the Banks systems of internal
controls. Overall management of operational risk is the responsibility of our
business heads and senior management. The risk management division provides
direct assistance and oversight on controls and internal processes. These
controls are subject to day-to-day oversight by compliance staff and periodic
review from our internal audit group. We also seek to manage this risk by
having procedure manuals, different levels of transaction verification and
appropriate separation of responsibilities. The risk management division also
attempts to provide an overview of the Banks operational exposures across the
institution in a common framework. The team provides tools and methodologies
that may be used throughout the organisation to ensure controls are embedded
within operational processes.

Regulation and Supervision

Regulation and Supervision in Bermuda

We are subject to regulation and supervision by the Bermuda Monetary Authority, or BMA, under:



| |  |  | the Bermuda Monetary Authority Act 1969;               
| | - |  | -------------------------------------------------------
|
| |  |  | the Banks and Deposit Companies Act 1999;              
|
| |  |  | the Trusts (Regulation of Trust Business) Act 2001; and
|
| |  |  | the Investment Business Act 1998.                      

We are also subject to regulation by the Minister of Finance under the
Companies Act 1981.

Supervision and Monitoring by the Bermuda Monetary Authority

Our activities are monitored by the BMA on an on-going basis. One of the
principal objectives of the BMA is to supervise, regulate and inspect Bermudian
financial institutions to ensure their financial stability and soundness. The
monitoring is primarily for the benefit and protection of our customers and not
the benefit of our investors. The BMA is also responsible for managing and
regulating transactions in foreign currency or gold on behalf of the Government
of Bermuda.

In addition to conducting on-site reviews to perform its duties, the BMA
utilises a comprehensive quarterly statistical return system which enables
off-site monitoring. The system, which follows the standards imposed on banks
in the United Kingdom by the Financial Services Authority and is consistent
with Basel Committee Standards (see The Basel Committee on Banking
Supervision), provides the BMA with a detailed break-down of a banks balance
sheet and profit and loss accounts on both a consolidated and unconsolidated
basis. This information enables the BMA to monitor the soundness of a banks
financial position and ensure that it meets the minimum total capital ratio of
10%. Total capital ratio is calculated by dividing risk weighted assets into
total capital where total capital is equal to the sum of Tier 1 and Tier 2
capital and risk weighted assets is calculated by assigning a risk weight to
each asset and exposure.

The BMAs approach to the definition of capital reflects international
best practice and, in particular, the work of the Basel Committee. In order to
qualify as Tier 1, or core capital, capital must be fully paid up, have no
fixed servicing or dividend costs attached to it, and be freely available to
absorb losses ahead of general creditors. Capital also needs to have a very
high degree of permanence if it is to be treated as Tier 1. Tier 1 capital
consists of permanent share capital, share premiums, other surpluses and
retained profit and loss arising during the current year, where verified by an
institutions external auditors. Our Tier 2, or supplementary capital,
consists of general provisions (only up to a total of 1.25% of total risk
weighted assets). Tier 2 capital can also

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consist of reserves arising from the revaluation of tangible fixed assets,
minority interests in Tier 2 preferred shares and qualifying subordinated term
debt. The BMA also requires that each bank in Bermuda hold Tier 1 capital in
an amount that exceeds the value of its Tier 2 capital. As of December 31,
2002, our total capital was $659.0 million, which was composed of approximately
$638.4 million in Tier 1 capital and approximately $20.6 million in Tier 2
capital, and our risk weighted assets was equal to approximately $4.3 billion,
resulting in a total capital ratio of 15.4%.

In the United States, the Federal Reserve Board guidelines for risk-based
capital requirements, applicable to all bank holding companies, require the
minimum ratios of Tier 1 capital and total capital to risk adjusted assets to
be 4% and 8% respectively. Furthermore, the Federal Reserve Board has adopted
leverage capital guidelines requiring bank holding companies to maintain a
minimum Tier 1 leverage ratio, which is the ratio of Tier 1 capital to total
quarterly average assets, of at least 3%. However, the regulations define
well capitalised for bank holding companies to mean a minimum Tier 1
risk-based capital ratio of 6%, a minimum of total risk-based capital ratio of
10% and a minimum Tier 1 leverage ratio of 5%. We are not subject to the
guidelines of the Federal Reserve Board. However, if we were so subject, as of
December 31, 2002, our capital adequacy ratios would qualify in the well
capitalised category because of our total capital ratio of 15.4%, Tier 1
capital ratio of 14.9%, and Tier 1 leverage ratio of 6.0%.

As our home country supervisory authority, the BMA is responsible for the
consolidated supervision of our worldwide operations. There are also host
regulatory bodies performing a similar function to that of the BMA in all major
locations in which we operate. Many of these local authorities require
detailed reporting on the activities of our branches and subsidiaries located
in their jurisdictions. As part of its oversight process, the BMA receives
copies of each of these reports on a regular basis and liases with the
regulatory authorities in the respective locations.

Banks and Deposit Companies Act 1999

Licensing Restrictions and Contingencies

The Banks and Deposit Companies Act 1999, or BDCA, prohibits any person
from carrying on a deposit-taking business in or from within Bermuda unless
that person is incorporated in Bermuda and licenced by the BMA under the BDCA.
The BDCA provides for two classes of licences, banking licences and deposit
company licences. We hold a banking licence and a deposit company licence. A
company which holds a banking licence must provide a range of minimum services
to the public in Bermuda, including checking accounts, other deposit accounts,
loan facilities in Bermuda dollars, foreign exchange services and credit card
or debit card facilities. A company holding a deposit company licence
typically offers a small range of services but must also provide some specified
services to the public in Bermuda, including savings, deposit or other similar
accounts in Bermuda dollars and loans in Bermuda dollars secured on mortgages
of real property in Bermuda.

As the agency responsible for administering the BDCA, regulating
deposit-taking businesses and protecting depositors, the BMA has broad
authority to compel companies licenced under the Act to take or cease specific
actions and comply with informational or access requests. The BMA can do, or
compel these companies, including us, to do, any or all of the following:



| |  |  | provide such information as the BMA may reasonably require for
the performance of its functions under the BDCA;                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | submit a report prepared by our auditors or by an accountant or
other person with professional skills on any matter relating to our
deposit-taking business;
|
| |  |  | produce documentation or other information relating to our deposit-taking business;                                                                         
|
| |  |  | enter our premises to obtain information and documents;                                                                                                     
|
| |  |  | examine, copy or retain any documents relating to our deposit-taking business;                                                                              
|
| |  |  | appoint an inspector to carry out an investigation of our affairs; and                                                                                      
|
| |  |  | restrict the scope of a licence or revoke a licence.                                                                                                        

- 21 -



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The BMA provides guidance on how it interprets aspects of the BDCA. In
addition, the BMA has the power to vary, suspend or revoke our banking licence
and to give us directions if it feels these are necessary to protect our
depositors. Our failure to comply with any of the statutory requirements set
forth in the BDCA could result in criminal penalties.

We are required to report certain transactions to the BMA. These include
any transaction relating to any one person as a result of which we would be
exposed to the risk of incurring losses in excess of 10% of our available
capital resources, or where we propose to enter into a transaction relating to
any one person, which, either alone or together with previous transactions
entered into by us in relation to the same person, would result in us being
exposed to the risk of incurring losses in excess of 25% of our available
capital resources. This also applies where the transaction relates to
different persons if they are connected in such a way that the financial
soundness of any of them may affect the financial soundness of the others. The
BMA may extend the scope of this requirement to our subsidiaries even if these
subsidiaries are not licenced. Relevant transactions include those where a
person incurs an obligation to us, where we may incur an obligation if the
relevant person defaults on an obligation to a third party and where we incur
an obligation to acquire an asset the value of which depends wholly or mainly
upon the relevant person performing his obligations or otherwise on his
financial soundness. Our available capital resources may be determined by the
BMA after consultation with us and in accordance with principles published by
the BMA. It is an offence for us to fail to make the required reports.

Shareholders of a Deposit-Taking Institution

Under the BDCA, any person who becomes a significant shareholder of a
deposit-taking institution, which is defined to include persons, either alone
or with associates, who hold 5% or more of the voting shares of the
institution, or the right to vote, or control the vote of, 5% or more of those
shares, must notify the BMA in writing of that fact within seven days. Failure
to provide the BMA with prompt and appropriate notice would make the person
guilty of an offence that could result in a fine.

The BDCA prohibits a person from becoming a shareholder controller of any
company licenced under the BDCA unless he provides written notice to the BMA of
his intent to do so. A shareholder controller is generally a person who holds
10% or more of the shares of the financial institution, has the right to vote,
or control the vote of, shares having 10% or more of the voting power of the
institution, or otherwise is able to exercise significant influence over the
management of the institution. If the BMA objects to a persons proposal to
become a shareholder controller, it will provide the requesting person with
notice of its objection. However, if three months pass from the date of giving
notice without the BMA serving a notice of objection, then the person may
become a shareholder controller to the extent stated in his proposal. In
practice, the BMAs procedure is always to respond to a proposal.

The BDCA distinguishes between shareholder controllers of the following
descriptions: 10% shareholder controllers, 20% shareholder controllers,
30% shareholder controllers, 40% shareholder controllers, 50% shareholder
controllers, 60% shareholder controllers and principal shareholder
controllers who have a 75% or greater interest. A shareholder controller who
intends to increase his shareholding (meaning ownership of shares or the
ability to exercise or control the exercise of voting rights attached to
shares) so as to become a shareholder controller at an increased level must
provide written notice to the BMA that he intends to do so. It is an offence
not to give this notice. The BMA may object to a shareholder controllers
request to acquire additional shares. If a person becomes a shareholder
controller of any description in spite of the BMAs objection to his becoming a
shareholder of that description or if a shareholder controller fails to comply
with the foregoing notice requirements or if a shareholder controller continues
as such after being given notice of objection to his being a shareholder
controller, the BMA may take the actions specified in the BDCA, including
revoking the relevant licence (where a 50%, 60% or principal shareholder
controller is involved) or mandating that any specified shares become subject
to one or more of the following restrictions:



| |  |  | any transfer of or agreement to transfer those shares or, in
the case of unissued shares, any transfer of or an agreement to
transfer the right to be issued with them, will be void;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | no voting rights will be exercised in respect of the shares;                                                                                                                         
|
| |  |  | no further shares will be issued in right of them or pursuant to any offer made to their holder; and                                                                                 
|
| |  |  | except in liquidation, no payment will be made of any sums due from the deposit-taking institution on the shares.                                                                    

The court may, on the application of the BMA, order the sale of any
specified shares. Any person may appeal to a tribunal constituted under the
BDCA for a review of a notice of objection given by the BMA as described above.
In addition, if a party has

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been subject to any of the restrictions set forth above, the tribunal may
determine that they will continue to be subject to those restrictions.

In the event that the BMA imposes any of the restrictions listed above,
the restrictions may apply to:



| |  |  | all shares of the deposit-taking institution in which the
person in question is a shareholder controller of the relevant
description which (1) are held by him or any associate of his and (2)
were not so held immediately before he became such shareholder
controller of the institution; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | all shares in another company where the person in question
became a shareholder controller (1) as a result of the acquisition by
him or any associate of his of shares in that other company and (2)
the shares were not so held before he became a shareholder controller
of that institution.

A company licenced under the BDCA must give written notice to the BMA in
the event that any person has either become or ceased to be a director,
controller or senior executive of the licenced company. For this purpose, the
term controller includes a shareholder controller, a managing director, a chief
executive or a person whose duties include directing the actions of the board
of directors of the licenced company or its holding company.

Trusts (Regulation of Trust Business) Act 2001 (The Trusts Business Act)

The principal purpose of the Trusts Business Act, which came into effect
on January 25, 2002, is to regulate trust business, which is generally
defined as providing the services of a trustee. Under the Trusts Business Act,
a licence is required to conduct trust business in or from within Bermuda.
Licences are designated either unlimited or limited. Only corporations are
entitled to obtain unlimited licences, which allow them to conduct trust
business and solicit business from the public generally. Limited licences are
granted to partnerships or individuals and entitle them to hold trust assets
valued up to a specified amount. At present, we and certain of our
subsidiaries hold unlimited licences issued by the BMA pursuant to the Trusts
Business Act.

Prior to the implementation of the Trusts Business Act, the regulation of
trust business was the responsibility of the Minister of Finance, but is now
delegated to the BMA. There is a right of appeal to a tribunal appointed by
the Minister on decisions of the BMA regarding restrictions, revocations or
rejections of licence applications, and a right of further appeal to the
Supreme Court of Bermuda on any points of law. Pursuant to section 6 of the
Trusts Business Act, the BMA has published a Statement of Principles, which
clarifies various aspects of the legislation, including the BMAs power to
grant, revoke or restrict a licence and to obtain information or require the
production of documents. Furthermore, pursuant to section 7 of the
legislation, the BMA published a Code of Practice to assist licencees with
their compliance with the duties, requirements and standards of licencees under
the Trusts Business Act.

In particular, the BMA has power to:



| |  |  | impose conditions on a licence to protect a client or potential
client of a licencee. Conditions relating to the licencees scope and
type of business may also be imposed;     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | revoke a licence if the licencee has not complied with the
licencing criteria; and                                                                                              
|
| |  |  | request and obtain information from a licencee to ensure
compliance with the provisions under the Trusts Business Act, and to
safeguard the interests of the licencees clients.

Investment Business Act 1998

The Investment Business Act, which became effective on January 1, 2000,
prohibits any person from carrying on, or purporting to carry on, an investment
business in or from within Bermuda unless that person holds a licence granted
under the Investment Business Act, or is exempted from holding a licence. A
contract made in connection with an investment business by a person that does
not have a licence or is not exempt from the requirements to hold a licence
will not be enforceable by that person. The Investment Business Act defines
investment business broadly as the business of dealing in securities,
arranging deals in securities, managing or offering securities and giving
advice on securities. The BMA is given the authority to grant licences and to
supervise licence holders. The BMA will only grant a licence if it is
satisfied that the applicant complies with licensing criteria set out

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in the Investment Business Act, which include that senior executives of
the applicant are fit and proper persons to carry on such business, the
applicant has sufficient personnel, consultants or advisors with adequate
knowledge, skill and experience necessary for the conduct of the business, that
the applicant has an auditor nominated or approved by the BMA, and that the
applicant has sufficient capital to carry out the type and scope of investment
business proposed.

At the present time, we and our wholly owned subsidiaries, Bermuda
International Securities Limited and Bermuda International Investment
Management Limited, hold licences under the Investment Business Act.

The Investment Business Act grants the BMA the power to require an
accountants report on a licence holder, to appoint an inspector to carry out
an investigation into the affairs of a licence holder and to demand the
production of documents or information relating to the investment business of a
licence holder. The Investment Business Act also grants the BMA broad powers
to enforce the provisions of the Investment Business Act, including powers to
issue directions, to vary, suspend or cancel a licence, to appoint a custodian
manager of an offending investment business, to levy fines and to seek from the
court injunctions and restitution orders. If the BMA considers that an
investment provider knowingly and wilfully has breached any condition imposed
on its licence, the licensing criteria or any other duty or obligation under
the Investment Business Act or has been carrying on investment business in a
manner detrimental to the interest of its clients and creditors, or contrary to
the public interests, the BMA may issue a direction of compliance, vary,
suspend or cancel the licence of the investment provider or appoint a custodian
manager to manage the investment business. Where a licence is either varied or
suspended on these grounds, the BMA may implement such variation or suspension
immediately. The Investment Business Act establishes a review committee to
conduct reviews of BMA decisions at the request of aggrieved licence holders.
A licence holder may apply for a review of the conditions attached to its
licence, a decision of the BMA to vary, suspend or cancel its licence and,
where the investment provider previously held a licence which was not
cancelled, the rejection of its application for a further licence.

Companies Act 1981

Notwithstanding the fact that the Bank is subject to regulation and
supervision by the BMA under the terms of the BDCA, as a Bermuda local company,
we are also subject to regulation by the Minister of Finance under the terms of
the Companies Act 1981. Under this Act the Minister may, for instance, appoint
an inspector to investigate our affairs.

The Minister of Finance has issued a licence under the Companies Act 1981
that allows the Bank to carry on business in Bermuda without compliance with
the requirements that the Bank be controlled by Bermudians, that at least 60%
of the total voting rights attached to our common shares be exercisable by
Bermudians and that 60% of our shares be beneficially owned by Bermudians.
Under the terms of the licence, the Bank is required to report annually to the
Minister the identity of the persons that the Bank has determined to be 10%
shareholder controllers and 30% shareholder controllers of the Bank within the
meaning of the BDCA. Where the Bank determines that a person has become a 30%
shareholder controller, the Bank is required to advise the Minister in writing
within 14 days of such determination. In addition, the Bank is required to
monitor the number of shares owned by a shareholder controller to establish
whether that person is a 40% shareholder controller. Where the Bank determines
that a person has become a 40% shareholder controller, the Bank is required to
advise the Minister in writing within 14 days of the determination. The voting
rights of a 40% non-Bermudian shareholder controller will be restricted unless
the Minister consents to such person, as described in Item 10. Additional
InformationVoting. Unless extenuating circumstances or prudential concerns
exist, as determined by the BMA, 60% of our directors shall be Bermudian. In
addition, the Bank is required to consult with the Minister concerning any
continuation, transfer, liquidation or amalgamation that would result in a
change of control or winding-up of the Bank. Our licence does not have an
expiration date. However, the Minister may revoke, suspend or amend the
licence at any time for the following reasons:



| |  |  | for a contravention of any condition subject to which the licence was granted;                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | the Bank is carrying on business in a manner contrary to the public interest;                                  
|
| |  |  | the Bank ceases to carry on business in Bermuda;                                                               
|
| |  |  | the Bank commences a liquidation or is wound up or otherwise dissolved; or                                     
|
| |  |  | the Bank fails to comply with any directive or requirement issued by the Minister under the Companies Act 1981.

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Stamp Duties Act 1976

Under various circumstances, the provisions of the Stamp Duties Act 1976
may subject transfers of our common shares to stamp duty at ad valorem stamp
duty rates on a progressive scale. At present, the provisions of the Bermuda
Stock Exchange Act 1992, as amended, provide that transfers of our common
shares on sale or by voluntary conveyance inter vivos are not subject to stamp
duty as a result of the listing of our common shares on the BSX.

Foreign Exchange Transactions

The payment of cash dividends to non-residents of Bermuda by Bermuda
companies requires the permission of the Controller of Foreign Exchange. We
currently pay cash dividends to non-Bermuda residents in U.S. dollars. The
present policy of Bermudas Controller of Foreign Exchange permits the
conversion of Bermuda dollars and payment of dividends in foreign currency to
shareholders who are non-residents of Bermuda, provided that all payments are
processed through an authorised dealer. The Bank qualifies as an authorised
dealer for this purpose. While we currently have no reason to believe that the
Controller of Foreign Exchange will change this policy, if the Controller of
Foreign Exchange were to do so, our ability to pay dividends to non-Bermuda
residents could be impaired. See Item 3. Key InformationRisk FactorsOur Ability to Pay Dividends to Non-Bermuda Residents and the Transfer of Our
Common Shares to Non-Bermudians Could Be Impaired by Bermudian Regulations.

General Bermudian Supervision

We are required to pay an annual fee in Bermuda for our licence under the
BDCA at the current rate of $1.5 million. We are also required to pay an
aggregate amount of $24,750 annually for our licences and the licences of our
wholly owned subsidiaries under the Trusts Business Act, the Investment
Business Act 1998 and the Companies Act 1981.

Regulation and Supervision in the United States

We do not presently maintain any direct offices, such as branches,
agencies or representative offices, in the United States. Our only U.S.
presence is through our subsidiary, Bank of BermudaNY, a limited-purpose
trust company. Because we do not maintain any direct offices in the United
States or own or control a bank, as defined under the U.S. Bank Holding Company
Act of 1956, or a commercial lending company there, we are not
subject to regulation by any
U.S. federal bank regulatory agency.

On October 26, 2001, President
Bush signed into law comprehensive anti-terrorism legislation known
as the USA PATRIOT Act of 2001. Title III of the USA PATRIOT Act
substantially broadened the scope of U.S. anti-money laundering laws
and regulations by imposing significant new compliance and due
diligence obligations, creating new crimes and penalties and expanding
the extraterritorial jurisdiction of the United States.

The U.S. Treasury Department has
issued a number of regulations implementing the USA PATRIOT Act that
apply certain of its requirements to limited-purpose trust companies
like Bank of BermudaNY. The regulations impose new
obligations to maintain appropriate policies, procedures and controls
to detect, prevent and report money laundering and terrorist
financing. The U.S. Treasury Department is expected to issue a number
of additional regulations which will further clarify the USA PATRIOT
Acts requirements.

Failure of a financial institution to
comply with the USA PATRIOT Acts requirements could have serious
legal and reputational consequences for the institution.

As a limited-purpose trust company chartered under New York law, Bank of
BermudaNY is subject to the New York Banking Law and its reporting
requirements and is subject to examination by the New York State Banking
Department. As a general matter, a limited-purpose trust company is required
to file reports of condition with the New York State Banking Department on a
quarterly basis and to have its directors certify its financial condition
annually to the New York State Banking Department. In addition, as part of its
regulatory obligations, a limited-purpose trust company is required to file
reports of suspicious activity or potential criminal activity with the New York
State Banking Department and with appropriate federal agencies. The New York
State Banking Department examines Bank of BermudaNY at least annually for
compliance with applicable law and for safety and soundness in its policies,
procedures and practices. The New York State Banking Department also has the
right to conduct special examinations, if needed.

Bank of BermudaNY is considered a banking institution for purposes
specified under the New York Banking Law. Under the New York Banking Law, no
person or entity is allowed to acquire direct or indirect control of a
banking institution without the prior consent of the New York State Banking
Board, which consent involves a detailed written application to the New York
State Banking Department. Control for these purposes is defined to include
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a banking institution, whether
through ownership of voting stock or otherwise. Control will be presumed to
exist where any company, directly or indirectly, owns, controls or holds with
the power to vote 10% or more of the voting stock of any banking institution or
any company which holds this type of power.

Any company seeking to acquire 10% or more of our voting stock or to
control us, and thus exercise indirect control over Bank of BermudaNY,
will be required to take either of the following actions:



| |  |  | obtain approval from the New York State Banking Board to make
its proposed acquisition; or
| | - |  | ------------------------------------------------------------------------------------------

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| |  |  | apply to the New York State Superintendent of Banks for a
ruling that the facts of its proposed acquisition do not constitute
control of Bank of BermudaNY.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Organisation for Economic Co-operation and Development

The Organisation for Economic Co-operation and Development, or OECD, is an
international organisation which serves as a forum for 30 major economic powers
to discuss and develop economic and social policy. The OECD engages in a wide
range of activities, from publishing policy studies to establishing legally
binding codes and agreements, such as codes for the free flow of capital and
services and agreements to attack bribery. The OECDs member countries meet in
committees, several of which review economic issues. The members of the OECD
are authorised under the Convention on the Organisation for Economic
Co-operation and Development to make decisions that are binding on member
states and to take coordinated action where appropriate in order to further the
OECDs economic, trade and employment objectives. Accordingly, the OECD may
review several Bermudian policies, including economic, fiscal and taxation
policies, if they affect member countries or the international community.
Bermuda is not a member of the OECD. However, Bermuda is an overseas territory
of the United Kingdom, and the United Kingdom is a member of the OECD.

In June 2000, the OECD released a report entitled Harmful Tax
Competition: Progress in Identifying and Eliminating Harmful Tax Practices to
address practices perceived by the OECD as unfairly eroding the tax bases of
other countries and distorting the location of capital and services. The
OECDs tax project endeavoured to ensure the fair allocation of the
international tax burden and to prevent tax policy from being the main factor
in placing capital. The OECDs report identified 35 jurisdictions as tax
havens whose tax policies were intended to attract assets from individuals and
entities seeking to escape taxation in their home countries. Bermuda and five
other jurisdictions were not included on the list of tax havens because they
each made a public commitment at the highest level, a so-called Advance
Commitment, prior to the release of the OECD report. Bermuda made its Advance
Commitment to the OECD Secretary-General in a letter from its Deputy Premier
and Minister of Finance dated May 15, 2000. The letter commits Bermuda to
implement necessary changes to eliminate any harmful aspects of Bermudas
financial services, and to refrain from modifying existing regimes or
introducing new regimes that constitute harmful tax practices under the OECD
report.

In April 2002, the OECDs Committee on Fiscal Affairs issued a list of
unco-operative tax havens that could be subject to measures by OECD member
countries if they do not change their tax policies in a timely manner. None of
the jurisdictions from which the Bank operates is on this list.

The
Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision, or Basel Committee, formulates
broad supervisory standards and guidelines and recommends statements of best
practice for individual authorities to implement. The Basel Committee does not
have any supranational supervisory authority and its conclusions are not
legally binding. The Basel Committee, meeting three to four times a year at
the Bank for International Settlements in Basel, Switzerland, is mostly
composed of representatives of the central banks of the Group of Ten countries.
Bermuda is not a member country of the Group of Ten. However, Bermuda is an
overseas territory of the United Kingdom, and the United Kingdom is a member of
the Group of Ten. In April 2003, the Basel Committee issued a revised proposal
for a New Basel Capital Accord, which focuses on minimum capital requirements,
supervisory review of the capital adequacy and internal assessment processes of
institutions and market discipline through effective disclosure to encourage
sound banking practices. The New Basel Capital Accord is likely to modify the
method for calculating risk-based capital ratios, which could result in the
Bank increasing the amount of capital it maintains relative to its assets. The
Basel Committee is currently requesting comments on its revised proposal,
seeking implementation of the new framework in each country at year-end 2006.

Other
Regulation

Our offices, branches and subsidiaries located in jurisdictions outside of
Bermuda and the United States must comply with various legal requirements
applicable to banks and similar financial institutions conducting business in
these jurisdictions. Our activities in these jurisdictions are typically
supervised by a financial services commission or a monetary authority or
similar agency. These regulators generally impose capital adequacy reserve,
reporting and other regulatory requirements or conditions on our operations.

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Subsidiaries of the Bank

The following table lists our significant subsidiaries. All of these
subsidiaries are wholly owned:

|                                                                                                                                                      |  |                                                     
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------
|Name                                                                                                                                                  |  | Country of Incorporation                            
|                                                                                                                                                      |  |                                                     
|Bermuda International Investment
Management Limited
Bank of Bermuda (Europe) PLC
Bank of Bermuda (Guernsey) Limited
Bank of Bermuda (Luxembourg) S.A. |  | Bermuda
Ireland
Guernsey, Channel Islands
Luxembourg

Properties

We own our headquarters at 6 Front Street, Hamilton, Bermuda HM 11, as
well as several other branch and administration buildings located in Bermuda.
We have approximately 301,000 square feet of useable space in Bermuda, of which
we own approximately 251,000 square feet, and we lease the balance. We lease
8,200 square feet of owned office space to third parties. Our headquarters
consists of approximately 74,000 square feet of useable space. We also own
office buildings in the Cayman Islands, Guernsey and the Cook Islands,
consisting of an aggregate of approximately 48,200 square feet of office space,
of which 23,500 square feet is leased to third parties. In 2002, we reduced
our operations in the Cayman Islands. In connection with this downsizing in
the Cayman Islands, our office building there, consisting of approximately
25,600 square feet of office space, was put up for sale. We received a
purchase offer for the property which, together with other market information,
indicated that the carrying value of the building was greater than its fair
value. As a result of this information, its carrying value was written down by
$2.5 million to its estimated fair value of $4.0 million, with the related
charge recorded within Other Income/(Loss) in our Consolidated Statement of
Income. During the year ended December 31, 2002, we sold an office building in
Guernsey consisting of approximately 4,500 square feet of office space. We
have also entered into discussions with third parties to sell a second office
building we own in Guernsey, consisting of approximately 11,700 square feet of
office space. We lease approximately 270,700 square feet for our other office
facilities located outside of Bermuda, of which 2,800 square feet is sub-leased
to third parties. There are no material encumbrances on any of our properties.

Selected Statistical Information on Banking Operations

Distribution
of Assets, Liabilities, and Stockholders Equity; Interest Rates
and Interest Differential

Average Consolidated Balance Sheets

The following table presents average consolidated balance sheets and net
interest income for the periods shown:

|                                   |  |                                       |       |          |  |         |     |         |  |          |      |         |  |         |        |          |  |         |     |  |  |  |      |   |  |   |       |  |  |             |     |  |  |  |      |  
|---------------------------------- |  | ------------------------------------- | ----- | -------- |  | ------- | --- | ------- |  | -------- | ---- | ------- |  | ------- | ------ | -------- |  | ------- | --- |  |  |  | ---- | - |  | - | ----- |  |  | ----------- | --- |  |  |  | ---- | -
|                                   |  | Assets                               
|                                   |  | For the Year Ended December 31,      
|                                   |  |                                      
|                                   |  | 2002                                  |       | 2001     |  | 2000   
|                                   |  |                                       |       |          |  |        
|                                   |  |                                       |       |          |  |         |     |         |  |          |      |         |  |         |        |          |  |         |     |  |  |  |      |   |  |   |       |  |  | (unaudited) |     |  |  | 
|                                   |  | Average                               |       | Interest |  | Average |     | Average |  | Interest |      | Average |  | Average |        | Interest |  | Average
|                                   |  | Balance                               |       | Income   |  | Yield   |     | Balance |  | Income   |      | Yield   |  | Balance |        | Income   |  | Yield  
|                                   |  |                                       |       |          |  |         |     |         |  |          |      |         |  |         |        |          |  |        
|                                   |  | (US$ in millions, except percentages)
|Interest-Earning                   |  |                                       |       |          |  |         |     |         |  |          |      |         |  |         |        |          |  |         |     |  |  |  |      |   |  |   |       |  |  |             |     |  |  |  |      |  
|Deposits with Banks(1)             |  | $                                     | 3,180 |          |  | $       | 73  |         |  |          | 2.30 | %       |  | $       | 4,090  |          |  | $       | 159 |  |  |  | 3.89 | % |  | $ | 4,239 |  |  | $           | 232 |  |  |  | 5.48 | %
|Marketable Securities 
AFS(1)     |  |                                       | 3,411 |          |  |         | 88  |         |  |          | 2.57 | %       |  |         | 4,105  |          |  |         | 191 |  |  |  | 4.66 | % |  |   | 3,425 |  |  |             | 235 |  |  |  | 6.86 | %
|Marketable Securities 
Trading(1) |  |                                       | 1,257 |          |  |         | 50  |         |  |          | 4.00 | %       |  |         | 623    |          |  |         | 33  |  |  |  | 5.24 | % |  |   | 548   |  |  |             | 34  |  |  |  | 6.10 | %
|Loans  Bermuda(2)                 |  |                                       | 1,297 |          |  |         | 76  |         |  |          | 5.84 | %       |  |         | 1,162  |          |  |         | 83  |  |  |  | 7.19 | % |  |   | 1,204 |  |  |             | 99  |  |  |  | 8.22 | %
|Loans  International(2)           |  |                                       | 380   |          |  |         | 14  |         |  |          | 3.71 | %       |  |         | 321    |          |  |         | 21  |  |  |  | 6.43 | % |  |   | 445   |  |  |             | 32  |  |  |  | 7.30 | %
|                                   |  |                                       |       |          |  |         |     |         |  |          |      |         |  |         |        |          |  |         |     |  |  |  |      |   |  |   |       |  |  |             |     |  |  |  |      |  
|Total Interest-Earning Assets(3)   |  |                                       | 9,525 |          |  |         | 301 |         |  |          | 3.16 | %       |  |         | 10,301 |          |  |         | 487 |  |  |  | 4.73 | % |  |   | 9,861 |  |  |             | 632 |  |  |  | 6.41 | %
|Non-Interest Earning               |  |                                       |       |          |  |         |     |         |  |          |      |         |  |         |        |          |  |         |     |  |  |  |      |   |  |   |       |  |  |             |     |  |  |  |      |  
|Cash                               |  |                                       | 47    |          |  |         |     |         |  |          |      |         |  |         | 37     |          |  |         |     |  |  |  |      |   |  |   | 37    |  |  |             |     |  |  |  |      |  
|Marketable
securities  AFS        |  |                                       | 98    |          |  |         |     |         |  |          |      |         |  |         | 123    |          |  |         |     |  |  |  |      |   |  |   | 193   |  |  |             |     |  |  |  |      |  

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|             |  |                                       |       |          |  |         |  |         |  |          |  |         |  |         |        |          |  |  |         |  |  |  |  |  |             |   |        | 
|------------ |  | ------------------------------------- | ----- | -------- |  | ------- |  | ------- |  | -------- |  | ------- |  | ------- | ------ | -------- |  |  | ------- |  |  |  |  |  | ----------- | - | ------ | 
|             |  | Assets                               
|             |  | For the Year Ended December 31,      
|             |  |                                      
|             |  | 2002                                  |       | 2001     |  | 2000   
|             |  |                                       |       |          |  |        
|             |  |                                       |       |          |  |         |  |         |  |          |  |         |  |         |        |          |  |  |         |  |  |  |  |  | (unaudited)
|             |  | Average                               |       | Interest |  | Average |  | Average |  | Interest |  | Average |  | Average |        | Interest |  |  | Average
|             |  | Balance                               |       | Income   |  | Yield   |  | Balance |  | Income   |  | Yield   |  | Balance |        | Income   |  |  | Yield  
|             |  |                                       |       |          |  |         |  |         |  |          |  |         |  |         |        |          |  |  |        
|             |  | (US$ in millions, except percentages)
|Other Assets |  |                                       | 310   |          |  |         |  |         |  |          |  |         |  |         | 366    |          |  |  |         |  |  |  |  |  |             |   | 344    | 
|             |  |                                       |       |          |  |         |  |         |  |          |  |         |  |         |        |          |  |  |         |  |  |  |  |  |             |   |        | 
|Total Assets |  | $                                     | 9,980 |          |  |         |  |         |  |          |  |         |  | $       | 10,827 |          |  |  |         |  |  |  |  |  |             | $ | 10,435 | 
|             |  |                                       |       |          |  |         |  |         |  |          |  |         |  |         |        |          |  |  |         |  |  |  |  |  |             |   |        | 



---

|(1) |  | All interest-earning deposits with banks and marketable securities are
considered to be international.                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The average balance of loans includes the amount of non-accrual loans.
Interest income amounts exclude any related revenue.                          
|(3) |  | The yields on interest-earning assets depend on the currencies in which
we invest and also on the interest rates in the countries in which we
invest.

|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |      |      |  
|-------------------------------------------------------- | -------- | ------ | ----- | ------------------------------------- | ----- | -------- | --- | ------- | -- | ------- | ---- | -------- | ---- | ------- | ------ | ------- | ----- | -------- | --- | ------- | -- |  | ---- | ---- | ---- | - | ------ | ----------- | ----- | - | --- | -- | --- |  | ---- | ---- | ---- | -
|                                                         |          |        |       | Liabilities                          
|                                                         |          |        |       | For the Year Ended December 31,      
|                                                         |          |        |       |                                      
|                                                         |          |        |       | 2002                                  |       | 2001     |     | 2000   
|                                                         |          |        |       |                                       |       |          |     |        
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        | (unaudited)
|                                                         |          |        |       | Average                               |       | Interest |     | Average |    | Average |      | Interest |      | Average |        | Average |       | Interest |     | Average
|                                                         |          |        |       | Balance                               |       | Expense  |     | Rate    |    | Balance |      | Expense  |      | Rate    |        | Balance |       | Expense  |     | Rate   
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |        
|                                                         |          |        |       | (US$ in millions, except percentages)
|Interest-Bearing                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Customer deposits                                       
|Bermuda                                                  |  Demand |        | $     | 2,375                                 |       |          | $   | 18      |    |         |      | 0.75     | %    |         | $      | 2,273   |       |          | $   | 39      |    |  |      | 1.73 | %    |   | $      | 1,981       |       |   | $   | 63 |     |  |      | 3.21 | %   
|                                                         |          |  Term |       |                                       | 2,228 |          |     |         | 47 |         |      |          | 2.08 | %       |        |         | 2,706 |          |     |         | 97 |  |      |      | 3.58 | % |        |             | 2,976 |   |     |    | 163 |  |      |      | 5.47 | %
|International                                            |  Demand |        |       | 2,330                                 |       |          |     | 21      |    |         |      | 0.92     | %    |         |        | 2,221   |       |          |     | 54      |    |  |      | 2.42 | %    |   |        | 2,193       |       |   |     | 83 |     |  |      | 3.79 | %   
|                                                         |          |  Term |       |                                       | 1,895 |          |     |         | 39 |         |      |          | 2.08 | %       |        |         | 2,485 |          |     |         | 99 |  |      |      | 4.01 | % |        |             | 2,141 |   |     |    | 118 |  |      |      | 5.49 | %
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Total Interest-Bearing
Deposits(1)                       |          |        | 8,828 |                                       |       |          | 125 |         |    |         | 1.41 | %        |      |         | 9,685  |         |       |          | 289 |         |    |  | 2.99 | %    |      |   | 9,291  |             |       |   | 427 |    |     |  | 4.60 | %   
|Security Lending
Agreements                              |          |        | 15    |                                       |       |          |    |         |    |         | 2.22 | %        |      |         | 1      |         |       |          |    |         |    |  |     |      |      |   | 2      |             |       |   |    |    |     |  | 8.33 | %   
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Total Interest-Bearing
Liabilities                       |          |        | 8,843 |                                       |       |          | 125 |         |    |         | 1.41 | %        |      |         | 9,686  |         |       |          | 289 |         |    |  | 2.99 | %    |      |   | 9,293  |             |       |   | 427 |    |     |  | 4.60 | %   
|Non-Interest Bearing
Deposits                            |          |        | 248   |                                       |       |          |     |         |    |         |      |          |      |         | 221    |         |       |          |     |         |    |  |      |      |      |   | 229    |             |       |   |     |    |     |  |      |     
|Other Non-Interest
Bearing Liabilities                   |          |        | 236   |                                       |       |          |     |         |    |         |      |          |      |         | 274    |         |       |          |     |         |    |  |      |      |      |   | 304    |             |       |   |     |    |     |  |      |     
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Total Liabilities                                        |          |        | 9,327 |                                       |       |          |     |         |    |         |      |          |      |         | 10,181 |         |       |          |     |         |    |  |      |      |      |   | 9,826  |             |       |   |     |    |     |  |      |     
|Shareholders Equity                                     |          |        | 653   |                                       |       |          |     |         |    |         |      |          |      |         | 646    |         |       |          |     |         |    |  |      |      |      |   | 609    |             |       |   |     |    |     |  |      |     
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Total Liabilities and
Shareholders Equity               |          | $      | 9,980 |                                       |       |          |     |         |    |         |      |          |      | $       | 10,827 |         |       |          |     |         |    |  |      |      |      | $ | 10,435 |             |       |   |     |    |     |  |      |     
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Total Interest Income
from Interest-Earning
Assets       |          |        |       |                                       |       |          | 301 |         |    |         | 3.16 | %        |      |         |        |         |       |          | 487 |         |    |  | 4.73 | %    |      |   |        |             |       |   | 632 |    |     |  | 6.41 | %   
|Total Interest Expense
from Interest-Bearing
Liabilities |          |        |       |                                       |       |          | 125 |         |    |         | 1.31 | %        |      |         |        |         |       |          | 289 |         |    |  | 2.81 | %    |      |   |        |             |       |   | 427 |    |     |  | 4.33 | %   
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     
|Net Interest Margin                                      |          |        |       |                                       |       | $        | 176 |         |    |         | 1.85 | %        |      |         |        |         |       | $        | 198 |         |    |  | 1.92 | %    |      |   |        |             |       | $ | 205 |    |     |  | 2.08 | %   
|                                                         |          |        |       |                                       |       |          |     |         |    |         |      |          |      |         |        |         |       |          |     |         |    |  |      |      |      |   |        |             |       |   |     |    |     |  |      |     



---

|(1) |  | The rates paid on interest-bearing liabilities depend on the interest
rates in the countries in which we accept deposits and also on the
currency of the deposits.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Total consolidated average assets decreased by $847 million during the
year ended December 31, 2002 and reflected a decline in customer deposit
volumes. Deposit volumes declined in late 2001 and remained at a lower average
level throughout 2002. We believe that the eleven successive interest rate
cuts by the U.S. Federal Reserve Board in 2001 led to the decline in deposit
volumes as clients more actively managed their cash positions in the low
interest rate environment.

The average balance of our trading portfolio in 2002 was $1.3 billion,
compared with $623.0 million in fiscal year 2001 and $548.1 million in calendar
year 2000. Our trading portfolio consists of mortgage and asset-backed
securities, which are managed by a third-party investment manager. At December
31, 2002, the value of the trading portfolio was approximately $495 million,
compared with $1.3 billion at December 31, 2001 and $588 million at December
31, 2000. Late in 2001, we had decided to increase the size of the trading
portfolio to enhance interest earnings, as the target return on this portfolio
is approximately 20 basis points above that earned on our available for sale
portfolio managed in-house. In October 2002, the decision was made to reduce
the size of the portfolio back to its original $500 million level to improve
earnings stability in more volatile market conditions.

Analysis of Changes in Volume and Rate on Interest Income and Interest
Expense

The following tables present an analysis of changes in interest income and
interest expense for the periods indicated. Changes not solely due to volume
or rate have been allocated to volume.

|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |         |  
|---------------------------------------- | -------- | ------------------------------------- | ------------------ | ------------- | ---- | - | ---------- | ------- | - | - | -------- | ------- | -
|Year ended December 31, 2002 compared    |          |                                       |                    |               |      |   |            |         |   |   |          |        
|with year ended December 31, 2001        |          | Increase/(Decrease) Due to Changes in |                    |               |      |  
|                                         |          |                                       |                    | Net Increase/
|                                         |          |                                       | Volume             |               | Rate |   | (Decrease)
|                                         |          |                                       |                    |               |      |   |           
|                                         |          |                                       | (US$ in thousands)
|Interest Income Related to:              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Deposits with Banks                      |          | $                                     | (20,952            | )             |      | $ | (64,907    | )       |   | $ | (85,859  | )      
|Marketable Securities  AFS              |          |                                       | (17,792            | )             |      |   | (86,007    | )       |   |   | (103,799 | )      
|Marketable Securities  Trading          |          |                                       | 25,376             |               |      |   | (7,757     | )       |   |   | 17,619   |        
|Loans  Bermuda                          |          |                                       | 7,876              |               |      |   | (15,767    | )       |   |   | (7,891   | )      
|Loans  International                    |          |                                       | 2,197              |               |      |   | (8,704     | )       |   |   | (6,507   | )      
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Total Interest-Earning Assets            |          | $                                     | (3,295             | )             |      | $ | (183,142   | )       |   | $ | (186,437 | )      
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Interest Expense Related to:             |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Customer Deposits                        |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Bermuda                                  |  Demand |                                       | $                  | 758           |      |   | $          | (22,433 | ) |   | $        | (21,675 | )
|                                         |  Term   |                                       |                    | (9,956        | )    |   |            | (40,402 | ) |   |          | (50,358 | )
|International                            |  Demand |                                       |                    | 994           |      |   |            | (33,450 | ) |   |          | (32,456 | )
|                                         |  Term   |                                       |                    | (12,209       | )    |   |            | (48,191 | ) |   |          | (60,400 | )
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Total Interest-Bearing Customer Deposits |          |                                       | (20,413            | )             |      |   | (144,476   | )       |   |   | (164,889 | )      
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Security Lending Agreements              |          |                                       | 352                |               |      |   |           |         |   |   | 352      |        
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Total Interest-Bearing Liabilities       |          | $                                     | (20,061            | )             |      | $ | (144,476   | )       |   | $ | (164,537 | )      
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Change in Net Interest Income            |          | $                                     | 16,766             |               |      | $ | (38,666    | )       |   | $ | (21,900  | )      
|                                         |          |                                       |                    |               |      |   |            |         |   |   |          |        

|                                              |  |                                       |                    |               |      |   |            |   |  |   |         |   | 
|--------------------------------------------- |  | ------------------------------------- | ------------------ | ------------- | ---- | - | ---------- | - |  | - | ------- | - | 
|Year ended December 31, 2001 compared         |  |                                       |                    |               |      |   |            |   |  |   |         |  
|with (unaudited) year ended December 31, 2000 |  | Increase/(Decrease) Due to Changes in |                    |               |      |  
|                                              |  |                                       |                    | Net Increase/
|                                              |  |                                       | Volume             |               | Rate |   | (Decrease)
|                                              |  |                                       |                    |               |      |   |           
|                                              |  |                                       | (US$ in thousands)
|Interest Income Related to:                   |  |                                       |                    |               |      |   |            |   |  |   |         |  
|Deposits with Banks                           |  | $                                     | (5,795             | )             |      | $ | (67,432    | ) |  | $ | (73,227 | )
|Marketable Securities  AFS                   |  |                                       | 31,699             |               |      |   | (75,236    | ) |  |   | (43,537 | )
|Marketable Securities  Trading               |  |                                       | 3,907              |               |      |   | (4,704     | ) |  |   | (797    | )
|Loans  Bermuda                               |  |                                       | (3,002             | )             |      |   | (12,443    | ) |  |   | (15,445 | )

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|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |         |  
|--------------------------------------------- | -------- | ------------------------------------- | ------------------ | ------------- | ---- | - | ---------- | ------- | - | - | -------- | ------- | -
|Year ended December 31, 2001 compared         |          |                                       |                    |               |      |   |            |         |   |   |          |        
|with (unaudited) year ended December 31, 2000 |          | Increase/(Decrease) Due to Changes in |                    |               |      |  
|                                              |          |                                       |                    | Net Increase/
|                                              |          |                                       | Volume             |               | Rate |   | (Decrease)
|                                              |          |                                       |                    |               |      |   |           
|                                              |          |                                       | (US$ in thousands)
|Loans  International                         |          |                                       | (7,955             | )             |      |   | (3,859     | )       |   |   | (11,814  | )      
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Total Interest-Earning Assets                 |          | $                                     | 18,854             |               |      | $ | (163,674   | )       |   | $ | (144,820 | )      
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Interest Expense Related to:                  |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Customer Deposits                             |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Bermuda                                       |  Demand |                                       | $                  | 5,043         |      |   | $          | (29,256 | ) |   | $        | (24,213 | )
|                                              |  Term   |                                       |                    | (9,647        | )    |   |            | (56,312 | ) |   |          | (65,959 | )
|International                                 |  Demand |                                       |                    | 678           |      |   |            | (30,055 | ) |   |          | (29,377 | )
|                                              |  Term   |                                       |                    | 13,807        |      |   |            | (31,748 | ) |   |          | (17,941 | )
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Total Interest-Bearing Customer Deposits      |          |                                       | 9,881              |               |      |   | (147,371   | )       |   |   | (137,490 | )      
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Security Lending Agreements                   |          |                                       |                   |               |      |   |           |         |   |   |         |        
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Total Interest-Bearing Liabilities            |          | $                                     | 9,881              |               |      | $ | (147,371   | )       |   | $ | (137,490 | )      
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        
|Change in Net Interest Income                 |          | $                                     | 8,973              |               |      | $ | (16,303    | )       |   | $ | (7,330   | )      
|                                              |          |                                       |                    |               |      |   |            |         |   |   |          |        

Investment Portfolio

Marketable Securities

The following table presents, by maturity distribution, the book value and
weighted average yield of our marketable securities at December 31, 2002:

|                                                  |                                    |   |                    |           |       |  |          |      |  
|------------------------------------------------- | ---------------------------------- | - | ------------------ | --------- | ----- |  | -------- | ---- | -
|                                                  |                                    |   |                    |           |       |  | Weighted
|                                                  |                                    |   |                    |           |       |  | Average 
|                                                  |                                    |   | Book Value         |           | Yield
|                                                  |                                    |   |                    |           |      
|                                                  |                                    |   | (US$ in thousands) |           |       |  |         
|U.S. Government and Agencies                      |                                    |   |                    |           |       |  |          |     
|Within 1 Year                                     |                                    | $ | 14,305             |           |       |  | 1.00     | %   
|Due After 1 Year But Within 5 Years               |                                    |   | 95,858             |           |       |  | 2.76     | %   
|Due After 5 Years But Within 10 Years             |                                    |   | 184,565            |           |       |  | 2.23     | %   
|Due After 10 Years                                |                                    |   | 685,169            |           |       |  | 2.09     | %   
|                                                  |                                    |   |                    |           |       |  |          |     
|                                                  | Total U.S. Government and Agencies |   | $                  | 979,897   |       |  |          | 2.16 | %
|                                                  |                                    |   |                    |           |       |  |          |     
|Non-U.S. Government, Provinces and Municipalities |                                    |   |                    |           |       |  |          |     
|Within 1 Year                                     |                                    | $ | 50,235             |           |       |  | 2.10     | %   
|Due After 1 Year But Within 5 Years               |                                    |   | 28,770             |           |       |  | 1.71     | %   
|Due After 5 Years But Within 10 Years             |                                    |   | 66,518             |           |       |  | 1.85     | %   
|Due After 10 Years                                |                                    |   |                   |           |       |  |         |     
|                                                  |                                    |   |                    |           |       |  |          |     
|                                                  | Total Non-U.S. Government          |   | $                  | 145,523   |       |  |          | 1.91 | %
|                                                  |                                    |   |                    |           |       |  |          |     
|Corporate Debt  U.S.                             |                                    |   |                    |           |       |  |          |     
|Within 1 Year                                     |                                    | $ | 85,456             |           |       |  | 2.92     | %   
|Due After 1 Year But Within 5 Years               |                                    |   | 667,482            |           |       |  | 2.13     | %   
|Due After 5 Years But Within 10 Years             |                                    |   | 1,315              |           |       |  | 5.00     | %   
|Due After 10 Years                                |                                    |   | 138,087            |           |       |  | 3.60     | %   
|                                                  |                                    |   |                    |           |       |  |          |     
|                                                  | Total U.S. Corporate Debt          |   | $                  | 892,340   |       |  |          | 2.44 | %
|                                                  |                                    |   |                    |           |       |  |          |     
|Corporate Debt  Non-U.S.                         |                                    |   |                    |           |       |  |          |     
|Within 1 Year                                     |                                    | $ | 195,847            |           |       |  | 1.74     | %   
|Due After 1 Year But Within 5 Years               |                                    |   | 2,024,587          |           |       |  | 2.40     | %   
|Due After 5 Years But Within 10 Years             |                                    |   | 14,629             |           |       |  | 2.37     | %   
|Due After 10 Years                                |                                    |   | 42,965             |           |       |  | 1.81     | %   
|                                                  |                                    |   |                    |           |       |  |          |     
|                                                  | Total Non-U.S. Corporate Debt      |   | $                  | 2,278,028 |       |  |          | 2.33 | %
|                                                  |                                    |   |                    |           |       |  |          |     
|Mutual Funds/Equity Investments                   |                                    |   | 74,110             |           |       |  |         |     
|                                                  |                                    |   |                    |           |       |  |          |     
|                                                  | Total                              |   | $                  | 4,369,898 |       |  |          | 2.26 | %
|                                                  |                                    |   |                    |           |       |  |          |     

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The following table presents all issuers whose securities we hold in an
amount that individually represented an investment of greater than 10% of our
shareholders equity at December 31, 2002:

|                                              |  |                |    |                      |        |                    |         | 
|--------------------------------------------- |  | -------------- | -- | -------------------- | ------ | ------------------ | ------- | 
|                                              |  | Moody's Senior |    |                      |        |                   
|                                              |  | Debt Rating    |    | Fair Market Value(1)
|                                              |  |                |    |                     
|                                              |  |                |    |                      |        | (US$ in thousands)
|HBOS Plc                                      |  | Aa2            |    | $                    | 82,057 |                   
|Canadian Imperial Bank of Commerce            |  | Aa3            |    |                      | 79,823 |                   
|Eurohypo AG                                   |  |                | A1 |                      |        |                    | 75,604  | 
|SNS Bank NV                                   |  |                | A2 |                      |        |                    | 74,820  | 
|Caisse Centrale Credit dImmobilier de France |  |                | A1 |                      |        |                    | 72,547  | 
|Alliance and Leicester Plc                    |  |                | A1 |                      |        |                    | 72,155  | 
|Key Bank USA NA                               |  |                | A1 |                      |        |                    | 72,105  | 
|Islandsbanki FBA HF                           |  |                | A2 |                      |        |                    | 70,101  | 
|                                              |  |                |    |                      |        |                    |         | 
|                                              |  |                |    |                      |        | $                  | 599,212 | 
|                                              |  |                |    |                      |        |                    |         | 



---

|(1) |  | Because all of these marketable securities are carried at fair value, the
book value is equal to the fair market value.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

Loan Portfolio

Types of Loans

The following table presents our loan portfolio by category as of the
dates indicated:

|                                                |  |                    |           |                |  |      |           |      |  |         |           |      |  |   |           |   |  |   |           |   |  |   |         |  
|----------------------------------------------- |  | ------------------ | --------- | -------------- |  | ---- | --------- | ---- |  | ------- | --------- | ---- |  | - | --------- | - |  | - | --------- | - |  | - | ------- | -
|                                                |  | As of December 31, |           | As of June 30,
|                                                |  |                    |           |               
|                                                |  | 2002               |           | 2001           |  | 2000 |           | 2000 |  | 1999(1) |           | 1998
|                                                |  |                    |           |                |  |      |           |      |  |         |           |     
|                                                |  | (US$ in thousands)
|Mortgages                                       |  | $                  | 853,928   |                |  | $    | 780,133   |      |  | $       | 759,554   |      |  | $ | 689,333   |   |  | $ | 611,690   |   |  | $ | 34,662  |  
|Bermuda Commercial                              |  |                    | 217,421   |                |  |      | 174,421   |      |  |         | 204,369   |      |  |   | 285,062   |   |  |   | 237,160   |   |  |   | 283,177 |  
|Bermuda Personal                                |  |                    | 199,674   |                |  |      | 161,641   |      |  |         | 160,738   |      |  |   | 153,113   |   |  |   | 169,491   |   |  |   | 231,116 |  
|International
Commercial and
Personal           |  |                    | 161,294   |                |  |      | 145,467   |      |  |         | 234,612   |      |  |   | 223,297   |   |  |   | 193,714   |   |  |   | 124,319 |  
|Secured Short-term
Investment Loans(2)          |  |                    | 360,426   |                |  |      | 243,526   |      |  |         | 180,763   |      |  |   | 254,348   |   |  |   | 255,281   |   |  |   | 303,721 |  
|                                                |  |                    |           |                |  |      |           |      |  |         |           |      |  |   |           |   |  |   |           |   |  |   |         |  
|Total Loans Before
Allowance for Loan
Losses    |  | $                  | 1,792,743 |                |  | $    | 1,505,188 |      |  | $       | 1,540,036 |      |  | $ | 1,605,153 |   |  | $ | 1,467,336 |   |  | $ | 976,995 |  
|                                                |  |                    |           |                |  |      |           |      |  |         |           |      |  |   |           |   |  |   |           |   |  |   |         |  
|General and
Specific Allowances
for Loan Losses |  |                    | (24,394   | )              |  |      | (27,611   | )    |  |         | (26,017   | )    |  |   | (24,243   | ) |  |   | (30,025   | ) |  |   | (26,697 | )
|                                                |  |                    |           |                |  |      |           |      |  |         |           |      |  |   |           |   |  |   |           |   |  |   |         |  
|Net Loans                                       |  | $                  | 1,768,349 |                |  | $    | 1,477,577 |      |  | $       | 1,514,019 |      |  | $ | 1,580,910 |   |  | $ | 1,437,311 |   |  | $ | 950,298 |  
|                                                |  |                    |           |                |  |      |           |      |  |         |           |      |  |   |           |   |  |   |           |   |  |   |         |  



---

|(1) |  | Figures for 1999 reflect the purchase of Bermuda Home Limited and the
reclassification of certain loans as mortgages.
|--- |  | ---------------------------------------------------------------------------------------------------------------------
|(2) |  | Predominantly international.                                                                                         

Mortgages

The increase in mortgages over the three years ending December 31, 2002
reflects growth in our Bermuda residential and commercial mortgage portfolio
through increased market penetration. As of December 31, 2002, approximately
47.6% of our loan
portfolio was in the form of residential and commercial mortgages. The
percentage of mortgages to total loans at December 31, 2002

- 31 -



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##### Table of Contents



differs
significantly from 1998, when mortgages comprised less than 10% of total loans.
At June 30, 1999, the $577.0 million increase in total mortgages over the
prior year reflected the acquisition of Bermuda Home Limited, whose primary
business was providing residential and commercial mortgages to Bermuda
residents, and the reclassification of some Bermuda personal and commercial
loans as mortgages, such as long-term loans for the purchase of real estate
secured by such real estate, in recognition of our re-entry into that market.
Since our acquisition of Bermuda Home Limited in 1999, over 90% of our mortgage
loans have been in Bermuda, with the balance in Cayman, Guernsey and the Isle
of Man.

This increased level of mortgage lending alters the Banks risk profile,
since mortgage lending typically results in a relatively low level of loan
losses as a result of conservative loan-to-value advance rates, which are
typically 80% or less of the collateral value. At the same time, the growth in
mortgages increases the Banks concentration risk to Bermuda real estate. A
significant downturn in local economic conditions and real estate values could
result in increased loan losses and difficulties in disposing of real estate
collateral.

In 2002 we sold or obtained repayment of $30.3 million of mortgages
recorded in our Cayman office due to our decision to exit banking in that
market.

Commercial and Personal Loans

Changes in international commercial and personal loans reflect an
initiative that we commenced in fiscal year ended June 30, 1999. In that year,
we began the development of a portfolio that included investments in syndicated
non-client loans. We also extended syndicated credit facilities to certain
Bermuda-based reinsurance companies and investment funds, which are included in
the loan portfolio, and investments in collateralised debt obligations, which
are part of the marketable securities portfolio. The syndicated loan
portfolio is being run-off as it is not a prime focus of our business
strategy.

At December 31, 2002, our syndicated loan exposure totalled $108.9
million, consisting of $22.8 million of overseas syndicated loans, $27.1
million to reinsurance and other companies in Bermuda, and $59.0 million to a
Bermuda-based investment fund. This compares to syndicated loan exposure of
$118.7 million at December 31, 2001, of which $44.7 million related to overseas
syndicated loans, $20.0 million to reinsurance companies in Bermuda, and $54.0
million to a Bermuda-based investment fund. Total syndicated loans at December
31, 2000 were $193.1 million and $195.2 million and $167.0 million at June 30,
2000 and 1999, respectively.

All syndicated obligors are investment grade and we have not experienced
any significant deterioration in credit risk on these credit exposures. There
were no sales or realised losses in 2002.

Secured Short-Term Investment Loans

As of December 31, 2002, 2001, and 2000, 20%, 16% and 12%, respectively,
of our loan portfolio was in the form of collateralised short-term investment
loans to institutional clients. These loans are typically granted to
investment fund clients on a margin basis for liquidity and investment purposes
and are collateralised by assets held in our custody. Short-term investment
loans increased by $116.9 million during 2002, reflecting our strategy to
increase lending to our GFS clients. Short-term investment loans increased by
$62.8 million during fiscal year ended December 31, 2001 due to the liquidity
requirements of an international investment fund client. Fluctuations in prior
years reflect changes in the liquidity requirements of our investment fund
clients and changes in their net asset values.

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Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the amount of each loan category by maturity
date:

|                                            |       |   |                         |         |         |   |                  |         |       |   |         |         |  |   |         |           | 
|------------------------------------------- | ----- | - | ----------------------- | ------- | ------- | - | ---------------- | ------- | ----- | - | ------- | ------- |  | - | ------- | --------- | 
|                                            |       |   | As of December 31, 2002
|                                            |       |   |                        
|                                            |       |   |                         |         |         |   | Due After 1 Year |         |       |   |         |         |  |   |        
|                                            |       |   | Due in                  |         | Through |   | Due              |         |       |   |        
|                                            |       |   | 1 Year or Less          |         | 5 Years |   | After 5 Years    |         | Total
|                                            |       |   |                         |         |         |   |                  |         |      
|                                            |       |   | (US$ in thousands)     
|Mortgages                                   |       | $ | 95,655                  |         |         | $ | 162,772          |         |       | $ | 595,501 |         |  | $ | 853,928 |          
|Bermuda Commercial Loans                    |       |   | 153,574                 |         |         |   | 56,666           |         |       |   | 7,181   |         |  |   | 217,421 |          
|Bermuda Personal Loans                      |       |   | 139,025                 |         |         |   | 45,885           |         |       |   | 14,764  |         |  |   | 199,674 |          
|International Commercial and Personal Loans |       |   | 68,953                  |         |         |   | 84,767           |         |       |   | 7,574   |         |  |   | 161,294 |          
|Secured Short-term Investment Loans         |       |   | 360,426                 |         |         |   |                 |         |       |   |        |         |  |   | 360,426 |          
|                                            |       |   |                         |         |         |   |                  |         |       |   |         |         |  |   |         |          
|                                            | Total |   | $                       | 817,633 |         |   | $                | 350,090 |       |   | $       | 625,020 |  |   | $       | 1,792,743 | 
|                                            |       |   |                         |         |         |   |                  |         |       |   |         |         |  |   |         |          

The majority of our loan portfolio consists of floating rate loans. The
following table presents information concerning our fixed versus floating
interest rate loans due after one year:

|                                   |       |   |                         |         |           |   |                 |         |  |   |         |         | 
|---------------------------------- | ----- | - | ----------------------- | ------- | --------- | - | --------------- | ------- |  | - | ------- | ------- | 
|                                   |       |   | As of December 31, 2002
|                                   |       |   |                        
|                                   |       |   | Due After               |         |           |   |                 |         |  |   |        
|                                   |       |   | 1 Year Through          |         | Due After |   | Total Due After
|                                   |       |   | 5 Years                 |         | 5 Years   |   | 1 Year         
|                                   |       |   |                         |         |           |   |                
|                                   |       |   | (US$ in thousands)     
|Loans with fixed interest rates    |       | $ | 106,966                 |         |           | $ | 9,823           |         |  | $ | 116,789 |        
|Loans with floating interest rates |       |   | 243,124                 |         |           |   | 615,197         |         |  |   | 858,321 |        
|                                   |       |   |                         |         |           |   |                 |         |  |   |         |        
|                                   | Total |   | $                       | 350,090 |           |   | $               | 625,020 |  |   | $       | 975,110 | 
|                                   |       |   |                         |         |           |   |                 |         |  |   |         |        

Nonaccrual, Past Due and Restructured Loans

Loans are considered impaired when, in the opinion of management and based
on current information and events, there has been a deterioration in credit
quality to the extent that it is probable that the Bank will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Loans for which payment is more
than 90 days overdue are automatically classified as impaired unless the loan
is well-secured and in the process of collection. Those loans over 90 days due
that are deemed to be well-secured and in the process of collection are placed
on a non-accrual basis and related interest is recorded in income only when
received. For all other impaired loans that are placed on a non-accrual basis,
interest is not recognised until the principal balance has been repaid. At
December 31, 2002 and 2001, there were $0.3 million and $2.4 million,
respectively, of loans that were overdue more than 90 days, but which were not
considered impaired as they were well secured and in the process of collection.
In the three preceding years, no loans were excluded from impaired status that
were more than 90 days overdue.

The following table presents information related to our impaired loans for
each of the periods indicated:

|                                      |       |   |                    |        |               |   |        |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------- | ----- | - | ------------------ | ------ | ------------- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |       |   | As of December 31, |        | As of June 30
|                                      |       |   |                    |        |              
|                                      |       |   | 2002               |        | 2001          |   | 2000   |        | 2000 |   | 1999   |        | 1998
|                                      |       |   |                    |        |               |   |        |        |      |   |        |        |     
|                                      |       |   | (US$ in thousands)
|Mortgages(1)                          |       | $ | 12,928             |        |               | $ | 15,002 |        |      | $ | 13,071 |        |      | $ | 15,977 |        |  | $ | 11,572 |        |  | $ | 477    |       
|Bermuda Commercial                    |       |   | 3,723              |        |               |   | 6,356  |        |      |   | 5,286  |        |      |   | 1,334  |        |  |   | 7,181  |        |  |   | 11,066 |       
|Bermuda Personal                      |       |   | 3,516              |        |               |   | 4,361  |        |      |   | 4,217  |        |      |   | 4,946  |        |  |   | 12,670 |        |  |   | 15,350 |       
|International Commercial and Personal |       |   |                   |        |               |   |       |        |      |   | 860    |        |      |   | 1,491  |        |  |   | 2,485  |        |  |   | 1,280  |       
|Secured Short-term Investment Loans   |       |   |                   |        |               |   |       |        |      |   |       |        |      |   |       |        |  |   |       |        |  |   | 2,843  |       
|                                      |       |   |                    |        |               |   |        |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       
|                                      | Total |   | $                  | 20,167 |               |   | $      | 25,719 |      |   | $      | 23,434 |      |   | $      | 23,748 |  |   | $      | 33,908 |  |   | $      | 31,016 | 
|                                      |       |   |                    |        |               |   |        |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       



---

|(1) |  | Reflects the purchase of Bermuda Home Limited in 1999.
|--- |  | ------------------------------------------------------

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Change in the impaired loan position is one measure of an organisations
lending management. As described above, total impaired loans at December 31,
2002 were $20.2 million, compared with $25.7 million at December 31, 2001, and
$23.4 million at December 31, 2000. A measure of the adequacy of established
allowances for loan losses is the coverage ratio, which is the allowance for
losses as a percentage of total impaired loans. Our coverage ratio was 121% at
December 31, 2002, an increase from 107% at December 31, 2001 and 111% at
December 31, 2000. The ratio of gross impaired loans to total gross loans was
1.1% at December 31, 2002 down from 1.7% at December 31, 2001 and 1.5% at
December 31, 2000.

In fiscal year ended June 30, 2000, total mortgages increased 13% over
fiscal year ended June 30, 1999. In the same year, impaired mortgages
increased 36%, as a result of a few larger mortgages migrating to impaired
status. However, specific allowances did not increase by an equivalent amount
as there was adequate collateral available from the underlying real estate.
Mortgages further increased by December 31, 2000, but impaired mortgages
declined as a result of successful collection efforts. At December 31, 2001,
impaired mortgages increased due to overdue mortgage loans in our Cayman office
of $2.7 million. One of these overdue mortgages has since been repaid and the
remainder are fully collateralised. At December 31, 2002, impaired mortgages
totalled $12.9 million, of which $11.0 million are located in Bermuda. These
loans are fully collateralised.

Impaired commercial loans declined by $2.6 million in fiscal year ended
December 31, 2002 due to the recoveries on several loans. During
the latter part of 2002, we
collected full payment on the $1.8 million loan to First Atlantic Commerce that
had been classified as impaired in 2000 and written off in full
earlier in the year. Of the recovery, $1.0 million was used to
reimburse an insurance recovery we had previously received.

For fiscal years ended December 31, 2002 and 2001, the amount of gross
interest income that would have been recorded had all non-accrual loans been
current was $2.4 million and $2.7 million, respectively, and $1.0 million in
the six months ended December 31, 2000. There was only one restructured loan
in our portfolio, which was shown in secured short-term investment loans. This
loan was a loan granted to an investment fund in Hong Kong which was adversely
affected by the economic problems in Southeast Asia in 1997. It was
subsequently reclassified as an impaired international commercial loan due to
the nature of its restructuring. This loan was repaid in full during fiscal
year ended December 31, 2001.

Foreign Outstandings

The following table presents the balance of our foreign outstandings for
each country where such outstandings exceeded one percent of our total assets
as of the end of one of the periods presented. Foreign outstandings include
assets with borrowers or customers in a foreign country: loans,
interest-earning deposits with banks and interest-earning marketable
securities. Local currency outstandings, whether or not hedged or funded by
local currency borrowings, are included in foreign outstandings. Local
currency outstandings are claims on local residents recorded by the overseas
offices of the Bank. Foreign outstandings are reported based on the location
of ultimate risk. There were no individual countries with aggregate foreign
outstandings between 0.75% and 1% of total assets at December 31, 2002, 2001,
2000 and June 30, 2000, other than those presented below.

|                    |               |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |     |     |  
|------------------- | ------------- | ---------- | --------- | -------------------------------------- | --------- | ----------------- | ---- | ----------------- | --- | ------------- | --------- | - | --------- | ------------ | ---- | --- | --- | - | --------- | ------------ | --------- |  | ---- | --- | --- | ------------ | --------- | ----- | ------- |  | ---- | --- | --- | -
|                    |               |            |           | December 31, 2002                      |           | December 31, 2001 |      | December 31, 2000 |     | June 30, 2000
|                    |               |            |           |                                        |           |                   |      |                   |     |              
|                    |               |            |           |                                        |           |                   |      | % of              |     |               |           |   |           | % of         |      |     |     |   |           | % of         |           |  |      |     |     | % of        
|                    |               |            |           |                                        |           |                   |      | Total Assets      |     |               |           |   |           | Total Assets |      |     |     |   |           | Total Assets |           |  |      |     |     | Total Assets
|                    |               |            |           | (US$ in thousands, except percentages)
|North America       |               |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |    
|                    | United States |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |     |    
|                    |               | Banks      |           | $                                      | 1,053,155 |                   |      |                   |     |               |           | $ | 1,132,844 |              |      |     |     |   |           | $            | 560,626   |  |      |     |     |              |           | $     | 672,633 |  |      |     |     |  
|                    |               | Government |           |                                        | 748,352   |                   |      |                   |     |               |           |   | 1,486,845 |              |      |     |     |   |           |              | 1,045,415 |  |      |     |     |              |           |       | 962,859 |  |      |     |     |  
|                    |               | Other      |           |                                        | 690,928   |                   |      |                   |     |               |           |   | 622,324   |              |      |     |     |   |           |              | 975,964   |  |      |     |     |              |           |       | 940,668 |  |      |     |     |  
|                    |               |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |    
|                    |               |            | 2,492,435 |                                        |           |                   | 22.5 | %                 |     |               | 3,242,013 |   |           |              | 30.0 | %   |     |   | 2,582,005 |              |           |  | 22.7 | %   |     |              | 2,576,160 |       |         |  | 24.9 | %  
|                    | Canada        |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |     |    
|                    |               | Banks      |           |                                        | 417,117   |                   |      |                   |     |               |           |   | 524,230   |              |      |     |     |   |           |              | 375,919   |  |      |     |     |              |           |       | 445,377 |  |      |     |     |  
|                    |               | Government |           |                                        |          |                   |      |                   |     |               |           |   | 2,150     |              |      |     |     |   |           |              | 44,504    |  |      |     |     |              |           |       | 50,431  |  |      |     |     |  
|                    |               | Other      |           |                                        | 346       |                   |      |                   |     |               |           |   |          |              |      |     |     |   |           |              | 835       |  |      |     |     |              |           |       | 10,860  |  |      |     |     |  
|                    |               |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |    
|                    |               |            | 417,463   |                                        |           |                   | 3.8  | %                 |     |               | 526,380   |   |           |              | 4.9  | %   |     |   | 421,258   |              |           |  | 3.7  | %   |     |              | 506,668   |       |         |  | 4.9  | %  
|                    | Cayman       
|                    |               | Other      |           |                                        | 145,229   |                   |      |                   | 1.3 | %             |           |   | 36,809    |              |      |     | 0.3 | % |           |              | 46,698    |  |      |     | 0.4 | %            |           |       | 47,608  |  |      |     | 0.5 | %
|                    | Other         |            |           | 29,325                                 |           |                   |      | 0.2               | %   |               |           |  |           |              |      | 0.0 | %   |   |           | 2,673        |           |  |      | 0.0 | %   |              |           | 2,838 |         |  |      | 0.0 | %  
|                    |               |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |    
|Total North America |               | $          | 3,084,452 |                                        |           |                   | 27.8 | %                 |     | $             | 3,805,202 |   |           |              | 35.2 | %   |     | $ | 3,052,634 |              |           |  | 26.8 | %   |     | $            | 3,133,274 |       |         |  | 30.3 | %  
|                    |               |            |           |                                        |           |                   |      |                   |     |               |           |   |           |              |      |     |     |   |           |              |           |  |      |     |     |              |           |       |         |  |      |    

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##### Table of Contents



|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |     |  
|-------------------- |  | -------------- | ---------- |  | -------------------------------------- | --------- | ----------------- | - | ----------------- | --- | ------------- |  | ------ | ------- | ------------ | - | --- | --- | --------- |  | ------------ | --------- | ---- | - | --- | --- | ------------ |  | ------- | --------- | ---- | - | --- | --- | -
|                     |  |                |            |  | December 31, 2002                      |           | December 31, 2001 |   | December 31, 2000 |     | June 30, 2000
|                     |  |                |            |  |                                        |           |                   |   |                   |     |              
|                     |  |                |            |  |                                        |           |                   |   | % of              |     |               |  |        |         | % of         |   |     |     |           |  | % of         |           |      |   |     |     | % of        
|                     |  |                |            |  |                                        |           |                   |   | Total Assets      |     |               |  |        |         | Total Assets |   |     |     |           |  | Total Assets |           |      |   |     |     | Total Assets
|                     |  |                |            |  | (US$ in thousands, except percentages)
|Western Europe       |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  | Germany        |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  | $                                      | 1,324,504 |                   |   |                   |     |               |  | $      | 799,192 |              |   |     |     |           |  | $            | 1,238,609 |      |   |     |     |              |  | $       | 1,105,516 |      |   |     |     |  
|                     |  |                | Other      |  |                                        |          |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              | 7,304     |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 1,324,504  |  |                                        |           | 11.9              | % |                   |     | 799,192       |  |        |         | 7.4          | % |     |     | 1,245,913 |  |              |           | 11.0 | % |     |     | 1,105,516    |  |         |           | 10.7 | %
|                     |  | United Kingdom |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 1,196,537 |                   |   |                   |     |               |  |        | 985,154 |              |   |     |     |           |  |              | 811,476   |      |   |     |     |              |  |         | 668,348   |      |   |     |     |  
|                     |  |                | Other      |  |                                        | 52,505    |                   |   |                   |     |               |  |        | 60,054  |              |   |     |     |           |  |              | 63,886    |      |   |     |     |              |  |         | 46,674    |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 1,249,042  |  |                                        |           | 11.3              | % |                   |     | 1,045,208     |  |        |         | 9.7          | % |     |     | 875,362   |  |              |           | 7.7  | % |     |     | 715,022      |  |         |           | 6.9  | %
|                     |  | Netherlands    |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 878,497   |                   |   |                   |     |               |  |        | 231,269 |              |   |     |     |           |  |              | 385,318   |      |   |     |     |              |  |         | 290,436   |      |   |     |     |  
|                     |  |                | Government |  |                                        | 9,380     |                   |   |                   |     |               |  |        | 9,380   |              |   |     |     |           |  |              |          |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                | Other      |  |                                        |          |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              | 14,677    |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 887,877    |  |                                        |           | 8.0               | % |                   |     | 240,649       |  |        |         | 2.2          | % |     |     | 399,995   |  |              |           | 3.5  | % |     |     | 290,436      |  |         |           | 2.8  | %
|                     |  | France         |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 428,057   |                   |   |                   |     |               |  |        | 664,579 |              |   |     |     |           |  |              | 748,482   |      |   |     |     |              |  |         | 331,717   |      |   |     |     |  
|                     |  |                | Other      |  |                                        |          |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              | 10,540    |      |   |     |     |              |  |         | 13,254    |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 428,057    |  |                                        |           | 3.9               | % |                   |     | 664,579       |  |        |         | 6.2          | % |     |     | 759,022   |  |              |           | 6.7  | % |     |     | 344,971      |  |         |           | 3.3  | %
|                     |  | Ireland        |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 332,543   |                   |   |                   |     |               |  |        | 171,623 |              |   |     |     |           |  |              | 144,501   |      |   |     |     |              |  |         | 60,446    |      |   |     |     |  
|                     |  |                | Other      |  |                                        | 14,976    |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              |          |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 347,519    |  |                                        |           | 3.1               | % |                   |     | 171,623       |  |        |         | 1.6          | % |     |     | 144,501   |  |              |           | 1.3  | % |     |     | 60,446       |  |         |           | 0.6  | %
|                     |  | Switzerland    |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 309,685   |                   |   |                   |     |               |  |        | 291,382 |              |   |     |     |           |  |              | 347,929   |      |   |     |     |              |  |         | 21,008    |      |   |     |     |  
|                     |  |                | Other      |  |                                        | 199       |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              |          |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 308,884    |  |                                        |           | 2.8               | % |                   |     | 291,382       |  |        |         | 2.7          | % |     |     | 347,929   |  |              |           | 3.1  | % |     |     | 21,008       |  |         |           | 0.2  | %
|                     |  | Portugal       |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 158,414   |                   |   |                   |     |               |  |        | 130,405 |              |   |     |     |           |  |              | 202,575   |      |   |     |     |              |  |         | 214,809   |      |   |     |     |  
|                     |  |                | Other      |  |                                        |          |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              | 9,937     |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 158,414    |  |                                        |           | 1.4               | % |                   |     | 130,405       |  |        |         | 1.2          | % |     |     | 212,512   |  |              |           | 1.9  | % |     |     | 214,809      |  |         |           | 2.1  | %
|                     |  | Austria        |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 146,105   |                   |   |                   | 1.3 | %             |  |        | 182,384 |              |   |     | 1.7 | %         |  |              | 145,592   |      |   |     | 1.3 | %            |  |         | 344,518   |      |   |     | 3.3 | %
|                     |  | Norway         |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 111,365   |                   |   |                   | 1.0 | %             |  |        | 83,569  |              |   |     | 0.8 | %         |  |              | 194,859   |      |   |     | 1.7 | %            |  |         | 214,324   |      |   |     | 2.1 | %
|                     |  | Italy          |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 79,806    |                   |   |                   |     |               |  |        | 164,064 |              |   |     |     |           |  |              | 354,772   |      |   |     |     |              |  |         | 281,500   |      |   |     |     |  
|                     |  |                | Government |  |                                        |          |                   |   |                   |     |               |  |        | 16,887  |              |   |     |     |           |  |              | 18,336    |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                | Other      |  |                                        | 17,053    |                   |   |                   |     |               |  |        |        |              |   |     |     |           |  |              | 855       |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 96,859     |  |                                        |           | 0.9               | % |                   |     | 180,951       |  |        |         | 1.7          | % |     |     | 373,963   |  |              |           | 3.3  | % |     |     | 281,500      |  |         |           | 2.7  | %
|                     |  | Luxembourg     |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 86,346    |                   |   |                   |     |               |  |        | 16,143  |              |   |     |     |           |  |              | 59,418    |      |   |     |     |              |  |         | 91,653    |      |   |     |     |  
|                     |  |                | Other      |  |                                        |          |                   |   |                   |     |               |  |        | 53,876  |              |   |     |     |           |  |              | 86,455    |      |   |     |     |              |  |         | 77,769    |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 86,346     |  |                                        |           | 0.8               | % |                   |     | 70,019        |  |        |         | 0.6          | % |     |     | 145,873   |  |              |           | 1.3  | % |     |     | 169,422      |  |         |           | 1.6  | %
|                     |  | Belgium        |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 72,652    |                   |   |                   | 0.7 | %             |  |        | 1,782   |              |   |     | 0.0 | %         |  |              | 92,291    |      |   |     | 0.8 | %            |  |         | 178,863   |      |   |     | 1.7 | %
|                     |  | Spain          |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 58,083    |                   |   |                   |     |               |  |        | 240,181 |              |   |     |     |           |  |              | 361,013   |      |   |     |     |              |  |         | 242,754   |      |   |     |     |  
|                     |  |                | Other      |  |                                        | 319       |                   |   |                   |     |               |  |        | 458     |              |   |     |     |           |  |              | 855       |      |   |     |     |              |  |         |          |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 58,402     |  |                                        |           | 0.5               | % |                   |     | 240,639       |  |        |         | 2.2          | % |     |     | 361,868   |  |              |           | 3.2  | % |     |     | 242,754      |  |         |           | 2.3  | %
|                     |  | Sweden         |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 49,984    |                   |   |                   |     |               |  |        | 94,595  |              |   |     |     |           |  |              | 135,775   |      |   |     |     |              |  |         | 132,894   |      |   |     |     |  
|                     |  |                | Government |  |                                        |          |                   |   |                   |     |               |  |        | 8,998   |              |   |     |     |           |  |              | 8,987     |      |   |     |     |              |  |         | 8,980     |      |   |     |     |  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|                     |  |                | 49,984     |  |                                        |           | 0.5               | % |                   |     | 103,593       |  |        |         | 1.0          | % |     |     | 144,762   |  |              |           | 1.3  | % |     |     | 141,874      |  |         |           | 1.4  | %
|                     |  | Guernsey       |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |   |     |    
|                     |  |                | Banks      |  |                                        | 29,258    |                   |   |                   | 0.3 | %             |  |        | 132,723 |              |   |     | 1.2 | %         |  |              | 61,979    |      |   |     | 0.5 | %            |  |         | 56,650    |      |   |     | 0.6 | %
|                     |  | Other          |            |  | 267,299                                |           |                   |   | 2.3               | %   |               |  | 98,393 |         |              |   | 0.9 | %   |           |  | 89,998       |           |      |   | 0.8 | %   |              |  | 137,460 |           |      |   | 1.3 | %  
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  
|Total Western Europe |  | $              | 5,622,567  |  |                                        |           | 50.7              | % |                   | $   | 4,437,091     |  |        |         | 41.1         | % |     | $   | 5,596,419 |  |              |           | 49.2 | % |     | $   | 4,519,573    |  |         |           | 43.7 | %
|                     |  |                |            |  |                                        |           |                   |   |                   |     |               |  |        |         |              |   |     |     |           |  |              |           |      |   |     |     |              |  |         |           |      |  

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|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |   |     |     |  
|-------------------------- |  | --------------- | ---------- |  | -------------------------------------- | ------- | ----------------- | - | ----------------- | --- | ------------- |  | ------- | ------- | ------------ | - | --- | --- | --------- |  | ------------ | ------- | ---- | - | --- | --- | ------------ |  | ------- | ------- | ---- | - | --- | --- | -
|                           |  |                 |            |  | December 31, 2002                      |         | December 31, 2001 |   | December 31, 2000 |     | June 30, 2000
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |              
|                           |  |                 |            |  |                                        |         |                   |   | % of              |     |               |  |         |         | % of         |   |     |     |           |  | % of         |         |      |   |     |     | % of        
|                           |  |                 |            |  |                                        |         |                   |   | Total Assets      |     |               |  |         |         | Total Assets |   |     |     |           |  | Total Assets |         |      |   |     |     | Total Assets
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |             
|                           |  |                 |            |  | (US$ in thousands, except percentages)
|Asia                       |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |   |     |    
|                           |  | Japan           |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |   |     |    
|                           |  |                 | Banks      |  | $                                      | 153,294 |                   |   |                   |     |               |  | $       | 168,345 |              |   |     |     |           |  | $            | 160,731 |      |   |     |     |              |  | $       | 179,971 |      |   |     |     |  
|                           |  |                 | Government |  |                                        | 20,260  |                   |   |                   |     |               |  |         | 50,068  |              |   |     |     |           |  |              | 55,210  |      |   |     |     |              |  |         | 51,644  |      |   |     |     |  
|                           |  |                 | Other      |  |                                        |        |                   |   |                   |     |               |  |         |        |              |   |     |     |           |  |              | 15,549  |      |   |     |     |              |  |         | 4,100   |      |   |     |     |  
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|                           |  |                 | 173,554    |  |                                        |         | 1.6               | % |                   |     | 218,413       |  |         |         | 2.0          | % |     |     | 231,490   |  |              |         | 2.0  | % |     |     | 235,715      |  |         |         | 2.3  | %
|                           |  | Hong Kong       |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |   |     |    
|                           |  |                 | Other      |  |                                        | 27,244  |                   |   |                   | 0.2 | %             |  |         | 20,101  |              |   |     | 0.2 | %         |  |              | 135,895 |      |   |     | 1.2 | %            |  |         | 174,377 |      |   |     | 1.7 | %
|                           |  | Singapore      
|                           |  |                 | Banks      |  |                                        | 400     |                   |   |                   | 0.0 | %             |  |         | 51,189  |              |   |     | 0.5 | %         |  |              | 113,097 |      |   |     | 1.0 | %            |  |         | 170,745 |      |   |     | 1.6 | %
|                           |  | Other           |            |  | 432                                    |         |                   |   | 0.0               | %   |               |  |        |         |              |   | 0.0 | %   |           |  | 27,116       |         |      |   | 0.2 | %   |              |  | 25,872  |         |      |   | 0.2 | %  
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|Total Asia                 |  | $               | 201,630    |  |                                        |         | 1.8               | % |                   | $   | 289,703       |  |         |         | 2.7          | % |     | $   | 507,598   |  |              |         | 4.5  | % |     | $   | 606,709      |  |         |         | 5.8  | %
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|Other                      |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|                           |  | Australia       |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |   |     |    
|                           |  |                 | Banks      |  | $                                      | 372,893 |                   |   |                   |     |               |  | $       | 445,800 |              |   |     |     |           |  | $            | 483,008 |      |   |     |     |              |  | $       | 332,557 |      |   |     |     |  
|                           |  |                 | Other      |  |                                        | 1,999   |                   |   |                   |     |               |  |         | 3,282   |              |   |     |     |           |  |              | 5,587   |      |   |     |     |              |  |         | 6,401   |      |   |     |     |  
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|                           |  |                 | 374,892    |  |                                        |         | 3.4               | % |                   |     | 449,082       |  |         |         | 4.1          | % |     |     | 488,595   |  |              |         | 4.3  | % |     |     | 338,958      |  |         |         | 3.3  | %
|                           |  | Other countries |            |  | 124,915                                |         |                   |   | 1.1               | %   |               |  | 105,642 |         |              |   | 1.0 | %   |           |  | 208,141      |         |      |   | 1.8 | %   |              |  | 200,361 |         |      |   | 1.9 | %  
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|Total Other                |  | $               | 499,807    |  |                                        |         | 4.5               | % |                   | $   | 554,724       |  |         |         | 5.1          | % |     | $   | 696,736   |  |              |         | 6.1  | % |     | $   | 539,319      |  |         |         | 5.2  | %
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  
|Total Foreign
Outstandings |  | $               | 9,408,456  |  |                                        |         | 84.8              | % |                   | $   | 9,086,720     |  |         |         | 84.1         | % |     | $   | 9,853,387 |  |              |         | 86.6 | % |     | $   | 8,798,875    |  |         |         | 85.0 | %
|                           |  |                 |            |  |                                        |         |                   |   |                   |     |               |  |         |         |              |   |     |     |           |  |              |         |      |   |     |     |              |  |         |         |      |  

Loan Concentrations

As of December 31, 2002, approximately 69% of our loan portfolio was in
the form of personal, mortgage and commercial lending made in Bermuda to
Bermudian businesses and residents of the island. As a result of our high
exposure to Bermuda, and in particular Bermuda real estate, the value of our
loan portfolios generally fluctuate with changes in the strength of the Bermuda
real estate market. These Bermuda-based portfolios are also subject to
economic risk, emanating primarily from the United States. The U.S. economy
has a direct and significant impact on Bermuda and, as a result, on the credit
risk of our Bermuda-based borrowers.

Despite this concentration of risk, loan quality has remained relatively
consistent, with no material changes in loan concentrations, re-allocations of
allowances or number of restructurings. We consider our allowance for loan
losses to be adequate for losses inherent in the portfolio at December 31,
2002.

There are no material concentrations of risk in the international lending
portfolio in terms of geographic region or underlying business activity.

Summary of Loan Loss Experience

Allowance for loan losses. The following table presents an analysis of
the allowance for loan losses:

|                                    |               |            |        |                                        |        |              |        |                     |        |      |        |            |      |      |        |        |        |   |        |      |      |   |        |        |        |  
|----------------------------------- | ------------- | ---------- | ------ | -------------------------------------- | ------ | ------------ | ------ | ------------------- | ------ | ---- | ------ | ---------- | ---- | ---- | ------ | ------ | ------ | - | ------ | ---- | ---- | - | ------ | ------ | ------ | -
|                                    |               |            |        |                                        |        |              |        |                     |        |      |        | Six Months |      |      |        |        |        |   |        |      |      |   |        |       
|                                    |               |            |        | Year Ended                             |        | Ended        |        |                     |        |      |        |            |      |      |        |        |        |  
|                                    |               |            |        | December 31,                           |        | December 31, |        | Year Ended June 30,
|                                    |               |            |        |                                        |        |              |        |                    
|                                    |               |            |        | 2002                                   |        | 2001         |        | 2000                |        | 2000 |        | 1999       |      | 1998
|                                    |               |            |        |                                        |        |              |        |                     |        |      |        |            |      |     
|                                    |               |            |        | (US$ in thousands, except percentages)
|Balance at Beginning of Period      |               | $          | 27,611 |                                        |        | $            | 26,017 |                     |        | $    | 24,243 |            |      | $    | 30,025 |        |        | $ | 26,697 |      |      | $ | 26,570 |       
|Acquisition of Bermuda Home Limited |               |            |       |                                        |        |              |       |                     |        |      |       |            |      |      |       |        |        |   | 3,233  |      |      |   |       |       
|(Released to)/Provided from Income  |               |            | (1,971 | )                                      |        |              | 2,662  |                     |        |      | 2,589  |            |      |      | 916    |        |        |   | 374    |      |      |   | 7,857  |       
|                                    |               |            |        |                                        |        |              |        |                     |        |      |        |            |      |      |        |        |        |   |        |      |      |   |        |       
|Charge-offs:                        |               |            |        |                                        |        |              |        |                     |        |      |        |            |      |      |        |        |        |   |        |      |      |   |        |       
|Loans Charged Off                   |               |            |        |                                        |        |              |        |                     |        |      |        |            |      |      |        |        |        |   |        |      |      |   |        |       
|                                    | Bermuda:      |            |        |                                        |        |              |        |                     |        |      |        |            |      |      |        |        |        |   |        |      |      |   |        |        |       
|                                    |               | Personal   |        |                                        | (2,659 | )            |        |                     | (1,866 | )    |        |            | (473 | )    |        |        | (667   | ) |        |      | (283 | ) |        |        | (3,730 | )
|                                    |               | Mortgages  |        |                                        |       |              |        |                     | (752   | )    |        |            | (112 | )    |        |        | (81    | ) |        |      | (282 | ) |        |        |       |  
|                                    |               | Commercial |        |                                        | (1,784 | )            |        |                     | (281   | )    |        |            | (82  | )    |        |        | (5,479 | ) |        |      | (95  | ) |        |        | (3,665 | )
|                                    |               |            |        |                                        |        |              |        |                     |        |      |        |            |      |      |        |        |        |   |        |      |      |   |        |       
|                                    | Total Bermuda |            |        | (4,443                                 | )      |              |        | (2,899              | )      |      |        | (667       | )    |      |        | (6,227 | )      |   |        | (660 | )    |   |        | (7,395 | )     

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|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |        |     | 
|--------------------------------------------------------------------- | ------------------------ | ---------- | ------ | ------------ | ----- | ------------ | ------ | ------------------- | ----- | ---- | ------ | ---------- | --- | ---- | ------ | ------ | --- | - | ------ | ------ | --- | - | ------ | ------ | --- | 
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        | Six Months |     |      |        |        |     |   |        |        |     |   |        |       
|                                                                      |                          |            |        | Year Ended   |       | Ended        |        |                     |       |      |        |            |     |      |        |        |     |  
|                                                                      |                          |            |        | December 31, |       | December 31, |        | Year Ended June 30,
|                                                                      |                          |            |        |              |       |              |        |                    
|                                                                      |                          |            |        | 2002         |       | 2001         |        | 2000                |       | 2000 |        | 1999       |     | 1998
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |     
|                                                                      | International            |            |        |             |       |              |        | (36                 | )     |      |        | (306       | )   |      |        | (662   | )   |   |        | (216   | )   |   |        | (1,307 | )  
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Total Charge-offs                                                     |                          |            | (4,443 | )            |       |              | (2,935 | )                   |       |      | (973   | )          |     |      | (6,889 | )      |     |   | (876   | )      |     |   | (8,702 | )     
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Loans Recovered                                                       |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|                                                                      | Bermuda:                 |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |        |    
|                                                                      |                          | Personal   |        |              | 2,362 |              |        |                     | 1,867 |      |        |            | 146 |      |        |        | 191 |   |        |        | 597 |   |        |        | 972 | 
|                                                                      |                          | Mortgages  |        |              |      |              |        |                     |      |      |        |            | 11  |      |        |        |    |   |        |        |    |   |        |        |    | 
|                                                                      |                          | Commercial |        |              | 788   |              |        |                     |      |      |        |            |    |      |        |        |    |   |        |        |    |   |        |        |    | 
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|                                                                      | Total Bermuda            |            |        | 3,150        |       |              |        | 1,867               |       |      |        | 157        |     |      |        | 191    |     |   |        | 597    |     |   |        | 972    |    
|                                                                      | International            |            |        | 47           |       |              |        |                    |       |      |        | 1          |     |      |        |       |     |   |        |       |     |   |        |       |    
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Total Recoveries                                                      |                          |            | 3,197  |              |       |              | 1,867  |                     |       |      | 158    |            |     |      | 191    |        |     |   | 597    |        |     |   | 972    |       
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Net Charge-offs                                                       |                          |            | (1,246 | )            |       |              | (1,068 | )                   |       |      | (815   | )          |     |      | (6,698 | )      |     |   | (279   | )      |     |   | (7,730 | )     
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Balance at End of Period                                              |                          | $          | 24,394 |              |       | $            | 27,611 |                     |       | $    | 26,017 |            |     | $    | 24,243 |        |     | $ | 30,025 |        |     | $ | 26,697 |       
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Comprising:                                                           |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Specific allowances                                                   |                          | $          | 3,745  |              |       | $            | 7,472  |                     |       | $    | 9,504  |            |     | $    | 8,269  |        |     | $ | 13,969 |        |     | $ | 14,028 |       
|General allowances                                                   
|                                                                      | Risk-rated portfolio     |            |        | 10,824       |       |              |        | 10,654              |       |      |        | 10,460     |     |      |        | 15,974 |     |   |        | 16,056 |     |   |        | 12,669 |    
|                                                                      | Non-risk rated portfolio |            |        | 5,698        |       |              |        | 7,459               |       |      |        | 4,920      |     |      |        |       |     |   |        |       |     |   |        |       |    
|                                                                      | Unallocated              |            |        | 4,127        |       |              |        | 2,026               |       |      |        | 1,133      |     |      |        |       |     |   |        |       |     |   |        |       |    
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Total general allowances                                              |                          |            | 20,649 |              |       |              | 20,139 |                     |       |      | 16,513 |            |     |      | 15,974 |        |     |   | 16,056 |        |     |   | 12,669 |       
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Total                                                                 |                          | $          | 24,394 |              |       | $            | 27,611 |                     |       | $    | 26,017 |            |     | $    | 24,243 |        |     | $ | 30,025 |        |     | $ | 26,697 |       
|                                                                      |                          |            |        |              |       |              |        |                     |       |      |        |            |     |      |        |        |     |   |        |        |     |   |        |       
|Ratio of net charge-offs during the year to
average outstanding loans |                          |            | 0.1    | %            |       |              | 0.1    | %                   |       |      | 0.1    | %          |     |      | 0.4    | %      |     |   | 0.0    | %      |     |   | 0.8    | %     
|Allowance for loan losses as a percentage of
gross loans              |                          |            | 1.4    | %            |       |              | 1.9    | %                   |       |      | 1.7    | %          |     |      | 1.5    | %      |     |   | 2.0    | %      |     |   | 2.7    | %     

Loans
charged off in fiscal year ended December 31, 2002 totalled
$4.4 million, an increase of $1.5 million over the prior
year. During the year, a personal loan was written off in the amount
of $1.1 million that had been impaired for several years. In
addition, the full $1.8 million of the First Atlantic Commerce
loan was written off. It had been classified as impaired during the
six months ended December 31, 2000 and fully provided for at
that time.

Loans
recovered in fiscal year ended December 31, 2002 totalled
$3.2 million, an increase of $1.3 million. During 2002,
$0.8 million of the First Atlantic Commerce loan recovery was
added to the allowance. The balance of the recoveries in 2002 was an
aggregation of smaller loans.

The
large variation in charge-offs over the years, as presented above, is
partly the result of the change in our charge-off policy during the
fiscal year ended June 30, 2000. It also reflects the impact of
periodic charge-offs of larger loans or groups of loans that were
carried with an allowance and written off when further collateral
recoveries were remote. The charge-offs at June 30, 2000
included $1.5 million resulting from our new charge-off policy
and a $4.0 million commercial account deemed uncollectable when
there was no more collateral to liquidate. The $4.0 million loss
had been provided for when the impairment was originally identified.

Under the new charge-off policy, consumer and
personal loans and mortgages with an outstanding balance less than $100,000
that reach 120 days past due and credit card balances that reach 180 days past
due are charged-off immediately. The amount of the loan is written off and
subsequent recoveries are added back to the allowance for loan losses when
received. This policy was introduced to simplify the reserving and charge-off
policy for smaller loans. Under the previous policy, the amount of such
overdue personal loans, mortgages and credit card balances that exceeded the
fair market value of the collateral was provided for in the allowance for loan
losses. Under the current policy, the total amount outstanding, whether
supported by underlying collateral or not, is written off immediately. As the
underlying loans are small and of a personal nature or relate to credit card
balances, the amount of underlying collateral is generally not significant and
the difference in the two policies is not material to our financial statements.

During the year ended December 31, 2002, the specific loan allowance
declined by $3.7 million to $3.7 million to reflect recoveries on impaired
loans and the write-offs of some loans that had previously been provided for in
full. The impact of negative trends related to concentration and economic risks
in Bermuda would be increased business failures, reduced employment, and
reduced demand for the rental and purchase of Bermuda real estate resulting in
decreased market values. On the basis of these considerations and managements
judgment of their impact, general allowances were increased during fiscal year
ended December 31, 2002. The unallocated general allowance
increased during the same period by $2.1 million, reflecting
managements judgments as to the impact on credit quality
arising from current economic uncertainty in Bermudas retail
and hospitality sectors.

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Provisions for Loan Losses.
Provisions for
loan losses are recorded on our Consolidated Statement of Income and increase
or decrease the total allowance for loan losses on our Consolidated Balance
Sheet. The following table presents our provisions for loan
losses in Bermuda and our overseas offices:

|                      |                                |                                |        |                    |        |                  |       |                     |       |      |       |      |       |      |     |  |     |   |        |   |       |   |       |  |       | 
|--------------------- | ------------------------------ | ------------------------------ | ------ | ------------------ | ------ | ---------------- | ----- | ------------------- | ----- | ---- | ----- | ---- | ----- | ---- | --- |  | --- | - | ------ | - | ----- | - | ----- |  | ----- | 
|                      |                                |                                |        | Year Ended         |        | Six Months Ended |       |                     |       |      |       |      |       |      |     |  |     |  
|                      |                                |                                |        | December 31,       |        | December 31,     |       | Year Ended June 30,
|                      |                                |                                |        |                    |        |                  |       |                    
|                      |                                |                                |        | 2002               |        | 2001             |       | 2000                |       | 2000 |       | 1999 |       | 1998
|                      |                                |                                |        |                    |        |                  |       |                     |       |      |       |      |       |     
|                      |                                |                                |        | (US$ in thousands)
|Bermuda               |                                | $                              | (97    | )                  |        | $                | 3,084 |                     |       | $    | 2,802 |      |       | $    | 808 |  |     | $ | 1,418  |   |       | $ | 4,000 | 
|International Offices |                                |                                | (1,874 | )                  |        |                  | (422  | )                   |       |      | (213  | )    |       |      | 108 |  |     |   | (1,044 | ) |       |   | 3,857 | 
|                      |                                |                                |        |                    |        |                  |       |                     |       |      |       |      |       |      |     |  |     |   |        |   |       |   |       | 
|Total Provisions      |                                | $                              | (1,971 | )                  |        | $                | 2,662 |                     |       | $    | 2,589 |      |       | $    | 916 |  |     | $ | 374    |   |       | $ | 7,857 | 
|                      |                                |                                |        |                    |        |                  |       |                     |       |      |       |      |       |      |     |  |     |   |        |   |       |   |       | 
|                      | Breakdown of Total Provisions: |                                |        |                    |        |                  |       |                     |       |      |       |      |       |      |     |  |     |   |        |   |       |   |       |  |      
|                      |                                | Charge for Specific Provisions |        |                    | (2,205 | )                |       |                     | (964  | )    |       |      | 2,057 |      |     |  | 483 |   |        |   | (797  | ) |       |  | 4,476 | 
|                      |                                | Charge for General Provisions  |        |                    | 234    |                  |       |                     | 3,626 |      |       |      | 532   |      |     |  | 433 |   |        |   | 1,171 |   |       |  | 3,381 | 
|                      |                                |                                |        |                    |        |                  |       |                     |       |      |       |      |       |      |     |  |     |   |        |   |       |   |       | 
|Total Provisions      |                                | $                              | (1,971 | )                  |        | $                | 2,662 |                     |       | $    | 2,589 |      |       | $    | 916 |  |     | $ | 374    |   |       | $ | 7,857 | 
|                      |                                |                                |        |                    |        |                  |       |                     |       |      |       |      |       |      |     |  |     |   |        |   |       |   |       | 

Provisions for loan losses
in the Consolidated Statement of Income was a release of $2.0 million in fiscal year ended December
31, 2002 compared with a provision for losses of $2.7 million in fiscal year
ended December 31, 2001 and a provision of $2.6 million in the six months ended
December 31, 2000. The positive impact in 2002 resulted from significant
recoveries on two charged-off loans and the corresponding decrease in
impaired loans.

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The following tables present a breakdown of our allowances for loan losses
by loan category:

|               |                                     |                  |        |                                        |       |                |     |                  |      |                |        |        |       |                  |     |      |      |   |        |                  |       |  |     |      |      |  
|-------------- | ----------------------------------- | ---------------- | ------ | -------------------------------------- | ----- | -------------- | --- | ---------------- | ---- | -------------- | ------ | ------ | ----- | ---------------- | --- | ---- | ---- | - | ------ | ---------------- | ----- |  | --- | ---- | ---- | -
|               |                                     |                  |        | As of December 31,                    
|               |                                     |                  |        |                                       
|               |                                     |                  |        | 2002                                   |       | 2001           |     | 2000            
|               |                                     |                  |        |                                        |       |                |     |                 
|               |                                     |                  |        |                                        |       |                |     | Percent of loans |      |                |        |        |       | Percent of loans |     |      |      |   |        | Percent of loans
|               |                                     |                  |        |                                        |       |                |     | in each category |      |                |        |        |       | in each category |     |      |      |   |        | in each category
|               |                                     |                  |        | Amount                                 |       | to total loans |     | Amount           |      | to total loans |        | Amount |       | to total loans  
|               |                                     |                  |        |                                        |       |                |     |                  |      |                |        |        |       |                 
|               |                                     |                  |        | (US$ in thousands, except percentages)
|Bermuda:       |                                     |                  |        |                                        |       |                |     |                  |      |                |        |        |       |                  |     |      |      |   |        |                  |       |  |     |     
|               |                                     | Commercial Loans |        | $                                      | 7,798 |                |     |                  | 12.1 | %              |        | $      | 8,788 |                  |     |      | 11.6 | % |        | $                | 7,628 |  |     |      | 13.3 | %
|               |                                     | Personal Loans   |        |                                        | 5,177 |                |     |                  | 11.1 | %              |        |        | 6,156 |                  |     |      | 10.7 | % |        |                  | 7,402 |  |     |      | 10.4 | %
|               |                                     | Mortgages        |        |                                        | 7,600 |                |     |                  | 47.7 | %              |        |        | 9,352 |                  |     |      | 51.8 | % |        |                  | 5,803 |  |     |      | 49.4 | %
|International: |                                     |                  |        |                                        |       |                |     |                  |      |                |        |        |       |                  |     |      |      |   |        |                  |       |  |     |     
|               | Commercial and Personal             |                  |        | 1,657                                  |       |                |     | 9.0              | %    |                |        | 1,559  |       |                  |     | 9.7  | %    |   |        | 3,049            |       |  |     | 15.2 | %   
|               | Secured Short-term
Investment Loans |                  |        | 2,162                                  |       |                |     | 20.1             | %    |                |        | 1,756  |       |                  |     | 16.2 | %    |   |        | 2,135            |       |  |     | 11.7 | %   
|               |                                     |                  |        |                                        |       |                |     |                  |      |                |        |        |       |                  |     |      |      |   |        |                  |       |  |     |     
|Total          |                                     | $                | 24,394 |                                        |       |                | 100 | %                |      | $              | 27,611 |        |       |                  | 100 | %    |      | $ | 26,017 |                  |       |  | 100 | %   
|               |                                     |                  |        |                                        |       |                |     |                  |      |                |        |        |       |                  |     |      |      |   |        |                  |       |  |     |     

|               |                                     |                  |        |                                        |        |                |     |                  |      |                |        |        |        |                  |     |      |      |   |        |                  |        |  |     |      |      |  
|-------------- | ----------------------------------- | ---------------- | ------ | -------------------------------------- | ------ | -------------- | --- | ---------------- | ---- | -------------- | ------ | ------ | ------ | ---------------- | --- | ---- | ---- | - | ------ | ---------------- | ------ |  | --- | ---- | ---- | -
|               |                                     |                  |        | As of June 30,                        
|               |                                     |                  |        |                                       
|               |                                     |                  |        | 2000                                   |        | 1999           |     | 1998            
|               |                                     |                  |        |                                        |        |                |     |                 
|               |                                     |                  |        |                                        |        |                |     | Percent of loans |      |                |        |        |        | Percent of loans |     |      |      |   |        | Percent of loans
|               |                                     |                  |        |                                        |        |                |     | in each category |      |                |        |        |        | in each category |     |      |      |   |        | in each category
|               |                                     |                  |        | Amount                                 |        | to total loans |     | Amount           |      | to total loans |        | Amount |        | to total loans  
|               |                                     |                  |        |                                        |        |                |     |                  |      |                |        |        |        |                 
|               |                                     |                  |        | (US$ in thousands, except percentages)
|Bermuda:       |                                     |                  |        |                                        |        |                |     |                  |      |                |        |        |        |                  |     |      |      |   |        |                  |        |  |     |     
|               |                                     | Commercial Loans |        | $                                      | 3,715  |                |     |                  | 17.8 | %              |        | $      | 7,481  |                  |     |      | 16.2 | % |        | $                | 6,129  |  |     |      | 29.0 | %
|               |                                     | Personal Loans   |        |                                        | 12,401 |                |     |                  | 9.5  | %              |        |        | 12,941 |                  |     |      | 11.6 | % |        |                  | 13,338 |  |     |      | 23.7 | %
|               |                                     | Mortgages        |        |                                        | 4,561  |                |     |                  | 43.0 | %              |        |        | 4,791  |                  |     |      | 41.6 | % |        |                  | 747    |  |     |      | 3.5  | %
|International: |                                     |                  |        |                                        |        |                |     |                  |      |                |        |        |        |                  |     |      |      |   |        |                  |        |  |     |     
|               | Commercial and Personal             |                  |        | 2,751                                  |        |                |     | 13.9             | %    |                |        | 4,315  |        |                  |     | 13.2 | %    |   |        | 3,267            |        |  |     | 12.7 | %   
|               | Secured Short-term
Investment Loans |                  |        | 815                                    |        |                |     | 15.8             | %    |                |        | 497    |        |                  |     | 17.4 | %    |   |        | 3,216            |        |  |     | 31.1 | %   
|               |                                     |                  |        |                                        |        |                |     |                  |      |                |        |        |        |                  |     |      |      |   |        |                  |        |  |     |     
|Total          |                                     | $                | 24,243 |                                        |        |                | 100 | %                |      | $              | 30,025 |        |        |                  | 100 | %    |      | $ | 26,697 |                  |        |  | 100 | %   
|               |                                     |                  |        |                                        |        |                |     |                  |      |                |        |        |        |                  |     |      |      |   |        |                  |        |  |     |     

Deposits

The following table presents the average amount of and average rate paid
on the following deposits placed with us, computed for Bermuda alone and on an
international basis, for the periods indicated.

|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |      |   | 
|------------------------------------------------------------- | ------ | ------------------------------------------------------------------- | - | ------------------------------------- | ----- | ------- |  | ----------- | - | ------- | - | -------- | ----- | ------- |  | ---- | - |  | - | ----- | ----- |  |  | ---- | - | 
|                                                              |        |                                                                     |   | As of December 31,                   
|                                                              |        |                                                                     |   |                                      
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   | 2000 
|                                                              |        |                                                                     |   | 2002                                  |       | 2001    |  | (unaudited)
|                                                              |        |                                                                     |   |                                       |       |         |  |            
|                                                              |        |                                                                     |   | (US$ in millions, except percentages)
|                                                              |        |                                                                     |   | Average                               |       | Average |  | Average     |   | Average |   | Average  |       | Average
|                                                              |        |                                                                     |   | Deposits                              |       | Rate    |  | Deposits    |   | Rate    |   | Deposits |       | Rate   
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |        
|Interest-Bearing Deposits placed in Bermuda                   |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     
|                                                              | Demand |                                                                     | $ | 2,375                                 |       |         |  | 0.75        | % |         | $ | 2,273    |       |         |  | 1.73 | % |  | $ | 1,981 |       |  |  | 3.21 | %
|                                                              | Term   |                                                                     |   | 2,228                                 |       |         |  | 2.08        | % |         |   | 2,706    |       |         |  | 3.58 | % |  |   | 2,976 |       |  |  | 5.47 | %
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     
|                                                              |        | Total Interest-Bearing
Deposits placed in Bermuda                   |   | $                                     | 4,603 |         |  |             |   |         |   | $        | 4,979 |         |  |      |   |  |   | $     | 4,957 |  |  |      |   | 
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     
|Interest-Bearing Deposits placed in our
International Offices |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     
|                                                              | Demand |                                                                     | $ | 2,330                                 |       |         |  | 0.92        | % |         | $ | 2,221    |       |         |  | 2.42 | % |  | $ | 2,193 |       |  |  | 3.79 | %
|                                                              | Term   |                                                                     |   | 1,895                                 |       |         |  | 2.08        | % |         |   | 2,485    |       |         |  | 4.01 | % |  |   | 2,141 |       |  |  | 5.49 | %
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     
|                                                              |        | Total Interest-Bearing
Deposits placed in our
International Offices |   | $                                     | 4,225 |         |  |             |   |         |   | $        | 4,706 |         |  |      |   |  |   | $     | 4,334 |  |  |      |   | 
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     
|                                                              |        | Total Interest-Bearing Deposits                                     |   | $                                     | 8,828 |         |  |             |   |         |   | $        | 9,685 |         |  |      |   |  |   | $     | 9,291 |  |  |      |   | 
|                                                              |        |                                                                     |   |                                       |       |         |  |             |   |         |   |          |       |         |  |      |   |  |   |       |       |  |  |     

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At December 31, 2002, of the $5.6 billion in interest-bearing deposits
placed in Bermuda, the aggregate amount of funds deposited with us by
international companies was $2.2 billion. At December 31, 2001 and 2000, the
total deposits placed in Bermuda
by international companies were $2.2 billion and $2.5 billion,
respectively. The remaining deposits placed in Bermuda were from local
corporate and community banking clients. Of the total customer deposits at
December 31, 2002, 61.7% were payable on demand.

The following table presents the maturity of term deposits over $100,000:

|                                    |       |         |                         |               |  |   |           |           | 
|----------------------------------- | ----- | ------- | ----------------------- | ------------- |  | - | --------- | --------- | 
|                                    |       |         | As of December 31, 2002
|                                    |       |         |                        
|Term to maturity                    |       | Bermuda |                         | International
|                                    |       |         |                         |              
|                                    |       |         | (US$ in thousands)     
|3 months or less                    |       | $       | 1,656,013               |               |  | $ | 1,631,133 |          
|6 months or less but over 3 months  |       |         | 105,738                 |               |  |   | 21,718    |          
|12 months or less but over 6 months |       |         | 58,731                  |               |  |   | 46,558    |          
|Over 12 months                      |       |         | 110,347                 |               |  |   | 9,095     |          
|                                    |       |         |                         |               |  |   |           |          
|                                    | Total |         | $                       | 1,930,829     |  |   | $         | 1,708,504 | 
|                                    |       |         |                         |               |  |   |           |          

Return on Equity and Assets

|                      |  |              |      |              |  |            |      |      |  |            |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|--------------------- |  | ------------ | ---- | ------------ |  | ---------- | ---- | ---- |  | ---------- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                      |  |              |      |              |  |            |      |      |  | Six Months |      |      |  |  |      |   |  |  |      |   |  | 
|                      |  | Year Ended   |      | Ended        |  | Year Ended
|                      |  | December 31, |      | December 31, |  | June 30,  
|                      |  |              |      |              |  |           
|                      |  | 2002         |      | 2001         |  | 2000       |      | 2000 |  | 1999       |      | 1998
|                      |  |              |      |              |  |            |      |      |  |            |      |     
|Return on Assets(1)   |  |              | 0.7  | %            |  |            | 0.5  | %    |  |            | 1.0  | %    |  |  | 1.1  | % |  |  | 0.8  | % |  |  | 0.6  | %
|Return on Equity(1)   |  |              | 11.9 | %            |  |            | 9.5  | %    |  |            | 18.3 | %    |  |  | 19.4 | % |  |  | 16.0 | % |  |  | 14.2 | %
|Equity to Assets      |  |              | 6.0  | %            |  |            | 5.8  | %    |  |            | 5.5  | %    |  |  | 5.8  | % |  |  | 5.1  | % |  |  | 4.1  | %
|Dividend Payout Ratio |  |              | 42.7 | %            |  |            | 51.4 | %    |  |            | 51.8 | %    |  |  | 28.5 | % |  |  | 33.8 | % |  |  | 34.2 | %



---

|(1) |  | Percentages based on average quarter-end balances.
|--- |  | --------------------------------------------------




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following review and prospects should be read in conjunction with our
Consolidated Financial Statements and the related notes thereto, included
elsewhere herein. See Forward-Looking Statements and Item 3. Key
Information  Risk Factors for a discussion of other factors that could cause
our future results of operations and financial condition to be different from
those discussed below.

FACTORS AFFECTING OUR RESULTS

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. Such principles require
management to make estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for the period. Management periodically
evaluates estimates and assumptions regarding its critical accounting policies.
Managements estimates are based upon historical experience, research, and
other assumptions believed to be reasonable. Actual results may vary under
different assumptions and conditions. These policies and estimates are
described in Item 5. Operating and Financial Review and Prospects 
Financial Condition and Note 1 to the Consolidated Financial Statements.

Management believes the following are the critical accounting policies
used in preparation of its Consolidated Financial Statements.

Marketable Securities

Marketable debt and equity securities classified as available for sale are
reported at fair value with unrealised gains and losses included within
accumulated other comprehensive income/(loss), a separate component of
shareholders equity on the Consolidated Balance Sheet. We have a small
portfolio of unquoted investments which are carried at cost. The recorded cost
of our unquoted

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securities at December
31, 2002 was $6.7 million. Trading account securities are carried at fair
value with unrealised gains and losses reported within gains/(losses) on
trading securities in the Consolidated Statement of Income as they arise.

Gains and losses on the sale of securities are computed on the basis of
the specific identification method and are reported within gains/(losses) on
available for sale marketable securities in the Consolidated Statement of
Income.

We carry out a quarterly review of our investments using information such
as market price, credit rating, analysts reports, outlook for the stock and
applicable industry, future estimated cash flows and other factors to determine
whether or not a decline in value below cost is other-than-temporary. When it
is determined that an investments value is impaired on an other-than-temporary
basis, the cost of that investment is written down to its estimated fair value
and the write down is included within gains/(losses) on available for sale
marketable securities in the Consolidated Statement of Income. The new cost
basis is not adjusted for any subsequent recoveries in fair value. During the
year ended December 31, 2002, we recorded charges of $4.3 million for other
than temporary impairments of certain investments.

For further details on our marketable securities and financial
instruments, see Notes 2 and 6 to the Consolidated Financial Statements.

Impaired Loans and Allowance for Loan Losses

The allowance for loan losses represents managements estimate of credit
losses inherent in our loan portfolio at the balance sheet date and consists of
both specific and general reserves. The process for determining the allowance
for loan losses is subject to numerous estimates and judgments. A key variable
in determining the allowance for loan losses is the credit rating assigned to
each rated credit. We use an 8-grade system for rating credits. The first
four of the grades are deemed acceptable or PASS, while the other four
warrant special review. For more information on our loan grading system and
our impaired loans and allowance for loan losses, see Financial
ConditionAssetsLoansImpaired Loans and Allowance for Loan Losses.

Impaired Loans

A loan is considered impaired when, in the opinion of management and based
on current information and events, there has been a deterioration in credit
quality to the extent that it is probable that the Bank will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Loans for which payment is more
than 90 days overdue are automatically classified as impaired unless the loan
is well-secured and in the process of collection.

When a loan has been individually identified as impaired, the carrying
amount of the loan is measured based on the present value of the payments
expected to be received or the fair value of the underlying collateral. Those
loans over 90 days due that are deemed to be well-secured and in the process of
collection are placed on a non-accrual basis and related interest is recorded
in income only when received. For all other impaired loans that are placed on
a non-accrual basis, interest is not recognised until the principal balance has
been repaid.

Assets that are acquired in satisfaction of impaired loans are recorded at
the lower of fair value or the carrying value of the loan at the date of
foreclosure and are included in other assets on the Consolidated Balance Sheet.
Any excess of the carrying value of the loan over the fair value of the asset
acquired is charged to the allowance for loan losses in the current period.

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Allowance for Loan Losses

We maintain an allowance for loan losses to provide for losses inherent in
the portfolio. The allowance for loan losses is maintained at a level deemed
appropriate by management to adequately provide for both known losses and as
yet unidentified losses existing in the loan portfolios at the balance sheet
date.

Specific Reserve.We employ a risk rating methodology for all commercial
and secured short-term investment loans. On a quarterly basis, risk rated
loans that have been graded substandard or doubtful are assessed for
impairment by comparing the carrying value of each such loan to its current
value, generally determined by an assessment of the realizable value of
collateral, or by the loans fair market value or through discounted cash flow
analysis. Identified shortfalls in value are set up as specific provisions
against these assets. Although consumer and personal loans, mortgages and
credit cards are not risk rated, all such impaired loans that have an
outstanding balance greater than $100,000 are individually assessed for
impairment and the need for a specific reserve using the same analysis. This
analysis is also performed quarterly and specific provisions are charged
against these assets in an amount equal to the identified shortfalls.

General Reserve.On a quarterly basis, a general reserve is also
established to absorb credit losses inherent in the portfolio which have not
yet been specifically identified. A general reserve is established for risk
rated loans and non-risk rated loans. We estimate historic loss rates for each
risk rating, which are then adjusted based on a qualitative assessment
framework that considers factors such as portfolio quality trends, portfolio
growth and portfolio management. Adjusted historic loss factors are applied to
the portfolio balance, excluding identified impaired loan assets that warrant a
specific reserve, for each risk rating. General reserves are established for
the non-risk rated portfolio, with reference to historic net loss experience
from each portfolio segment adjusted for qualitative factors such as
delinquency trends, portfolio growth and changes in underwriting criteria.
Impaired assets that warrant a specific reserve are excluded from the loans
subject to this analysis. Our personal and commercial loan and mortgage
portfolios are concentrated in Bermuda, which has an economy that is largely
dependent on tourism and international business services. The health of these
industry segments depends to a large extent on the strength of the U.S. and
European economies. Because of this concentration and also to reflect any
imprecision in the allowance methodology, we also include in general reserves
an unallocated amount that represents managements judgments of inherent losses
within the portfolio, which have not otherwise been identified or measured in
this analysis.

Charge-offs.All consumer and personal loans and mortgages greater than
$100,000, and all risk rated loans which have been identified as impaired and
provided for under the reserving methodology, are charged off when they are
deemed to be uncollectible. Any subsequent recoveries of these loans are added
back to the allowance for loan losses. Consumer and personal loans and
mortgages with an outstanding balance less than $100,000 that reach 120 days
past due and credit card balances that reach 180 days past due are charged off
immediately. The amount of the loan is written off and subsequent recoveries
are added back to the allowance for loan losses when received.

The amount of the provision for loan losses that is charged to the
Consolidated Statement of Income is the amount required to bring the allowance
to the level management determines is needed to absorb all probable loan losses
inherent in our loan portfolios. The models developed by us to estimate our
allowance for loan losses are subjective and use assumptions and data that
management believes are appropriate based upon information that is currently
available. However, these assumptions are subjective and may require revision
in the future. Such adjustments could have a significant impact on the level
of reserves carried and on reported earnings in future periods.

Revenue Recognition

We recognise interest income and expense on the accruals basis.

Our non-interest income represents fee income from the provision of
investment, banking, foreign exchange, trustee, corporate administration and
other related services. Such income is recognised on the accruals basis as the
related services are provided to clients, upon the underlying investment
transaction volume or the value of the assets under administration, as
appropriate. We have controls and processes in place to ensure the accuracy of
such fee income and related accruals and to ensure timely invoicing and fee
collection from clients.

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Change in Fiscal Year End

Prior to January 1, 2001, we reported our results on a July 1 to June 30
fiscal year basis. We changed to a calendar year reporting basis beginning
January 1, 2001. To present a meaningful comparison to the 2001 fiscal year
results, management has presented results for calendar year ended December 31,
2000 in the following discussion and analysis. The restatement of our results
on a calendar year basis for 2000 has not been audited and, accordingly, the
results of operations for the year ended December 31, 2000 discussed below are
marked unaudited. In addition, the results for the six-month period ending
December 31, 2000 and our balance sheet at that date have been audited and
separately reported.

CONSOLIDATED RESULTS OF OPERATIONS

|                                                                 |  |                    |          |      |  |      |          |   |  |             |          |  
|---------------------------------------------------------------- |  | ------------------ | -------- | ---- |  | ---- | -------- | - |  | ----------- | -------- | -
|                                                                 |  | Year Ended        
|                                                                 |  | December 31,      
|                                                                 |  |                   
|                                                                 |  | 2002               |          | 2001 |  | 2000
|                                                                 |  |                    |          |      |  |     
|                                                                 |  |                    |          |      |  |      |          |   |  | (unaudited)
|                                                                 |  | (US$ in thousands)
|Non-Interest
Income                                              |  | $                  | 264,256  |      |  | $    | 256,977  |   |  | $           | 247,219  |  
|Net Interest
Income                                              |  |                    | 175,774  |      |  |      | 197,674  |   |  |             | 205,004  |  
|Recovery/(Provision) for Loan
Losses                             |  |                    | 1,971    |      |  |      | (2,662   | ) |  |             | (2,641   | )
|Net Interest Income after Loan
Losses                            |  |                    | 177,745  |      |  |      | 195,012  |   |  |             | 202,363  |  
|Other Income/(Loss) and gains/
(losses) on marketable
securities |  |                    | (21,004  | )    |  |      | (8,181   | ) |  |             | (8,234   | )
|                                                                 |  |                    |          |      |  |      |          |   |  |             |          |  
|Total
Revenue                                                    |  |                    | 420,997  |      |  |      | 443,808  |   |  |             | 441,348  |  
|Operating
Expenses                                               |  |                    | (337,106 | )    |  |      | (376,960 | ) |  |             | (319,915 | )
|                                                                 |  |                    |          |      |  |      |          |   |  |             |          |  
|Net Income from Operations before
Income
Taxes                   |  |                    | 83,891   |      |  |      | 66,848   |   |  |             | 121,433  |  
|Income
Taxes                                                     |  |                    | (6,233   | )    |  |      | (6,771   | ) |  |             | (7,185   | )
|                                                                 |  |                    |          |      |  |      |          |   |  |             |          |  
|Net
Income                                                       |  | $                  | 77,658   |      |  | $    | 60,077   |   |  | $           | 115,765  |  
|                                                                 |  |                    |          |      |  |      |          |   |  |             |          |  

Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001

Net income for 2002 increased $17.6 million, or 29%, to $77.7 million from
$60.1 million in 2001. Diluted earnings per share were $2.53, compared with
$1.91 last year when results were adversely affected by net costs to settle
litigation. The net effect of litigation and related adjustments reduced
diluted earnings per share by $1.08 in 2001 and added $0.15 to diluted earnings
per share in 2002.

Total revenue for 2002 was $421.0 million, a decrease of 5% from $443.8
million in the prior year. Fee revenue increased 3% in 2002, but was more than
offset by lower interest earnings and weaker performance of our outsourced
trading portfolio. We generate revenue from two principal sources: fee
revenues, based largely on the value of client assets and the volumes of their
activities; and interest earnings, from the reinvestment of client deposits.
Economic conditions in 2002 challenged both of these revenue streams. The
ongoing weakness in equity markets suppressed client asset values and
transaction volumes and created a more demanding sales environment. Despite
these pressures, fee revenue grew for the fourth consecutive year, primarily as
a result of contribution flows to client pension fund assets in Asia-Pacific
and new alternative fund client relationships, both of which are key target
markets. These markets showed ongoing growth in 2002, while traditional funds
were impacted by market value declines and lower subscription levels.

The sustained low interest rate environment challenged our second key
revenue source, interest earnings. The eleven successive reductions in the
U.S. federal funds rate in 2001 led to a decline in 2002 in both the volume of
our deposits and the net interest margin we generated on reinvestment of those
deposits. Deposit volumes declined in late 2001 and remained at a lower
average level throughout 2002. Our net interest margin decreased as a result
of the structure of our balance sheet, which earns a lower net interest margin
when rates are extremely low. Net interest income for 2002 decreased 11% to
$175.8 million from $197.7 million in 2001.

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Non-Interest Income

Total non-interest income was $264.3 million, an increase of 3% from
$257.0 million in 2001. Total non-interest income represented 63% of total
revenues, compared with 58% for 2001. The increase in non-interest income in
2002 was primarily due to increased fee revenue from the growing pension funds
in the Asia-Pacific region, and the ongoing demand for products offered by
investment managers with skills-based strategies, such as those who run hedge
funds, funds of funds and other alternative asset management products. Both of
these groups represent key client segments of our Global Fund Services
division.

Non-interest income is the function of a number of factors, including the
composition and value of client assets under management and administration, the
volume and nature of clients transaction activities and the types of products
and services our clients use. Currently, about 40% of our non-interest income
is tied to the value of client assets and 50% is transaction-driven, with the
remainder linked to other factors.

The following table presents the components of our non-interest income for
the years ended December 31, 2002 and 2001:

|                           |  |              |         |      |  |                    |         |          |  |   |        |   |  |  |      |   
|-------------------------- |  | ------------ | ------- | ---- |  | ------------------ | ------- | -------- |  | - | ------ | - |  |  | ---- | --
|                           |  | Year Ended   |         |      |  |                    |         |          |  |  
|                           |  | December 31, |         |      |  |                    |         |          |  |  
|                           |  |              |         |      |  |                    |         |          |  |  
|                           |  | 2002         |         | 2001 |  | Change             |         | % Change
|                           |  |              |         |      |  |                    |         |         
|                           |  |              |         |      |  | (US$ in thousands) |         |          |  |   |        |   |  | 
|Trust and Related Services |  | $            | 156,475 |      |  | $                  | 148,109 |          |  | $ | 8,366  |   |  |  | 5.6  | % 
|Investment Services        |  |              | 40,779  |      |  |                    | 40,736  |          |  |   | 43     |   |  |  | 0.1  | % 
|Foreign Exchange Earnings  |  |              | 42,365  |      |  |                    | 42,394  |          |  |   | (29    | ) |  |  | (0.1 | %)
|Banking Services           |  |              | 23,163  |      |  |                    | 24,395  |          |  |   | (1,232 | ) |  |  | (5.1 | %)
|Other Non-Interest Income  |  |              | 1,474   |      |  |                    | 1,343   |          |  |   | 131    |   |  |  | 9.8  | % 
|                           |  |              |         |      |  |                    |         |          |  |   |        |   |  |  |      |   
|Total Non-Interest Income  |  | $            | 264,256 |      |  | $                  | 256,977 |          |  | $ | 7,279  |   |  |  | 2.8  | % 
|                           |  |              |         |      |  |                    |         |          |  |   |        |   |  |  |      |   

Trust and Related Services

Trust and related services fees were $156.5 million, up 6% from $148.1
million in 2001, and represented 59% of total non-interest income. These fees
are generated from the provision of a range of fund administration and private
trust products, tailored to the needs of our client base.

The following table shows trust and related services fees by product and
geographic region for the years shown:

|                         |               |   |              |        |      |   |                    |        |          |   |       |        |   |  |      |      |   
|------------------------ | ------------- | - | ------------ | ------ | ---- | - | ------------------ | ------ | -------- | - | ----- | ------ | - |  | ---- | ---- | --
|                         |               |   | Year Ended   |        |      |   |                    |        |          |   |      
|                         |               |   | December 31, |        |      |   |                    |        |          |   |      
|                         |               |   |              |        |      |   |                    |        |          |   |      
|                         |               |   | 2002         |        | 2001 |   | Change             |        | % Change
|                         |               |   |              |        |      |   |                    |        |         
|                         |               |   |              |        |      |   | (US$ in thousands) |        |          |   |       |        |   |  |     
|Fund Administration Fees |               |   |              |        |      |   |                    |        |          |   |       |        |   |  |      |     
|                         | North America |   | $            | 39,406 |      |   | $                  | 40,695 |          |   | $     | (1,289 | ) |  |      | (3.2 | %)
|                         | Europe        |   |              | 36,854 |      |   |                    | 33,996 |          |   |       | 2,858  |   |  |      | 8.4  | % 
|                         | Asia-Pacific  |   |              | 49,892 |      |   |                    | 42,991 |          |   |       | 6,901  |   |  |      | 16.1 | % 
|                         |               |   |              |        |      |   |                    |        |          |   |       |        |   |  |      |     
|                         |               |   | 126,152      |        |      |   | 117,682            |        |          | $ | 8,470 |        |   |  | 7.2  | %   
|Private Trust Fees       |               |   |              |        |      |   |                    |        |          |   |       |        |   |  |      |     
|                         | North America |   |              | 13,298 |      |   |                    | 13,449 |          |   |       | (151   | ) |  |      | (1.1 | %)
|                         | Europe        |   |              | 8,561  |      |   |                    | 8,020  |          |   |       | 541    |   |  |      | 6.8  | % 
|                         | Asia-Pacific  |   |              | 8,464  |      |   |                    | 8,958  |          |   |       | (494   | ) |  |      | (5.5 | %)
|                         |               |   |              |        |      |   |                    |        |          |   |       |        |   |  |      |     
|                         |               |   | 30,323       |        |      |   | 30,427             |        |          |   | (104  | )      |   |  | (0.3 | %)  
|Total                    |               | $ | 156,475      |        |      | $ | 148,109            |        |          | $ | 8,366 |        |   |  | 5.7  | %   
|                         |               |   |              |        |      |   |                    |        |          |   |       |        |   |  |      |     

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Fund Administration Fees

Fund administration fees represented 81% of total trust and related
services fees in 2002 and were the primary reason for growth in this revenue
line. Fund administration fees increased by $8.5 million in 2002, or 7%, with
$6.9 million of this growth in the Asia-Pacific region, driven largely by the
accumulation of assets in client pension funds.

Approximately 80% of Asia-Pacific fund administration fees are generated
from our Hong Kong office, with the remainder generated from our Singapore
office. Pension funds are an important part of our Hong Kong client base,
representing $12.6 million, or 32.2%, of Hong Kong fund administration fees in
2002. This was a 30% increase from $9.7 million in 2001. In Singapore, our
2002 fund administration revenues were $1.8 million higher than the previous
year, as increased subscriptions to client funds augmented assets under
administration.

In 2002, the New York office produced $7.4 million of our total fund
administration fees in North America. This was 15% higher than the prior year,
driven by continued interest in our alternative funds offerings, of which funds
of funds is a major component. Bermuda accounted for $29.3 million, or 74%, of
North Americas fund administration fees. This was $1.4 million, or 5%, lower
than last year as new business was offset by market value declines of
traditional funds and by the impact of lost institutional client business which
did not fit with our target client base.

In Europe, fund administration fees in 2002 were $36.9 million, which was
a $2.9 million increase over 2001. This increase was due, in part, to stronger
results in our Dublin office, which contributed $1.5 million of the increase in
2002 fund administration fees, mainly driven by new alternative fund business.
Our Luxembourg and Guernsey offices also reported fund administration fee
increases of $1.1 million and $0.5 million, respectively.

Private Trust Fees

In 2002, private trust fees were little changed from 2001 in all
geographic regions. New business revenues for the year of $0.8 million were
largely offset by our termination of approximately 150 relationships that did
not meet profitability or other targets, with associated lost 2002 revenue of
approximately $0.6 million.

Investment Services

Overall investment services fees, which are generated from investment
management services with respect to our proprietary range of mutual funds,
discretionary investment management services and stock brokerage services,
remained flat in 2002. The growth of our mutual fund products in 2002
generated $2.0 million in additional revenue. This improvement was offset by a
decline of $2.1 million in brokerage, execution and discretionary management
fees as a result of stock market weakness, which resulted in lower transaction
volumes as well as a change in the mix of our mutual fund products towards bond
and money market funds, on which we earn lower margins, and away from
higher-margin equity fund products. The level of investment services fees is
driven by the volume and mix of assets in our proprietary range of mutual
funds, as well as by the volume of client trading activities.

At December 31, 2002, the total value of our proprietary funds was $6.4
billion, compared to $6.3 billion at December 31, 2001. Bond and money market
funds accounted for approximately 90% of the total value of our proprietary
funds at December 31, 2002, an increase of $188 million, with most of the
growth in the All Points Corporate Money Fund. This increase was partly offset
by a $91 million decrease in equity funds.

Foreign Exchange Earnings

We offer a comprehensive range of foreign exchange services to our global
client base with minimal proprietary position-taking. Revenues from foreign
exchange activity were $42.4 million for 2002, unchanged from a year earlier.

Dublin and Luxembourg increased foreign exchange earnings by $1.1 million
and $0.5 million, respectively. Both locations generated higher client trading
volumes, with Dublin benefiting from having its new banking licence and a full
year of treasury operations, which began in April 2001. These improvements
were offset by lower revenues in Guernsey due to reduced client trading
volumes.

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Banking Services

Banking services fees in 2002 were $23.2 million, a decrease of 5% from
$24.4 million in 2001 primarily due to the termination of a credit card
incentive program, which resulted in a $1.0 million reduction for reward
payouts. In 2002, $19.8 million, or 85.3%, of banking services fees were
earned in North America, with $2.9 million, or 12.5%, earned in Europe and the
remainder earned in Asia-Pacific.

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Net Interest Income

The following table presents our net interest income for the years ended
December 31, 2002 and 2001:

|                                     |  |              |           |      |  |                    |            |          |  |       |          |   |  |  |       |   
|------------------------------------ |  | ------------ | --------- | ---- |  | ------------------ | ---------- | -------- |  | ----- | -------- | - |  |  | ----- | --
|                                     |  | Year Ended   |           |      |  |                    |            |          |  |      
|                                     |  | December 31, |           |      |  |                    |            |          |  |      
|                                     |  |              |           |      |  |                    |            |          |  |      
|                                     |  | 2002         |           | 2001 |  | Change             |            | % Change
|                                     |  |              |           |      |  |                    |            |         
|                                     |  |              |           |      |  | (US$ in thousands) |            |          |  |       |          |   |  | 
|Interest Income                      |  | $            | 300,771   |      |  | $                  | 487,212    |          |  | $     | (186,441 | ) |  |  | (38.3 | %)
|Interest Expense                     |  |              | 124,997   |      |  |                    | 289,538    |          |  |       | (164,541 | ) |  |  | (56.8 | %)
|                                     |  |              |           |      |  |                    |            |          |  |       |          |   |  |  |       |   
|Net Interest Income                  |  |              | 175,774   |      |  |                    | 197,674    |          |  |       | (21,900  | ) |  |  | (11.1 | %)
|                                     |  |              |           |      |  |                    |            |          |  |       |          |   |  |  |       |   
|Average Interest-Earning Assets      |  | $            | 9,525,000 |      |  | $                  | 10,301,000 |          |  | $     | (776,000 | ) |  |  | (7.5  | %)
|Average Interest-Bearing Liabilities |  |              | 8,843,000 |      |  |                    | 9,685,000  |          |  |       | (842,000 | ) |  |  | (8.7  | %)
|Net Interest Margin                  |  |              | 1.85      | %    |  |                    | 1.92       | %        |  | (0.07 | pts)     |   |  | 

Net interest income is the amount of interest received on our
interest-earning assets less interest paid on our interest-bearing liabilities.
A portion of our interest-earning assets are funded by non-interest bearing
sources of funds such as non-interest bearing deposits and equity. Changes in
net-interest income are driven by several factors, including changes in the
volume and mix of interest-earning assets and interest-bearing liabilities,
their relative sensitivity to interest rate movements and the proportion of
non-interest bearing funds.

Net interest income was $175.8 million in 2002, down 11% from $197.7
million in the prior year. This decline was the result of a lower net interest
margin, which fell from 1.92% in 2001 to 1.85% in 2002, together with lower
average interest-earning assets, which fell by $776.0 million or 8%. The net
interest margin is defined as net interest income as a percentage of average
interest-earning assets. Net interest income represented 42% of total revenues
for 2002, compared with 45% in 2001.

The
analysis on pages 29-30 shows the effects of changes in volumes and rates
on our net interest income. Average interest-earning assets fell to $9.5
billion in 2002, from $10.3 billion in 2001, reflecting a decline in customer
deposits as clients more actively managed their cash in the low interest rate
environment. For more information on our average interest-earning assets and
average interest-bearing liabilities, see Item 4. Information on the
CompanySelected Statistical Information on Banking OperationsDistribution of
Assets, Liabilities, and Stockholders Equity; Interest Rates and Interest
DifferentialAverage Consolidated Balance Sheets.

Our short matched-duration balance sheet provides market value stability
but does not protect against margin declines in the event of extreme interest
rate reductions. The unprecedented cuts in interest rates beginning in mid
2001 had a negative impact on margins, as we were unable to maintain yield on
the reinvestment of low and non-interest bearing customer deposits. Although
these deposits are classified as interest bearing, we are not paying interest
on these deposits in such a low rate environment. However, the applicable
rates for these deposits will rise when market rates rise. Therefore they
cannot be effectively matched with longer duration assets. In 2002, we
initiated a strategy to improve future margin protection by reinvesting our
capital base in longer duration instruments. At December 31, 2002, this
portfolio had reached a total size of $365 million with an average duration of
2.2 years.

We are primarily a fee-driven bank and derive our interest income from
customer deposits that are short-term with respect to liquidity and interest
rate sensitivity. Our policy is to reinvest these funds in liquid short
duration instruments to match the characteristics of our deposit base.
Additionally, our loan portfolio represents only 16% of our total assets.
Consequently, we generate lower net interest margins than other financial
institutions that focus primarily on lending.

To improve diversification and long-term yield, in 1998 we appointed a
third-party investment manager to manage a portfolio of mortgage and
asset-backed securities for which we do not have in-house expertise. At
December 31, 2002, this portfolio had a net asset value of $494.8 million, down
$833.4 million from $1,328.2 million at December 31, 2001, as we decided to
reduce the size of the portfolio in 2002. The target return on the portfolio
is approximately 20 basis points above that earned on our portfolio managed
in-house. These investments tend to be of a longer duration than our
requirements and our third-party investment manager uses interest rate swaps
and futures to reduce duration to our target levels. Because this portfolio is
classified as a trading portfolio, the mark-to-market changes in portfolio
value are included in gains/(losses) on trading portfolio, while the associated
interest income is included in net interest income. With an upward-sloping
yield curve, this portfolio structure results in a higher level of interest

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income on the assets, which is included in net interest income, and a
mark-to-market loss on the portfolio, which is included in gains/(losses) on
trading portfolio. For 2002, interest earned on the trading portfolio was
$50.3 million, compared with $32.7 million in 2001. The loss on marking the
portfolio to market, realised losses on the sale of securities and management
fees totalled $24.9 million in 2002 and $6.5 million in 2001. On a net basis,
the portfolio earned 2.02%, equivalent to $25.4 million, in 2002, and 4.19%,
equivalent to $26.1 million, in 2001.

Provision for Loan Losses

Provisions
for loan losses was a release of $2.0 million in 2002, compared
with an expense of $2.7 million in 2001, reflecting an improvement in impaired
loans. Gross impaired loans at December 31, 2002 were $20.2 million, down from
$25.7 million a year earlier. The decrease in impaired loans largely resulted
from improved efforts on collecting impaired assets in Corporate Banking,
Community Banking and overseas Private Client Services. Additions to impaired
status continue to be predominantly in the Community Banking portfolio and are
consistent with historical levels.

During the year, our specific loan allowance declined by $3.7 million to
$3.7 million to reflect recoveries on impaired loans and the write-offs of some
loans that had previously been provided for in full. The general allowance
increased by $0.5 million to $20.6 million, reflecting managements judgment as
to the impact on credit quality arising from current economic uncertainty in
Bermudas retail and hospitality sectors.

A measure of the adequacy of established allowances for loan losses is the
coverage ratio, which is the allowance for loan losses expressed as a
percentage of total impaired loans. Our coverage ratio was 121% at December
31, 2002, an increase from 107% at December 31, 2001. The ratio of gross
impaired loans to total gross loans was 1.1% at December 31, 2002, compared
with 1.7% at December 31, 2001.

Other Income/(Loss)

Other income/(loss) represents dividends from our equity portfolio and
miscellaneous income and losses. In 2002, we earned a net $3.5 million of
other income compared with a net loss of $1.9 million in 2001. Dividends on
our portfolio of equity securities and mutual funds were $3.2 million for the
year, down from $5.8 million in 2001. This decrease was primarily the result
of a reduction of our mutual fund investments in 2002. Prior year other
income/(loss) included a charge of $11.5 million in relation to our investment
in Measurisk, which reduced our investment carrying value in this asset to $0.
Current year other income/(loss) included a gain on the sale of property of
$1.3 million and a $2.5 million expense to reduce the book value of the Banks
office building in Cayman to its estimated fair value of $4.0 million.

Losses on Trading Portfolio

Net losses on our trading portfolio were $24.9 million in 2002, compared
with losses of $6.5 million in 2001. The combination of a larger average
trading portfolio and a steepening of the yield curve resulted in an increase
in the mark-to-market loss as a result of our portfolio hedging strategy,
described above in Net Interest Income.

Gains/(Losses) on Available for Sale Marketable Securities

Gains on available for sale marketable securities were $0.4 million in
2002, compared with $0.3 million in 2001. During 2002, we sold several equity
and mutual fund investments that were originally made several years ago to
support client relationships and business initiatives. Investments in two
publicly traded insurance companies and a private investment company were sold
for gains of $3.7 million. Several investments in mutual funds were sold for
net gains of $2.1 million. These gains were partially offset by realised net
losses on the sale of other equity securities totalling $1.1 million.

In 2002, we recorded charges of $4.3 million for other than temporary
impairments of certain investments. The charges included:



| |  |  | a write-down of $1.1 million on mutual fund holdings,                    
| | - |  | -------------------------------------------------------------------------
|
| |  |  | a write-down of $1.0 million on an investment in a local Bermuda company,

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| |  |  | a write-down of $1.9 million on several private equity
investments that invest primarily in offshore insurance companies,
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a write-down of $0.3 million on an investment in a company
engaged in the settlement of securities transactions.             

During 2001, we sold equity securities for net realised gains of $7.6
million and debt securities for net realised losses of $2.0 million.
Additionally, we incurred an expense of $5.3 million for the write down of
securities that were identified as being other than temporarily impaired.

Operating Expenses

The following table presents our operating expenses for the years ended
December 31, 2002 and 2001:

|                              |                          |   |              |         |      |   |                    |         |          |           |         |         |   |  |       |       |   
|----------------------------- | ------------------------ | - | ------------ | ------- | ---- | - | ------------------ | ------- | -------- | --------- | ------- | ------- | - |  | ----- | ----- | --
|                              |                          |   | Year Ended   |         |      |   |                    |         |          |           |        
|                              |                          |   | December 31, |         |      |   |                    |         |          |           |        
|                              |                          |   |              |         |      |   |                    |         |          |           |        
|                              |                          |   | 2002         |         | 2001 |   | Change             |         | % Change
|                              |                          |   |              |         |      |   |                    |         |         
|                              |                          |   |              |         |      |   | (US$ in thousands) |         |          |           |         |         |   |  |      
|Salaries                      |                          | $ | 181,940      |         |      | $ | 161,359            |         |          | $         | 20,581  |         |   |  | 12.8  | %    
|Pension & Staff Benefits      |                          |   | 58,373       |         |      |   | 51,858             |         |          |           | 6,515   |         |   |  | 12.6  | %    
|Property                      |                          |   | 27,723       |         |      |   | 28,613             |         |          |           | (890    | )       |   |  | (3.1  | %)   
|Systems & Communications      |                          |   | 41,129       |         |      |   | 39,800             |         |          |           | 1,329   |         |   |  | 3.3   | %    
|Corporate, Marketing, & Other |                          |   | 27,941       |         |      |   | 95,330             |         |          |           | (67,389 | )       |   |  | (70.1 | %)   
|                              |                          |   |              |         |      |   |                    |         |          |           |         |         |   |  |       |      
|                              | Total Operating Expenses |   | $            | 337,106 |      |   | $                  | 376,960 |          |           | $       | (39,854 | ) |  |       | (10.6 | %)
|                              |                          |   |              |         |      |   |                    |         |          |           |         |         |   |  |       |      
|Efficiency Ratio(1)           |                          |   | 80.1         | %       |      |   | 84.9               | %       |          | (4.8 pts) |         |         |   | 
|Average Number of Employees   |                          |   | 2,933        |         |      |   | 2,914              |         |          |           | 19      |         |   |  | 0.1   | %    



---

| |  | (1) Efficiency ratio is defined as total operating expenses divided by total
revenue.
| |  | -------------------------------------------------------------------------------------

Operating expenses were $337.1 million in 2002, a decrease of 11% compared
with $377.0 million in the prior year. The decrease was primarily due to a
2001 net expense of $34.1 million and a 2002 net income impact of $4.7 million
in connection with litigation. Other significant items include a $1.5 million
charge in 2002 in connection with the downsizing of our Cayman operations and,
in 2001, expenses of $7.7 million relating to start up costs of a cancelled
business venture and a $4.1 million net credit in connection with pension plan
obligations (see below under Pension and Staff Benefits). Excluding all
such items in both years, 2002 operating costs were $1 million higher.

Salaries

Salary costs were $181.9 million in 2002, a $20.6 million increase from
2001. Salary costs in 2001 were affected by a $10.0 million reduction in
performance-related compensation, which reflected the impact of litigation
settlements on that years results. Salary costs in 2002 include a charge of
$1.5 million in connection with the downsizing of our Cayman office. The
remaining increase is due to a marginal increase in headcount and a more
experienced staff complement as we consolidated support functions and added
more senior staff to promote business growth.

Headcount increased in Europe and Asia-Pacific as we added staff to
support business growth, but decreased in North America as we restructured our
Cayman office and consolidated support functions in early 2002. The overall
effect of these changes was a modest increase in total headcount to 2,961 at
December 31, 2002, up from 2,926 at December 31, 2001.

Salary costs in Europe totalled $48.9 million, up from $39.6 million in
the prior year. $2.9 million of this increase was in Dublin, where we added
staff in order to develop our Global Fund Services business in that location.
Additional resources in our principal information technology support base in
Scotland added salaries of $1.8 million in 2002. The remaining increase was
largely the result of a more expensive staff complement as we added more
experienced senior personnel to support business growth.

In Asia-Pacific, salary costs were $3.1 million higher due to the addition
of employees to service our growing Global Fund Services business and banking
and treasury operations in that region.

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Salary costs in North America were up 9.4% at $94.5 million despite a
decrease in headcount, due to a $6.9 million increase of performance-related
compensation and a charge of $1.5 million for downsizing in Cayman. Staff
levels in Bermuda were slightly below prior year as the consolidation of
support functions compensated for additions in other areas, including risk and
compliance functions and certain product divisions.

Pension and Staff Benefits

Total pension and staff benefits costs for 2002 were $58.4 million,
compared with $51.9 million in the prior year. This difference is primarily
the result of a charge of $2.1 million in 2002 for the Sterling area (which
includes Isle of Man, Jersey and Guernsey) defined benefit pension obligations
due to the poor performance of equity markets, and in 2001, a gain of $4.1
million, representing net gains of $5.6 million on the settlement of the
Bermuda defined benefit plan, partly reduced by a provision of $1.5 million in
respect of tax liabilities incurred on the termination of the plan for U.S.
citizens. See Note 8 of the Consolidated Financial Statements.

Property

Property expense totalled $27.7 million for 2002, a decline of $0.9
million or 3% from 2001. In Bermuda, property expense decreased by $1.3
million as we reduced leased premises. The decrease in Bermuda was partly
offset by increases in Dublin and Hong Kong, where we entered into new leases
to support our expanding operations in those locations.

Systems and Communications

Systems and communications expenses were $41.1 million, an increase of
$1.3 million over 2001. Approximately $1.0 million of the increase relates to
the enhancement of our Global Fund Services technology platform with new global
portfolio accounting systems.

Corporate, Marketing, and Other

Corporate, marketing and other expenses were $27.9 million in 2002,
compared with $95.3 million in 2001. Of the $67.4 million decrease, $43.4
million relates to 2001 costs to settle litigation in connection with Cash 4
Titles. During 2002, we also recorded a net insurance recovery of $5.4 million
relating to this litigation (see Item 8. Financial InformationLegal
Proceedings). Legal expenses relating to this litigation decreased to $1.2
million in 2002, from $3.9 million in 2001.

We recovered $0.8 million in 2002 of an errors and omission charge of $3.5
million incurred last year. Travel and professional fees declined by $3.4
million and $6.2 million, respectively.

Income Taxes

Income taxes were $6.2 million in 2002, compared to $6.8 million in 2001.
This decrease was attributable to lower net income from operations, before
income taxes in our taxable jurisdictions in Asia-Pacific and Europe.

Year Ended December 31, 2001 Compared with the (unaudited) Year Ended December 31, 2000

Net income for 2001 was $60.1 million, compared with $115.8 million in
2000. Net income for 2000 included a gain of $1.5 million recorded upon the
adoption of a new accounting policy (see Note 1 of the Consolidated Financial
Statements under the heading Derivative Instruments and Hedging Activities).
Net income for 2001 included the cost of litigation settlements in connection
with Cash 4 Titles of $77.5 million, less amounts received for insurance
recoveries of $34.1 million and adjustments to profit-related compensation of
$9.3 million.

Diluted earnings per share were $1.91 in 2001, compared with $3.77 in
2000. This decline reflected the effects of the items described in the
preceding paragraph, the difficult economic climate on certain fee revenues and
net interest earnings and charges incurred in connection with impaired
investments.

While we continued to grow our client base in 2001 and achieved record
non-interest income, the impact of weak equity markets on the value of existing
client assets restrained total fee revenue growth. In addition, net interest
earnings were lower as

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sustained interest rate cuts eroded margins on the reinvestment of low and
non-interest bearing customer deposits. Total revenue of $443.8 million in
2001 was marginally higher than $441.3 million in 2000.

Excluding the cost of the litigation settlements in connection with Cash 4
Titles, total operating costs were 7.2% higher in 2001 than in 2000. The
majority of this increase was due to increased staff, salaries, legal fees,
systems and the formation of a new subsidiary.

Non-Interest Income

Total non-interest income was $257.0 million in 2001, 3.9% higher than
$247.2 million in 2000. Non-interest income contributed 58% of total revenues
in 2001, compared with 56% in 2000. Trust and related service fees are the
largest component of non-interest income. The increase in these fees in 2001
was primarily a result of the strength of new business generated by our GFS
division. This growth was partially offset by declines in investment services
revenues, which fell due to weakened trading volumes and lower asset values
following a general decline in equity markets.

The following table presents the components of our non-interest income for
the years ended December 31, 2001 and 2000:

|                          |                           |   |              |         |      |   |                    |         |          |   |        |       |  |  |       |     |  
|------------------------- | ------------------------- | - | ------------ | ------- | ---- | - | ------------------ | ------- | -------- | - | ------ | ----- |  |  | ----- | --- | -
|                          |                           |   | Year Ended   |         |      |   |                    |         |          |   |       
|                          |                           |   | December 31, |         |      |   |                    |         |          |   |       
|                          |                           |   |              |         |      |   |                    |         |          |   |       
|                          |                           |   | 2001         |         | 2000 |   | Change             |         | % Change
|                          |                           |   |              |         |      |   |                    |         |         
|                          |                           |   |              |         |      |   | (unaudited)        |         |          |   |        |       |  |  |      
|                          |                           |   |              |         |      |   | (US$ in thousands) |         |          |   |        |       |  |  |      
|Trust & Related Services  |                           | $ | 148,109      |         |      | $ | 133,138            |         |          | $ | 14,971 |       |  |  | 11.2  | %  
|Investment Services       |                           |   | 40,736       |         |      |   | 46,166             |         |          |   | (5,430 | )     |  |  | (11.8 | %) 
|Foreign Exchange Earnings |                           |   | 42,394       |         |      |   | 42,091             |         |          |   | 303    |       |  |  | 0.7   | %  
|Banking Services          |                           |   | 24,395       |         |      |   | 25,272             |         |          |   | (877   | )     |  |  | (3.5  | %) 
|Other Non-Interest Income |                           |   | 1,343        |         |      |   | 552                |         |          |   | 791    |       |  |  | 143.3 | %  
|                          |                           |   |              |         |      |   |                    |         |          |   |        |       |  |  |       |    
|                          | Total Non-Interest Income |   | $            | 256,977 |      |   | $                  | 247,219 |          |   | $      | 9,758 |  |  |       | 3.9 | %
|                          |                           |   |              |         |      |   |                    |         |          |   |        |       |  |  |       |    

Trust and Related Services

Trust and related services fees were $148.1 million in 2001, up 11.2% from
$133.1 million, and represented 57.6% of total non-interest income.

The following table shows trust and related services fees by product and
geographic region for the years shown:

|                         |               |   |              |        |      |   |                    |        |          |   |        |       |   |  |      |      |   
|------------------------ | ------------- | - | ------------ | ------ | ---- | - | ------------------ | ------ | -------- | - | ------ | ----- | - |  | ---- | ---- | --
|                         |               |   | Year Ended   |        |      |   |                    |        |          |   |       
|                         |               |   | December 31, |        |      |   |                    |        |          |   |       
|                         |               |   |              |        |      |   |                    |        |          |   |       
|                         |               |   | 2001         |        | 2000 |   | Change             |        | % Change
|                         |               |   |              |        |      |   |                    |        |         
|                         |               |   |              |        |      |   | (unaudited)        |        |          |   |        |       |   |  |     
|                         |               |   |              |        |      |   | (US$ in thousands) |        |          |   |        |       |   |  |     
|Fund Administration Fees |               |   |              |        |      |   |                    |        |          |   |        |       |   |  |      |     
|                         | North America |   | $            | 40,695 |      |   | $                  | 31,940 |          |   | $      | 8,755 |   |  |      | 27.4 | % 
|                         | Europe        |   |              | 33,996 |      |   |                    | 32,974 |          |   |        | 1,022 |   |  |      | 3.1  | % 
|                         | Asia-Pacific  |   |              | 42,991 |      |   |                    | 38,148 |          |   |        | 4,843 |   |  |      | 12.7 | % 
|                         |               |   |              |        |      |   |                    |        |          |   |        |       |   |  |      |     
|                         |               |   | 117,682      |        |      |   | 103,062            |        |          |   | 14,620 |       |   |  | 14.2 | %   
|Private Trust Fees       |               |   |              |        |      |   |                    |        |          |   |        |       |   |  |      |     
|                         | North America |   |              | 13,449 |      |   |                    | 12,078 |          |   |        | 1,371 |   |  |      | 11.4 | % 
|                         | Europe        |   |              | 8,020  |      |   |                    | 8,707  |          |   |        | (687  | ) |  |      | (7.9 | %)
|                         | Asia-Pacific  |   |              | 8,958  |      |   |                    | 9,291  |          |   |        | (333  | ) |  |      | (3.6 | %)
|                         |               |   |              |        |      |   |                    |        |          |   |        |       |   |  |      |     
|                         |               |   | 30,427       |        |      |   | 30,076             |        |          |   | 351    |       |   |  | 1.2  | %   
|Total                    |               | $ | 148,109      |        |      | $ | 133,138            |        |          | $ | 14,971 |       |   |  | 11.2 | %   
|                         |               |   |              |        |      |   |                    |        |          |   |        |       |   |  |      |     

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Fund Administration Fees

Fund administration fees represented 79% of total trust and related
services fees in 2001 and were the primary reason for growth in this revenue
line. Fund administration fees increased by $14.6 million in 2001, or 14.2%,
with $8.8 million of this growth contributed by North America and $4.8 million
contributed by Asia-Pacific.

The growth in North America was primarily the result of new subscriptions
for hedge funds and funds of funds in Bermuda, which contributed to an $8.8
million increase in fund administration fees.

The growth in Asia-Pacific was largely the result of increased revenue in
Hong Kong of $4.6 million, driven by new pension fund assets resulting from our
appointment to administer a significant portion of the MPF funds there.

Fund administration fees in Europe increased by $1.0 million in 2001, or
3%.

Private Trust Fees

Private trust fees increased by $0.4 million in 2001, as new client
business offset a short-term revenue reduction as we exited lower value client
relationships to focus on higher value fiduciary business. Decreases of 7.9%
and 3.6% in Europe and Asia-Pacific, respectively, were offset by an 11.4%
increase in North America.

Investment Services

Investment services declined $5.4 million, or 11.8%, to $40.7 million in
2001. The decrease was due to a decline in brokerage and management fees as
our clients assets and investment activity were adversely affected by the
downturn in global capital markets, which was partly offset by revenue growth
from our proprietary mutual funds, which grew by $1.0 million in 2001 as a
result of the increased volumes in our All Points Corporate Money Fund.

Our proprietary All Points Multi-Manager investment vehicle, which uses
independent third-party investment managers, had a net asset value of
approximately $891 million at December 31, 2001. During 2001, the net asset
value of our proprietary funds grew to $6.3 billion and we added a Global
Themes Equity Portfolio and a U.S. Large Cap Value Fund to our fund family. In
2001, the net asset value of our bond funds and money market funds grew by $1.2
billion, while the net asset value of our equity funds declined by $68.0
million.

Foreign Exchange Earnings

Revenues from our foreign exchange activity were $42.4 million for 2001,
little changed from 2000.

Our Guernsey and Hong Kong offices grew their foreign exchange earnings in
2001 by $1.7 million and $1.2 million, respectively, due to higher client
trading volumes. However, Luxembourg, Bermuda and Isle of Man experienced
declines of $1.3 million, $0.7 million and $0.5 million, respectively, due to
lower client trading volumes and lower margins.

Banking Services

Banking services fees in 2001 were $24.4 million, $0.9 million lower than
in 2000, due primarily to lower fees from credit card products, partly as a
result of our decision to discontinue credit card payment processing for online
merchants. In 2001, our Bermuda office contributed 86% of our banking services
fees.

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Net Interest Income

The following table presents the components of our net interest income for
the years ended December 31, 2001 and 2000:

|                                     |  |              |            |      |  |                    |           |          |  |   |          |      |  |  |       |   
|------------------------------------ |  | ------------ | ---------- | ---- |  | ------------------ | --------- | -------- |  | - | -------- | ---- |  |  | ----- | --
|                                     |  | Year Ended   |            |      |  |                    |           |          |  |  
|                                     |  | December 31, |            |      |  |                    |           |          |  |  
|                                     |  |              |            |      |  |                    |           |          |  |  
|                                     |  | 2001         |            | 2000 |  | Change             |           | % Change
|                                     |  |              |            |      |  |                    |           |         
|                                     |  |              |            |      |  | (unaudited)        |           |          |  |   |          |      |  | 
|                                     |  |              |            |      |  | (US$ in thousands) |           |          |  |   |          |      |  | 
|Interest Income                      |  | $            | 487,212    |      |  | $                  | 632,032   |          |  | $ | (144,820 | )    |  |  | (22.9 | %)
|Interest Expense                     |  |              | 289,538    |      |  |                    | 427,028   |          |  |   | (137,490 | )    |  |  | (32.2 | %)
|                                     |  |              |            |      |  |                    |           |          |  |   |          |      |  |  |       |   
|Net Interest Income                  |  |              | 197,674    |      |  |                    | 205,044   |          |  |   | (7,330   | )    |  |  | (3.6  | %)
|                                     |  |              |            |      |  |                    |           |          |  |   |          |      |  |  |       |   
|Average Interest-Earning Assets      |  | $            | 10,301,000 |      |  | $                  | 9,861,000 |          |  | $ | 440,000  |      |  |  | 4.5   | % 
|Average Interest-Bearing Liabilities |  |              | 9,685,000  |      |  |                    | 9,921,000 |          |  |   | (394,000 | )    |  |  | (4.2  | %)
|Net Interest Margin                  |  |              | 1.92       | %    |  |                    | 2.08      | %        |  |   | (0.16    | pts) |  |  |       |   

Net interest income was $197.7 million in 2001, compared with $205.0
million in 2000, a decline of 3.6%. This decline reflected a lower net
interest margin, which fell from 2.08% in 2000 to 1.92% in 2001. Our policy
has been to maintain a short, matched-duration balance sheet which provides
market value stability but does not protect from margin erosion in the event of
extreme interest rate reductions. In 2001, unprecedented cuts in interest
rates had a negative impact on margins as we were unable to maintain yields on
the reinvestment of low and non-interest bearing customer deposits. The effect
of higher average interest-earning assets partly compensated for this decline.

The
analysis on pages 29-30 shows the effects of changes in volumes and rates
on our net interest income. The net decline in net interest income in 2001 was
$7.3 million and may be attributed to the effect of declines in average rates
of $16.3 million, offset by the effect of increased volumes of $9.0 million
during this period. Average interest-earning assets grew by $440.0 million in
2001, primarily due to our corporate clients holding higher cash balances
during this period. For more information on our average interest-earning
assets and average interest-bearing liabilities, see Item 4. Information on
the CompanySelected Statistical Information on Banking OperationsDistribution
of Assets, Liabilities, and Stockholders Equity; Interest Rates and Interest
DifferentialAverage Consolidated Balance Sheets.

Provision for Loan Losses

Our provision for loan losses in 2001 was $2.7 million, little changed
from the prior year. Our total allowance for loan losses at December 31, 2001
was $27.6 million, an increase from $26.0 million at December 31, 2000. Gross
impaired loans were $25.7 million at December 31, 2001 and $23.4 million at
December 31, 2000.

During the year, our specific loan allowance declined by $2.0 million to
$7.5 million and our general allowance increased by $3.6 million to $20.1
million. The movement in our allowance for loan losses was a result of a
change in the mix of our impaired loans. The increase was due to the
impairment of certain mortgages, which are well collateralised and require a
lower level of specific allowances. The increase also reflected managements
opinion that losses inherent in the Bermuda loan portfolio had increased due to
the decline in Bermudas economy as a result of the continuing deterioration of
the tourism industry, especially since the events of September 11, 2001.

Other Income/(Loss)

For 2001, other income/(loss) was a net loss of $1.9 million, compared
with net income of $7.9 million for 2000. This decrease was primarily a result
of our investment in Measurisk, which was offset in part by gains on the sale
of our shares of First Ecommerce Data Services and other income relating to
First Atlantic Commerce, all as described below. Dividends on our portfolio of
equity securities and mutual funds were $5.8 million for 2001, compared with
$5.1 million in 2000.

Measurisk

We currently hold an investment consisting of equity interests in
Measurisk, a start up company offering risk management analytical information
to financial companies. Other income/(loss) in 2001 includes total charges of
$11.5 million related to our

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investment in Measurisk. During 2001, we invested an additional $4.2
million in the company, bringing our total investment to date to $11.5 million,
and began to account for the investment using the equity method. Our last
investment in Measurisk was made in June 2001. We believed at the time of our
initial and subsequent investments in Measurisk that the company had a viable
business model and the potential to complement the Banks client offerings in
the future. Our share of Measurisks losses was $4.2 million in 2001. We also
expensed $1.3 million in 2001 relating to the amortisation of goodwill arising
from the investment in Measurisk. At December 31, 2001, we determined the
investment was other than temporarily impaired due to the combination of poor
operating performance and diminished cash resources. No additional financing
was forthcoming at December 31, 2001 and, consequently, a write-down against
the remaining carrying value of the investment of $6.0 million was made. We are
now carrying the investment at $0.

First Ecommerce Data Services (FEDS)

During 2001, we sold our remaining 50% ownership of FEDS to First Ecom.com
(First Ecom) for a net gain of $2.0 million. We had sold the initial 50%
interest during 2000 for a net gain of $2.8 million. See Gains/(Losses) on
Available for Sale Marketable Securities for a discussion of our relationship
with First Ecom. This sale followed our strategic decision to stop providing
credit card payment processing services to online merchants. Our share of the
FEDS net loss from operations was $0.3 million for 2001 and $0.2 million in
2000.

First Atlantic Commerce (First Atlantic)

During 2001, we recorded $2.3 million in other income/(loss) relating to
a release of a $1.3 million provision and an insurance recovery of $1.0 million
for losses related to First Atlantic. At December 31, 2000, we had provided
for, or written off, a total of $7.0 million with respect to the estimated cost
of uncollectible amounts loaned to or invested in First Atlantic. Of this
total, $1.3 million represented a provision for estimated credit card
charge-backs incurred but not reported to First Atlantic at that date. We were
the card processor for payment services provided by First Atlantic and would
have been liable for such charge-backs if First Atlantic had been unable to
meet them. At December 31, 2001, total reported credit card charge-backs were
unchanged from December 31, 2000, and as a result, we reduced our $1.3 million
provision to $0 and recorded the $1.3 million in other income. See Note 7 of
the Consolidated Financial Statements for more information.

Losses on Trading Portfolio

Net losses on our trading portfolio were $6.5 million in 2001, compared
with net losses of $1.1 million in 2000, due largely to increased hedging costs
incurred to bring higher yields on underlying assets in line with the lesser
yields on the short duration portfolio.

Gains/(Losses) on Available for Sale Marketable Securities

Net gains on available for sale marketable securities were $0.3 million in
2001, compared with losses of $15.0 million in 2000.

During 2001, we sold our investment in First Ecom and recognised a net
loss of $4.1 million in the period. This loss was in addition to an impairment
provision we had recognised against the investment in 2000 of $10.0 million.
First Ecom was a joint venture partner in the FEDS initiative to provide
multi-currency credit card processing solutions to online merchants. We sold
our two million shares representing a 10.4% interest in First Ecom during 2001
after we decided to exit the credit card payment processing business. We made
an initial investment of $6.5 million to purchase one million shares in
November 1999 and exercised warrants for an additional one million shares at a
cost of $7.8 million in July 2000. At December 31, 2000, we wrote our
investment down to approximately $2.00 per share, which was equivalent to its
net book value at that date. We disposed of the investment in November 2001
for $150,000, an average sales price of 7.5 cents per share.

In 2001, we recorded charges of $5.3 million for other than temporary
impairments of certain investments. The charges included:



| |  |  | a write-down of $1.3 million on an asset-backed debt security held by the Bank,                                
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | a write-down of $1.0 million in an investment in a unit trust that invests in real estate in the United States,

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| |  |  | a write-down of $1.9 million in a private equity partnership
that invests primarily in insurance, financial services and
healthcare industries, and                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a $1.1 million write-down in an investment in a private equity
partnership that participates in expansion financings, special
situations and buyouts in insurance related entities.

In 2000, we had additional charges for other than temporary impairments of
certain investments totalling $6.5 million, including a $4.0 million charge
against our investment in First Atlantic.

We also sold our interest in the London Stock Exchange held by our stock
brokerage subsidiary in Jersey for a gain of $4.1 million in 2001.

Operating Expenses

The following table presents the components of our operating expenses for
the years ended December 31, 2001 and 2000:

|                              |                          |   |              |         |      |   |                    |         |          |   |        |        |  |  |       |      |  
|----------------------------- | ------------------------ | - | ------------ | ------- | ---- | - | ------------------ | ------- | -------- | - | ------ | ------ |  |  | ----- | ---- | -
|                              |                          |   | Year Ended   |         |      |   |                    |         |          |   |       
|                              |                          |   | December 31, |         |      |   |                    |         |          |   |       
|                              |                          |   |              |         |      |   |                    |         |          |   |       
|                              |                          |   | 2001         |         | 2000 |   | Change             |         | % Change
|                              |                          |   |              |         |      |   |                    |         |         
|                              |                          |   |              |         |      |   | (unaudited)        |         |          |   |        |        |  |  |      
|                              |                          |   |              |         |      |   | (US$ in thousands) |         |          |   |        |        |  |  |      
|Salaries                      |                          | $ | 161,359      |         |      | $ | 161,062            |         |          | $ | 297    |        |  |  | 0.2   | %   
|Pension & Staff Benefits      |                          |   | 51,858       |         |      |   | 51,530             |         |          |   | 328    |        |  |  | 0.6   | %   
|Property                      |                          |   | 28,613       |         |      |   | 26,969             |         |          |   | 1,644  |        |  |  | 6.1   | %   
|Systems & Communications      |                          |   | 39,800       |         |      |   | 35,644             |         |          |   | 4,156  |        |  |  | 11.7  | %   
|Corporate, Marketing, & Other |                          |   | 95,330       |         |      |   | 44,710             |         |          |   | 50,620 |        |  |  | 113.2 | %   
|                              |                          |   |              |         |      |   |                    |         |          |   |        |        |  |  |       |     
|                              | Total Operating Expenses |   | $            | 376,960 |      |   | $                  | 319,915 |          |   | $      | 57,045 |  |  |       | 17.8 | %
|                              |                          |   |              |         |      |   |                    |         |          |   |        |        |  |  |       |     
|Efficiency Ratio(1)           |                          |   | 84.9         | %       |      |   | 72.5               | %       |          |   | (12.4  | pts)   |  |  |       |     
|Average Number of Employees   |                          |   | 2,914        |         |      |   | 2,742              |         |          |   | 172    |        |  |  | 6.3   | %   



---

| |  | (1) Efficiency ratio is defined as total operating expenses divided by total
revenue.
| |  | -------------------------------------------------------------------------------------

Operating expenses were $377.0 million in 2001, an increase of 17.8%
compared with $319.9 million in 2000. Operating expenses included the net
expense of $43.4 million relating to the litigation costs associated with Cash
4 Titles. See Cash 4 Titles for more information on these expenses.
Operating expenses, excluding litigation costs associated with Cash 4 Titles,
increased 4.3% to $333.5 million in 2001, compared with $319.9 million in 2000.
The increase was due to higher staff levels and systems costs along with some
other expenses, as described below.

Salaries

Salary costs were $161.4 million for 2001, an increase of 0.2% over 2000.
The total salary costs in 2001 are net of a $9.3 million reduction in profit
related compensation relating to the charges for Cash 4 Titles. Excluding this
expense reduction, total salaries grew by $9.6 million in 2001 over 2000. Our
average number of employees grew by 172 in 2001, with 76 of the additional
staff located in Hong Kong, primarily to service our new MPF business.
Salaries in Hong Kong grew by $5.7 million to $30.9 million in 2001.

Other offices with significant staff growth were Dublin and Scotland,
which increased their number of employees by 31 and 27, respectively. This
resulted in increased salary costs of $1.2 million for each office to $4.2
million and $6.2 million, respectively.

Salary costs in Bermuda and New York increased by $4.0 million and $1.2
million, respectively, in 2001, reflecting costs associated with hiring and
retaining professionally qualified staff. The average number of employees in
Bermuda grew marginally to 1,226 for the year from 1,215 in 2000. Our New York
office grew by 30% to 52 at December 31, 2001, compared with 39 at December 31,
2000, as we continued to develop our GFS business in that location.

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Our profit-based compensation relating to our operations, excluding the
effects of the litigation costs, was reduced by $3.8 million for 2001,
reflecting the reduction in our operating income.

Pension and Staff Benefits

Pension and staff benefit costs were $51.9 million for 2001, which
included a net gain of $5.6 million recognised on the settlement of the defined
benefit pension plan in Bermuda, which was partly offset by a provision of $1.5
million for the tax liability of American employees who participated in the
defined benefit plan prior to the settlement of the plan. See Note 8 of the
Consolidated Financial Statements for more information regarding this
settlement.

Staff benefits for 2001 included $1.3 million for temporary staff costs
relating to a new subsidiary formed in early 2001, but subsequently
discontinued, as described more fully below under New Subsidiary.

The balance of the increase in pension and staff benefits reflected the
growth in personnel and average salaries during the year.

Property

Property expense grew by $1.6 million in 2001, to a total of $28.6
million. In Bermuda, expenses increased by $0.9 million primarily as a result
of renovations to our head office. In addition, property expense increased by
$0.8 million in Dublin as we upgraded our office space. During 2001, we
incurred additional lease expense of $0.6 million in Bermuda for a new
subsidiary formed in early 2001, but subsequently discontinued, as described
more fully below under New Subsidiary. Our other offices reported little
change in premises costs.

Systems and Communications

Systems and communications expenses were $39.8 million for 2001, an
increase of $4.2 million over 2000. During 2001, we wrote off the $2.6 million
carrying value of a system that was being developed in our GFS division to
service the increased requirements of our growing hedge fund and limited
partnership clients. The implementation of this system was cancelled in favour
of a more technically advanced solution that was implemented in early 2002.
Our New York office incurred an additional $0.6 million of systems costs in
2001 relating to a system implemented to enable year end accounting
capabilities for its alternative investment clients. The balance of the
increase reflected investments in other systems to remain competitive.

Corporate, Marketing and Other

Corporate, marketing and other expenses, including the Cash 4 Titles
litigation expenses, were $95.3 million in 2001, an increase of $50.6 million
from 2000. Corporate, marketing and other expenses, excluding the Cash 4
Titles litigation expenses, were $51.9 million in 2001, compared with $44.7
million in 2000.

Included in other costs in 2001 are $3.9 million of legal fees from our
Cayman office relating to the Cash 4 Titles litigation. This was an increase of
$1.5 million from the $2.4 million incurred in 2000. See Cash 4 Titles
below.

In Bermuda, a new subsidiary that was established, but subsequently
discontinued, incurred corporate, marketing, and other costs of $5.3 million
for 2001. These costs related primarily to consulting, legal, marketing, and
other start-up costs incurred.

Other expenses in our Guernsey office increased by $3.3 million in 2001 as
we incurred an errors and omissions charge of $3.5 million, relating to losses
incurred by a GFS client. It had been alleged that our Guernsey office had
committed operating errors on a GFS clients fund that resulted in investment
losses to the fund. At December 2001, we provided for $3.5 million to settle
the claim with no admission of liability.

Other expenses in our Luxembourg and Hong Kong offices declined in 2001 by
$1.6 million and $1.2 million, respectively. The declines were primarily due to
lower professional fees in 2001 compared with 2000.

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New Subsidiary

In early 2001, we formed a new subsidiary in Bermuda to provide management
and technical services to multinational companies seeking to perform part of
their operations from offshore jurisdictions. The decline in capital spending
by multinational companies resulting from the recent worldwide economic
downturn, combined with the negative economic effects of September 11th, led us
to re-evaluate this business. As a result, we decided not to proceed with this
venture. All costs were expensed as incurred and totalled $7.7 million for the
year.

Cash 4 Titles

Included in our net earnings results in 2001 is a net cost of $43.4
million relating to the Cash 4 Titles litigation. During 2001, we settled
these class action suits in the U.S. at an estimated cost of $67.5 million. We
also accrued $10.0 million, representing our then estimate of the liabilities
and expenses with respect to all remaining actions then still outstanding
against the Bank. The total expense we have recorded for all Cash 4 Titles
related litigation is $77.5 million. We also received $34.1 million of
recoveries under our various insurance policies. See Item 8. Financial
InformationLegal Proceedings.

Income Taxes

Income taxes were $6.8 million for 2001, $0.4 million less than the $7.2
million in 2000. The decrease was due to lower tax expenses in some of our
European subsidiaries.

Results by Business Division

Our management reporting system incorporates processes for allocating
revenue and expenses to each business division, as well as for allocating
assets, liabilities and the applicable interest income and expense. Capital is
allocated based on the risk weighted assets employed. The capital allocations
may not, however, be representative of the capital that would be required if
the divisions operated as independent entities. The Other category captures
non-client specific revenues and expenses such as proprietary trading income,
return on investment of unallocated capital and certain corporate expenses.
From time to time, we adjust our internal management reporting to reallocate
certain activities, clients and related costs across our business divisions.
To the extent necessary, we have restated all prior periods to conform with the
presentation for fiscal year ended December 31, 2002.

The following tables present our results by business division for the
years ended December 31, 2002 and 2001:

|                                      |                   |   |                    |         |          |   |           |        |           |   |         |        |       |   |        |        |  |   |       |        |  |   |         |         | 
|------------------------------------- | ----------------- | - | ------------------ | ------- | -------- | - | --------- | ------ | --------- | - | ------- | ------ | ----- | - | ------ | ------ |  | - | ----- | ------ |  | - | ------- | ------- | 
|                                      |                   |   | Year Ended        
|                                      |                   |   | December 31, 2002 
|                                      |                   |   |                   
|                                      |                   |   |                    |         |          |   | Private   |        |           |   |         |        |       |   |        |        |  |   |       |        |  |   |        
|                                      |                   |   | Global Fund        |         | Client   |   | Corporate |        | Community |   |         |        |       |   |        |        | 
|                                      |                   |   | Services           |         | Services |   | Banking   |        | Banking   |   | Other   |        | Total
|                                      |                   |   |                    |         |          |   |           |        |           |   |         |        |      
|                                      |                   |   | (US$ in thousands)
|Non-Interest Income                   |                   | $ | 150,961            |         |          | $ | 67,485    |        |           | $ | 18,589  |        |       | $ | 21,488 |        |  | $ | 5,733 |        |  | $ | 264,256 |        
|Net Interest Income
after Loan Losses |                   |   | 43,836             |         |          |   | 22,843    |        |           |   | 48,439  |        |       |   | 58,132 |        |  |   | 4,495 |        |  |   | 177,745 |        
|Investment and Other
Income/(Loss)    |                   |   | (4,272             | )       |          |   | (374      | )      |           |   | (12,430 | )      |       |   | (5,240 | )      |  |   | 1,312 |        |  |   | (21,004 | )      
|                                      |                   |   |                    |         |          |   |           |        |           |   |         |        |       |   |        |        |  |   |       |        |  |   |         |        
|                                      | Total Revenues    |   |                    | 190,525 |          |   |           | 89,954 |           |   |         | 54,598 |       |   |        | 74,380 |  |   |       | 11,540 |  |   |         | 420,997 | 
|Operating Expenses                    |                   |   | 170,571            |         |          |   | 77,264    |        |           |   | 26,545  |        |       |   | 60,053 |        |  |   | 2,673 |        |  |   | 337,106 |        
|Income Taxes                          |                   |   | 3,623              |         |          |   | 1,413     |        |           |   | 287     |        |       |   | 128    |        |  |   | 782   |        |  |   | 6,233   |        
|                                      |                   |   |                    |         |          |   |           |        |           |   |         |        |       |   |        |        |  |   |       |        |  |   |         |        
|                                      | Net Income/(Loss) |   | $                  | 16,331  |          |   | $         | 11,277 |           |   | $       | 27,766 |       |   | $      | 14,199 |  |   | $     | 8,085  |  |   | $       | 77,658  | 
|                                      |                   |   |                    |         |          |   |           |        |           |   |         |        |       |   |        |        |  |   |       |        |  |   |         |        

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|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |         | 
|------------------------------------- | ----------------- | - | ------------------ | ------- | -------- | - | --------- | ------ | --------- | - | ------ | ------ | ----- | - | ------ | ------ |  | - | ------ | ------- | - | - | ------- | ------- | 
|                                      |                   |   | Year Ended        
|                                      |                   |   | December 31, 2001 
|                                      |                   |   |                   
|                                      |                   |   |                    |         |          |   | Private   |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |        
|                                      |                   |   | Global Fund        |         | Client   |   | Corporate |        | Community |   |        |        |       |   |        |        | 
|                                      |                   |   | Services           |         | Services |   | Banking   |        | Banking   |   | Other  |        | Total
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |      
|                                      |                   |   | (US$ in thousands)
|Non-Interest Income                   |                   | $ | 140,813            |         |          | $ | 69,099    |        |           | $ | 15,999 |        |       | $ | 25,217 |        |  | $ | 5,849  |         |   | $ | 256,977 |        
|Net
Interest Income after Loan
Losses |                   |   | 48,975             |         |          |   | 30,587    |        |           |   | 50,041 |        |       |   | 55,087 |        |  |   | 10,322 |         |   |   | 195,012 |        
|Investment and Other
Income/
(Loss)   |                   |   | (553               | )       |          |   | (268      | )      |           |   | (3,492 | )      |       |   | (1,183 | )      |  |   | (2,685 | )       |   |   | (8,181  | )      
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |        
|                                      | Total Revenues    |   |                    | 189,235 |          |   |           | 99,418 |           |   |        | 62,548 |       |   |        | 79,121 |  |   |        | 13,486  |   |   |         | 443,808 | 
|Operating Expenses                    |                   |   | 162,218            |         |          |   | 76,280    |        |           |   | 23,457 |        |       |   | 57,569 |        |  |   | 57,436 |         |   |   | 376,960 |        
|Income Taxes                          |                   |   | 2,784              |         |          |   | 2,506     |        |           |   | 291    |        |       |   | 40     |        |  |   | 1,150  |         |   |   | 6,771   |        
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |        
|                                      | Net Income/(Loss) |   | $                  | 24,233  |          |   | $         | 20,632 |           |   | $      | 38,800 |       |   | $      | 21,512 |  |   | $      | (45,100 | ) |   | $       | 60,077  | 
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |        

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Global Fund Services (GFS)

Net income for GFS was $16.3 million for the 2002 year, a decrease of $7.9
million from $24.2 million in the prior year, which represented 21% of our
total net income and 45% of our total revenues for the year compared with 40%
of our total net income and 43% of our total revenue in 2001. The decline in
earnings was due to a combination of reduced net interest income, allocated
trading portfolio losses and hedge costs, and increased operating expenses to
generate new business and improve technology. However, despite weak global
equity markets, non-interest income for GFS continued to improve as a result of
the MPF program in Hong Kong and growth in new business.

Despite the fact that equity markets were weak in 2002, non-interest
income increased by $10.1 million, or 7%, to $151.0 million from $140.8 million
in 2001. Our client assets increased 3%, as new business more than offset the
impact of weak equity markets on the value of existing client assets. On
average, our assets under administration increased from $80.8 billion to $83.5
billion year-over-year. Hedge funds and funds invested in emerging markets
totalled 47% of total client assets.

Our strong performance in the Asia-Pacific region was a main contributor
to the increase in non-interest income. In Hong Kong, strength in our MPF
pension revenues resulted in an increase of 13%, or $5.3 million, while new
business in Singapore contributed $1.8 million, or 21%, to the increase. Net
asset flows of approximately $750.0 million a year are being received by the
MPF business.

Total European fees increased by $2.8 million, with Dublin generating a
$2.2 million, or 17%, increase as a result of our focus on alternative
investment products there.

In North America, Bermuda fees remained consistent. New York improved fee
earnings by $0.9 million, or 15%. The implementation of a new accounting and
valuation system to improve servicing was a key factor in this performance and
continues to attract new business. Revenues in our Cayman office declined 33%
as services were moved to other locations.

GFS net interest income decreased from $49.0 million to $43.8 million, as
a result of combined margin compression and volume declines. GFS net interest
income represented 23% of the divisions total revenue.

GFS share of the marketable securities trading portfolio loss was $4.3
million, compared with $0.6 million in 2001. The losses on the trading
portfolio were allocated across our business divisions.

Operating expenses for GFS increased 5% to $170.6 million in 2002. This
was attributable to increased staff and systems costs in order to generate new
business and improve service to existing clients. Our New York and Dublin
offices accounted for most of these higher expenses, with increases of $2.0
million and $4.0 million, respectively. Both of these locations are key to our
strategy for future growth in GFS. New York has been the starting site for a
number of systems improvements and, as a growing source for

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both onshore and offshore business, has required additional investment in
staff. Dublin is the focal point for expanding our GFS presence in Europe and
has also needed similar investment. The chief system being implemented is
Advent Softwares Geneva, a real-time, global portfolio accounting system
which will become the global standard for GFS.

Our Guernsey office recovered $0.8 million in the year related to a $3.5
million errors and omissions charge in 2001. The downsizing of the Cayman
office resulted in lower operating expenses of $1.3 million compared with
2001. In addition, European locations were negatively affected by the U.S.
dollar weakening against the Euro, which contributed to increased expense
levels.

Private Client Services (PCS)

PCS earned $11.3 million in 2002, a decrease of 45% compared with $20.6
million in 2001, which represented 15% of our total net income and 21% of total
revenue for 2002, compared with 34% and 22%, respectively, for 2001. This
decrease was primarily the result of an almost $8 million decrease in interest
income coupled with slightly lower fee income and modestly increased operating
expenses.

Non-interest income declined $1.6 million compared to 2001, as a result of
declining client asset values and levels of investing activity. Our PCS
non-interest income is derived, in large part, from our trust services, where
fees are based upon client asset values, and investment services, where fees
are driven by the transaction volumes and value of assets managed, including
those assets invested in our own mutual funds.

In North America, fee income declined $1.6 million as a result of lower
investment transaction fees. At the same time, our fees in Hong Kong declined
by $0.8 million, mostly because of the rationalisation of our client base. The
net effect of the lower fees in the Asia-Pacific region was offset by an
increase of $0.6 million in Europe. Transaction fees increased in our Jersey
office as we consolidated our operations and saw positive results from new
management appointed in 2001.

Net interest earnings for PCS decreased $7.7 million to $22.9 million from
$30.6 million reported in 2001. This decrease was the result of lower net
interest margins and reduced client deposit volumes in a number of our offices,
notably Hong Kong, Guernsey, Isle of Man and Cayman.

PCS share of the trading portfolio loss was $0.4 million, compared with
$0.3 million in 2001.

PCS operating expenses were marginally higher at $77.3 million, compared
with $76.3 million in 2001. This represents an increase of 1% over 2001,
largely caused by increased staff-related costs.

Corporate Banking

Net income for Corporate Banking was $27.8 million in 2002, a decrease of
28% compared to $38.8 million for 2001. This result was mainly due to
increased losses from the trading portfolio, lower interest earnings and higher
operating expenses, which was partially offset by higher fees derived from
client investments in proprietary money funds. Total revenue from Corporate
Banking was $54.6 million for 2002, an $8.0 million decrease from 2001, and
represented 13% of our total revenue for 2002, compared with 14% for 2001.

Non-interest income grew 16% to $18.6 million, driven by higher average
volumes in our All Points Corporate Money funds. Fees from these funds are
mostly asset-based. Increased foreign exchange earnings also contributed to the
growth in non-interest income.

Net interest earnings for Corporate Banking decreased by $1.6 million,
reflecting lower margins and reduced volumes. Corporate Banking provides the
largest proportion of our Bermuda customer deposits. As these deposits are
largely reinvested in our treasury asset portfolios, Corporate Banking is
allocated the highest amount of the trading portfolio results. As a result,
investment losses for Corporate Banking increased from $3.5 million in 2001 to
$12.4 million in 2002.

Operating expenses increased from $23.5 million in 2001 to $26.5 million
in 2002, primarily as a result of higher marketing costs related to the launch
of GlobalConnect.

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Community Banking

Community Banking earned $14.2 million in 2002, a decrease of 34% compared
to $21.5 million in 2001, which represented 18% of total net income and 18% of
total revenue in 2002 compared with 36% and 18%, respectively, for 2001. All
of our Community Banking income, which is driven by customer deposits and the
margin earned on those deposits, is earned in Bermuda. In addition, we earn
fees from lending services, credit cards, bank account services and foreign
exchange services. Therefore, revenues are dependent upon the volume of
customer deposits, level of borrowing and transaction activity.

Non-interest income decreased $3.7 million to $21.5 million in 2002 from
$25.2 million in 2001. Card service fees decreased $0.8 million, mostly as a
result of a charge for the cessation of a customer rewards programme. Loan
origination and related fees were down $0.3 million, while bank account fees
dropped $0.5 million, reflecting lower levels of client activity. The balance
of the decrease was evenly split between volume-related declines in fees from
foreign exchange and investment services.

Net interest income was $58.1 million in 2002 compared with $55.1 million
in the prior year. This improvement was attributable to a reduction in amounts
charged for loan loss provisions. We charged $3.4 million for loan losses in
2001 compared with a net recovery of $0.4 million during 2002.

Community Banking had a loss of $5.2 million on its portion of the
outsourced trading portfolio in 2002, compared with a $1.2 million loss in
2001.

Operating expenses for 2002 were $60.1 million, approximately 4% higher
than the prior year level of $57.6 million. A large component of the increase
was additional systems costs relating to the launch of EasyLink Online, while
other costs were relatively flat.

Other

The Banks Other segment includes non-client specific revenues and
expenses, including investment income/loss, proprietary trading income,
interest on unallocated capital and related expenses. In addition, there are
certain corporate expenses that are not allocated to our business divisions.

In 2002, this category generated net income of $8.1 million compared with
a net loss of $45.1 million in 2001. This increase in net income was primarily
related to the Cash 4 Titles litigation. A credit of $5.4 million was recorded
in 2002, reflecting an insurance recovery, compared with a charge of $43.4
million in 2001 for litigation settlement costs.

Revenues totalled $11.5 million, down $1.9 million from last year. Fee
income was flat while investment and other income increased by $4.0 million
compared with 2001. This increase was primarily a result of several items that
affected investment and other income in 2001, including a write-down of $11.5
million relating to our investment in Measurisk, and the gains and losses on
the sales of several equity investments. Investment and other income in 2002
included the gain of $1.3 million on the sale of our office building in
Guernsey, along with a write-down of $2.5 million on our office building in
Cayman. The remainder of the change was primarily due to lower dividends
received on our equity portfolio in 2002 compared with 2001. Net interest
income decreased $5.8 million to $4.5 million, reflecting reduced margins on
unallocated capital.

Operating expenses decreased $54.8 million to $2.7 million. Of such
amount, $48.9 million related to Cash 4 Titles litigation. The remainder was
primarily due to expenses of $7.7 million in 2001 relating to a new e-commerce
subsidiary that was subsequently discontinued. Expenses in 2002 also included
$2.1 million for the Sterling area defined benefit pension plan, while 2001
included a gain of $4.1 million on the settlement of the Bermuda defined
benefit plan.

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Year Ended December 31, 2001 Compared with (unaudited) Year Ended December 31, 2000

|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |         | 
|------------------------------------- | ----------------- | - | ------------------ | ------- | -------- | - | --------- | ------ | --------- | - | ------ | ------ | ----- | - | ------ | ------ |  | - | ------ | ------- | - | - | ------- | ------- | 
|                                      |                   |   | Year Ended        
|                                      |                   |   | December 31, 2001 
|                                      |                   |   |                   
|                                      |                   |   |                    |         |          |   | Private   |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |        
|                                      |                   |   | Global Fund        |         | Client   |   | Corporate |        | Community |   |        |        |       |   |        |        | 
|                                      |                   |   | Services           |         | Services |   | Banking   |        | Banking   |   | Other  |        | Total
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |      
|                                      |                   |   | (US$ in thousands)
|Non-Interest Income                   |                   | $ | 140,813            |         |          | $ | 69,099    |        |           | $ | 15,999 |        |       | $ | 25,217 |        |  | $ | 5,849  |         |   | $ | 256,977 |        
|Net Interest Income
after Loan Losses |                   |   | 48,975             |         |          |   | 30,587    |        |           |   | 50,041 |        |       |   | 55,087 |        |  |   | 10,322 |         |   |   | 195,012 |        
|Investment and
Other Income/(Loss)    |                   |   | (553               | )       |          |   | (268      | )      |           |   | (3,492 | )      |       |   | (1,183 | )      |  |   | (2,685 | )       |   |   | (8,181  | )      
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |        
|                                      | Total Revenues    |   |                    | 189,235 |          |   |           | 99,418 |           |   |        | 62,548 |       |   |        | 79,121 |  |   |        | 13,486  |   |   |         | 443,808 | 
|Operating Expenses                    |                   |   | 162,218            |         |          |   | 76,280    |        |           |   | 23,457 |        |       |   | 57,569 |        |  |   | 57,436 |         |   |   | 376,960 |        
|Income Taxes                          |                   |   | 2,784              |         |          |   | 2,506     |        |           |   | 291    |        |       |   | 40     |        |  |   | 1,150  |         |   |   | 6,771   |        
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |        
|                                      | Net Income/(Loss) |   | $                  | 24,233  |          |   | $         | 20,632 |           |   | $      | 38,800 |       |   | $      | 21,512 |  |   | $      | (45,100 | ) |   | $       | 60,077  | 
|                                      |                   |   |                    |         |          |   |           |        |           |   |        |        |       |   |        |        |  |   |        |         |   |   |         |        

|                                                    |                   |   |                    |         |          |   |           |         |           |   |        |        |       |   |        |        |  |   |        |        |   |   |         |         | 
|--------------------------------------------------- | ----------------- | - | ------------------ | ------- | -------- | - | --------- | ------- | --------- | - | ------ | ------ | ----- | - | ------ | ------ |  | - | ------ | ------ | - | - | ------- | ------- | 
|                                                    |                   |   | Year Ended        
|                                                    |                   |   | December 31, 2000 
|                                                    |                   |   |                   
|                                                    |                   |   |                    |         |          |   | Private   |         |           |   |        |        |       |   |        |        |  |   |        |        |   |   |        
|                                                    |                   |   | Global Fund        |         | Client   |   | Corporate |         | Community |   |        |        |       |   |        |        | 
|                                                    |                   |   | Services           |         | Services |   | Banking   |         | Banking   |   | Other  |        | Total
|                                                    |                   |   |                    |         |          |   |           |         |           |   |        |        |      
|                                                    |                   |   | (unaudited)       
|                                                    |                   |   | (US$ in thousands)
|Non-Interest Income                                 |                   | $ | 119,364            |         |          | $ | 76,927    |         |           | $ | 13,843 |        |       | $ | 28,557 |        |  | $ | 8,528  |        |   | $ | 247,219 |        
|Net Interest Income
after Loan Losses               |                   |   | 59,946             |         |          |   | 32,388    |         |           |   | 44,476 |        |       |   | 60,212 |        |  |   | 5,341  |        |   |   | 202,363 |        
|Investment and
Other Income/(Loss)                  |                   |   | (373               | )       |          |   | (191      | )       |           |   | 279    |        |       |   | (1,620 | )      |  |   | (6,329 | )      |   |   | (8,234  | )      
|                                                    |                   |   |                    |         |          |   |           |         |           |   |        |        |       |   |        |        |  |   |        |        |   |   |         |        
|                                                    | Total Revenues    |   |                    | 178,937 |          |   |           | 109,124 |           |   |        | 58,598 |       |   |        | 87,149 |  |   |        | 7,540  |   |   |         | 441,348 | 
|Operating Expenses                                  |                   |   | 142,997            |         |          |   | 79,290    |         |           |   | 23,337 |        |       |   | 61,006 |        |  |   | 13,285 |        |   |   | 319,915 |        
|Income Taxes                                        |                   |   | 2,948              |         |          |   | 2,771     |         |           |   | 117    |        |       |   | (6     | )      |  |   | 1,355  |        |   |   | 7,185   |        
|                                                    |                   |   |                    |         |          |   |           |         |           |   |        |        |       |   |        |        |  |   |        |        |   |   |         |        
|Income/(Loss) from
Operations, after
Income Taxes   |                   |   | 32,992             |         |          |   | 27,063    |         |           |   | 35,144 |        |       |   | 26,149 |        |  |   | (7,100 | )      |   |   | 114,248 |        
|Cumulative Effect
of Change in
Accounting
Principle |                   |   |                   |         |          |   |          |         |           |   |       |        |       |   |       |        |  |   | 1,517  |        |   |   | 1,517   |        
|                                                    |                   |   |                    |         |          |   |           |         |           |   |        |        |       |   |        |        |  |   |        |        |   |   |         |        
|                                                    | Net Income/(Loss) |   | $                  | 32,992  |          |   | $         | 27,063  |           |   | $      | 35,144 |       |   | $      | 26,149 |  |   | $      | (5,583 | ) |   | $       | 115,765 | 
|                                                    |                   |   |                    |         |          |   |           |         |           |   |        |        |       |   |        |        |  |   |        |        |   |   |         |        

Global Fund Services (GFS)

Our GFS division earned net income of $24.2 million in 2001, compared with
$33.0 million in 2000. This represented 40% of our total net income and 43% of
our total revenues in 2001. The decline in earnings was primarily a result of
an increase in operating expenses to support new business.

GFS reported an 18.0% increase in non-interest income in 2001 due to the
growth of our hedge fund clients and the impact of the new MPF business in Hong
Kong. In Hong Kong, our MPF pension fund revenues were stronger than
anticipated, resulting in fee income growth of 16.8%, or $5.7 million. Fee
income in Europe increased by $4.0 million in 2001, primarily as a result of
fee income growth in Dublin of $3.0 million in 2001 relating to the growth of
Dublin as a centre for alternative investment products. Our Bermuda office
generated fees of $39.3 million from GFS in 2001, an increase of $9.9 million
over 2000. Our New York office also generated an increase in fee income of
$1.4 million to $6.4 million as a result of servicing both onshore and offshore
funds for international fund managers.

Net interest income was negatively impacted as a result of the eleven
interest rate cuts made by the U.S. Federal Reserve Board during 2001. Net
interest income for GFS fell 18.3% to $49.0 million in 2001 due to lower
margins.

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GFS share of the trading portfolio loss was $0.6 million in 2001, compared
to $0.4 million in 2000.

Operating expenses increased by $19.2 million to $162.2 million for 2001
as a result of investment in staff and systems primarily to service new
business opportunities. Operating expenses were net of a reduction of $4.6
million in profit related compensation that resulted from litigation charges
incurred in 2001. The related litigation cost is included in the other
category. Increased operating expenses in 2001 were primarily due to the hiring
of new employees, particularly in Hong Kong where we were appointed to
administer a significant portion of the MPF business, which was launched in
December 2000. Direct GFS expenses in Hong Kong increased by $7.0 million in
2001.

Our Guernsey office incurred a charge of $3.5 million in fiscal year ended
December 31, 2001, relating to losses incurred by a GFS client. Other
increases in operating expenses occurred in Bermuda where we wrote off the $2.6
million carrying value of a system designed to service alternative investment
vehicles. We are currently implementing new systems that we believe will
better serve the needs of our clients.

Private Client Services (PCS)

Our PCS division earned $20.6 million in 2001, $6.4 million less than in
2000. Earnings from our PCS division represented 34% of our total net income
for 2001. Total revenue for PCS, which was $99.4 million, represented 22% of
our total revenue for 2001, compared with 25% for 2000.

Non-interest income declined by $7.8 million in 2001, or 10.2%, due to
weak equity markets with revenues from investment services declining by $6.6
million during the period. The lower revenues were a result of decreased asset
values and reduced trading volumes. Trust services fees were relatively
unchanged in 2001, at $30.4 million. Total fees declined by $2.2 million in
Bermuda in 2001, and by $2.6 million in our Jersey office which experienced a
decline in brokerage fees.

Net interest income declined from $32.3 million in 2000 to $30.6 million
in 2001, or 5.6%, due to lower margins. Net interest income was negatively
impacted by the eleven interest rate cuts made by the U.S. Federal Reserve
Board during 2001.

PCS share of the trading portfolio loss was $0.3 million in 2001, compared
to $0.2 million in 2000.

Operating expenses for PCS declined by $3.0 million to $76.3 million in
2001, primarily due to a decline in profit related compensation. Expenses were
tightly controlled during 2001 with no increase in personnel. PCS has
implemented a new system to enhance the management of client accounts and is
also implementing a financial package to improve reporting to clients.

Corporate Banking

Corporate Banking earned $38.8 million in 2001, an increase of 10.4% from
2000, primarily due to increased interest earnings. Corporate Bankings
activities are concentrated in Bermuda, with 85% of total revenues generated
from that office. However, we continue to expand our presence in Europe, where
revenues grew to $6.2 million in 2001.

Total revenue from Corporate Banking was $62.5 million in 2001, an
increase of $3.9 million, or 6.7%, which represented 14% of our total revenue
for 2001 compared with 13% for 2000.

Net interest income grew by $5.6 million in 2001 due to the impact of
increased volumes, which was more than offset by the decline in net interest
margin during the year. Capital market volatility in 2001 resulted in our
clients increasing holdings of cash deposits. In addition, fee income grew by
$2.2 million to $16.0 million in 2001. During 2000, we launched our Corporate
Account which enables clients to transact in multiple currencies from one
account. We also offer a daily sweep facility into our managed Corporate Money
funds. This account and sweep facility had increased volumes, generating
higher investment services fees in 2001.

Corporate Banking experienced $3.5 million of investment losses in 2001,
an increase of $3.8 million. The gains and losses on our portfolio of debt
securities were allocated across business segments based upon each divisions
client volumes. In Bermuda, Corporate Banking funds the majority of net client
assets.

Corporate Bankings operating expenses were $23.5 million for 2001, little
changed from 2000.

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Community Banking

Our Community Banking division earned $21.5 million in 2001, a decline of
$4.6 million from 2000. Total revenue from Community Banking was $79.1
million, which represented 18% of our total revenues for 2001, compared with
20% for 2000.

Non-interest income of $25.2 million for 2001 was $3.3 million lower than
2000 due to declines in fees of $1.2 million in banking services and a decline
of $1.9 million from foreign exchange services. Our decision to exit online
credit card payment processing contributed to the decrease in banking services
revenues during this period.

The Community Banking division derives the majority of its revenue from
interest earnings. Net interest earnings decreased $5.1 million in 2001 to
$55.1 million. This decrease resulted from lower net interest margins
following interest rate cuts by the U.S. Federal Reserve Board in 2001. In
addition, the results for 2000 included a $1.7 million provision for a loan to
a client, First Atlantic Commerce, that incurred credit card losses during
2000.

The amount of loss in other income/(loss) for 2001 decreased $0.4 million
compared with 2000, primarily as a result of recoveries of $2.3 million
relating to First Atlantic Commerce. Other income/(loss) in 2000 included a
write-off of our investment in First Atlantic Commerce of $4.0 million. The
balance of the other income/(loss) relates to the Community Banking division
share of losses on our portfolio of debt securities.

Operating expenses were reduced by $3.4 million to $57.6 million for 2001.
The litigation charges in 2001 contributed to a reduction of $1.6 million in
profit-related compensation for the community banking division. Operating
expenses in 2000 included a provision of $1.3 million relating to estimated
chargebacks for First Atlantic Commerce credit card losses.

Other

The Other category had a net loss of $45.1 million for 2001 compared with
a net loss of $5.6 million in 2000. The loss in 2001 was primarily due to the
net cost of the Cash 4 Titles litigation of $43.4 million. The net litigation
charge includes $77.5 million of costs relating to the U.S. settlement and
outstanding litigation offset by $34.1 million of insurance recoveries received
in 2001. Profit-related compensation for 2001 was reduced by $9.3 million as a
result of this charge. This amount was allocated across all of our business
divisions.

Non-interest income in 2001 included $4.5 million from non-client foreign
exchange earnings, but decreased from $8.5 million in 2000 to $5.8 million in
2001.

Net interest income grew to $10.3 million in 2001, from $5.3 million in
2000, as a result of higher levels of unallocated capital during the period.

The amount of loss in other income/(loss) with respect to the Other
category decreased to $2.7 million in 2001, compared with a loss of $6.3
million in 2000. Other loss in 2001 included a provision related to our
investment in Measurisk of $11.5 million and the loss on the sale of First
Ecom. These losses in 2001 were partially offset by dividends received on our
equity portfolio of $5.8 million, a gain of $4.1 million on the sale of our
interest in the London Stock Exchange and the gain realised on our sale of
FEDS. In 2000, other loss included a $10.0 million write-down of our
investment in First Ecom, which was offset by dividends received of $5.1
million and the gain on the initial sale of our interest in FEDS in 2000.

In addition to the litigation settlement costs, operating expenses for
2001 included $3.9 million of legal fees incurred for the Cash 4 Titles case
compared with $2.4 million of legal fees incurred for the same litigation in
2000. The 2001 operating expenses also included $7.7 million relating to our
investment in a new subsidiary, a gain of $5.6 million resulting from our
termination of a defined benefit pension plan in Bermuda during 2001 and $1.5
million of tax expense incurred on behalf of our U.S. employees who were
members of the old Bermuda defined benefit pension plan. See Note 8 of the
Consolidated Financial Statements.

In 2000, the Other category also included a gain of $1.5 million resulting
from a cumulative effect of a change in accounting principle. See Note 1 of
the Consolidated Financial Statements under the heading Derivative Instruments
and Hedging Activities.

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FINANCIAL CONDITION

|                                                             |                                        |   |                                        |           |      |   |            |           |  |   |            |           | 
|------------------------------------------------------------ | -------------------------------------- | - | -------------------------------------- | --------- | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                                                             |                                        |   | As of December 31,                    
|                                                             |                                        |   |                                       
|                                                             |                                        |   | 2002                                   |           | 2001 |   | 2000      
|                                                             |                                        |   |                                        |           |      |   |           
|                                                             |                                        |   | (US$ in thousands, except percentages)
|Total Assets                                                 |                                        | $ | 11,089,968                             |           |      | $ | 10,808,019 |           |  | $ | 11,373,759 |          
|Interest-Earning Assets:                                     |                                        |   |                                        |           |      |   |            |           |  |   |            |          
|                                                             | Interest-Earning Deposits with Banks   |   |                                        | 4,602,862 |      |   |            | 3,519,613 |  |   |            | 4,798,085 | 
|                                                             | Interest-Earning Marketable Securities |   |                                        | 4,295,788 |      |   |            | 5,367,136 |  |   |            | 4,527,513 | 
|Total Loans                                                  |                                        |   | 1,792,743                              |           |      |   | 1,505,188  |           |  |   | 1,540,036  |          
|Allowance for Loan Losses                                    |                                        |   | (24,394                                | )         |      |   | (27,611    | )         |  |   | (26,017    | )        
|                                                             |                                        |   |                                        |           |      |   |            |           |  |   |            |          
|Net Loans                                                    |                                        |   | 1,768,349                              |           |      |   | 1,477,577  |           |  |   | 1,514,019  |          
|Total Interest-Earning Assets                                |                                        |   | 10,666,999                             |           |      |   | 10,364,326 |           |  |   | 10,839,617 |          
|Total Interest-Bearing Liabilities                           |                                        |   | 9,808,017                              |           |      |   | 9,645,163  |           |  |   | 10,238,268 |          
|Total Shareholders Equity                                   |                                        |   | 662,193                                |           |      |   | 629,383    |           |  |   | 626,447    |          
|Impaired Loans                                               |                                        |   | 20,167                                 |           |      |   | 25,719     |           |  |   | 23,434     |          
|Impaired Loans to Total Loans                                |                                        |   | 1.1                                    | %         |      |   | 1.7        | %         |  |   | 1.5        | %        
|Allowance for loan losses to Impaired
Loans (Coverage Ratio) |                                        |   | 121.0                                  | %         |      |   | 107.4      | %         |  |   | 111.0      | %        
|Net Loans to Interest-Earning Assets                         |                                        |   | 16.6                                   | %         |      |   | 14.3       | %         |  |   | 14.0       | %        

Assets

Average total assets in 2002 were $10.0 billion, down $847 million or 7.8%
from $10.8 billion in 2001. Total balance sheet assets were $11.1 billion at
December 31, 2002, an increase of $281.9 million from December 31, 2001.
Period-end balances can differ significantly from average balances as our
clients often reposition their assets at quarter-ends.

Our asset mix continues to be comprised of high quality and liquid
instruments. In 2002, we maintained 82% of average interest-earning assets in
the form of either interbank deposits or debt instruments issued by OECD
governments and financial institutions.

Interest-Earning Deposits with Banks

Average interest-earning deposits with banks of $3.2 billion for 2002
represented 33.4% of total average interest-earning assets, which compares with
$4.1 billion and 39.7%, respectively, for 2001. At December 31, 2002,
interest-earning deposits with banks were $4.6 billion. The significant
increase from the average balance is due to a year-end increase in customer
deposits and the decision made in October 2002 to reduce the size of our
outsourced trading portfolio. The funds from the reduction in the outsourced
portfolio have been redeposited with banks until we reinvest the proceeds in
our securities portfolio that is managed in-house. See Item 4. Information
on the CompanySelected Statistical Information on Banking
OperationsDistribution of Assets, Liabilities, and Stockholders Equity;
Interest Rates and Interest DifferentialAverage Consolidated Balance Sheets.

We only place deposits with highly rated institutions and ensure there is
an appropriate geographic diversification. Exposure and aggregate limits are
set for each of the institutions with which we have a relationship. At December
31, 2002, external rating agencies rated 96.7% of our interbank deposits A- or
better.

Marketable Securities

Total marketable securities at December 31, 2002 were $4.4 billion,
compared with $5.5 billion at December 31, 2001. The average balance of our
interest-earning marketable securities portfolio for 2002 was $4.7 billion,
unchanged from 2001. Marketable securities represented 49% of total average
interest-earning assets in 2002, up from 45.9% in 2001.

The following table provides an analysis of the carrying value of our
marketable securities as at December 31, 2002, 2001 and 2000:

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|                                                  |       |  |                    |       |      |  |       |       |  |  |       |       | 
|------------------------------------------------- | ----- |  | ------------------ | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                                                  |       |  | As at December 31,
|                                                  |       |  |                   
|                                                  |       |  | 2002               |       | 2001 |  | 2000 
|                                                  |       |  |                    |       |      |  |      
|                                                  |       |  | (US$ in millions) 
|U.S. Government and Agencies                      |       |  | 980                |       |      |  | 1,487 |       |  |  | 1,045 |      
|Non-U.S. Government, Provinces and Municipalities |       |  | 146                |       |      |  | 127   |       |  |  | 326   |      
|Corporate DebtU.S.                               |       |  | 892                |       |      |  | 1,094 |       |  |  | 781   |      
|Corporate DebtNon-U.S.                           |       |  | 2,278              |       |      |  | 2,659 |       |  |  | 2,376 |      
|Mutual Fund/Equity Investments                    |       |  | 74                 |       |      |  | 101   |       |  |  | 166   |      
|                                                  |       |  |                    |       |      |  |       |       |  |  |       |      
|                                                  | Total |  |                    | 4,370 |      |  |       | 5,468 |  |  |       | 4,694 | 
|                                                  |       |  |                    |       |      |  |       |       |  |  |       |      

A portion of our total marketable securities is held in a trading
portfolio, which had a total value of $494.8 million at December 31, 2002,
compared with $1.3 billion a year earlier. The average balance of the trading
portfolio for 2002 was $1.3 billion, compared with $623 million in 2001. Our
trading portfolio is managed by a third-party investment management firm,
BlackRock Financial Management, Inc., in accordance with strict portfolio
quality and duration guidelines. The trading portfolio must have a minimum
weighted average credit quality of AA-, no single issue may be rated below A,
and concentration risk is mitigated by adhering to sector limits. The maximum
duration for the portfolio is 0.5 years.

In late 2001, we increased the size of the trading portfolio to $1.3
billion with the aim of improving the long-term yield on our securities and
asset diversification. However, we found that market conditions in 2002 led to
variations in portfolio performance, which, as this is a mark-to-market trading
portfolio, resulted in earnings volatility that was outside what we considered
to be acceptable limits. Accordingly, the portfolio size was reduced to our
revised target of approximately $500.0 million by December 31, 2002. For more
information on our trading portfolio and interest rate risk management, see
Item 11. Quantitative and Qualitative Disclosures About Market RiskTrading
Activities.

Our available for sale marketable securities portfolio was valued at $3.9
billion at December 31, 2002, compared with $4.1 billion at December 31, 2001.
Our Capital Markets Products division manages this portfolio of primarily debt
instruments issued by governments and government agencies of OECD countries and
debt instruments issued by financial institutions, principally banks, organised
in these countries. Our guidelines stipulate a minimum average credit rating
of A- for the portfolio as a whole, with no single issue being less than BBB at
the time of purchase.

The strategy for the available for sale portfolio has been to hold
investment grade securities with a short duration and low interest rate
exposure that closely matches the expense stream of most of our deposits. We
utilise swaps to convert instruments with a fixed income stream into floating
to manage interest rate risk. At December 31, 2002, 88.7% of this portfolio
was comprised of floating rate securities.

In 2002, we also introduced a new portfolio of available for sale
securities that pay a fixed rate income stream. It is our intention to
gradually build a longer-duration portfolio equivalent to the size of our
capital base. At December 31, 2002, the fair value of this fixed rate
portfolio was $365 million. We expect to add to this portfolio over time as
part of our interest rate risk management process. We also hold a small
portfolio of equity securities and mutual funds.

Loans

Types of Loans

The following table presents our loan portfolio by category as of the
dates indicated:

|                                      |  |                    |         |      |  |      |         |  |  |   |         | 
|------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                      |  | As at December 31,
|                                      |  |                   
|                                      |  | 2002               |         | 2001 |  | 2000
|                                      |  |                    |         |      |  |     
|                                      |  | (US$ in thousands)
|Mortgages                             |  | $                  | 853,928 |      |  | $    | 780,133 |  |  | $ | 759,554 | 
|Bermuda Commercial                    |  |                    | 217,421 |      |  |      | 174,421 |  |  |   | 204,369 | 
|Bermuda Personal                      |  |                    | 199,674 |      |  |      | 161,641 |  |  |   | 160,738 | 
|International Commercial and Personal |  |                    | 161,294 |      |  |      | 145,467 |  |  |   | 234,612 | 
|Secured Short-term Investment Loans   |  |                    | 360,426 |      |  |      | 243,526 |  |  |   | 180,763 | 
|                                      |  |                    |         |      |  |      |         |  |  |   |         | 

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|                                                |  |                    |           |      |  |      |           |   |  |   |           |  
|----------------------------------------------- |  | ------------------ | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                |  | As at December 31,
|                                                |  |                   
|                                                |  | 2002               |           | 2001 |  | 2000
|                                                |  |                    |           |      |  |     
|                                                |  | (US$ in
thousands)
|Total Loans Before Allowance for Loan Losses    |  | $                  | 1,792,743 |      |  | $    | 1,505,188 |   |  | $ | 1,540,036 |  
|                                                |  |                    |           |      |  |      |           |   |  |   |           |  
|General and Specific Allowances for Loan Losses |  |                    | (24,394   | )    |  |      | (27,611   | ) |  |   | (26,017   | )
|                                                |  |                    |           |      |  |      |           |   |  |   |           |  
|Net Loans                                       |  | $                  | 1,768,349 |      |  | $    | 1,477,577 |   |  | $ | 1,514,019 |  
|                                                |  |                    |           |      |  |      |           |   |  |   |           |  

Loans net of related allowances increased $291 million to $1.8 billion at
December 31, 2002. Our average loan portfolio represented 17.6% of average
total interest earning assets during fiscal 2002, up from 14.4% in the prior
year. Loans increased during 2002 across all categories, but primarily in
secured short-term investment loans and mortgages.

The majority of the increase in short-term investment loans relates to
credit facilities provided by GFS to certain clients for liquidity and, on a
selective basis, for investment purposes. Lending for liquidity involves
short-term advances to bridge the timing difference between the sale or
purchase of specific assets and the receipt of cash from predetermined sources.
Investment or leverage facilities are provided to a select group of clients
who have demonstrated a consistent investment record. These loans may be for a
longer duration and are conservatively margined. The margin is determined
specifically for each client based on an analysis of the performance and mix
within the investment portfolio. In both cases, GFS is the custodian for the
collateral and often serves as the administrator. Amounts drawn and approved
under these facilities were $187 million and $341 million respectively at
December 31, 2002, compared with $77 million and $105 million at December 31,
2001.

At December 31, 2002, our syndicated loan exposure totalled $109 million,
consisting of $23 million of overseas syndicated loans, $27 million to
reinsurance and other companies in Bermuda, and $59 million to a Bermuda-based
investment fund. This compares to syndicated loan exposure of $119 million at
December 31, 2001, of which $45 million related to overseas syndicated loans,
$20 million to reinsurance companies and other in Bermuda, and $54 million to a
Bermuda-based investment fund. All syndicated obligors are investment grade
and we have not experienced any significant deterioration in credit risk on
these credit exposures.

The growth in mortgages in the year of $74 million reflects increased
residential and commercial mortgage activity in Bermuda. The mortgage
portfolio continues to represent a relatively low risk profile, as mortgage
lending typically results in a relatively low level of loan losses as a result
of conservative loan-to-value advance rates, which are typically 80% or less of
the collateral value. A significant downturn in local economic conditions and
real estate values could result in increased loan losses and difficulties in
disposing of real estate collateral. During 2002 we also sold, or obtained
repayment of, $30 million of mortgages recorded in our Cayman office following
our decision to stop providing banking services in that market.

Impaired Loans And Allowance For Loan Losses

Approximately $1.4 billion, or 78%, of our total loans are Bermuda-based,
and the quality of these loans has been fairly consistent due to the relatively
stable nature of the Bermuda economy. Bermuda has not experienced similar
swings in economic volatility, employment levels, and real estate values that
many other jurisdictions have experienced, and this stability has been
reflected in the generally stable quality of our loan portfolio. Loan quality
has remained relatively consistent, with no material changes in loan
concentrations or re-allocations of allowances. We consider our allowance for
loan losses to be adequate for losses inherent in the portfolio at December 31,
2002.

Loans are considered impaired when, in the opinion of management and based
on current information and events, there has been a deterioration in credit
quality to the extent that it is probable that the Bank will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Loans for which payment is more
than 90 days overdue are automatically classified as impaired unless the loan
is well secured and in the process of collection. Those loans over 90 days
due that are deemed to be well-secured and in the process of collection are
placed on a non-accrual basis and related interest is recorded in income only
when received. For all other impaired loans that are placed on non-accrual
basis, interest is not recognised until the principal balance has been repaid.
At December 31, 2002 and December 31, 2001, there were $0.3 million and $2.4
million, respectively, of loans that were overdue more than 90 days, but which
were not considered impaired as they were well secured and in the process of
collection.

At December 31, 2002, impaired mortgages reduced to $12.7 million of which
$11 million are located in Bermuda. These loans are fully collateralised.
Impaired commercial loans at December 31, 2002 decreased by $2.6 million. Full
payment was received on the $1.8 million First Atlantic loan, which was classed
as impaired in 2001, with the first $1 million in proceeds reimbursing an
earlier insurance claim. Further net payments of $0.6 million were received
during the year on other real estate impaired loans.

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Impaired personal loans in Bermuda reduced $0.8 million as a result of
improved collection and repayment activity.

Our allowance for loan losses represents managements judgment of losses
inherent in the loan portfolio at the assessment date and consists of both
specific and general reserves. Our credit risk management department prepares
a quarterly analysis of impaired loans and related reserves. This analysis is
reviewed for adequacy by our board of directors. The methodology for the
analysis is set out in our credit policy, which is periodically reviewed by
management and the board of directors.

The Bank employs a risk rating methodology for all commercial and secured
short-term investment loans. Our risk rating methodology uses an 8-grade
rating system incorporating special mention, substandard, doubtful and
loss definitions that, since July 2000, have been aligned with U.S.
regulatory norms. Account officers are responsible for risk rating accuracy,
which is tested periodically by a credit review group that is independent of
the lending functions.

The table below outlines the classifications of our 8-grade risk rating
system:

|                         |  |        |   |             |  |                                                                         
|------------------------ |  | ------ | - | ----------- |  | ------------------------------------------------------------------------
|                         |  | Risk   |   |            
|Category                 |  | Rating |   | Description
|                         |  |        |   |            
|Minimal Risk             |  |        | 1 |             |  | Little or no risk                                                       
|                         |  |        | 2 |             |  | Better than average risk                                                
|Average Risk             |  |        | 3 |             |  | Average riskupper tier                                                 
|                         |  |        | 4 |             |  | Average risklower tier                                                 
|Higher than Average Risk |  |        | 5 |             |  | Special Mention(also known as
OAEMother assets especially
mentioned)
|Classified Assets        |  |        | 6 |             |  | Substandard                                                             
|                         |  |        | 7 |             |  | Doubtful                                                                
|                         |  |        | 8 |             |  | Loss                                                                    

Prior to July 2000, all credit facilities were assigned a risk rating that
was considered in the establishment of an allowance for loan losses. However,
for retail consumer loans, individual risk rating of credits is not practical,
cost effective, or meaningful, and, since July 2000, credit risk for these loan
assets is now measured in terms of delinquency and prior loss experience.
Credit facilities that are not risk rated include all consumer and personal
loans, mortgages and credit cards.

Specific Reserves. On a quarterly basis, risk rated loan assets that
have been graded substandard or doubtful are assessed for impairment by
comparing the book value of each such loan to its current value, generally
determined by an assessment of the realisable value of collateral, or by the
loans fair market value or through discounted cash flow analysis. Identified
shortfalls in value are set up as specific provisions against these assets.
Where specific provisions are deemed to be required for substandard loans, such
loans are reclassified as doubtful. Although consumer and personal loans,
mortgages and credit cards are not risk rated, all such impaired loans that
have an outstanding balance greater than $100,000 are individually assessed for
impairment and the need for a specific reserve using the same analysis. This
analysis is also performed quarterly and specific provisions are charged
against these assets in an amount equal to the identified shortfalls.

General Reservesrisk rated portfolios. Each quarter, the portfolio of
our loan assets that are risk rated is reviewed by business division and by
risk rating. Estimated historic loss rates for each risk rating and business
division are reviewed and adjusted based on a qualitative assessment framework
that considers factors such as portfolio quality trends, portfolio growth, and
portfolio management. Adjusted loss factors are applied to the portfolio
balance, excluding identified impaired loans that warrant a specific reserve,
for each business division and risk rating. We have recently introduced a
migration modelling approach that will be used to support these estimates of
historic losses from each risk rating. Impaired assets that warrant a specific
reserve are excluded from the pool of loans subject to general reserve
modelling.

General Reservesnon-risk rated portfolios. Reserves are established
with reference to historic net loss experience from each portfolio segment
adjusted for qualitative factors such as delinquency trends, portfolio growth,
and changes in underwriting criteria. Impaired assets that warrant a specific
reserve are excluded from the loans subject to this analysis.

Unallocated Reserves.An unallocated allowance is also included to
reflect any imprecision in the allowance methodology as well as managements
judgments of inherent losses within the portfolio which have not otherwise been
identified or measured in
- 67 -Table of Contentsthe manners described above. Unallocated reserves also take into account
the risk factors inherent in the Bermuda-based loan portfolio, including
concentration risk and economic risk.
    
    Concentration Risk. We consider that our Bermuda retail
portfolios, consumer, personal, mortgages, credit cards, and
commercial lending represent Bermuda risk, and in many ways will
perform in a relatively consistent manner when various factors are
present. For instance, a high degree of our lending is for the
purpose of purchasing, and/or is secured by, Bermuda real estate. As
a result of our high exposure to Bermuda, and in particular Bermuda
real estate, these portfolios are considered highly correlated and
subject to common influences.
    
    Economic Risk. We consider that all our Bermuda-based
portfolios are subject to economic risk, emanating predominantly from
the United States. The U.S. economy has a direct and significant
impact on Bermuda and, as a result, on the credit risk of our
Bermuda-based borrowers. Bermuda does not have a diverse economy and
deterioration in one of its key industries would be especially
harmful to the overall economy. International business, now
Bermudas largest revenue generator, is subject to many other
external economic and regulatory-related influences that could
significantly impact Bermuda. International business can also be impacted by local factors. Potential
events such as political independence, labour strife, amended legislation
affecting international companies, or increased restrictions on non-Bermudian
labour, all of which are increasingly debated in local political circles, could
negatively impact the business environment. We believe that international
business is highly mobile and can re-locate to other jurisdictions relatively
quickly.Any combination of the above economic factors could significantly impact
our loan portfolios and therefore are considered in determining the level of
general reserves.Charge-off policy. All consumer and personal loans and mortgages that are
greater than $100,000 and all risk rated loans (commercial loans and secured
short-term investment loans) which have been identified as impaired and which
have been provided for under our reserving methodology, are charged off when
they are deemed to be uncollectible. Any subsequent recoveries of these loans
are added back to the allowance for loan losses. The treatment of such loans
is unchanged from our prior practices.We changed our charge-off policy during fiscal year ended June 30, 2000
for certain smaller loans. Under our current policy, consumer and personal
loans and mortgages with an outstanding balance less than $100,000 that reach
120 days past due and credit card balances that reach 180 days past due are
charged-off immediately. The amount of the loan is written off and subsequent
recoveries are added back to the allowance for loan losses when received. This
policy was introduced to simplify the reserving and charge-off policy for
smaller loans. Under the previous policy, the amount of such overdue personal
loans, mortgages and credit card balances that exceeded the fair market value
of the collateral was provided for in the allowance for loan losses. Under the
current policy, the total amount outstanding, whether supported by underlying
collateral or not, is written off immediately. As the underlying loans are
small and of a personal nature or relate to credit card balances, the amount of
underlying collateral is generally not significant and the difference in the
two policies is not material to our financial statements. As a general matter,
it is very uncommon to have any impaired mortgage outstanding under $100,000
due to the nature of the real estate market in Bermuda. Mortgage balances
under $100,000 are typically mortgages that have been substantially repaid and,
therefore, have a large property value in comparison to the outstanding balance
of the mortgage.The cumulative effect of this change in policy was to reduce the amount of
impaired loans and the related allowance for loan losses in the consolidated
balance sheet at June 30, 2000 by $1.5 million. However this is a cumulative
figure which relates to more than one financial period. The effect of the
change in policy on the statement of income averages approximately $350,000 per
annum over the three fiscal years prior to June 30, 2000, and is therefore
considered to be immaterial.LiabilitiesDepositsTotal customer deposits at December 31, 2002 were $10.2 billion, an
increase of $221.7 million, or 2.2%, from December 31, 2001 and a decrease of
$344.7 million, or 3.3%, from December 31, 2000. Average deposits in the
fiscal year ended December 31, 2002 were $8.8 billion compared with $9.7
billion for fiscal year 2001 and $9.3 billion for calendar year 2000. In
servicing our client base, we provide a range of term and demand products,
including savings and checking account services. Our- 68 -Table of Contentsinternational clients generate a substantial majority of our customer
deposits. The decline in average deposits followed the eleven successive
interest rate cuts in 2001 as our clients more actively managed their cash
balances to improve their return. Our customer deposit volumes declined in
late 2001 and remained at a lower average level throughout 2002.Our deposit base is sourced entirely from our business divisions. We do
not, as a general policy, solicit interbank or government funds. Any exceptions
are short-term in nature and are not material to our balance sheet. We do not
have any short-term borrowing debt.The following table presents non-interest bearing and interest bearing
deposits placed with us, computed for Bermuda alone and on an international
basis at the dates indicated.

|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           |  |           |           |            | 
|-------------------------- | -------------------------------------------- | ------ | -------------------- | -------------------------------------------------- | --------- | -------------------------------------- | ---------- | ---- | --------- | ------------------ | --------- |  | --------- | --------- | ---------- | 
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           | As of December 31, |           |  |           |          
|                           |                                              |        |                      |                                                    |           | 2002                                   |            | 2001 |           | 2000              
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                   
|                           |                                              |        |                      |                                                    |           | (US$ in thousands, except percentages)
|Deposits placed in Bermuda |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           | 
|                           |                                              | Demand |                      |                                                    |           |                                        |            |      |           |                    |           |  |           |          
|                           |                                              |        | Non-Interest Bearing |                                                    | $         | 325,690                                |            |      | $         | 234,613            |           |  | $         | 255,657   |           
|                           |                                              |        | Interest-Bearing     |                                                    |           | 3,413,106                              |            |      |           | 2,722,528          |           |  |           | 2,468,561 |           
|                           |                                              | Term   |                      |                                                    | 2,172,139 |                                        |            |      | 2,224,350 |                    |           |  | 2,623,072 |          
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           | 
|                           |                                              |        |                      | Total Deposits placed in Bermuda                   |           | $                                      | 5,910,935  |      |           | $                  | 5,181,491 |  |           | $         | 5,347,290  | 
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           |  |           |           |           
|                           | Deposits placed in our International Offices |        |                      |                                                    |           |                                        |            |      |           |                    |           |  |          
|                           |                                              | Demand |                      |                                                    |           |                                        |            |      |           |                    |           |  |           |          
|                           |                                              |        | Non-Interest Bearing |                                                    | $         | 31,482                                 |            |      | $         | 63,690             |           |  | $         | 16,977    |           
|                           |                                              |        | Interest-Bearing     |                                                    |           | 2,499,193                              |            |      |           | 2,335,992          |           |  |           | 2,467,349 |           
|                           |                                              | Term   |                      |                                                    | 1,723,579 |                                        |            |      | 2,362,294 |                    |           |  | 2,678,306 |          
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           | 
|                           |                                              |        |                      | Total Deposits placed in our International
Offices |           | $                                      | 4,254,254  |      |           | $                  | 4,761,976 |  |           | $         | 5,162,632  | 
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           |  |           |           |           
|                           |                                              |        |                      | Total Deposits                                     |           | $                                      | 10,165,189 |      |           | $                  | 9,943,467 |  |           | $         | 10,509,922 | 
|                           |                                              |        |                      |                                                    |           |                                        |            |      |           |                    |           |  |           |           |           

Liquidity and Capital Resources

Liquidity

Our ability to fund the repayment of liabilities as they occur is
essential to our creditors, depositors and regulatory authorities. In our
various banking subsidiaries around the world, as well as in Bermuda, we
attract deposits from a large and diverse customer base. Our deposit base is
our primary source of cash flows. As of December 31, 2002, customers had
placed deposits with us totalling $10.2 billion, with $5.9 billion placed in
Bermuda and $4.3 billion placed in our international offices. These deposits
are both demand and term liabilities and the majority are due within three
months. We are able to satisfy our liquidity requirements by the disposal of
liquid assets which, in general, are short-term or are traded on highly liquid
markets. As of December 31, 2002, liquid assets represented 81.6% of total
assets compared with 83.6% at December 31, 2001, and averaged 80.1% in the
fiscal year ended December 31, 2002 compared with 82.9% during the fiscal year
ended December 31, 2001.

Liquidity risk is managed through our Capital Markets Products division
and monitored in the corporate and subsidiary asset and liability committees.
We have established policies that specify acceptable asset classes and
investment parameters for those assets. We monitor our liquidity on a regular
basis, to ensure that we are prepared for possible changes in circumstances.
We also use informal lines of credit provided by interbank counterparties to
meet daily cash needs.

Capital Management

One of our key objectives is to maintain a strong capital position in
order to achieve healthy capital ratios and high credit ratings, and to provide
the funding needed for corporate growth. Capital requirements are balanced
against the need to provide enhanced shareholder returns and all uses of
capital are carefully evaluated, considering expected levels of risk-adjusted
assets, future investment plans and the achievement of capital performance
criteria.

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We are regulated by the Bermuda Monetary Authority, or BMA, which has
established guidelines for minimum capital ratios. The policies of the BMA in
this respect follow the standards imposed on banks in the United Kingdom by the
Financial Services Authority and are consistent with the Basel Committee
Standards. Our total capital ratio at December 31, 2002 of 15.4% is above the
ratios required by regulators for a well-capitalised institution.

Restrictions on the Ability of Our Subsidiaries to Transfer Funds to Us

Our subsidiaries located outside of Bermuda are required to maintain
certain liquidity ratios or minimum levels of capital in accordance with the
laws of the jurisdictions in which they operate, as set forth below. The
necessity of maintaining these ratios or levels of capital could restrict the
ability of these subsidiaries to transfer funds to us in the form of cash
dividends, loans or advances. These restrictions have not in the past had any
impact on our ability to meet our cash obligations and are not expected to have
any such impact in the future:

|                          |                               |                                                                     |                           |                                          
|------------------------- | ----------------------------- | ------------------------------------------------------------------- | ------------------------- | -----------------------------------------
|Subsidiary                |                               | Required Limits                                                    
|                          |                               |                                                                    
|North America             |                               |                                                                    
|The Cayman Islands        |                               | 12% Capital Ratio Minimum                                          
|New York                  |                               | 8% Total Capital to Risk Weighted Assets                           
|                          |                               |                                                                     |                           | 4% Tier 1 Capital to Risk Weighted Assets
|                          |                               |                                                                     |                           | 4% Tier 1 Capital to Average Assets      
|Europe                    |                               |                                                                    
|Dublin                    |                               | 10% Capital Ratio Limit                                            
|Guernsey, Channel Islands |                               | 12% Risk Asset Ratio                                               
|Isle of Man               |                               | 10% Risk Asset Ratio                                               
|Jersey, Channel Islands   |                               | Minimum of GBP 0.25 million plus 27.5% of
projected annual expenses
|Luxembourg                |                               | 8% Capital Ratio Limit                                             
|                          |                               |                                                                     |                           | 30% Liquidity Ratio                      
|Asia-Pacific              |                               |                                                                    
|Cook Islands              |                               | Minimum of NZ$250,000                                              
|Hong Kong                 |                               |                                                                    
|                          | Bermuda Trust (Far East) Ltd  |                                                                     | Minimum of HKD 50 million
|                          | Bermuda Trust (Hong Kong) Ltd |                                                                     | Minimum of HKD 3 million 
|New Zealand               |                               | None                                                               
|Singapore                 |                               | Minimum of SGD 5 million                                           




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors

The following table presents pertinent information concerning our
directors as of the date of this annual report. Our board consists of 13
directors, 12 of whom are non-executive directors. Our directors are elected
by holders of our common shares for a three-year term, and are divided into
three classes of approximately equal size, which class assignment is determined
by lot. The business address of each of the persons in this table is as
follows: c/o The Bank of Bermuda Limited, P.O. Box HM 1020, Hamilton, Bermuda.

|                                       |  |                  |  |                      |  |                |      | 
|-------------------------------------- |  | ---------------- |  | -------------------- |  | -------------- | ---- | 
|                                       |  |                  |  |                      |  | Term of       
|Name                                   |  | Current Position |  | Date Became Director |  | Office Expires
|                                       |  |                  |  |                      |  |               
|Joseph C.H. Johnson, JP                |  | Director         |  | December 1985        |  |                | 2005 | 
|                                       |  | Chairman         |  | January 2001         |  |                |      | 
|Paul A. Leseur, MBE                    |  | Director         |  | June 1976            |  |                | 2004 | 
|                                       |  | Deputy Chairman  |  | January 2001         |  |                |      | 
|E. Eugene Bean                         |  | Director         |  | May 1995             |  |                | 2005 | 
|John D. Campbell, QC, JP               |  | Director         |  | July 1987            |  |                | 2004 | 
|Peter N. Cooper                        |  | Director         |  | September 1987       |  |                | 2006 | 
|The Hon. Ann F. Cartwright DeCouto, JP |  | Director         |  | July 1987            |  |                | 2005 | 
|William de V. Frith, JP                |  | Director         |  | September 1961       |  |                | 2005 | 

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|                      |  |                                   |  |                      |  |                |      | 
|--------------------- |  | --------------------------------- |  | -------------------- |  | -------------- | ---- | 
|                      |  |                                   |  |                      |  | Term of       
|Name                  |  | Current Position                  |  | Date Became Director |  | Office Expires
|                      |  |                                   |  |                      |  |               
|David P. Gutteridge   |  | Director                          |  | September 1987       |  |                | 2006 | 
|David W. Hamshere, JP |  | Director                          |  | August 1990          |  |                | 2005 | 
|R. Blake Marshall, CA |  | Director                          |  | September 2001       |  |                | 2004 | 
|Richard S.L. Pearman  |  | Director                          |  | June 1975            |  |                | 2006 | 
|Henry B. Smith        |  | Director,
Chief Executive Officer |  | March 1999           |  |                | 2004 | 
|Dennis G. Tucker, JP  |  | Director                          |  | May 1995             |  |                | 2006 | 

Joseph C. H. Johnson, JPhas served as a member of our board since 1985
and as our Chairman since 2001. Mr. Johnson is President & Chief Executive
Officer of American International Company Ltd., a subsidiary of American
International Group (AIG), a holding company that, through its subsidiaries, is
engaged in a broad range of insurance and insurance-related activities and
financial services. He is a past President of the Bermuda Chamber of Commerce
and past Chairman of the International Companies Division of the Bermuda
Chamber of Commerce. He is also Chairman of the board of directors of IPC
Holdings, Ltd.

Paul A. Leseur, MBEhas served as a member of our Board since 1976 and as
our Deputy Chairman since 2001. Mr. Leseur has been involved in the tourism
industry for the past 40 years and has served as President of The Bermuda Hotel
Association, The Hotel Employers of Bermuda, The Lantana Hotel, and Bermuda Air
Conditioning Ltd., Bermudas largest mechanical company. He has served as a
Member of the Bermuda Monetary Authority and was a founding Governor and
Chairman of the Bermuda College. Currently, Mr. Leseur is Chairman of Oleander
Cycles Ltd.

E. Eugene Beanhas served as a member of our board since 1995. Mr. Bean is
President & Chief Executive Officer of Bermuda Aviation Services and its wholly
owned subsidiary, Aircraft Services Bermuda Ltd., and has extensive airline
experience. Bermuda Aviation Services Ltd. (BAS) is publicly traded on the
Bermuda Stock Exchange. The company, along with its wholly owned subsidiary
Aircraft Services Bermuda Ltd. (ASB), supplies aviation-related services in
Bermuda. BAS also owns Crow Lane Bakery Ltd., which operates a wholesale
bakery operation and several retail food outlets in Bermuda. BAS is also the
majority shareholder in BAS-Serco, a joint-venture company which supplies
outsourcing services to both the public and private sector in Bermuda, Weir
Enterprises Ltd., an automotive parts distributor and DE Mortimer Ltd., a
wholesale distributor of industrial chemicals and supplies. In addition to
sitting on the Executive Committee and Board of Directors of BAS and ASB, he is
a Director of Stevedoring Services Ltd., the major supplier of container
seaport services in Bermuda, and the Bermuda Stock Exchange Council.

John D. Campbell, QC, JPhas served as a member of our board since 1987.
Mr. Campbell is Senior Counsel at Appleby Spurling & Kempe, Barristers &
Attorneys. He was appointed as Queens Counsel in 1992. He is also a Director
of Sea Containers Ltd. and Orient-Express Hotels Ltd., Argus Insurance Company
Ltd. and certain other companies for which Appleby Spurling & Kempe act as
attorneys.

Peter N. Cooperhas served as a member of our board since 1987. Mr.
Cooper is Managing Director of A.S. Cooper & Sons Ltd., a leading Bermuda
retail store. He is also a Director of A.S. Cooper & Sons, Alexander Samuel
Cooper Ltd., a holding company for real estate and other investments, The
Bermuda Press Ltd., which specialises in publishing and printing, and BF&M Ltd,
a holding company for the BF&M Insurance Group.

The Hon. Ann F. Cartwright DeCouto, JPhas served as a member of our board
since 1987. Mrs. Cartwright DeCouto holds a Bachelor of Laws and is a member
of the Bar of England and Wales, a Member of the Bermuda Bar and a notary
public. She established her own legal practice, Ann Frith Cartwright
Barristers & Attorneys, in 1973 and conducts an extensive litigation practice
in Bermuda.

Mr. William de V. Frith, JPhas served as a member of our board since
1961. Mr. Frith is President of William Frith Ltd., a real estate investment
company. He is also a Director and President of S.C.A.L.A., a mutual insurance
company. Mr. Frith served as Bermudas French Consul for 36 years and has been
honoured by France with the Legion of Honour, National Award of Merit and the
National Award of Merit for Agriculture, all with the rank of Chevalier. Mr.
Frith served the city of Hamilton as Mayor for three years and as a Councillor
for 28 years.

David P. Gutteridgehas served as a member of our board since 1987. In
1999, Mr. Gutteridge retired as Executive Vice President of Bermuda Home Ltd.
He is a Director of Argus Insurance Company Ltd., Devonshire Industries Ltd., a
paint manufacturer, Bermuda Bakery Ltd., a wholesale bakery operation and
Engravers Ltd., specialised printers.

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David W. Hamshere, JPhas served as a member of our board since 1990. Mr.
Hamshere is Managing Director of TESS Ltd., with 19 retail shops in Bermuda.
He is also a Director of Delverton International, a Hong Kong garment trading
company. He is the former Chairman of the Bermuda Department of Tourism Board.

R. Blake Marshall, CAhas served as a member of our board since 2001. Mr.
Marshall is President of Par Management and Consulting Services Ltd., a
provider of accounting and management services to local and international
companies in Bermuda. He is also a Director of BF&M Ltd., a holding company
for the BF&M Insurance Group, SDI Inc., a Bermuda-based investment subsidiary
of the Hyatt Corporation and the Grotto Bay Beach Hotel. He is a member of the
Florida Institute of Certified Public Accountants and the Institute of
Chartered Accountants of Bermuda.

Richard S.L. Pearmanhas served as a member of our board since 1975. Mr.
Pearman is a Consultant with Conyers Dill & Pearman, Barristers & Attorneys.
He is Chairman of Engravers Ltd., specialised printers, and Deputy Chairman of
Bermuda Aviation Services Ltd. and Aircraft Services Ltd. Mr. Pearman is a
Director of Masters Ltd., a department store, Bermuda Properties Ltd. (Castle
Harbour Hotel), a land development company, and Ocean Wilsons International
Ltd., a Bermuda Company quoted on the London Stock Exchange. Mr. Pearman also
represents a number of international companies registered in Bermuda through
his association with Conyers Dill & Pearman. He is a notary public and past
Chairman of the Bermuda International Business Association.

Henry B. Smithhas served as a member of our board since 1999 and our
Chief Executive Officer since 1997. From 1973 to 1997, Mr. Smith held various
other positions within the Bank, including Executive Vice President and Chief
Operating Officer, Executive Vice President (Europe) and Senior Vice President
and General Manager, Retail Banking. He is a Deputy Chairman of the Bermuda
Stock Exchange Council and is a Director of W.P. Stewart & Co., Ltd.

Dennis G. Tucker, JPhas served as a member of our board since 1995. Mr.
Tucker is Vice President & Managing Director of Sonesta Beach Resort, Bermuda,
and has extensive knowledge of the hotel industry. He is also a Director of
Port Royal Ltd. and Hotel Corporation of America, Ltd., both Bermuda-based
companies. Mr. Tucker is a Trustee of the Hotel Pension Trust and is President
of the Hotel Employers of Bermuda. He is past President of the Bermuda Hotel
Association and the Bermuda Employers Council.

Committees of the Board of Directors

Four principal standing committees support the work of the Board. Each
committee has written terms of reference (charters) approved by the Board and the
conduct of business at committee meetings conforms to the practices of the
Board. The Board and each of its committees has the power to take, at the
expense of the Bank, such independent, outside advice as it considers necessary
to perform its duties. The membership of each committee is determined by the
Board based on the recommendations of the Nominations and Governance Committee.

Risk and Audit Committee

The main role of the Risk and Audit Committee is oversight of the
accounting and financial reporting process of the Bank and audits of the Banks
financial statements. The Committee is responsible for recommending to the
Board the appointment of the Banks external auditors and the arrangements with
the auditors with respect to their fees and expenses. The Committee is also
responsible for, among other things, generally overseeing and reviewing the
work of the external auditors, reviewing the Banks financial statements,
reviewing the integrity of the Banks systems of internal controls over
operations and financial reporting, monitoring the internal and external audit
processes and compliance with Bank policies and legal and regulatory matters.
The audit committees of the Banks subsidiaries are subject to oversight by the
Risk and Audit Committee. Members of the Risk and Audit Committee are John D.
Campbell, QC, JP (Chairman), R. Blake Marshall, CA, David W. Hamshere, JP and
Paul A. Leseur, MBE.

Nominations and Governance Committee

The Nominations and Governance Committee is responsible for identifying
and recommending nominees for the Board and for ensuring that the Board and
each of its committees is composed of individual directors with the abilities
and skills necessary to effectively lead the Bank and shape its vision and
direction. The Committee is also responsible for performing periodic
performance evaluations of individual directors and the Board as a whole,
recommending on the mandates of the Boards committees and policies governing
the size and structure of the Board and monitoring developments in corporate
governance practices. Members of the

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Nominations and Governance Committee are E. Eugene Bean (Chairman), David
P. Gutteridge, the Hon. Ann F. Cartwright-DeCouto, JP, William De V. Frith, JP
and Dennis G. Tucker, JP.

Compensation Committee

The Compensation Committee is responsible for ensuring that the
remuneration packages offered to the Banks directors and executive officers
are competitive and designed to attract, motive and retain directors and
executive officers of the standard required and to stimulate performance with
the overall view of enhancing shareholder value. The Committee is also
responsible for any Bank share-related compensation schemes, performing an
annual evaluation of the CEO based on objective performance criteria, ensuring
that appropriate succession plans are in place for the CEO and other executive
officers and senior management, and recommending to the Board a successor to
the CEO when a vacancy occurs in that office. Members of the Compensation
Committee are David W. Hamshere, JP (Chairman), Peter N. Cooper, David P.
Gutteridge, Joseph C.H. Johnson, JP, Richard S.L. Pearman and Dennis G. Tucker,
JP.

Board Advisory Committee

The main purpose of the Board Advisory Committee is to consult with
management on behalf of the Board during extraordinary situations when the
Board is not in session and to advise management regarding acquisition,
disposition and merger opportunities. The Committee also serves as a forum for
the chairs of the Boards committees to discuss the activities and operations
of the other Board committees. Members of the Board Advisory Committee are
Joseph C.H Johnson, JP (Chairman), Paul A. Leseur, MBE, E. Eugene Bean, John D.
Campbell, QC, JP and David W. Hamshere, JP.

Executive Officers

The following table presents pertinent information concerning our
executive officers as of the date of this annual report. The business address
of each of the persons in this table is as follows: c/o The Bank of Bermuda
Limited, P.O. Box HM 1020, Hamilton, Bermuda.

|                        |  |                                 |  |               |  |                   |  |               
|----------------------- |  | ------------------------------- |  | ------------- |  | ----------------- |  | --------------
|                        |  |                                 |  | Executive     |  | Date Appointed to |  | Date Started  
|Name                    |  | Current Position                |  | Officer Since |  | Current Position  |  | at Bank       
|                        |  |                                 |  |               |  |                   |  |               
|Henry B. Smith          |  | Chief Executive Officer         |  | October 1990  |  | March 1997        |  | September 1973
|Philip M. Butterfield   |  | Chief Operating Officer         |  | June 2000     |  | August 2001       |  | June 2000     
|Edward H. Gomez         |  | Chief Financial Officer         |  | December 1995 |  | December 1995     |  | February 1988 
|Wayne P. Chapman        |  | Head of Private Client Services |  | July 1997     |  | July 2001         |  | November 1980 
|Michael W. Collins      |  | Head of Banking Services        |  | November 1998 |  | July 2002         |  | July 1992     
|Paul H. Smith, ACA, CFA |  | Head of Global Fund Services    |  | June 1997     |  | January 2001      |  | May 1996      

Henry B. Smithhas served as a member of our board since 1999 and our
Chief Executive Officer since 1997. From 1973 to 1997, Mr. Smith held various
other positions within the Bank, including Executive Vice President and Chief
Operating Officer, Executive Vice President (Europe) and Senior Vice President
and General Manager, Retail Banking. He is a Deputy Chairman of the Bermuda
Stock Exchange Council and is a Director of W.P. Stewart & Co., Ltd.

Philip M. Butterfieldhas been our Chief Operating Officer since 2001. In
2000, he joined the Bank as our Chief Administration Officer. From 1972 to
2000, Mr. Butterfield held various positions with Citibank, including U.S.
Chief of Staff of Citibank Private Bank, Chief Administration Officer of
Citigroup Industrial Credit and key roles in North American Global
Finance/Corporate Staff, North American Banking, Financial Institutions
Services and Corporate Banking.

Edward H. Gomezhas been our Chief Financial Officer since 1995. From
1988 to 1995, Mr. Gomez served in various other positions within the Bank,
including Vice President, Finance and Planning and Senior Manager, Financial
Control. From 1973 to 1988, he held various financial positions with The Ford
Motor Company, including Vice President  Treasurer of reinsurance and finance
operations and President and Managing Director of Fords Bermuda subsidiaries.

Wayne P. Chapmanhas been our Head of Private Client Services since 2001.
From 1997 to 2001, Mr. Chapman served as our Senior Vice President, Investment
Services. From 1980 to 1997, Mr. Chapman served in various other positions
within the Bank, including Managing Director of our Luxembourg Office, Manager,
GFS, Bermuda and Deputy Manager, Global Custody.

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Michael W. Collinshas
been our Head of Banking Services since 2002. From 1992 to 1999, Mr. Collins
served in various other positions within the Bank, including Vice President and
Head of Corporate Banking. From 1990 to 1992, he was International Corporate
Manager for Bermuda Commercial Bank Ltd. From 1985 to 1990, he held various
positions with J.P. Morgan & Co. Incorporated, including Vice President, Loan
Syndications Group and Assistant Vice President, European Corporate Finance.

Paul H. Smith, ACA, CFAhas been our Head of Global Fund Services since
2001. From 1998 to 2001, Mr. Smith was our Senior Vice President, Global Fund
Services, Asia. From 1996 to 1998, he served as our Managing Director of
Financial Institutions. From 1995 to 1996, he worked for Tiedemann
International Group, a fund management company. From 1984 to 1995, he held
various positions with Ermitage SA, a privately owned fund management company.
He is also a Director of a number of our subsidiary companies in Asia-Pacific
as well as a number of other companies associated with our clients.

There are no family relationships among any of our directors or executive
officers.

Executive Office and Senior Management Committees

The Executive Office

The Executive Office is accountable for the day-to-day management of the
Bank. The primary responsibility of the Executive Office is the approval and
implementation of operating and strategic plans.

Strategic Planning Committee (SPC)

The SPC is responsible for developing and monitoring the Banks strategic
plans, subject to Executive Office oversight. These include long-term planning
proposals, new product/business line proposals and business
development/cross-selling proposals.

Risk Management Committee (RMC)

The RMC provides high-level oversight on exposure and control mechanisms.
This responsibility includes evaluating the adequacy of steps taken by the
Banks management, business groups and support functions to identify, monitor,
measure and control risk. The RMC will recommend risk-related policies to the
Executive Office for approval.

Operating Committee

The Operating Committee is comprised of the Executive Office and members
of our senior management. The purpose of this Committee is to receive and
disseminate information from the Board of Directors, Executive Office, SPC and
RMC.

Share Ownership of Directors and Executive Officers

As of December 31, 2002, the members of the Banks board of directors and
its executive officers, as a group, were beneficial owners of 2,145,198 common
shares, which represented 7.2% of the Banks outstanding common shares. David
P. Gutteridge, one of our directors, beneficially owned a total of 723,148
common shares. 653,546 of these shares were held in a family trust. Richard
S.L. Pearman, one of our directors, beneficially owned a total of 340,890
common shares. Henry B. Smith, our chief executive officer and one of our
directors, beneficially owned a total of 336,666 common shares. All other
directors and executive officers of the Bank each beneficially owned less than
one percent of our shares at December 31, 2002. See Item 7. Major
Shareholders and Related Party TransactionsMajor Shareholders for information
on the major shareholders of the Bank and the method used for determining
beneficial ownership.

Director Compensation

Effective April 1, 2003, directors who are not also employees of the Bank,
other than the chairman and deputy chairman of the board, receive compensation
at the rate of $10,000 per annum for their service as board members, $1,000 for
each board meeting attended and $750 for each board committee meeting attended,
with the exception of the Risk and Audit Committee, for which directors will
receive $1,000 per meeting attended, and the Board Advisory Committee, for
which directors will receive no additional meeting attendance fee. Committee
chairmen receive an additional $15,000 per annum, with the exception of the
chairman of the Risk and Audit Committee, who receives an additional $18,000
per annum, and deputy committee chairmen receive an additional
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$2,500 per annum. The chairman and deputy chairman of the board receive
an all-inclusive fee of $85,000 and $67,500 per annum, respectively. In
addition, non-employee directors are eligible to receive 2,000 options to
purchase common shares of the Bank each year.

We incurred $326,000 in compensation to our directors during the fiscal
year ended December 31, 2002.

Henry B. Smith, who is our Chief Executive Officer, does not receive
additional compensation for his service as a director.

All directors also receive reimbursement of reasonable expenses incurred
in attending board and committee meetings and otherwise carrying out their
duties.

The compensation of the directors is from time to time determined by the
board. Any directors who perform services which in the opinion of the board or
any authorised committee of the board go beyond the ordinary duties of any
director may be paid extra remuneration as the board or any authorised
committee may determine.

We do not have any service contracts with any of our directors.

Director Share Option Plan

On September 22, 1999, our shareholders approved the 1999 director share
option plan. The goal of the director share option plan is to attract,
motivate and retain directors who will make significant contributions to our
long-term prosperity. The plan is designed to achieve this purpose by
providing equity incentives that are competitive and align the interests of our
directors with those of our shareholders. The 1999 director share option plan
is administered by our compensation committee.

All directors who are not also employees of the Bank are eligible to
receive share options under this plan. The compensation committee has the
authority to grant share options. A total of 195,676 common shares have been
registered for issuance under the plan. The compensation committee has the
authority, at its discretion, to grant each director 2,000 share options during
any fiscal year. All options have a term of ten years from the date of grant
and 25% of the total number of options granted become exercisable on each of
the first four anniversaries of the grant date. However, the options may vest
earlier under circumstances specified in the plan, including a change of
control and a mandatory retirement event.

The following table contains a summary of the outstanding option grants to
all directors as a group under the director share option plan as of December
31, 2002, adjusted for the September 1999, August 2000 and January 2002 stock
dividends:

Option Grants

|                         |  |                |        |                 |  |  |  |   |       |  |  |               
|------------------------ |  | -------------- | ------ | --------------- |  |  |  | - | ----- |  |  | --------------
|Number of                |  |                |        |                 |  | 
|Common Shares Underlying |  | Exercise Price |        |                
|Options Granted          |  | (BD$/Sh)       |        | Expiration Date
|                         |  |                |        |                
|                         |  |                | 30,807 |                 |  |  |  | $ | 24.66 |  |  | September 2009
|                         |  |                | 31,350 |                 |  |  |  | $ | 32.73 |  |  | September 2010
|                         |  |                | 12,925 |                 |  |  |  | $ | 43.64 |  |  | March 2011    
|                         |  |                | 26,000 |                 |  |  |  | $ | 44.25 |  |  | April 2012    

Executive Compensation

We expensed $4.0 million in compensation to our executive officers for
fiscal year ended December 31, 2002. We also expensed $0.2 million during
fiscal year ended December 31, 2002 for pension, retirement or similar plans
for our executive officers.

Profit Share

Since July 1, 1997, all of our personnel, excluding executive officers and
members of senior management, have been eligible to receive annual bonus
payments based on our net profits. The designation of profit share funds is
determined by the Executive Office, and approved by the board, on the basis of
our net profits, after considering an appropriate return on capital to our
shareholders.

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The distribution of the profit share funds is determined by the Executive
Office and, as a general rule, is based on an allocation of:



| |  |  | a percentage of salary (25%), which is non-discretionary;                              
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | a percentage of salary based on performance (25%), which is also non-discretionary; and
|
| |  |  | a discretionary amount based on performance and level of responsibility (50%).         

Executive Incentive Plan

Each executive officer and member of senior management is eligible to
receive an incentive bonus, which is expressed as a percentage of salary. Our
compensation committee establishes the performance criteria for awarding the
bonus based on individual and corporate targets. Depending on the results of
the various performance criteria, the actual amount of bonus to be paid can
vary from 0% to 100% of the target. Our executive incentive plan requires that
20% of every cash bonus be invested in our common shares by the executive
officer or member of senior management. The executive incentive plan is
administered by our compensation committee.

Executive Share Plan

Our executive share plan, approved by our shareholders in July 1998, is
intended to encourage share ownership among executive officers and members of
senior management and provide long-term equity incentives for these senior
employees. A total of 472,316 common shares have been registered for issuance
under the plan. The plan has two main components:



| |  |  | mandatory share purchases by executive officers and members of senior management; and
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | performance-related awards of restricted shares.                                     

Under the first component, 20% of each participants annual cash bonus
must be used to subscribe for our common shares at a discount of 25% of their
market price on the date of subscription. These shares will be held by
trustees and restricted from sale or use by the participant for three years,
which period will be reduced upon a change of control, as defined below, of
the Bank. However, the compensation committee may, in its discretion, require
participants to use more than 20% of their cash bonus to subscribe for our
common shares. In addition, participants may elect to voluntarily contribute a
further amount, not to exceed 30% of their cash bonus for the year.

A participant who voluntarily leaves the employ of the Bank may receive a
reduced allocation of common shares. Early termination of employment will
result in various penalties to the participant. The objectives of this
mandatory share purchase component are:



| |  |  | to increase executive officer and senior management share ownership in our common shares;                      
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | to retain qualified, effective executive officers and senior managers; and                                     
|
| |  |  | to align the economic interests of our executive officers and senior management with those of our shareholders.

The compensation committee will determine which of our executive officers
and key employees will participate in the performance-related awards of
restricted shares. These participants will be entitled to receive common
shares of the Bank that will be held by trustees and restricted from sale or
use by the chosen executive officers and key employees for up to seven years of
continuous employment. These shares can vest as early as three years, or
earlier upon a change of control of the Bank, based on our achievement of
performance criteria as established by the compensation committee of the board.
The objective of the performance accelerated restricted share element is to:



| |  |  | motivate the performance of the participating executive officers and key employees;
| | - |  | -----------------------------------------------------------------------------------

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| |  |  | promote faster share price appreciation;                                                                
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | attract and retain qualified, effective executive officers and key employees; and                       
|
| |  |  | increase share ownership of our common shares by the participating executive officers and key employees.

For purposes of the executive share plan and all of our employee benefit
plans described in this annual report, a change of control generally means
the occurrence of any of the following:

(1) any person is or becomes the beneficial owner of securities of the
Bank representing 20% or more of the combined voting power of the Banks then
outstanding securities, excluding any person who becomes a beneficial owner in
connection with a transaction described in clause (A) of subparagraph (3)
below, and not including in the securities beneficially owned by this person
any securities acquired directly from the Bank or any parent or subsidiary of
the Bank, unless this person acquires by these means 50% or more of the
combined voting power of the Banks then outstanding securities;

(2) individuals who, on the effective date of such plan, constitute the
board and any new directors whose appointment, nomination or election to the
board was approved by a vote of at least two-thirds of the directors then still
in office who either were directors on the effective date of such plan or whose
appointment or election or nomination for election was previously so approved,
cease for any reason to constitute a majority of the directors then serving;

(3) the consummation of a merger or consolidation of the Bank or any
direct or indirect subsidiary of the Bank with any other corporation, other
than (A) a merger or consolidation in which the voting securities of the Bank
outstanding immediately prior to the merger or consolidation represent at least
60% of the combined voting power of the Bank or the surviving entity or any
parent thereof immediately after the merger or consolidation, or (B) certain
mergers or consolidations effected to implement a recapitalisation of the Bank
or similar transaction; or

(4) the shareholders of the Bank approve a plan of complete liquidation
or dissolution of the Bank or there is consummated an agreement for the sale or
disposition by the Bank of all or substantially all of the Banks assets, other
than a sale or disposition of all or substantially all of the Banks assets to
an entity, at least 60% of the combined voting power of which are owned by
shareholders of the Bank in substantially the same proportions as their
ownership of the Bank immediately prior to the sale.

For purposes of this definition of change of control, beneficial owner
of a common share means any person who, directly or indirectly, has or shares
voting power or investment power with respect to such common share. Person
means a natural person, company or governmental body, except that this term
does not include the Bank, certain entities affiliated with the Bank and
underwriters temporarily holding shares as a result of an offering of those
shares.

Executive Share Option Plan

On June 30, 1997, we adopted our share option plan for executive officers,
members of senior management and key employees. Share options granted under
the plan are exercisable at prices not less than the fair market value of the
common shares on the date of the grant. All options have a term of ten years
from the date of the grant and 25% of the total number of options granted
become exercisable on each of the first four anniversaries of the grant date.
However, the options may vest earlier under some circumstances, including if a
change of control occurs. No additional options may be granted under the
Executive Share Option Plan.

The following table contains a summary of the outstanding option grants
held by all executive officers as a group as of December 31, 2002, adjusted for
the September 1999, August 2000 and January 2002 stock dividends. The only
directors who have been granted any options to purchase common shares under the
executive share option plan are directors who are also executive officers:

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Option Grants

|                      |  |                |         |                 |  |  |  |   |        |  |  |              
|--------------------- |  | -------------- | ------- | --------------- |  |  |  | - | ------ |  |  | -------------
|Number of             |  |                |         |                 |  | 
|Securities Underlying |  | Exercise Price |         |                
|Options Granted       |  | (BD$/Sh)       |         | Expiration Date
|                      |  |                |         |                
|                      |  |                | 338,800 |                 |  |  |  | $ | 14.463 |  |  | June 2007    
|                      |  |                | 27,657  |                 |  |  |  | $ | 20.519 |  |  | December 2007
|                      |  |                | 27,657  |                 |  |  |  | $ | 28.564 |  |  | July 2008    
|                      |  |                | 78,823  |                 |  |  |  | $ | 26.033 |  |  | July 2008    
|                      |  |                | 98,182  |                 |  |  |  | $ | 21.333 |  |  | July 2009    
|                      |  |                | 4,148   |                 |  |  |  | $ | 22.670 |  |  | February 2010
|                      |  |                | 25,143  |                 |  |  |  | $ | 22.273 |  |  | June 2010    
|                      |  |                | 86,743  |                 |  |  |  | $ | 29.790 |  |  | July 2010    
|                      |  |                | 66,000  |                 |  |  |  | $ | 40.000 |  |  | January 2011 

Share Option Plan 2000

In September 2000, shareholders approved our share option plan 2000. The
key provisions of the plan include:



| |  |  | issuance of share options until the fifth anniversary of the
plan, with shares allocated from authorised but unissued share
capital or shares purchased on the open market;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the exercise price will not be less than fair market value as
at the date of grant and options will vest over four years at 25% per
year, expiring in ten years;           
|
| |  |  | early termination conditions and change of control provisions; and                                                                                                         
|
| |  |  | a total of 2,999,786 common shares have been registered for issuance under this plan.                                                                                      

The 2000 plan expands the eligibility to include all Bank employees. The
Bank plans to use option grants to retain executive and senior management and
key employees in addition to supporting the Banks current executive and senior
management compensation structure and to support a performance-based
compensation structure by providing options for outstanding performance.

The following table contains a summary of the outstanding option grants
held by our executive officers as a group under the Share Option Plan 2000 as of
December 31, 2002, adjusted for the January 2002 stock dividends. The only
directors who have been granted any options under the Share Option Plan 2000
are directors who are also executive officers:

Option Grants

|                      |  |                |         |                 |  |  |  |   |        |  |  |               
|--------------------- |  | -------------- | ------- | --------------- |  |  |  | - | ------ |  |  | --------------
|Number of             |  |                |         |                 |  | 
|Securities Underlying |  | Exercise Price |         |                
|Options Granted       |  | (BD$/Sh)       |         | Expiration Date
|                      |  |                |         |                
|                      |  |                | 66,000  |                 |  |  |  | $ | 40.000 |  |  | January 2011  
|                      |  |                | 50,600  |                 |  |  |  | $ | 45.227 |  |  | February 2011 
|                      |  |                | 242,000 |                 |  |  |  | $ | 36.364 |  |  | September 2011
|                      |  |                | 91,149  |                 |  |  |  | $ | 44.450 |  |  | February 2012 

Employee Share Purchase Plan

On August 15, 1998, our shareholders approved a third employee share
purchase plan. Under this plan, employees may subscribe to purchase our common
shares at a discounted value not exceeding 10% of the employees annual gross
salary or $25,000, whichever is less. The purchase price for the shares is 75%
of the market price on the date of subscription, which is August 15 of each
year or the next business day if applicable. Employees pay the cost of the
shares in equal instalments over a one year period. Interest on funds invested
is earned at a rate equal to a Bermuda dollar statement savings account. At
the conclusion of the plan year, shares are distributed from authorised,
unissued capital and/or purchased from the open market and the interest earned
on funds invested is paid in cash. 2,934,786 common shares have been
registered for issuance under the plan. Employees who leave our employment or
withdraw their subscription before the end of the plan year will receive a cash
refund equal to the instalments paid together with the

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accumulated interest.
Upon a change of control, employees may choose either to receive a cash
refund plus accumulated interest, or to pay their balance and receive their
shares.

Retirement Plan

We provide non-contributory defined contribution pension plans to our
employees in the majority of our locations. Employees are able to make
voluntary payments to the defined contribution plans. We have a defined
benefit plan for most of our employees in the Isle of Man, Jersey and Guernsey
(Sterling area). Effective January 1, 2002, the Sterling area defined benefit
plan no longer accepted new employees, and a new defined contribution plan was
commenced. Existing members of the Sterling area defined benefit plan may
continue to have their contributions paid into the Sterling area defined
benefit plan or can choose to have their contributions paid into the new
defined contribution plan. In addition, existing members of the Sterling area
defined benefit plan have the choice to transfer their funds to the new defined
contribution plan or leave their funds in the Sterling area defined benefit
plan. Defined benefits are based upon length of service and an employees level
of compensation. As of December 31, 2002, our defined benefit pension plans
had benefit obligations of approximately $27.4 million and assets of
approximately $20.8 million. Certain group companies also participate in an
unfunded post retirement benefit plan that provides health care for retired
employees.

Effective January 1, 2000, we decided to establish a defined contribution
plan to replace the existing defined benefit plan for Bermuda-based employees.
Employees were offered the choice of remaining in the defined benefit plan, or
joining the defined contribution plan. Those joining the defined contribution
plan received into their contribution plan account a fund transfer equal to the
value of their accrued benefits from the defined benefit plan, including an
allowance for future COLA increases that may have been awarded through the
defined benefit plan, in settlement of any liability of the defined
contribution plan. Almost all of the employees decided to join the defined
contribution plan. Acceptance of this change by the employees was finalised
during fiscal year ended December 31, 2001. During fiscal year ended June 30,
2000, there were transfers totalling $66.5 million. During fiscal year ended
December 31, 2001, the final transfer of assets took place with a total payment
of $59.3 million. During 2001, we also decided to purchase annuities for
former employees receiving a pension under the defined benefit plan and those
electing not to transfer to the defined contribution plan. The defined benefit
plan purchased annuities at a cost of $34.0 million from an insurance company
for the benefit of these individuals. As a result of the final settlement of
the defined benefit plan, we recorded a gain of $5.6 million representing the
excess assets in the plan at the completion of the settlement.

Severance Plan

Our 1999 severance benefits plan provides specified payments of severance
benefits to key employees, in consideration for their service to us, following
certain voluntary or involuntary terminations of employment related to a
change of control. These key employees will be designated by the
compensation committee and will be limited to a total of 50 individuals.

Eligible employees will receive severance benefits if the employees
employment with us is terminated, other than due to death, disability or just
cause, or if the employee leaves voluntarily upon a change in job status,
forced relocation, our successors refusal to honour, or our successors breach
of, this plan or, with respect to certain eligible employees, leaves
voluntarily, for any reason, within 30 days following the first anniversary of
a change of control, provided that there is no misconduct or
misrepresentations on the part of the employee. Employees entitled to receive
benefits will receive an amount equal to a number between one and three and one
half, which number will be determined by the compensation committee, multiplied
by the sum of:



| |  |  | the employees annual base salary immediately prior to the
change of control; and                                                                                                                                                                                                                                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the greater of (1) the highest annual bonus payment paid or
payable to the employee during the last three fiscal years ending
immediately prior to the change of control and (2) the amount of
the target bonus payment to which the employee would be entitled for
the fiscal year in which the change of control occurs, each
determined in accordance with the guidelines for the bonus payments
set by the compensation committee.

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In addition, an eligible employee will be entitled to receive benefits
under the employee retirement plan and will continue to receive his or her then
existing health and insurance benefits, each for a period of between one and
three years, as determined by the compensation committee. We do not set aside
any amounts to fund the plan.

Capital Markets Products Division Bonus

Certain employees of our worldwide capital markets products division,
excluding executive officers and members of senior management, are eligible for
bonus payments based on the annual net income of our capital markets products
division. The bonus pool increases as capital markets products earnings
exceed budgeted amounts.

Employees

At December 31, 2002, we had 2,961 full-time employees worldwide, of which
1,192, or 40%, were located in Bermuda.

The following table shows the geographical distribution of our full-time
employees as of December 31 for each of the years presented:

|                    |       |  |       |       |      |  |       |       |  |  |       |       | 
|------------------- | ----- |  | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                    |       |  | 2002  |       | 2001 |  | 2000 
|                    |       |  |       |       |      |  |      
|Bermuda             |       |  | 1,192 |       |      |  | 1,227 |       |  |  | 1,211 |      
|Other North America |       |  | 96    |       |      |  | 103   |       |  |  | 103   |      
|Europe              |       |  | 881   |       |      |  | 838   |       |  |  | 794   |      
|Asia-Pacific        |       |  | 790   |       |      |  | 756   |       |  |  | 721   |      
|Other               |       |  | 2     |       |      |  | 2     |       |  |  | 1     |      
|                    |       |  |       |       |      |  |       |       |  |  |       |      
|                    | Total |  |       | 2,961 |      |  |       | 2,926 |  |  |       | 2,830 | 
|                    |       |  |       |       |      |  |       |       |  |  |       |      

Our employees are not covered by a collective bargaining agreement, with
the exception of our Luxembourg office, and we consider our relationships with
our employees to be good. We have made a commitment to developing and
maintaining high quality human resources. To help us to fulfil this
commitment, we have established our own international banking school, which is
located on our property in Bermuda.




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

The following table sets forth information as of December 31, 2002, regarding:



| |  |  | each person who is known by us to beneficially own 5% or more of our common shares;                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | each of our directors and executive officers who is known by us
to beneficially own 1% or more of our common shares; and
|
| |  |  | beneficial ownership of our common shares by our directors and
executive officers as a group.                           

For purposes of this table, beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission, pursuant to which a person is deemed to have beneficial ownership
of any common shares that such person has the right to acquire within 60 days.
Any common shares that a person had a right to acquire within 60 days of
December 31, 2002 are deemed to be outstanding for purposes of computing the
percentage of outstanding common shares held by such person, but are not deemed
to be outstanding for purposes of computing the percentage of ownership of any
other person.

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Unless otherwise indicated, the address of each person named in the table
below is The Bank of Bermuda Limited, P.O. Box HM 1020, Hamilton, Bermuda:

|                                                |  |                  |           |                      |  |  |      |  
|----------------------------------------------- |  | ---------------- | --------- | -------------------- |  |  | ---- | -
|Name                                            |  | Number of Shares |           | Percentage of Shares
|                                                |  |                  |           |                     
|Bank of Bermuda Foundation(1)                   |  |                  | 3,164,637 |                      |  |  | 10.9 | %
|David P. Gutteridge(2)                          |  |                  | 723,148   |                      |  |  | 2.5  | %
|Richard S.L. Pearman                            |  |                  | 340,890   |                      |  |  | 1.2  | %
|Henry B. Smith                                  |  |                  | 336,666   |                      |  |  | 1.1  | %
|All directors and executive officers as a group |  |                  | 2,145,198 |                      |  |  | 7.2  | %



---

|(1) |  | Each of the directors and officers of Bank of Bermuda Foundation is also
either a director or officer of the Bank.
|--- |  | ------------------------------------------------------------------------------------------------------------------
|(2) |  | 653,546 of these shares are held of record by a family trust.                                                     

On December 28, 2000, Bank of Bermuda Centennial Trust, Bank of Bermuda
Charitable Trust and Bank of Bermuda Educational Trust transferred all of our
common shares held by them to Bank of Bermuda Foundation for no consideration.
Bank of Bermuda Centennial Trust, Bank of Bermuda Charitable Trust and Bank of
Bermuda Educational Trust were trusts formed by us for philanthropic purposes.
In connection with the transfer, the three trusts were terminated and their
philanthropic purposes were assumed by Bank of Bermuda Foundation.

Bank of Bermuda Foundation is a local company formed under the laws of
Bermuda without any share capital. Bank of Bermuda Foundation helps charities
and causes in both Bermuda and elsewhere that support communities and people in
need, promote public health and welfare, medical research, education, religion
and other charitable purposes. There are currently ten directors and three
officers of Bank of Bermuda Foundation, each of whom is either a director or
officer of the Bank. Bank of Bermuda Foundation entered into an administration
agreement with Bermuda Trust Company Limited on May 17, 2001 pursuant to which
Bermuda Trust Company Limited will manage the day-to-day operations of Bank of
Bermuda Foundation. In the past, the Bermuda Monetary Authority has indicated
to us its desire that the predecessor trusts whose assets were transferred to
Bank of Bermuda Foundation reduce substantially their ownership of our common
shares. It is likely that Bank of Bermuda Foundation will reduce its
ownership of our common shares in the future, in public or private market
transactions.

Neither Bank of Bermuda Foundation nor any of our directors or executive
officers have voting rights that differ from any of our other shareholders.

As of December 31, 2002, approximately 29% of our common shares, or 8.4
million common shares, were held of record in the United States by
approximately 377 holders.

Related Party Transactions

Lending to our directors and executive officers and their associates is
not material to our balance sheet. Because Bermuda is a small community and
there are only three other banks providing domestic services, it is common for
us to provide banking services to our directors and companies with which they
are associated. We provide these services in the ordinary course of business
on terms which we believe are no less favourable to us than those reached with
unaffiliated parties of comparable creditworthiness. Prior to July 30, 2002,
the Bank provided loan facilities to executive officers of the Bank at
preferred lending rates. As of December 31, 2002, $2.6 million was outstanding
on loans made to executive officers under these facilities.

We are the beneficial owner of 50% of the outstanding voting shares of
Proserve (Bermuda) Limited, or Proserve, a joint venture established in 1997
with The Bank of N.T. Butterfield & Son to facilitate the processing of cheques
and other financial instruments and to provide maintenance and systems support
to financial institutions. On an ongoing basis, and in the ordinary course of
business, we enter into transactions with Proserve for the provision of these
services. Revenues generated by these transactions are material to Proserves
results of operations, but are not material to our results of operations.

We
are the beneficial owner of 14.5% of the outstanding voting shares of
Banque Notz Stucki SA (BQNS), a financial services
institution based in Switzerland. On an ongoing basis, and in the
ordinary course of business, we enter into transactions with BQNS.
Revenues generated by these transactions are material to BQNS
results of operations, but are not material to our results of
operations.




ITEM 8. FINANCIAL INFORMATION

Consolidated Financial Statements

See Item 18. Financial Statements.

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Legal Proceedings

In the ordinary course of business, we and our subsidiaries are routinely
defendants in, or parties to, a number of pending and threatened legal actions
and proceedings. Except as described below, management believes, based on
information currently available to it, that these actions and proceedings and
losses, if any, resulting from the final outcome thereof will not be material
in the aggregate to our financial position or results of operations.

In October 2001, we and two of our subsidiaries, the Bank of Bermuda
(Cayman) Limited and Bermuda Trust (Cayman) Limited, settled, among other
things, two civil actions brought against us and those subsidiaries in US
federal district courts in Florida and Illinois relating to the alleged
involvement by us and those subsidiaries in a scheme to defraud investors in a
business known as Cash 4 Titles. The Florida action was brought on behalf of a
class of investors in Cash 4 Titles. On March 6, 2002, an amended complaint
was filed in an action styled Norton et al. v. Homa et al.in US federal
district court in Florida against Bank of Bermuda (Cayman) Limited on behalf of
46 individuals and entities that purported to opt out of the class action
settlement. The plaintiffs claimed losses totalling about $10.3 million.
After the claims alleged by many of the named plaintiffs were dismissed from
that action, on June 11, 2002, we and our subsidiaries entered into a
settlement agreement with the 14 plaintiffs remaining in the Nortonaction.
Under the terms of the Nortonsettlement, the Bank and its subsidiaries paid
$1.3 million to the Nortonplaintiffs in full and complete satisfaction of all
claims that were or could have been asserted in the Nortonaction. On June 26,
2002, the Nortonaction was dismissed with prejudice.

Bank of Bermuda (Cayman) Limited and Bermuda Trust (Cayman) Limited also
were named as defendants in a civil action in the Cayman Islands relating to
Cash 4 Titles. The Cayman Islands case was commenced on October 28, 1999 in
the Grand Court of the Cayman Islands against two Cash 4 Titles related
entities and Bank of Bermuda (Cayman) Limited by a Cayman Islands corporation
that allegedly invested in Cash 4 Titles. Plaintiffs claimed approximately $22
million in damages as well as interest and costs. In February 2002, this was
settled as between the plaintiffs and Bank of Bermuda (Cayman) Limited and
Bermuda Trust (Cayman) Limited. The actions were discontinued with no finding
of liability against either of the Banks subsidiaries. Under the terms of
settlement, the Banks subsidiaries paid a total sum of $10 million to the
plaintiffs, including all fees and costs.

We are aware that there may exist another potential claim in connection
with Cash 4 Titles. As of the date of this annual report, no such claim has
been made against the Bank. Based upon information currently known to us, it
is not possible to determine the probability that such a claim will be asserted
and, if asserted, the probability that a liability will result. Any such claim
would be defended vigorously.

In connection with a breach of contract claim brought by Pentium Limited
and Landcleve Corporation against the Bank in which the plaintiffs allege that
certain funds were improperly withdrawn from their accounts by a third party,
in April 2003 summary judgment was rendered in favor of the plaintiff Landcleve
Corporation in the amount of $1.79 million plus interest and costs. A trial
was ordered to determine liability, if any, with respect to the claim by
Pentium Limited. We have filed a notice of appeal on several grounds, and will
continue to defend these claims vigorously.

Dividend Policy

Our board of directors may declare and pay dividends from time to time
unless there are reasonable grounds for believing that:



| |  |  | we are or would, after the payment, be unable to pay our
liabilities as they become due;                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the realisable value of our assets would, after the payment, be
less than the aggregate of our liabilities and issued share capital
and share premium accounts; or                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | our total capital ratio is below 10% or the payment of
dividends would cause our total capital ratio to fall below 10%, the
minimum level required by the Bermuda Monetary Authority. These
capital requirements may limit our ability to pay dividends to a
greater or lesser extent than financial or banking institutions
organised in some jurisdictions in the U.S. See Item 4.
Information on the CompanyRegulation and SupervisionRegulation and
Supervision in BermudaSupervision and Monitoring by the Bermuda
Monetary Authority.

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The board of directors may from time to time, subject to the foregoing
conditions, declare dividends. We will pay dividends to our shareholders
according to their respective rights to the sums available for distribution,
after the satisfaction of the rights of the holders of any other shares, if
any, ranking in priority to the common shares with respect to the payment of
dividends. Any dividend unclaimed after a period of seven years from the date
the dividend became payable is forfeited and reverts to the Bank. At present,
there are no other shares of the Bank which rank higher than the common shares
with respect to the payment of dividends.

In formulating our dividend policy, our board of directors considers
historical financial results, future prospects and our anticipated capital
needs. This policy is intended to provide shareholders with dividend income
growth, while allowing us to maintain our desired internal capital generation
rate. Dividends for the five years ended December 31, 2002 have averaged 38.8%
of our net profits. The payment of future dividends will be dependent upon our
financial results, capital requirements and economic conditions in general,
none of which we can accurately predict at this time.

The following table sets forth cash dividends paid in respect of our
common shares for the periods indicated:

|                                                                       |  |              |       |              |  |            |       |      |  |            |       |      |  |   |       |     |  |   |       |     |  |   |       |  
|---------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | ---------- | ----- | ---- |  | ---------- | ----- | ---- |  | - | ----- | --- |  | - | ----- | --- |  | - | ----- | -
|                                                                       |  |              |       |              |  |            |       |      |  | Six Months |       |      |  |   |       |     |  |   |       |     |  |  
|                                                                       |  | Year Ended   |       | Ended        |  | Year Ended
|                                                                       |  | December 31, |       | December 31, |  | June 30,  
|                                                                       |  |              |       |              |  |           
|                                                                       |  | 2002         |       | 2001         |  | 2000       |       | 2000 |  | 1999       |       | 1998
|                                                                       |  |              |       |              |  |            |       |      |  |            |       |     
|First Quarter                                                          |  | $            | 0.270 |              |  | $          | 0.245 |      |  | $          | 0.692 | (1)  |  | $ | 0.362 | (2) |  | $ | 0.268 | (3) |  | $ | 0.173 |  
|Second Quarter                                                         |  |              | 0.270 |              |  |            | 0.245 |      |  |            | 0.245 |      |  |   | 0.214 |     |  |   | 0.195 |     |  |   | 0.174 |  
|Third Quarter                                                          |  |              | 0.270 |              |  |            | 0.245 |      |  |            |      |      |  |   | 0.215 |     |  |   | 0.195 |     |  |   | 0.174 |  
|Fourth Quarter                                                         |  |              | 0.270 |              |  |            | 0.246 |      |  |            |      |      |  |   | 0.215 |     |  |   | 0.195 |     |  |   | 0.174 |  
|                                                                       |  |              |       |              |  |            |       |      |  |            |       |      |  |   |       |     |  |   |       |     |  |   |       |  
|Total dividends per common share                                       |  | $            | 1.080 |              |  | $          | 0.981 |      |  | $          | 0.937 |      |  | $ | 1.006 |     |  | $ | 0.853 |     |  | $ | 0.695 |  
|                                                                       |  |              |       |              |  |            |       |      |  |            |       |      |  |   |       |     |  |   |       |     |  |   |       |  
|Total dividends per common
share as a percentage of
earnings per share |  |              | 42.7  | %            |  |            | 51.4  | %    |  |            | 51.8  | %    |  |   | 28.5  | %   |  |   | 33.8  | %   |  |   | 34.2  | %



---

|(1) |  | Includes a special dividend of $0.477 per share.                                                                                                                                     
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Represents a special dividend of $0.362 per share. During this quarter,
we changed our dividend payment date and, as a result, we did not pay a
regular dividend to our shareholders.
|   
|   
|   
|(3) |  | Includes a special dividend of $0.072 per share.                                                                                                                                     

In the quarter ended September 30 of each of the fiscal years ended June
30, 1999 and 2000 and the six months ended December 31, 2000, we paid a special
dividend to our shareholders, because our profits in each of the preceding
fiscal years had exceeded the estimates we used to determine our regular
quarterly dividend level.

On September 15, 1999, we paid a 1-for-10 stock dividend to all
shareholders of record as of August 31, 1999. On August 31, 2000, we paid a
1-for-7 stock dividend to all shareholders of record as of August 18, 2000. On
January 15, 2002, we paid a 1-for-10 stock dividend to all shareholders of
record as of December 31, 2001. All dividend and per share amounts have been
restated to include the effects of these stock dividends.

For a discussion of material United States federal income tax provisions
regarding the taxation of dividends on our common shares, see Item 10.
Additional InformationTaxationUnited States Federal Income Tax
Considerations.




ITEM 9. THE OFFER AND LISTING

Market Information

Our common shares have been listed on the Bermuda Stock Exchange, or BSX,
since February 1971, and currently trade under the symbol BOB. We, along
with Bermuda Commercial Bank Limited and The Bank of N.T. Butterfield and Son
Limited, incorporated the Bermuda Stock Exchange in 1992 as a limited liability
corporation, and we currently own an approximately 23.4% interest in the BSX.
In addition, since April 2002, our common shares have been listed on the Nasdaq
National Market under the symbol BBDA.

The table below sets forth the high and low closing prices of our common
shares on the Bermuda Stock Exchange, stated in Bermuda dollars, for the fiscal
years ended December 31, 2002 and 2001, the six months ended December 31, 2000,
and the fiscal

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years ended June 30, 2000, 1999 and 1998, and the high and low closing
prices of our common shares on the Nasdaq National Market, stated in U.S.
dollars, for the fiscal year ended December 31, 2002:

|                                    |  |       |       |        |  |      |       |     |  |  |       |  |  |  |       | 
|----------------------------------- |  | ----- | ----- | ------ |  | ---- | ----- | --- |  |  | ----- |  |  |  | ----- | 
|                                    |  | BSX   |       | Nasdaq
|                                    |  |       |       |       
|                                    |  | High  |       | Low    |  | High |       | Low
|                                    |  |       |       |        |  |      |       |    
|                                    |  | (BD$) |       | (US$) 
|Fiscal Year ended June 30, 1998     |  |       | 28.93 |        |  |      | 18.08 |     |  |  |      |  |  |  |      | 
|Fiscal Year ended June 30, 1999     |  |       | 28.93 |        |  |      | 18.08 |     |  |  |      |  |  |  |      | 
|Fiscal Year ended June 30, 2000     |  |       | 27.84 |        |  |      | 20.25 |     |  |  |      |  |  |  |      | 
|Six Months ended December 31, 2000  |  |       | 41.77 |        |  |      | 25.46 |     |  |  |      |  |  |  |      | 
|Fiscal Year ended December 31, 2001 |  |       | 50.23 |        |  |      | 34.55 |     |  |  |      |  |  |  |      | 
|Fiscal Year ended December 31, 2002 |  |       | 49.00 |        |  |      | 27.00 |     |  |  | 50.00 |  |  |  | 26.75 | 

The table below shows the high and low closing prices of our common shares
on the Bermuda Stock Exchange, stated in Bermuda dollars, for each full
quarterly period within the two most recent fiscal years, and the high and low
closing prices of our common shares on the Nasdaq National Market, stated in
U.S. dollars, for each of the second, third and fourth quarters of the fiscal
year ended December 31, 2002:

|                                    |  |       |       |        |  |      |       |     |  |  |       |  |  |  |       | 
|----------------------------------- |  | ----- | ----- | ------ |  | ---- | ----- | --- |  |  | ----- |  |  |  | ----- | 
|                                    |  | BSX   |       | Nasdaq
|                                    |  |       |       |       
|                                    |  | High  |       | Low    |  | High |       | Low
|                                    |  |       |       |        |  |      |       |    
|                                    |  | (BD$) |       | (US$) 
|Fiscal Year ended December 31, 2001 |  |       |       |        |  |      |       |     |  |  |       |  |  |  |       | 
|First Quarter                       |  |       | 46.36 |        |  |      | 39.55 |     |  |  |      |  |  |  |      | 
|Second Quarter                      |  |       | 50.23 |        |  |      | 42.73 |     |  |  |      |  |  |  |      | 
|Third Quarter                       |  |       | 46.82 |        |  |      | 34.55 |     |  |  |      |  |  |  |      | 
|Fourth Quarter                      |  |       | 48.00 |        |  |      | 36.82 |     |  |  |      |  |  |  |      | 
|Fiscal Year ended December 31, 2002 |  |       |       |        |  |      |       |     |  |  |       |  |  |  |       | 
|First Quarter                       |  |       | 48.00 |        |  |      | 43.00 |     |  |  |      |  |  |  |      | 
|Second Quarter                      |  |       | 49.00 |        |  |      | 42.10 |     |  |  | 50.00 |  |  |  | 43.50 | 
|Third Quarter                       |  |       | 44.50 |        |  |      | 30.00 |     |  |  | 45.50 |  |  |  | 29.90 | 
|Fourth Quarter                      |  |       | 33.00 |        |  |      | 27.00 |     |  |  | 33.74 |  |  |  | 26.75 | 

The table below shows the high and low closing prices of our common shares
on the Bermuda Stock Exchange, stated in Bermuda dollars, and on the Nasdaq
National Market, stated in U.S. dollars, for each full monthly period within
the six most recent months:

|              |  |       |       |        |  |      |       |     |  |  |       |  |  |  |       | 
|------------- |  | ----- | ----- | ------ |  | ---- | ----- | --- |  |  | ----- |  |  |  | ----- | 
|              |  | BSX   |       | Nasdaq
|              |  |       |       |       
|              |  | High  |       | Low    |  | High |       | Low
|              |  |       |       |        |  |      |       |    
|              |  | (BD$) |       | (US$) 
|December 2002 |  |       | 32.50 |        |  |      | 31.50 |     |  |  | 33.74 |  |  |  | 31.90 | 
|January 2003  |  |       | 35.00 |        |  |      | 31.00 |     |  |  | 33.51 |  |  |  | 30.40 | 
|February 2003 |  |       | 30.00 |        |  |      | 30.00 |     |  |  | 32.85 |  |  |  | 30.10 | 
|March 2003    |  |       | 31.10 |        |  |      | 30.25 |     |  |  | 34.82 |  |  |  | 32.86 | 
|April 2003    |  |       | 35.00 |        |  |      | 31.55 |     |  |  | 35.73 |  |  |  | 33.83 | 
|May 2003      |  |       | 35.00 |        |  |      | 33.25 |     |  |  | 34.98 |  |  |  | 32.75 | 

All share prices in the above tables have been restated to reflect a
1-for-10 stock dividend to all shareholders of record as of August 31, 1999, a
1-for-7 stock dividend to all shareholders of record as of August 18, 2000 and
a 1-for-10 stock dividend to all shareholders of record as of December 31,
2001.

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ITEM 10. ADDITIONAL INFORMATION

Voting

A resolution put to the vote of shareholders at any meeting will be
decided by a show of hands unless a poll is demanded. On a show of hands, every
shareholder, whether an individual and present in person or a corporation and
present by a duly authorised representative, will have one vote. Our bye-laws
permit the following parties to demand a poll:



| |  |  | the chairman of the meeting;                                                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | at least three shareholders present in person and entitled to vote at the meeting;                                                                                                                                                                              
|
| |  |  | any shareholder or shareholders representing in person or by
proxy not less than 10% of the total voting rights of all
shareholders having the right to vote at the meeting; or                                                                                 
|
| |  |  | any shareholder or shareholders in person or by proxy holding
shares conferring a right to vote at the meeting, being shares on
which an aggregate sum has been paid up equal to not less than 10% of
the total sum paid up on all shares conferring that right.

On a poll, every shareholder present in person or by proxy shall have one
vote for every share held by such person. A proxy must be a registered holder
of our common shares. A shareholder may appoint a proxy for all or only part
of his holding of our common shares. Proxies must be received by us not less
than 14 days prior to a general meeting. Please note that most companies that
are organised and publicly traded in the U.S. can receive proxies as of a date
that is closer to the date of a shareholder meeting.

As required under the terms of our licence from the Minister of Finance,
we have adopted bye-laws that prevent a 40% shareholder controller who is
non-Bermudian from exercising the voting rights of those shares acquired in
excess of 40% without the prior written approval of the Minister.

Most matters to be approved by holders of the common shares require
approval by a simple majority vote of the votes cast at a shareholders
meeting. The affirmative vote of two-thirds or more of all voting rights
attached to all issued and outstanding shares is required, among other things,
to take the following actions, except to the extent that any of these actions
has received the prior approval of the board of directors:



| |  |  | to remove a director other than for cause;                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to amend the provision of the bye-laws requiring these super-majority votes;                                                                           
|
| |  |  | to approve certain amalgamations, mergers, consolidations or the sale of substantially all of our assets;                                              
|
| |  |  | continuation of the Bank in a country or jurisdiction outside Bermuda;                                                                                 
|
| |  |  | to approve the commencement of proceedings seeking the
winding-up, liquidation or reorganisation of our operations; and                                
|
| |  |  | to amend the provision of the bye-laws which restricts voting
rights of persons with an interest in more than 40% of our issued and
outstanding shares.

If any of the these actions have received the approval of the board of
directors prior to the shareholder vote, these actions would only require
approval by a simple majority vote of our shareholders cast at a shareholder
meeting at which a quorum is present, with the following exceptions:



| |  |  | any amendment to our bye-laws would require 75% of the votes
cast by shareholders at a meeting at which a quorum of at least 10 of
our shareholders in person or by proxy holding or representing a
minimum of 10% of our outstanding shares are present; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | an amalgamation would require 75% of the votes cast by
shareholders at a meeting at which at least ten of our shareholders
holding or representing by proxy more than one-third of our
outstanding shares are present.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, corporate re-structurings described in section 99 of the
Companies Act 1981 must be approved by at least a 75% vote of those voting on
such items, in accordance with the terms of the Companies Act 1981. These
approvals require that proper notice be provided to shareholders in accordance
with section 100 of the Act.

Also, section 89 of the Companies Act provides that the removal of an
auditor before the expiration of his term of office always requires a vote of
two thirds of the votes cast at a meeting of shareholders.

Please note that the corporation laws of many states of the U.S. enable
some or all actions of these types to be taken by a simple majority of the
votes cast at a shareholder meeting. However, even in the case of corporations
organised in these states, many of these corporations have organisational
documents that require higher percentages of the voting shareholders in order
to approve these types of actions.

Shareholder Meetings

Under Bermuda law, we are required to convene at least one general
shareholders meeting in each calendar year, called the annual general meeting.
A special general meeting may be called by our board of directors whenever
desirable or necessary and must be called upon the request of shareholders
holding at least 10% of paid-up capital of the Bank with the right to vote.
Shareholders of a corporation organised in the U.S. may have a greater or
lesser ability to call a shareholder meeting.

Under Bermuda law, the number of shareholders constituting a quorum at any
general meeting of shareholders is determined by the bye-laws of a company.
Our bye-laws provide that at a general meeting ten shareholders entitled to
vote and present in person throughout the meeting will constitute a quorum. In
contrast, a quorum will exist for a meeting held by a typical U.S. corporation
if a designated percentage of the shareholders are present in person or in
proxy. In the case of a publicly traded corporation, this percentage is
typically at least 50%.

The Banks annual general meeting usually takes place in April, although
our directors may decide to hold the meeting during another month. We are
required to send the annual accounts and reports to shareholders not less than
one week before the date fixed for the meeting.

We must provide notice of every general and special meeting to each
shareholder of not less than 30 days before the date fixed by the board of
directors for the meeting, not including in such 30 days the day that the
notice is given and the day the meeting is to occur. In determining when
notice is given, we must take into account the amount of time required for the
notice to arrive in the ordinary course of transmission. Therefore, all of our
shareholders, including those outside Bermuda, generally should receive the
notice 30 days prior to the meeting.

The rules for our special meetings are the same as the rules for our
general meetings.

Amendment to the Bank of Bermuda Act and our Bye-laws

Bermuda law provides that the incorporating act of a company may be
amended by a resolution passed at a general meeting of shareholders of which we
have given due notice. Such amendments will be subject to the consent of the
Minister of Finance. However, amendments to the incorporating act which relate
to currency or banking can only be made by an amending Act passed by the
Bermuda legislature. With limited exceptions in industries such as the
financial or banking industry, companies that are organised in the U.S. are
typically not subject to provisions of these types.

Under Bermuda law, the holders of an aggregate of not less than 20% in par
value of a companys issued share capital have the right to apply to a court of
appropriate jurisdiction in Bermuda for an annulment of any amendment of the
incorporating act adopted by shareholders at any general meeting, other than an
amendment which alters, increases or reduces a companys share capital as
provided in sections 45 and 46 of the Companies Act 1981. When the proper
holders make this type of application, the court may annul or confirm the
amendment on such terms as it deems appropriate. An application for an
annulment of an amendment of the Bank of Bermuda Act must be made within 21
days after the date on which the resolution altering the Bank of Bermuda Act is
passed and may be made on behalf of the persons entitled to make the
application by one or more of their number as they may appoint in
- 86 -Table of Contents

writing for the purpose. Persons voting in favour of the amendment may
not make this type of application. Companies that are organised and publicly
traded in the U.S. are typically not subject to provisions of these types.

Our bye-laws and the Companies Act 1981 provide that no bye-law will be
rescinded, altered or amended and no new bye-law will be made unless it has
been approved by a resolution of our board of directors which is confirmed by a
resolution of our shareholders approved by 75% of the votes cast at a general
meeting at which at least 10 of our shareholders who hold a minimum of 10% of
our outstanding shares are present or represented by proxy. In addition,
certain bye-law amendments would require approval by our shareholders by the
affirmative vote of two thirds or more of all voting rights attached to all
outstanding shares. Please note that the corporation laws of many states of
the U.S. enable actions of these types to be taken by a simple majority of the
votes cast at a shareholder meeting. However, even in the case of corporations
organised in these states, many of these corporations have organisational
documents that require higher percentages of the voting shareholders in order
to approve these types of actions. In addition, the directors of most U.S.
corporations can amend the bye-laws without any shareholder approval.

Capitalisation of Profits and Reserves

Pursuant to our bye-laws, the board of directors may capitalise any part
of the amount of our share premium or other reserve accounts or any amount
credited to the profit and loss account or otherwise available for distribution
by either:



| |  |  | applying this sum in paying up unissued shares to be allotted
as fully paid bonus shares to shareholders pro-rata; or                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | paying up in whole or in part partially paid shares of those
shareholders who would have been entitled to these sums if they were
distributed by way of dividend or distribution.

Liquidation Rights

In the event of the winding up or dissolution of the Bank, whether
voluntary or involuntary or for the purpose of a reorganisation or otherwise or
upon any distribution of capital, the holders of our common shares are
entitled, after the satisfaction of the Banks liabilities and of the rights of
the holders of any other shares ranking in priority to our common shares, if
any, to our surplus assets.

Transfer Restrictions

Our board of directors may decline to register the transfer of any share:



| |  |  | on which we have a lien;                                                                                                                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | if the request is made by a shareholder who is indebted to us;                                                                                                                              
|
| |  |  | if the request appears to violate the Banks and Deposit Companies Act 1999; or                                                                                                              
|
| |  |  | if the request is not accompanied by the relevant share
certificate and any other evidence of the transferors right to make
the transfer as the board of directors will reasonably require.

Pursuant to the Exchange Control Regulations, securities of a Bermuda
company may not be transferred where either the transferor or the transferee is
a non-resident of Bermuda for exchange control purposes without the
permission of the Controller of Foreign Exchange. However, during the past 20
years, it has been the policy of the Controller of Foreign Exchange to grant
permission for the free transfer of shares where those shares are listed on an
appointed stock exchange, as defined in the Companies Act 1981. At present,
the Nasdaq National Market and the Bermuda Stock Exchange each qualify as an
appointed stock exchange under this definition, and therefore our shareholders
are able to freely transfer their commons shares without the specific
permission of the Controller of Foreign Exchange. The Controller of Foreign
Exchange confirmed this general permission in a public information notice
issued in January, 1998.

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Board of Directors

Our business is managed and conducted by a board of directors consisting
of between nine and 30 members, as the shareholders may from time to time
determine. Our shareholders will elect the directors at our annual general
meeting. On September 16, 1998, we divided the board of directors into three
classes of approximately equal size and the membership of each class was
determined by lot. At each annual general meeting, one of the three classes of
directors is elected by the shareholders. Each director is eligible to serve
for a three-year term. Those appointed by the directors to fill a vacancy
serve until the next annual general meeting and will then be eligible for
re-election by the shareholders for a three-year term. Each director will hold
office for the term for which he is elected or appointed and until his
successor is either elected or appointed. Please note that many companies that
are organised and publicly traded in the U.S. do not have boards that are
divided into different classes.

Pursuant to a resolution adopted by our board of directors in 1992, the
mandatory retirement age for our directors is 70.

The only persons eligible for election as one of our directors are
persons:



| |  |  | for whom a written notice of nomination signed by not less than
10 of our shareholders holding not less than 5% of our outstanding
shares has been delivered to our secretary not less than 20 days
prior to the scheduled date of our general meeting or any adjournment
thereof; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | who have been approved for such purpose by the board of
directors and identified in the notice of our general meeting.                                                                                                                                                               

Restrictions on the ability of shareholders to nominate directors varies
among corporations organised and publicly traded in the U.S., depending upon
the state in which they are incorporated and the provisions of their charter
and bylaws.

Removal of Directors

Under Bermuda law and our bye-laws, a director may be removed at any
general meeting of shareholders, provided that the notice of this meeting
convened for the purpose of removing a director contains a statement of the
intention to do so and has been delivered to the director in question at least
14 days before the meeting. At the meeting, this director will be entitled to
be heard on the motion for his removal. Shareholders may remove directors for
cause with the approval of the simple majority of the votes cast. However,
removing a director other than for cause requires the affirmative vote of not
less than two-thirds of all voting rights attached to all issued and
outstanding common shares. The corporation laws of some states in the U.S.
provide that directors may be removed without cause if a smaller percentage of
the shareholders approves the removal. However, even in the case of
corporations organised in these states, many of these corporations have
organisational documents that require higher percentages of the voting
shareholders in order to approve the removal of a director other than for
cause.

Voting on Interested Transactions

A director who to his knowledge is directly or indirectly interested in a
contract or arrangement with the Bank must declare the nature of his interest
at the meeting of the board of directors at which the question of entering into
the contract or arrangement is first considered or at the first meeting after
he learns that he is or has become so interested. Unless disqualified by the
chairman of the meeting after the declaration of interest, any director may
vote on a matter in which he is interested and his vote shall be counted. Such
director may be counted in the quorum at the board meeting. In addition, under
our listing agreement with Nasdaq, our audit committee or comparable body shall
review all potential conflicts of interest situations where appropriate.

Voting by the board of directors on matters concerning the compensation of
any directors is not subject to any independent quorum requirements.

Borrowing Powers

The board may exercise all the powers of the Bank to borrow money and to
mortgage or charge any present or future assets of the Bank, and subject to the
Companies Act 1981, to issue debenture and other securities, whether outright
or as collateral for any debt, liability or obligation of the Bank or of any
third party.

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Share Purchases; No Treasury Shares

Our board of directors has the power to authorise the purchase of our
common shares, subject to the general provisions of Bermuda law. Under Bermuda
law, we must pay for share purchases out of capital paid-up for these shares,
out of funds that would otherwise be available for a dividend or distribution
or out of proceeds of the sale of additional shares for the purpose of the
purchase. However, to the extent that any premium over the par value is payable
on the purchase, the premium must be provided out of funds that would otherwise
be available for a dividend or distribution or out of our share premium
account. Bermuda law and the Bank of Bermuda Act prevent us from holding our
own common shares. Therefore, any shares we purchase are automatically
cancelled, and the amount of our issued capital is reduced accordingly. All
cancelled shares are available for re-issue.

On
February 4, 2003, our board of directors authorised the purchase
of an additional 1.5 million of our common shares pursuant to
our existing share buyback programme, increasing the total
authorisation from 2.5 million to 4 million common shares. As a capital management tool, we make purchases pursuant to our share
buyback programme from time to time, depending on market conditions and other factors, through open market purchases. The total remaining authorisation
under the share buyback programme was approximately 1.9 million
common shares as of March 31, 2003.

Appraisal Rights and Shareholder Suits

Under Bermuda law, in the event of an amalgamation of a Bermuda company, a
shareholder who is not satisfied that he has received an offer for the fair
value of his shares may apply to a Bermuda court within one month of notice of
the meeting of shareholders for an appraisal of the fair value of those shares.
If the court appraised value is greater than the value received or to be
received in the amalgamation, the Bermuda company must pay the court appraised
value to the dissenting shareholder within one month of the appraisal, unless
it decides to terminate the amalgamation. The corporation laws of some states
in the U.S. do not permit appraisal rights for a corporations shareholders in
some situations where they are available under Bermuda law, including in the
case of publicly traded companies if the shareholders are to receive in the
relevant transaction only shares of the surviving corporation. In addition, the
procedures that shareholders must follow to exercise appraisal rights vary
among U.S. states, and in some cases may be significantly more difficult or
less difficult to exercise than in the case of a Bermuda corporation. Also,
under Bermuda law, the amalgamation of a company with another entity requires
that the amalgamation agreement be approved by the board of directors of the
company and 75% of the votes cast at a meeting of shareholders at which at
least two persons holding or representing by proxy more than one-third of the
issued shares of the company or class, as the case may be, are present, unless
the bye-laws of the company specify a different requirement. Our bye-laws
require that an amalgamation be approved by a two-thirds vote of all of our
outstanding shares unless our board of directors has given its prior approval,
in which case approval is required by 75% of the votes cast, in each case at a
meeting of shareholders at which at least ten of our shareholders holding or
representing by proxy more than one-third of our outstanding shares are
present.

For shareholders of U.S. corporations, class action and derivative actions
are typically permitted under a variety of circumstances, including in some
situations in which the shareholders are defrauded by the corporation, or
management does not exercise its fiduciary duties. However, class actions and
derivative actions are generally not available under Bermuda law to
shareholders of Bermuda companies. In certain very limited circumstances an
action can be brought by minority shareholders, on behalf of the company,
seeking to enforce a right of action vested in or derived from the company.
However, a derivative action will not be permitted if an alternative action
which would provide an adequate remedy is also available. The company and not
the plaintiff shareholders receive any property or damages recovered in a
derivative action. The Companies Act 1981 enables a shareholder who complains
that the affairs of a company are being or have been conducted in a manner
oppressive or prejudicial to some part of the shareholders, including himself,
to petition a court. If the court determines that winding-up the company would
unfairly prejudice those shareholders but that otherwise the facts would
justify a winding-up order on just equitable grounds, then the court may make
whatever order it deems appropriate, including winding up the company.

Other claims against a Bermuda company by its shareholders must be based
on the general law of contract or tort of Bermuda. A statutory right of action
is conferred on shareholders of a Bermuda company against persons responsible
for the issue of a prospectus, including directors and executive officers, for
damages suffered as a result of an untrue statement in the registration
statement. However, in contrast to the U.S. securities laws, there is not a
statutory right of action against the company itself on these grounds. In
addition, a company itself may bring an action against its officers and
directors for their breach of their statutory and fiduciary duty to act
honestly and in good faith with a view to the best interests of the company.

BSX Pre-emptive Rights

The regulations of the BSX require a listed company to obtain the consent
of its shareholders prior to allotting or issuing any shares in a listed class
of shares, or any securities convertible into shares of a listed class, unless:



| |  |  | the allotment or issuance of these securities is the result of
an offer made to the shareholders pro rata to their existing
holdings, or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | the existing shareholders have given a general mandate to the
directors to allot or issue these shares, provided that the latter
allotment does not in effect alter the control of the company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to a general mandate from our shareholders, we have amended our
bye-laws so as to permit our directors to allot or issue, at their discretion,
from time to time, shares not to exceed 20% of our outstanding common shares.

Corporations organised and publicly traded in the U.S. are not typically
subject to these types of restrictions.

Shareholder Rights Plan

Purpose

In December 1997, we adopted a shareholder rights plan designed to protect
the Bank of Bermuda and our shareholders in the event of an unsolicited attempt
to acquire control of the Bank of Bermuda. On July 29, 2002, the board of
directors approved a number of amendments to the plan, and it was amended and
restated in its entirety. Unsolicited attempts to acquire control include a
gradual accumulation of shares in the open market, a partial or two-tiered
tender offer that does not treat all shareholders equally and other take-over
tactics which the board of directors believes may be abusive and not in the
best interests of our shareholders. The implementation of the shareholder
rights plan increases the board of directors power in the event of an
unsolicited proposal by giving the board of directors the time and opportunity
to evaluate an offer and exercise its good faith business judgment to take
appropriate steps to protect and advance our interests and those of our
shareholders. However, while the shareholder rights plan is intended to
prevent abusive hostile take-over attempts, it could also have the effect of
deterring or preventing an acquisition of the Bank of Bermuda even if a
majority of our shareholders were in favour of this acquisition. The
shareholder rights plan could also have the effect of making it more difficult
for a person or group to gain control over us or to change our existing
management.

Please note that in the U.S., the ability of corporations to adopt plans
of this type, the terms that such plans may have, and the actions that may be
taken by the management of a corporation in connection with such a plan, vary
from state to state depending upon the provisions of applicable corporate laws
and the related judicial decisions applying these laws. As a result, the terms
of our plan, and some of the actions that could be taken by us in the future
under the plan, might not be valid if we had been organised as a corporation in
some of the states of the U.S.

Grant of Rights

Under the shareholder rights plan, we granted one right per common share
to all holders of record of our common shares at the close of business on
December 12, 1997 and authorised the issuance of one right in respect of each
share issued thereafter. The rights currently trade with the common shares.

The rights expire on July 29, 2012, unless exchanged or redeemed before
that date.

Exercisability of Rights

The rights will not be exercisable until ten days after a public
announcement by the Bank that any one person or group has acquired beneficial
ownership of 15% or more of our common shares. Initially, each right will
entitle the holder to purchase one quarter of one common share for a purchase
price of $50.00. Upon the occurrence of trigger events specified in the
shareholder rights plan, the $50.00 purchase price, the number and kind of
common shares issuable upon exercise of the rights and/or the number of rights
will be subject to certain adjustments. Pursuant to the shareholder rights
plan, certificates representing the rights will be distributed on the date that
is ten days after a public announcement by the Bank that any one person or
group has acquired beneficial ownership of 15% or more of our common shares.

Prior to this distribution date, no separate rights certificates will be
issued and the rights will be evidenced by the certificates for the common
shares. After this distribution date, each holder of record, as of the close
of business on the same distribution date, of the common shares will receive
separate certificates evidencing the rights, which certificates will be
separately transferable.

Triggering Events

Following a public announcement by the Bank that a person or group has
become an acquiring person, which is defined as a beneficial owner of 15% or
more of the common shares, each right, excluding rights held by the acquiring
person, will entitle the

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holder to purchase, for the $50.00 price, that number of common shares
having a market value at the time equal to two times the $50.00 purchase price,
or $100.00. This flip in provision would not apply if:



| |  |  | a person inadvertently acquires 15% or more of the common
shares and, as promptly as practical, disposes of enough shares to
bring this persons holdings below 15%; or                                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we purchase some of the common shares and, as a result, a
shareholders holding reaches the 15% threshold. In this case, the
flip-in provision would not apply unless the shareholder
subsequently became the beneficial owner of any additional common shares.

If any person or group becomes an acquiring person and either:



| |  |  | we are involved in a business combination in which we are not
the surviving corporation or the common shares are exchanged for
other securities or assets, or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we and/or our subsidiaries sell or transfer 50% or more of our
total assets or operating income or cash flow.                                                

then each right will entitle the holder to purchase, for the $50.00
purchase price, a number of shares of the other party to the business
combination or sale, or if appropriate, an affiliate, having a market value at
two times the $50.00 purchase price, or $100.00.

After a shareholder has acquired at least 15% of the common shares, the
board of directors may elect to exchange the rights, in whole or in part, for
common shares at the rate of two shares per right.

Redemption of Rights

Until ten days after a public announcement by the Bank that any one person
or group has acquired beneficial ownership of 15% or more of our common shares,
the board of directors may redeem all of the rights at a price of $0.01 per
right.

Amending the Shareholder Rights Plan

Prior to the date that is ten days after a public announcement by the Bank
that any one person or group has acquired beneficial ownership of 15% or more
of our common shares, the rights agreement may be amended in any respect. After this
date, the rights agreement may be amended in any respect that does not
adversely affect the rights holders.

The foregoing summary of the shareholder rights plan is not complete and
is qualified in its entirety by reference to the rights agreement, which has
previously been filed with the Securities and Exchange Commission and has been
incorporated by reference as Exhibit 2.1 to this annual report.

Exchange Controls

Pursuant to the Exchange Control Act 1972 and the Exchange Control
Regulations adopted under this act, the Bank is considered resident in
Bermuda for exchange control purposes. Having this status means that the Bank
is subject to certain limitations on its ability to convert Bermuda dollars
into a foreign currency, including into U.S. dollars, in order to make payments
to shareholders who are considered non-resident in Bermuda for exchange
control purposes. The present policy of the Controller of Foreign Exchange is
to allow the conversion and payment of dividends which are properly payable to
shareholders who are non-residents of Bermuda if all payments are processed
through an authorised dealer. The Bank qualifies as an authorised dealer. We
currently pay cash dividends to non-Bermuda residents in U.S. dollars. We have
no reason to believe that the present policy of the Controller of Foreign
Exchange will change.

Taxation

This section describes the material United States federal income and
Bermuda tax consequences of owning our common shares. It applies to you only
if you are a U.S. holder and you hold your shares as capital assets for tax
purposes. This section does not apply to you if you are a member of a special
class of holders subject to special rules, including:

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| |  |  | a dealer in securities,                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings,
|
| |  |  | a tax-exempt organisation,                                                                                   
|
| |  |  | a life insurance company,                                                                                    
|
| |  |  | a person liable for alternative minimum tax,                                                                 
|
| |  |  | a person that actually or constructively owns 10% or more of our voting stock,                               
|
| |  |  | a person that holds shares as part of a straddle or a hedging or conversion transaction, or                  
|
| |  |  | a person whose functional currency is not the U.S. dollar.                                                   

This section is based on the Internal Revenue Code of 1986, as amended,
its legislative history, existing and proposed regulations, published rulings
and court decisions, and the laws of Bermuda all as currently in effect. These
laws are subject to change, possibly on a retroactive basis. The tax treaty
between Bermuda and the United States, which relates only to the taxation of
insurance enterprises and mutual assistance in tax matters, will generally not
affect the Bermuda tax and United States federal income tax considerations
material to owning our common shares.

You are a U.S. holder if you are a beneficial owner of our common shares and you are:



| |  |  | a citizen or resident of the United States,                                                                                                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a domestic corporation,                                                                                                                                                                                  
|
| |  |  | an estate whose income is subject to United States federal income tax regardless of its source, or                                                                                                       
|
| |  |  | a trust if a United States court can exercise primary
supervision over the trusts administration and one or more United
States persons are authorised to control all substantial decisions of
the trust.

| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | You should consult your own tax advisor regarding the United States
federal, state and local and the Bermuda and other tax consequences
of owning and disposing of shares in your particular
circumstances.

This discussion addresses only United States federal income taxation and
Bermuda taxation.

Bermuda Tax Considerations

As of the date of this annual report, there is no Bermuda income,
corporation or profits tax, dividend withholding tax, capital gains tax,
capital transfer tax, estate duty or inheritance tax payable by us or our
shareholders other than stamp duty payable on transfers of our shares, other
than transfers on sale and voluntary conveyances inter vivos, and with regard
to the estate of shareholders ordinarily resident in Bermuda, except that the
estate of a person who is not a resident in Bermuda but which obtains probate
in Bermuda will be required to pay stamp duty with respect to any of our common
shares.

United States Federal Income Tax Considerations

Taxation of Dividends

Under the United States federal income tax laws, and subject to the
passive foreign investment company, or PFIC, rules discussed below, if you are
a U.S. holder, the gross amount of any dividend we pay out of our current or

accumulated earnings and profits (as determined for United States federal
income tax purposes) is subject to United States federal income taxation. If
you are a noncorporate U.S. holder, dividends paid to you in taxable years
beginning after December 31, 2002 and before January 1, 2009 that

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constitute qualified dividend income will be taxable to you at a maximum
tax rate of 15% provided that you hold the shares for more than 60 days during
the 120-day period beginning 60 days before the ex-dividend date and meet other
holding period requirements. Dividends we pay with respect to shares generally
will be qualified dividend income provided that, in the year that you receive
the dividend, the shares are readily tradable on an established securities
market the United States. The dividend will be taxable to you when you receive
it, actually or constructively. The dividend will not be eligible for the
dividends-received deduction generally allowed to United States corporations in
respect of dividends received from other United States corporations. The
amount of the dividend distribution that you must include in your income as a
U.S. holder will be the U.S. dollar value of the Bermuda dollar payments made,
determined at the spot Bermuda dollar/U.S. dollar rate on the date the dividend
distribution is includible in your income, regardless of whether the payment is
in fact converted into U.S. dollars. Generally, any gain or loss resulting
from currency exchange fluctuations during the period from the date you include
the dividend payment in income to the date you convert the payment into U.S.
dollars will be treated as ordinary income or loss and will not be eligible for
the special tax rate applicable to qualified dividend income. The gain or loss
generally will be income or loss from sources within the United States for
foreign tax credit limitation purposes. Distributions in excess of current and
accumulated earnings and profits, as determined for United States federal
income tax purposes, will be treated as a non-taxable return of capital to the
extent of your basis in the shares and thereafter as capital gain.

Dividends will be income from sources outside the United States, but
generally will be passive income or financial services income which is
treated separately from other types of income for purposes of computing the
foreign tax credit allowable to you. Special rules apply in determining the
foreign tax credit limitation with respect to dividends that are subject to the
maximum 15% tax rate.

Taxation of Capital Gains

Subject to the PFIC rules discussed below, if you sell or otherwise
dispose of your shares, you will recognise capital gain or loss for United
States federal income tax purposes equal to the difference between the U.S.
dollar value of the amount that you realise and your tax basis, determined in
U.S. dollars, in your shares. Capital gain of a noncorporate U.S. holder that
is recognised on or after May 6, 2003 and before January 1, 2009 is generally
taxed at a maximum rate of 15% where the holder has a holding period greater
than one year. The gain or loss will generally be income or loss from sources
within the United States for foreign tax credit limitation purposes.

PFIC Rules

We believe that our common shares should not be treated as stock of a PFIC
for United States federal income tax purposes, but this conclusion is a factual
determination that is made annually and thus may be subject to change.

In general, we will be a PFIC with respect to you if for any taxable year in which you held our common shares:



| |  |  | at least 75% of our gross income for the taxable year is passive income or                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | at least 50% of the value, determined on the basis of a
quarterly average, of our assets is attributable to assets that
produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents
(other than certain rents and royalties derived in the active conduct of a
trade or business), annuities and gains from assets that produce passive
income. If a foreign corporation owns at least 25% by value of the stock of
another corporation, the foreign corporation is treated for purposes of the
PFIC tests as owning its proportionate share of the assets of the other
corporation, and as receiving directly its proportionate share of the other
corporations income.

If we are treated as a PFIC, and you did not make a mark-to-market
election, as described below, you will be subject to special rules with respect
to:



| |  |  | any gain you realise on the sale or other disposition of your
shares and
| | - |  | ------------------------------------------------------------------------

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| |  |  | any excess distribution that we make to you (generally, any
distributions to you during a single taxable year that are greater
than 125% of the average annual distributions received by you in
respect of the shares during the three preceding taxable years or, if
shorter, your holding period for the shares).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under these rules:



| |  |  | the gain or excess distribution will be allocated rateably over your holding period for the shares,                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the amount allocated to the taxable year in which you realised
the gain or excess distribution will be taxed as ordinary income,      
|
| |  |  | the amount allocated to each prior year, with certain
exceptions, will be taxed at the highest tax rate in effect for that
year, and  
|
| |  |  | the interest charge generally applicable to underpayments of
tax will be imposed in respect of the tax attributable to each such
year.

Special rules apply for calculating the amount of the foreign tax credit
with respect to excess distributions by a PFIC.

If you own shares in a PFIC that are treated as marketable stock, you may
make a mark-to-market election. If you make this election, you will not be
subject to the PFIC rules described above. Instead, in general, you will
include as ordinary income each year the excess, if any, of the fair market
value of your shares at the end of the taxable year over your adjusted basis in
your shares. These amounts of ordinary income will not be eligible for the
favourable tax rates applicable to qualified dividend income or long-term
capital gains. You will also be allowed to take an ordinary loss in respect of
the excess, if any, of the adjusted basis of your shares over their fair market
value at the end of the taxable year (but only to the extent of the net amount
of previously included income as a result of the mark-to-market election).
Your basis in the shares will be adjusted to reflect any such income or loss
amounts.

In addition, notwithstanding any election you make with regard to the
shares, dividends that you receive from us will not constitute qualified
dividend income to you if we are a PFIC either in the taxable year of the
distribution or the preceding taxable year. Dividends that you receive that do
not constitute qualified dividend income are not eligible for taxation at the
15% maximum rate applicable to qualified dividend income. Instead, you must
include the gross amount of any such dividend paid by us out of our accumulated
earnings and profits (as determined for United States federal income tax
purposes) in your gross income, and it will be subject to tax at rates
applicable to ordinary income.

If you own our common shares during any year that we are a PFIC, you must
file Internal Revenue Service Form 8621.

Documents on Display

We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended, and in accordance with these requirements, we
file reports and other information with the Securities and Exchange Commission.
These materials, including this annual report and the exhibits hereto, may be
inspected without charge at the Commissions Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the materials may be obtained
from the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may obtain information
on the operation of the Commissions Public Reference Room by calling the
Commission in the United States at 1-800-SEC-0330. In addition, the Commission
maintains a Web site (http://www.sec.gov) that contains reports and other
information regarding registrants, including us, that file electronically with
the Commission.




ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The asset and liability management committee monitors and evaluates our
balance sheet in terms of interest rate, foreign exchange, and liquidity risk.
We are exposed to interest rate risk, which is the potential for economic loss
due to future interest rate changes, through our deposit taking, investment and
lending activities. Foreign exchange risk is the potential for economic loss
arising from changes in foreign currency exchange rates, from our ownership of
foreign operations and foreign currency denominated investments, as well as
from positions we take in handling and managing customer business.
- 94 -Table of Contents

We manage our net interest rate exposure, together with our foreign
exchange exposures, within pre-approved guidelines. Exposure to interest rate
and foreign exchange risks can result in loss of future net interest income
and/or a loss of current market values. The asset and liability department
quantifies our market risk exposures across the entire balance sheet. Various
methodologies and tools are used to quantify exposures, to ensure that
risk-taking activities fall within acceptable ranges and to ensure that
liquidity risk is properly managed. Foreign exchange and interest rate risk
guidelines are set in quantitative terms, using value at risk and absolute
limits as appropriate for the underlying instrument class. Value at risk
represents an estimate of the possible loss due to changes in interest rates
given an assumed confidence level and holding period. All market risk limits
are consistent with our business strategy. Our primary source of interest rate
risk is a decline in short-term U.S. interest rates.

Trading Activities

Interest Rate Risk

We have designated a portion of our marketable securities portfolio as our
trading portfolio. The value of the trading portfolio was $495 million at
December 31, 2002. The portfolio was $1.3 billion at the beginning of the
year, but was reduced in size during the fourth quarter. While the portfolio
has performed as expected on an annual basis, it was determined that a smaller
portfolio was appropriate given the level of volatility that we have
experienced in the financial markets and that is expected to continue for some
time. The portfolio has an average credit quality of Aaa/AAA (Moodys/S&P).
The portfolio is managed by a third-party investment manager, in accordance
with strict guidelines as to the type of investments held. The portfolio is
managed to a very short duration using interest rate swaps and futures
contracts. At December 31, 2002 and 2001, the portfolio had a duration of 0.03
years and 0.47 years, respectively, and consisted primarily of mortgage and
mortgage-backed securities, high-grade asset-backed securities, U.S. government
and agency securities and some investment grade corporate securities.

We use value at risk modelling techniques to measure the market risk in
this portfolio. Values at risk are computed on a regular basis and the
analysis is augmented by stress testing, which looks at the potential impact of
more extreme moves in market prices. The portfolios value at risk is measured
using a 95% degree of confidence and a one-month horizon. The calculation uses
historical one-day movements in market rates and prices, and takes account of
the correlation between different markets and rates. We calculate value at
risk with the Quantitative Risk Management asset and liability management
system, which is widely used in the banking industry. For the year ended
December 31, 2002, the value at risk on this portfolio averaged $3.0 million
and ranged between $1.7 million and $4.6 million. For the year ended December
31, 2001, the value at risk on this portfolio averaged $1.1 million and ranged
between $0.5 million and $3.4 million.

Foreign Exchange Risk

Our foreign exchange trading activity consists of providing foreign
exchange products to our customers and a limited amount of proprietary trading
in the form of overnight foreign currency positions. We generally close out
these client transactions with offsetting positions with other banks, with any
open positions becoming a proprietary position and subject to our position
limits. Where we leave positions open overnight we do not believe that they
create a significant foreign exchange exposure. Our capital markets products
division is responsible for foreign exchange risk management on a Bank-wide
basis and our activities are managed within prescribed daily limits for each
trader and office. All foreign exchange forward contracts arising from this
activity are treated as trading and are marked to market daily. At December
31, 2002, our financial instruments that were subject to foreign currency risk
had a net fair value of $4.7 million, compared with $2.8 million at December
31, 2001 and $0.6 million at December 31, 2000. Revenue generated from
proprietary trading for the year ended December 31, 2002 was $3.4 million,
compared with $4.5 million for the year ended December 31, 2001 and $1.2
million for the six months ended December 31, 2000. We do not believe that
changes in exchange rates in the near term will have a material impact on our
future earnings.

Non-Trading Activities

Interest Rate Risk

Interest rate risk is identified for each large subsidiary and for the
Bank as a whole. The primary tools for the assessment of interest rate risk
are net interest income simulation, value at risk analyses and standard gap
analyses. Simulation techniques assist in a detailed determination of the risk
exposures, taking into account balance sheet dynamics such as current business
strategies and tactics, as well as other features that may exist within
standard banking products. Each net interest income simulation begins with an
expected rate case, supplemented by a variety of economic and interest rate
scenarios. Interest rate scenarios in which rates rise or fall
- 95 -Table of Contentsimmediately by 100 basis points illustrate the basic rate sensitivity of
our net interest income. Using the December 31, 2002 balance sheet, it is
estimated that the net interest margin would rise by 13 basis points in the
higher rate scenario, which would increase income from operations before income
taxes by $13 million over the next 12 months. Under the lower rate scenario,
the net interest margin could fall by 21 basis points, which results in a
decrease in income from operations before income taxes of $21 million over the
same period. While we have added approximately $365.4 million of fixed rate
securities since December 31, 2001 in order to reduce our exposure to declining
rates, the lower level of interest rates has further impacted the measured
interest rate risk. At December 31, 2001, a 100 basis point immediate increase
in rates would have improved net interest margin by 7 basis points, an increase
in income of $7 million. Under the lower rate scenario, the net interest
margin could fall by 14 basis points, which would have been a $15 million
decrease in income. The difference between the periods is primarily due to
more deposit rates reaching floors at the lower level of rates, while most
assets continue to reprice in line with market rate changes. Thus, there is
now a greater negative impact from declining rates. There is also a greater
improvement in margin with rising rates as some deposits at floors will not
initially pay higher rates.The available for sale marketable securities are also analysed using value
at risk. At December 31, 2002, the available for sale marketable securities
portfolio had value at risk of $4.2 million and a weighted average duration of
0.26 years. For the year ended December 31, 2002, the value at risk on the
available for sale marketable securities portfolio averaged $5.6 million, with
a range between $4.0 million and $8.4 million. For the year ended December 31,
2001, the available for sale marketable securities portfolio had value at risk
which averaged $6.1 million with a range between $4.2 million and $8.7 million,
and had a weighted average duration of 0.09 years at year-end.Another measure of interest rate risk, gap analysis, is the difference in
asset and liability repricing on a cumulative basis within a specified
time-frame. As set forth in the following table, at December 31, 2002 we had a
concentration in instruments that reprice and/or mature within a period of
three months.Interest Rate Sensitivity Position at December 31, 2002

|                                              |                                    |  |                                       |        |        |  |         |     |          |  |         |    |       |  |     |     |  |  |     |     |  |  |       |        | 
|--------------------------------------------- | ---------------------------------- |  | ------------------------------------- | ------ | ------ |  | ------- | --- | -------- |  | ------- | -- | ----- |  | --- | --- |  |  | --- | --- |  |  | ----- | ------ | 
|                                              |                                    |  | Interest Sensitivity Period in Months
|                                              |                                    |  | 0 to 3                                |        | 4 to 6 |  | 7 to 12 |     | 12 to 24 |  | Over 24 |    | Total
|                                              |                                    |  |                                       |        |        |  |         |     |          |  |         |    |      
|                                              |                                    |  | (US$ in millions)                    
|Interest-earning assets:                      |                                    |  |                                       |        |        |  |         |     |          |  |         |    |       |  |     |     |  |  |     |     |  |  |       |       
|Interest-earning deposits with banks          |                                    |  | 4,574                                 |        |        |  | 29      |     |          |  |        |    |       |  |    |     |  |  |    |     |  |  | 4,603 |       
|Available for sale securities                 |                                    |  | 3,448                                 |        |        |  |        |     |          |  |        |    |       |  | 60  |     |  |  | 293 |     |  |  | 3,801 |       
|Trading securities                            |                                    |  | 495                                   |        |        |  |        |     |          |  |        |    |       |  |    |     |  |  |    |     |  |  | 495   |       
|Loans                                         |                                    |  | 1,632                                 |        |        |  | 35      |     |          |  | 10      |    |       |  | 40  |     |  |  | 51  |     |  |  | 1,768 |       
|                                              | Total interest-earning assets      |  |                                       | 10,149 |        |  |         | 64  |          |  |         | 10 |       |  |     | 100 |  |  |     | 344 |  |  |       | 10,667 | 
|Interest-bearing liabilities:                 |                                    |  |                                       |        |        |  |         |     |          |  |         |    |       |  |     |     |  |  |     |     |  |  |       |       
|Domestic deposits                             |                                    |  | 5,158                                 |        |        |  | 117     |     |          |  | 74      |    |       |  | 91  |     |  |  | 145 |     |  |  | 5,585 |       
|Foreign deposits                              |                                    |  | 4,193                                 |        |        |  | 22      |     |          |  | 8       |    |       |  |    |     |  |  |    |     |  |  | 4,223 |       
|                                              | Total interest-bearing liabilities |  |                                       | 9,351  |        |  |         | 139 |          |  |         | 82 |       |  |     | 91  |  |  |     | 145 |  |  |       | 9,808  | 
|Interest rate sensitivity position            |                                    |  | 798                                   |        |        |  | (75     | )   |          |  | (72     | )  |       |  | 9   |     |  |  | 199 |     |  |  |       |       
|Cumulative interest rate sensitivity position |                                    |  | 798                                   |        |        |  | 723     |     |          |  | 651     |    |       |  | 660 |     |  |  | 859 |     |  |  |       |       

Key assumptions in the simulation, value at risk and gap analysis models
include the timing of cash flows, maturities and repricing of financial
instruments, changes in market conditions and deposit sensitivity. In this
very low interest rate environment, some deposits have hit floors and their
rates cannot adjust if rates decline further. The impact of the floors is
measured in the income simulation results, but the gap analysis shows only the
potential repricing for rising rates. These assumptions are inherently
uncertain and, as a result, the models cannot precisely estimate the effect on
our net interest revenue and economic value of our assets arising from changes
in interest rates. Actual results may differ from simulated results due to the
timing, magnitude and frequency of interest rate changes and changes in market
conditions, among other factors.

Foreign Exchange Risk

As an international bank, we accept deposits from customers in currencies
other than Bermuda and U.S. dollars. These deposits are generally reinvested
as deposits with other banks or in marketable securities in the same currency
in which the initial

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deposits are received. At December 31, 2002, we had foreign currency
denominated assets of $3.4 billion and foreign currency denominated liabilities
of $3.1 billion. Since we generally maintain balanced positions in each
currency, the risk associated with changes in foreign exchange rates is not
significant. To the extent that customer deposits cannot be reinvested in the
same currency, the foreign currency exposure is managed by our Capital Markets
Products division in a similar manner to our trading activities. This
generally involves the use of foreign exchange forward contracts to manage any
residual exposure. All such contracts are considered to be trading instruments
and are marked to market daily. See Trading ActivitiesForeign Exchange
Risk. For foreign currency denominated fixed interest securities, we may
utilise risk management instruments such as swaps to convert foreign currency
income streams into U.S. dollar income streams. These investments are then
managed within our overall interest rate risk framework in the same manner as
U.S. dollar denominated securities, as discussed below.

In certain overseas subsidiaries, we incur operating expenses in
currencies other than our respective functional currencies. To minimise the
variability in cash flows caused by foreign exchange rate risk, we use foreign
currency forward contracts to hedge the foreign currency cash flow exposures.
These contracts had a fair value of $1.3 million at December 31, 2002 and $0.2
million at December 31, 2001.

Some of our subsidiaries have functional currencies other than the Bermuda
or U.S. dollar. We are exposed to foreign currency risk when reporting our
financial position, as our financial statements are denominated in U.S.
dollars. The total value of shareholders equity for our subsidiaries that
have functional currencies other than the Bermuda or U.S. dollar was $122.8
million at December 31, 2002. The cumulative unrealised translation gain for
these subsidiaries at December 31, 2002 is $1.6 million. We do not hedge this
exposure as we feel that the amount of gain or loss is unlikely to be realised.

At December 31, 2002, we computed our net foreign exchange exposure to be
a net long position of $12.9 million on a consolidated basis. This amount
includes trading and non-trading activities, but excludes the foreign exchange
exposure arising from our investment in overseas subsidiaries, discussed above.
This net amount represents 2% of our shareholders equity at December 31, 2002,
which we believe is immaterial to our financial position. We do not believe
that changes in exchange rates in the near term will have a material effect on
our future earnings.

Risk Management Instruments

Derivative instruments are financial contracts whose value depends on the
value of other assets, interest rates, foreign exchange rates or indices. We
use derivative instruments, primarily interest rate swaps and futures
contracts, to reduce interest rate risk on interest-earning assets to ensure
they are within our guidelines and overall risk management strategies. We may
also use derivative instruments to reduce foreign exchange risk by translating
foreign currency cash flows into a currency where we have an offsetting
exposure.

Within our portfolios of marketable securities, we hold investments that
are a combination of fixed rate instruments and an interest rate or a foreign
currency swap. The effect of the swap is to translate the cash flows on an
underlying security into cash flows that meet our interest rate risk
requirements and match our currency exposures. Usually, these investments are
in the form of a package made up of a fixed rate security, with an attached
swap that exchanges the fixed interest flows to floating U.S.
dollar-denominated interest flows. See Note 6 of the Consolidated Financial
Statements.




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.




PART II




ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.




ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

On April 23, 2002, in connection with the listing of our common shares on
the Nasdaq National Market, we appointed EquiServe LLP to act as our paying
agent. EquiServes address is P.O. Box 43069, Providence,
Rhode Island 02940.

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ITEM 15. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this annual report, an
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.




ITEM 16. [RESERVED]




PART III




ITEM 17. FINANCIAL STATEMENTS

Not Applicable.




ITEM 18. FINANCIAL STATEMENTS

See
pages F-1 through F-37.




ITEM 19. EXHIBITS

Exhibit Index

| |  |         |     |                        |  |                                                                                                                                               
| |  | ------- | --- | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit |     |                       
| |  | No.     |     | Description of Exhibit
| |  |         |     |                       
| |  |         | 1.1 |                        |  | Bank of Bermuda Act (incorporated by reference to Exhibit 1.1 of
Registration Statement on Form 20-F, filed April 22, 2002).                  
| |  |         |     |                        |  |                                                                                                                                               
| |  |         | 1.2 |                        |  | Bye-laws of the Bank (incorporated by reference to Exhibit 1.2 of
Registration Statement on Form 20-F, filed April 22, 2002).                 
| |  |         |     |                        |  |                                                                                                                                               
| |  |         | 2.1 |                        |  | Amended and Restated Rights Agreement, dated as of July 29, 2002
(incorporated by reference to Exhibit 1 of Form 8-A12G, filed July
31, 2002).
| |  |         |     |                        |  |                                                                                                                                               
| |  |         | 8.1 |                        |  | Subsidiaries of the Registrant.                                                                                                               

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

| |  |                             |  |                        
| |  | --------------------------- |  | -----------------------
| |  | THE BANK OF BERMUDA LIMITED
| |  |                             |  |                        
| |  | By:                         |  | /s/ Henry B. Smith     
| |  |                             |  | Henry B. Smith         
| |  |                             |  | Chief Executive Officer

Date:  June 24, 2003

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CERTIFICATIONS

I, Henry B. Smith, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of The Bank of Bermuda
Limited;                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                   



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:    June 24, 2003



| | /s/ Henry B. Smith
Henry B. Smith
Chief Executive Officer
| | ---------------------------------------------------------

-100-



---



##### Table of Contents



I, Edward H. Gomez, certify that:



|1. |  | I have reviewed this annual report on Form 20-F of The Bank of Bermuda
Limited;                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                   



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:    June 24,
2003



| | /s/ Edward H. Gomez
Edward H. Gomez
Chief Financial Officer
| | -----------------------------------------------------------

-101-



---



##### Table of Contents



THE BANK OF BERMUDA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                    |  |      |     | 
|----------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                    |  | Page
|                                                                                    |  |     
|Report of KPMG, Independent Auditors                                                |  |      | F-2 | 
|Consolidated Balance Sheet                                                          |  |      | F-3 | 
|Consolidated Statement of Income                                                    |  |      | F-4 | 
|Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income |  |      | F-5 | 
|Consolidated Statement of Cash Flows                                                |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                          |  |      | F-7 | 

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To The Board of Directors and Shareholders

The Bank of Bermuda Limited

We have audited the accompanying consolidated balance sheets of The Bank of
Bermuda Limited and subsidiaries as of December 31, 2002 and December 31, 2001
and the related consolidated statements of income, changes in shareholders
equity and comprehensive income and cash flows for the years ended December 31,
2002 and December 31, 2001, the six month period ended December 31, 2000 and
the year ended June 30, 2000. These consolidated financial statements are the
responsibility of the Banks management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Bank of Bermuda
Limited and subsidiaries, as of December 31, 2002 and December 31, 2001, and
the results of its operations and its cash flows for the years ended December
31, 2002 and December 31, 2001, the six month period ended December 31, 2000
and the year ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.

/s/    KPMG
Chartered Accountants
Hamilton, Bermuda
January 17, 2003

F-2



---



##### Table of Contents



Consolidated Balance Sheet

|                                                   |                                                     |               |            |              |           |              |            |           |           | 
|-------------------------------------------------- | --------------------------------------------------- | ------------- | ---------- | ------------ | --------- | ------------ | ---------- | --------- | --------- | 
|                                                   |                                                     |               |            | December 31, |           | December 31,
|(In US$ thousands)                                 |                                                     | 2002          |            | 2001        
|                                                   |                                                     |               |            |             
|Assets                                             |                                                     |               |            |              |           |              |            |          
|Cash and deposits with banks                       |                                                     |               |            |              |           |              |            |          
|                                                   | Interest-earning                                    |               |            | 4,602,862    |           |              |            | 3,519,613 |          
|                                                   | Non-interest earning                                |               |            | 74,149       |           |              |            | 50,392    |          
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Total cash and deposits with banks                 |                                                     |               | 4,677,011  |              |           |              | 3,570,005  |          
|Marketable securities (Note 2)                     |                                                     |               |            |              |           |              |            |          
|                                                   | Available for sale                                  |               |            | 3,875,130    |           |              |            | 4,139,700 |          
|                                                   | Trading                                             |               |            | 494,768      |           |              |            | 1,328,175 |          
|Loans, less allowance for loan losses (Note 3)     |                                                     |               | 1,768,349  |              |           |              | 1,477,577  |          
|Premises, equipment and computer software (Note 4) |                                                     |               | 145,325    |              |           |              | 139,104    |          
|Accrued interest                                   |                                                     |               | 29,481     |              |           |              | 36,167     |          
|Other assets                                       |                                                     |               | 99,904     |              |           |              | 117,291    |          
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Total Assets                                       |                                                     |               | 11,089,968 |              |           |              | 10,808,019 |          
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Liabilities                                        |                                                     |               |            |              |           |              |            |          
|Customer deposits                                  |                                                     |               |            |              |           |              |            |          
|                                                   | Non-interest bearing                                |               |            | 357,172      |           |              |            | 298,303   |          
|                                                   | Interest bearing                                    |               |            |              |           |              |            |           |          
|                                                   |                                                     | Bermuda       |            |              | 5,585,245 |              |            |           | 4,946,877 | 
|                                                   |                                                     | International |            |              | 4,222,772 |              |            |           | 4,698,286 | 
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Total customer deposits                            |                                                     |               | 10,165,189 |              |           |              | 9,943,466  |          
|Accrued interest                                   |                                                     |               | 12,682     |              |           |              | 17,676     |          
|Other liabilities                                  |                                                     |               | 249,904    |              |           |              | 217,494    |          
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Total Liabilities                                  |                                                     |               | 10,427,775 |              |           |              | 10,178,636 |          
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Shareholders Equity (Note 5)                      |                                                     |               |            |              |           |              |            |          
|Common share capital, $1 par:                      |                                                     |               |            |              |           |              |            |          
|                                                   | Authorised shares  140,000,000                     |               |            |              |           |              |            |           |          
|                                                   | Outstanding shares  December 31, 2002  28,990,928 |               |            |              |           |              |            |           |          
|                                                   | (December 31, 2001 - 29,919,878)                    |               |            | 28,991       |           |              |            | 29,920    |          
|Share premium                                      |                                                     |               | 384,443    |              |           |              | 422,248    |          
|Retained earnings                                  |                                                     |               | 242,817    |              |           |              | 197,495    |          
|Accumulated other comprehensive income/(loss)      |                                                     |               | 5,942      |              |           |              | (20,280    | )        
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Total Shareholders Equity                         |                                                     |               | 662,193    |              |           |              | 629,383    |          
|                                                   |                                                     |               |            |              |           |              |            |           |          
|Total Liabilities and Shareholders Equity         |                                                     |               | 11,089,968 |              |           |              | 10,808,019 |          
|                                                   |                                                     |               |            |              |           |              |            |           |          

See accompanying Notes to Consolidated Financial Statements.

F-3



---



##### Table of Contents



Consolidated Statement of Income

|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|--------------------------------------------------------------------- | ------------------------------ | ---- | ------------ | ------- | ------------ | ---- | --------------- | ------- | ---------- |  | ------- | ------- |  |  | ------- | ------- | 
|                                                                      |                                |      | Year Ended   |         | Year Ended   |      | Six
MonthsEnded |         | Year Ended
|                                                                      |                                |      | December 31, |         | December 31, |      | December 31,    |         | June 30,  
|(In US$ thousands, except per share data)                             |                                | 2002 |              | 2001    |              | 2000 |                 | 2000   
|                                                                      |                                |      |              |         |              |      |                 |        
|Revenue                                                               |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |        
|Non-interest income                                                   |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |        
|                                                                      | Trust and related services     |      |              | 156,475 |              |      |                 | 148,109 |            |  |         | 68,124  |  |  |         | 129,447 | 
|                                                                      | Investment services            |      |              | 40,779  |              |      |                 | 40,736  |            |  |         | 22,219  |  |  |         | 42,146  | 
|                                                                      | Foreign exchange earnings      |      |              | 42,365  |              |      |                 | 42,394  |            |  |         | 21,502  |  |  |         | 37,726  | 
|                                                                      | Banking services               |      |              | 23,163  |              |      |                 | 24,395  |            |  |         | 12,208  |  |  |         | 24,918  | 
|                                                                      | Other non-interest income      |      |              | 1,474   |              |      |                 | 1,343   |            |  |         | 330     |  |  |         | 437     | 
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Total non-interest income                                             |                                |      | 264,256      |         |              |      | 256,977         |         |            |  | 124,383 |         |  |  | 234,674 |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Interest income                                                       |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |        
|                                                                      | Deposits with banks            |      |              | 73,734  |              |      |                 | 159,091 |            |  |         | 113,880 |  |  |         | 216,470 | 
|                                                                      | Loans                          |      |              | 89,260  |              |      |                 | 104,171 |            |  |         | 68,851  |  |  |         | 120,116 | 
|                                                                      | Marketable securities (Note 2) |      |              | 137,777 |              |      |                 | 223,950 |            |  |         | 144,850 |  |  |         | 221,667 | 
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Total interest income                                                 |                                |      | 300,771      |         |              |      | 487,212         |         |            |  | 327,581 |         |  |  | 558,253 |        
|Interest expense                                                      |                                |      | 124,997      |         |              |      | 289,538         |         |            |  | 222,816 |         |  |  | 376,044 |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Net interest income                                                   |                                |      | 175,774      |         |              |      | 197,674         |         |            |  | 104,765 |         |  |  | 182,209 |        
|(Recovery)/provision for loan losses (Note 3)                         |                                |      | (1,971       | )       |              |      | 2,662           |         |            |  | 2,589   |         |  |  | 916     |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Net interest income, after (recovery)/provision for loan losses       |                                |      | 177,745      |         |              |      | 195,012         |         |            |  | 102,176 |         |  |  | 181,293 |        
|Other income/(loss) (Note 11)                                         |                                |      | 3,524        |         |              |      | (1,936          | )       |            |  | 6,441   |         |  |  | 5,207   |        
|(Losses)/gains on trading portfolio                                   |                                |      | (24,900      | )       |              |      | (6,538          | )       |            |  | 1,135   |         |  |  | (1,205  | )      
|Gains/(losses) on available for sale marketable securities
(Note 2)   |                                |      | 372          |         |              |      | 293             |         |            |  | (14,102 | )       |  |  | (957    | )      
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Total Revenue                                                         |                                |      | 420,997      |         |              |      | 443,808         |         |            |  | 220,033 |         |  |  | 419,012 |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Operating Expenses                                                    |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |        
|Salaries                                                              |                                |      | 181,940      |         |              |      | 161,359         |         |            |  | 81,608  |         |  |  | 153,645 |        
|Pension and staff benefits (Note 8)                                   |                                |      | 58,373       |         |              |      | 51,858          |         |            |  | 26,566  |         |  |  | 48,586  |        
|Property                                                              |                                |      | 27,723       |         |              |      | 28,613          |         |            |  | 13,514  |         |  |  | 26,488  |        
|Systems and communications                                            |                                |      | 41,129       |         |              |      | 39,800          |         |            |  | 16,693  |         |  |  | 34,754  |        
|Corporate, marketing, and other (Note 7)                              |                                |      | 27,941       |         |              |      | 95,330          |         |            |  | 23,695  |         |  |  | 41,347  |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Total Operating Expenses                                              |                                |      | 337,106      |         |              |      | 376,960         |         |            |  | 162,076 |         |  |  | 304,820 |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Net income from operations, before income taxes                       |                                |      | 83,891       |         |              |      | 66,848          |         |            |  | 57,957  |         |  |  | 114,192 |        
|Income taxes (Note 13)                                                |                                |      | 6,233        |         |              |      | 6,771           |         |            |  | 3,228   |         |  |  | 8,138   |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Net income from operations, after income taxes                        |                                |      | 77,658       |         |              |      | 60,077          |         |            |  | 54,729  |         |  |  | 106,054 |        
|Cumulative effect of a change in accounting
principle (Notes 1 and 6) |                                |      |             |         |              |      |                |         |            |  | 1,517   |         |  |  |        |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|NET INCOME                                                            |                                |      | 77,658       |         |              |      | 60,077          |         |            |  | 56,246  |         |  |  | 106,054 |        
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 
|Earnings per share (Note 14)                                          |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |        
|                                                                      | Basic                          |      |              | 2.62    |              |      |                 | 2.00    |            |  |         | 1.87    |  |  |         | 3.61    | 
|                                                                      | Diluted                        |      |              | 2.53    |              |      |                 | 1.91    |            |  |         | 1.81    |  |  |         | 3.53    | 
|                                                                      |                                |      |              |         |              |      |                 |         |            |  |         |         |  |  |         |         | 

See accompanying Notes to Consolidated Financial Statements.

F-4



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##### Table of Contents



Consolidated Statement of Changes in
Shareholders Equity and Comprehensive Income

|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | -------- | -------- |  |  | -------- | - |  |  | ------- | -
|                                                                                                                                                               |  | Year         |         | Year         |  | Six Months   |          | Year    
|                                                                                                                                                               |  | Ended        |         | Ended        |  | Ended        |          | Ended   
|                                                                                                                                                               |  | December 31, |         | December 31, |  | December 31, |          | June 30,
|(In US$ thousands)                                                                                                                                             |  | 2002         |         | 2001         |  | 2000         |          | 2000    
|                                                                                                                                                               |  |              |         |              |  |              |          |         
|Common Share Capital                                                                                                                                           |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Issued and outstanding at beginning of period 
29,919,878 shares (December 31, 2001 
29,979,468; December 31, 2000  30,045,103; June
30, 2000  28,452,880) |  |              | 29,920  |              |  |              | 27,227   |          |  |  | 23,861   |   |  |  | 20,205  |  
|Dividend reinvestment                                                                                                                                          |  |              | 119     |              |  |              | 118      |          |  |  | 133      |   |  |  | 201     |  
|Stock dividend                                                                                                                                                 |  |              |        |              |  |              | 2,752    |          |  |  | 3,432    |   |  |  | 2,064   |  
|Warrant conversion                                                                                                                                             |  |              |        |              |  |              |         |          |  |  |         |   |  |  | 1,246   |  
|Issued under executive and employee share plans                                                                                                                |  |              | 155     |              |  |              | 267      |          |  |  | 55       |   |  |  | 152     |  
|Shares held by affiliates                                                                                                                                      |  |              | 146     |              |  |              | 13       |          |  |  | (254     | ) |  |  | (7      | )
|Shares repurchased and cancelled                                                                                                                               |  |              | (1,349  | )            |  |              | (457     | )        |  |  |         |   |  |  |        |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Issued and outstanding at end of period 
28,990,928 shares (December 31, 2001 
29,919,878; December 31, 2000  29,979,468; June
30, 2000  30,045,103)       |  |              | 28,991  |              |  |              | 29,920   |          |  |  | 27,227   |   |  |  | 23,861  |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Share Premium                                                                                                                                                  |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Balance at beginning of period                                                                                                                                 |  |              | 422,248 |              |  |              | 304,679  |          |  |  | 180,073  |   |  |  | 85,551  |  
|Dividend reinvestment                                                                                                                                          |  |              | 4,632   |              |  |              | 5,667    |          |  |  | 5,204    |   |  |  | 5,886   |  
|Stock dividend                                                                                                                                                 |  |              |        |              |  |              | 123,234  |          |  |  | 128,049  |   |  |  | 59,848  |  
|Warrant conversion                                                                                                                                             |  |              |        |              |  |              |         |          |  |  |         |   |  |  | 26,950  |  
|Issued under executive and employee share plans                                                                                                                |  |              | 3,354   |              |  |              | 5,711    |          |  |  | 530      |   |  |  | 4,906   |  
|Shares held by affiliates                                                                                                                                      |  |              | 5,089   |              |  |              | 1,794    |          |  |  | (9,177   | ) |  |  | (3,068  | )
|Shares repurchased and cancelled                                                                                                                               |  |              | (50,880 | )            |  |              | (18,837  | )        |  |  |         |   |  |  |        |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Balance at end of period                                                                                                                                       |  |              | 384,443 |              |  |              | 422,248  |          |  |  | 304,679  |   |  |  | 180,073 |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Retained Earnings                                                                                                                                              |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Balance at beginning of period                                                                                                                                 |  |              | 197,495 |              |  |              | 293,936  |          |  |  | 398,153  |   |  |  | 381,405 |  
|Net income for period                                                                                                                                          |  |              | 77,658  |              |  |              | 60,077   |          |  |  | 56,246   |   |  |  | 106,054 |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|                                                                                                                                                               |  |              | 275,153 |              |  |              | 354,013  |          |  |  | 454,399  |   |  |  | 487,459 |  
|Cash dividends on common shares                                                                                                                                |  |              | (32,336 | )            |  |              | (29,912  | )        |  |  | (28,339  | ) |  |  | (29,419 | )
|Stock dividend                                                                                                                                                 |  |              |        |              |  |              | (126,606 | )        |  |  | (132,124 | ) |  |  | (61,912 | )
|Shares held by affiliates                                                                                                                                      |  |              |        |              |  |              |         |          |  |  |         |   |  |  | 2,025   |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Balance at end of period                                                                                                                                       |  |              | 242,817 |              |  |              | 197,495  |          |  |  | 293,936  |   |  |  | 398,153 |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Accumulated Other Comprehensive Income/(Loss)                                                                                                                  |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Net unrealised gains/(losses) on
available for sale securities                                                                                                 |  |              | 3,045   |              |  |              | (10,604  | )        |  |  | 7,473    |   |  |  | 8,344   |  
|Net unrealised gains/(losses) on translation
of net investment in foreign operations                                                                           |  |              | 1,634   |              |  |              | (9,830   | )        |  |  | (7,103   | ) |  |  | (6,398  | )
|Net unrealised gains on cash flow hedges                                                                                                                       |  |              | 1,263   |              |  |              | 154      |          |  |  | 235      |   |  |  |        |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Balance at end of period                                                                                                                                       |  |              | 5,942   |              |  |              | (20,280  | )        |  |  | 605      |   |  |  | 1,946   |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Total Shareholders Equity                                                                                                                                     |  |              | 662,193 |              |  |              | 629,383  |          |  |  | 626,447  |   |  |  | 604,033 |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Comprehensive Income                                                                                                                                           |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Net income                                                                                                                                                     |  |              | 77,658  |              |  |              | 60,077   |          |  |  | 56,246   |   |  |  | 106,054 |  
|Change in unrealised gains/(losses) on
available for sale securities                                                                                           |  |              | 13,649  |              |  |              | (18,077  | )        |  |  | (871     | ) |  |  | 8,771   |  
|Change in unrealised gains/(losses) on translation
of net investment in foreign operations                                                                     |  |              | 11,464  |              |  |              | (2,727   | )        |  |  | (705     | ) |  |  | (3,776  | )
|Net unrealised gains/(losses) on cash flow hedges                                                                                                              |  |              | 1,109   |              |  |              | (81      | )        |  |  | 235      |   |  |  |        |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  
|Total Comprehensive Income                                                                                                                                     |  |              | 103,880 |              |  |              | 39,192   |          |  |  | 54,905   |   |  |  | 111,049 |  
|                                                                                                                                                               |  |              |         |              |  |              |          |          |  |  |          |   |  |  |         |  

See accompanying Notes to Consolidated Financial Statements.

F-5



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##### Table of Contents



Consolidated Statement of Cash Flows

|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |          |  
|-------------------------------------------------------------- | ----------------------------------------------------- | ---- | ------------ | -------- | ------------ | ---- | --------------- | ------- | ---------- |  | ---------- | ------- | - |  | ---------- | -------- | -
|                                                               |                                                       |      | Year Ended   |          | Year Ended   |      | Six
MonthsEnded |         | Year Ended
|                                                               |                                                       |      | December 31, |          | December 31, |      | December 31,    |         | June 30,  
|(In US$ thousands)                                             |                                                       | 2002 |              | 2001     |              | 2000 |                 | 2000   
|                                                               |                                                       |      |              |          |              |      |                 |        
|Operating Activities                                           |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Net income for the period                                      |                                                       |      | 77,658       |          |              |      | 60,077          |         |            |  | 56,246     |         |   |  | 106,054    |         
|Items not affecting cash and cash equivalents                  |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|                                                               | Depreciation and amortisation                         |      |              | 20,594   |              |      |                 | 23,689  |            |  |            | 9,322   |   |  |            | 19,982   |  
|                                                               | Premium/(discount) on available for sale securities   |      |              | 1,132    |              |      |                 | (903    | )          |  |            | 600     |   |  |            | 711      |  
|                                                               | (Gains)/losses on available for sale securities       |      |              | (372     | )            |      |                 | (293    | )          |  |            | 13,961  |   |  |            | 957      |  
|                                                               | Change in carrying value of investment in affiliate   |      |              |         |              |      |                 | 11,533  |            |  |            |        |   |  |            |         |  
|                                                               | Gain on sale of subsidiary                            |      |              |         |              |      |                 | (1,970  | )          |  |            | (2,835  | ) |  |            |         |  
|                                                               | Net loss arising on sale and impairment of properties |      |              | 1,181    |              |      |                 |        |            |  |            |        |   |  |            |         |  
|                                                               | (Recovery)/provision for loan losses                  |      |              | (1,971   | )            |      |                 | 2,662   |            |  |            | 2,589   |   |  |            | 916      |  
|                                                               | Cumulative effect of a change in accounting principle |      |              |         |              |      |                 |        |            |  |            | (1,517  | ) |  |            |         |  
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|                                                               |                                                       |      | 98,222       |          |              |      | 94,795          |         |            |  | 78,366     |         |   |  | 128,620    |         
|Net change in trading account securities                       |                                                       |      | 833,407      |          |              |      | (740,388        | )       |            |  | 16,896     |         |   |  | 28,115     |         
|Change in other assets and liabilities  net                   |                                                       |      | 63,830       |          |              |      | 18,986          |         |            |  | (4,551     | )       |   |  | (107,730   | )       
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Cash provided by/(used in) Operating Activities                |                                                       |      | 995,459      |          |              |      | (626,607        | )       |            |  | 90,711     |         |   |  | 49,005     |         
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Investing Activities                                           |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Additions to premises, equipment and computer                  |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|                                                               | software  net                                        |      |              | (27,764  | )            |      |                 | (24,501 | )          |  |            | (12,175 | ) |  |            | (24,675  | )
|                                                               | Loans  net                                           |      |              | (288,801 | )            |      |                 | 33,780  |            |  |            | 64,302  |   |  |            | (144,515 | )
|Proceeds on sale and maturity of available for
sale securities |                                                       |      | 1,997,381    |          |              |      | 1,685,581       |         |            |  | 270,135    |         |   |  | 904,729    |         
|Purchase of available for sale securities                      |                                                       |      | (1,719,922   | )        |              |      | (1,745,817      | )       |            |  | (1,007,988 | )       |   |  | (1,443,355 | )       
|Investment in affiliate                                        |                                                       |      |             |          |              |      | (4,233          | )       |            |  | (3,300     | )       |   |  | (2,000     | )       
|Proceeds on sale of subsidiary                                 |                                                       |      |             |          |              |      | 4,250           |         |            |  | 3,000      |         |   |  |           |         
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Cash used in Investing Activities                              |                                                       |      | (39,106      | )        |              |      | (50,940         | )       |            |  | (686,026   | )       |   |  | (709,816   | )       
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Financing Activities                                           |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Change in demand and term deposit liabilities                  |                                                       |      | 221,723      |          |              |      | (566,456        | )       |            |  | 1,031,329  |         |   |  | 747,061    |         
|Change in common shares  net                                  |                                                       |      | (38,734      | )        |              |      | (6,344          | )       |            |  | (4,152     | )       |   |  | 38,291     |         
|Cash dividends                                                 |                                                       |      | (32,336      | )        |              |      | (29,912         | )       |            |  | (28,339    | )       |   |  | (29,419    | )       
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Cash provided by/(used in) Financing Activities                |                                                       |      | 150,653      |          |              |      | (602,712        | )       |            |  | 998,838    |         |   |  | 755,933    |         
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Net increase/(decrease) in cash and deposits                   |                                                       |      | 1,107,006    |          |              |      | (1,280,259      | )       |            |  | 403,523    |         |   |  | 95,122     |         
|Cash and deposits at beginning of period                       |                                                       |      | 3,570,005    |          |              |      | 4,850,264       |         |            |  | 4,446,741  |         |   |  | 4,351,619  |         
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Cash and deposits at end of period                             |                                                       |      | 4,677,011    |          |              |      | 3,570,005       |         |            |  | 4,850,264  |         |   |  | 4,446,741  |         
|                                                               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Supplemental Disclosure of Cash Flow Information               |                                                       |      |              |          |              |      |                 |         |            |  |            |         |   |  |            |         
|Amount of interest paid in the period                          |                                                       |      | 129,991      |          |              |      | 311,124         |         |            |  | 214,844    |         |   |  | 378,171    |         
|Amount of income tax paid in the period                        |                                                       |      | 7,028        |          |              |      | 8,476           |         |            |  | 3,489      |         |   |  | 5,189      |         

See accompanying Notes to Consolidated Financial Statements.

F-6



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | SIGNIFICANT ACCOUNTING POLICIES
|-- |  | -------------------------------

General

These financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Such estimates are subject
to change in the future as additional information becomes available or
previously existing circumstances are modified.

Change in Fiscal Year End

On September 20, 2000, the Banks shareholders approved the change in the
Banks fiscal year end from June 30 to December 31.

Basis of Consolidation

The consolidated financial statements include, on a line-by-line basis,
the accounts and results of operations of all subsidiaries. Inter-company
transactions are eliminated on consolidation.

Investments in affiliates which are less than majority owned but more than
20% owned are accounted for under the equity method of accounting. The Banks
proportionate share of the income or loss of such affiliates is included in the
Consolidated Statement of Income.

Comparative Figures

Comparative figures are restated wherever necessary to conform to the
current period presentation.

Foreign Currency Translation

Assets and liabilities denominated in Bermuda dollars are translated into
US dollars at par. Other foreign currency assets and liabilities are translated
into US dollars at rates of exchange prevailing on the balance sheet date,
except for non-monetary assets and liabilities which are translated at their
historical rate. Revenues and expenses are translated at the rate prevailing on
the day of the transaction or the average daily rates. Realised and unrealised
gains and losses are included in foreign exchange earnings.

The assets and liabilities of foreign currency based subsidiaries are
translated at the rates of exchange prevailing on the balance sheet date.
Unrealised translation gains or losses on investments in foreign currency based
subsidiaries are recorded as a separate component of shareholders equity
within accumulated other comprehensive income. Such gains and losses are
recorded in the Consolidated Statement of Income only when realised.

Marketable Securities

Marketable debt and equity securities classified as available for sale are
reported at fair value with unrealised gains and losses included within
accumulated other comprehensive income, a separate component of shareholders
equity. Unquoted investments are carried at cost. Trading account securities
are carried at fair value with unrealised gains and losses reported within
gains/(losses) on trading securities in the Consolidated Statement of Income as
they arise.

Gains and losses on the sale of securities are computed on the basis of
the specific identification method and are reported within losses on marketable
securities in the Consolidated Statement of Income.
F-7Table of ContentsThe Bank carries out a quarterly review of its investments using
information such as market price, credit rating, analysts reports, outlook for
the stock and applicable industry, future estimated cash flows and other
factors to determine whether or not a decline in value below cost is
other-than-temporary. When it is determined that an investments value is
impaired on an other-than-temporary basis, the cost of that investment is
written down to its estimated fair value and the write down is included within
losses on marketable securities in the Consolidated Statement of Income. The
new cost basis is not adjusted for any subsequent recoveries in fair value.LoansLoans are stated net of any related allowance for credit losses. Interest
income is accounted for on the accrual basis except on loans classified as
impaired.Impaired LoansA loan is considered impaired when, in the opinion of management and based
on current information and events, there has been a deterioration in credit
quality to the extent that it is probable that the Bank will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Loans for which collection is
more than 90 days overdue are automatically classified as impaired unless the
loan is well secured and in the process of collection.When a loan has been individually identified as impaired, the carrying
amount of the loan is measured based on the present value of the payments
expected to be received or the fair value of the underlying collateral. Impaired loans are placed on a non-accrual basis with
interest recorded in income only when received.Assets that are acquired in satisfaction of impaired loans are recorded at
the lower of fair value or the carrying value of the loan at the date of
foreclosure and are included in other assets on the Consolidated Balance Sheet.
Any excess of the carrying value of the loan over the fair value of the asset
acquired is charged to the allowance for loan losses in the current period.Loan origination fees, including loan restructuring or renegotiating fees,
are deferred and amortised to non-interest income over the term of the loan.
Commitment fees are treated on the same basis if there is a reasonable
expectation that the commitment will be called upon and will result in a loan,
otherwise the fees are deferred and amortised to income over the term of the
commitment. Commitment fees on revolving lines of credit are determined
retrospectively each quarter based upon the unused line of credit in the
previous period and are recognised in income at that time.Allowance for Loan LossesThe Bank maintains an allowance for loan losses to provide for losses
inherent in the portfolio. The allowance for loan losses is maintained at a
level deemed appropriate by management to adequately provide for both known
losses and as yet unidentified losses existing in the loan portfolios at the
balance sheet date.Specific ReserveThe Bank employs a risk rating methodology for all commercial, corporate,
and secured short-term investment loans. On a quarterly basis, risk rated
loans deemed to be substandard or doubtful are assessed for impairment by
comparing the carrying value of each such loan to its current value determined
through discounted cash flow analysis, an assessment of the realisable value of
collateral, or by the loans fair value. Identified shortfalls in value are
set up as specific provisions against these assets. Although consumer and
personal loans, mortgages and credit cards are not risk rated, all such
impaired loans that have an outstanding balance greater than $100,000 are
individually assessed for impairment and the need for a specific reserve using
the same analysis. This analysis is also performed quarterly and specific
provisions are charged against these assets in an amount equal to the
identified shortfalls.F-8Table of ContentsGeneral ReserveOn a quarterly basis a general reserve is also established to absorb
credit losses inherent in the portfolio at the balance sheet date, which have
not yet been specifically identified. A general reserve is established for
risk rated loans and non-risk rated loans. The Bank estimates historic loss
rates for each risk rating which are adjusted based on a qualitative assessment
framework that considers factors such as portfolio quality trends, portfolio
growth, and portfolio management. Adjusted historic loss factors are applied
to the portfolio balance, excluding identified impaired loan assets that
warrant a specific reserve, for each risk rating. General reserves are
established for the non-risk rated portfolio with reference to historic net
loss experience from each portfolio segment adjusted for qualitative factors
such as delinquency trends, portfolio growth, and changes in underwriting
criteria. Impaired assets that warrant a specific reserve are excluded from
the loans subject to this analysis. The Banks personal and commercial loan
and mortgage portfolios are concentrated in Bermuda, which has an economy that
is largely dependent on tourism and international business services. The
health of these industry segments depends to a large extent on the strength of
US and European economies. Because of this concentration and also to reflect
any imprecision in the allowance methodology, the Bank also includes in general
reserves an amount that represents managements judgments of inherent losses
within the portfolio which have not otherwise been identified or measured in
this analysis.Charge-offsAll consumer and personal loans and mortgages greater than $100,000 and
all risk rated loans, that have been identified as impaired and provided for
under the reserving methodology, are charged off when they are deemed to be
uncollectible. Any subsequent recoveries of these loans are added back to the
allowance for loan losses. Consumer and personal loans and mortgages with an
outstanding balance less than $100,000 that reach 120 days past due and credit
card balances that reach 180 days past due are charged off immediately. The
amount of the loan is written off and subsequent recoveries are added back to
the allowance for loan losses when received.The amount of the provision for loan losses that is charged to the
Consolidated Statement of Income is the amount required to bring the allowance
to the level management determines is needed to absorb all probable loan losses
inherent in the Banks loan portfolio at the balance sheet date. The models
developed by the Bank to estimate its allowance for loan losses are subjective
and use assumptions and data that management believes are appropriate based
upon information that is currently available. However these assumptions are
subjective and may require revision in the future. Such adjustments could have
a significant impact on the level of reserves carried and on reported earnings
in future periods.Revenue RecognitionThe Bank recognises interest income and expense on the accruals basis.The Banks non-interest income represents fee income from the provision of
investment, banking, foreign exchange, trustee, corporate administration and
other related services. Such income is recognised on the accruals basis as the
related services are provided to clients, based upon the underlying investment
transaction volume or the value of the assets under administration, as
appropriate.Assets Held in Trust or CustodySecurities and properties (other than cash and deposits held with the
Bank) held in a trust, custody, agency or fiduciary capacity for customers are
not included on the Consolidated Balance Sheet as such assets are not the
property of the Bank.Premises, Equipment and Computer SoftwarePremises, equipment and computer software are stated at cost less
accumulated depreciation. Depreciation, including amortisation, is charged on a
straight line basis over the following estimated useful lives of the assets:
buildings  40 years; furniture and fixtures  5 to 7 years; equipment  3 to 5
years; computer software  3 years. InF-9Table of Contentsthe case of leasehold improvements, depreciation is charged over the
shorter of the estimated useful life of the asset or the term of the lease.The Bank reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the existing carrying value for an asset
or group of assets is not recoverable. To the extent that the carrying value
is not deemed to be recoverable, then a charge will be made to income in the
current period to reduce the carrying value of the asset or assets to their
estimated fair value.Goodwill and Other Intangible AssetsGoodwill arises mainly from the excess of the purchase price of Bermuda
Home Limited (BHL) over the fair value of its net assets when it was acquired
in May 1999. The Bank is carrying goodwill of $11.3 million as at December 31,
2002 (December 31, 2001 - $11.3 million; December 31, 2000 - $12.2 million;
June 30, 2000 - $12.7 million). The BHL activity is reported as part of the
Community Banking division in Note 10.In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Number 142  Goodwill and
Other Intangible Assets. Under SFAS Number 142 goodwill is deemed to have an
indefinite life, is no longer amortised, but is subjected to an initial
impairment test on adoption of SFAS Number 142 and an annual impairment test in
subsequent years. Impairment losses for goodwill arising due to the initial
application of SFAS Number 142 are reported as a change in an accounting
principle and any subsequent impairment losses are reported as operating
expenses in a separate line on the income statement. The Bank adopted SFAS
Number 142 on January 1, 2002.The Bank completed the initial goodwill impairment test upon its adoption
of SFAS Number 142 and determined that no impairment charge was necessary.The amount of goodwill amortisation for the year ended December 31, 2002
was $nil (year ended December 31, 2001 - $0.9 million; six months ended
December 31, 2000 - $0.5 million; year ended June 30, 2000 - $0.9 million) and
therefore was not significant. As a result, the pro-forma impact on reported
net income and earnings per share arising from the adoption of SFAS Number142
is not presented.Derivative Instruments and Hedging ActivitiesThe Bank enters into interest rate and foreign exchange swaps, futures,
forwards and options as part of its overall risk management activities, as an
intermediary for customers, and to generate income. Instruments used as part
of the Banks overall risk management activities are designated as risk
management instruments while all others are designated as client related or
trading instruments.In June 1998, the FASB issued SFAS Number 133 - Accounting for Derivative
Instruments and Certain Hedging Activities. In June 2000, the FASB issued SFAS
Number 138 - Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS Number 133. SFAS Number 133 and SFAS Number
138 (the standards) require that all derivative instruments be recorded on the
balance sheet at their respective fair values. The standards are effective for
all fiscal quarters of all fiscal years beginning after June 30, 2000; the Bank
adopted the standards on July 1, 2000.In accordance with the transition provisions of the standards, a net gain
of $1.5 million was transferred from accumulated other comprehensive income
through a cumulative-effect-type adjustment to consolidated net income on July
1, 2000. The $1.5 million transition adjustment is made up of the cumulative
unrealised gains and losses on derivatives, together with the cumulative
unrealised losses and gains on the hedged marketable securities (to the extent
of an offsetting adjustment for the related derivative instruments) that
existed at June 30, 2000. The gross gains and losses transferred for the
derivatives were $50.5 million and $10.9 million, respectively. The gross
losses and gains transferred for the hedged marketable securities were $49
million and $10.9 million, respectively.Those derivatives that did not qualify for hedge accounting under the
standards were transferred to the trading portfolio on July 1, 2000 along with
the associated marketable securities. The fair value of the derivativesF-10Table of Contentsand associated marketable securities transferred was $106.7 million at
that date. The net unrealised gain relating to these derivatives and securities
recognised in net income at the date of transfer was $25,000 and this amount is
included in the transition adjustment discussed in the preceding paragraph.All derivatives are recognised on the Consolidated Balance Sheet at their
fair value. On the date the derivative contract is entered into, the Bank
designates the derivative as either a hedge of the fair value of a recognised
asset or liability or of an unrecognised firm commitment (fair value hedge), a
hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognised asset or liability (cash flow hedge),
a foreign currency, fair value, or cash flow hedge (foreign currency hedge), or
a held for trading (trading) instrument. The Bank formally documents all
relationships between the hedging instruments and the hedged items, as well as
its risk management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are
designated as fair value, cash flow, or foreign currency hedges to specific
assets and liabilities on the Consolidated Balance Sheet or to specific firm
commitments or forecasted transactions. The Bank also formally assesses, both
at the inception of each hedge and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge or that it has ceased to
be a highly effective hedge, the Bank discontinues hedge accounting
prospectively.Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a fair value hedge, along with the loss or
gain on the hedged asset or liability or unrecognised firm commitment that is
attributable to the hedged risk are recorded in the Consolidated Statement of
Income. Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a cash flow hedge are recorded in other
comprehensive income, until earnings are affected by the variability in cash
flows of the designated hedged item or the forecasted transaction. Changes in
the fair value of derivatives that are highly effective as hedges and that are
designated and qualify as foreign currency hedges are recorded in either the
Consolidated Statement of Income or other comprehensive income, depending on
whether the hedge transaction is a fair value hedge or a cash flow hedge.
Changes in the fair value of derivative trading instruments are reported in the
Consolidated Statement of Income.The Bank discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is de-designated as a hedging
instrument, because it is unlikely that a forecasted transaction will occur, a
hedged firm commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a hedging
instrument is no longer appropriate.When hedge accounting is discontinued because the hedged item no longer
meets the definition of a firm commitment, the Bank continues to carry the
derivative on the Consolidated Balance Sheet at its fair value, removes any
asset or liability that was recorded pursuant to recognition of the firm
commitment from the Consolidated Balance Sheet and recognises any gain or loss
in the Consolidated Statement of Income. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not occur, the Bank
continues to carry the derivative on the Consolidated Balance Sheet at its fair
value, and gains and losses that were accumulated in other comprehensive income
are recognised immediately in the Consolidated Statement of Income. In all
other situations in which hedge accounting is discontinued, the Bank continues
to carry the derivative at its fair value on the Consolidated Balance Sheet,
and recognises any subsequent changes in its fair value in the Consolidated
Statement of Income.Futures contracts are held within the trading portfolio to manage the
duration of certain securities held. These contracts are marked to market and
all gains and losses are included in the Consolidated Statement of Income in
gains/(losses) on marketable securities.Foreign exchange spot and forward contracts entered into to meet clients
needs are marked to market and all gains and losses are included in foreign
exchange earnings. Any other trading instruments are marked to market and all
gains and losses are recorded in the Consolidated Statement of Income.Prior to the adoption of the standards on July 1, 2000, the Bank accounted
for its risk management instruments as follows:F-11Table of ContentsNet accrued interest receivable/payable on interest rate and foreign
currency swaps was recorded as other assets and liabilities as appropriate.
The unrealised gains or losses on such swaps were recognised in a manner which
was consistent with the method of accounting for the hedged items. Unrealised
gains or losses on swaps used to hedge available for sale securities were
reported as a separate component of shareholders equity within accumulated
other comprehensive income.Risk management swaps were assigned to hedge a specific asset or liability
and reduced the Banks interest rate or foreign currency risk. They also
achieved their intended objective of converting the yield on the hedged asset
or liability to the desired rate. This criterion was assumed to have been met
if the interest rate on the hedged asset or liability was identical to the
offsetting interest rate on the swap. In addition, the notional amount of the
swap must have been less than or equal to the par amount of the item being
hedged. If a risk management swap was terminated or no longer met the criteria
described above, any unrealised gain or loss existing at that time was deferred
and amortised over the remaining original hedge period. Any subsequent changes
in value of the swap were recorded within gains/(losses) on marketable
securities in the Consolidated Statement of Income.Earnings Per ShareEarnings per share presented in the Consolidated Statement of Income is
calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated
by dividing net income by the weighted average number of common shares
outstanding plus potentially dilutive common shares. Options and warrants
issued by the Bank are considered potentially dilutive common shares and are
included in the calculation using the treasury stock method.Income TaxesThe Bank determines its income tax expense and liability under the
provisions of SFAS Number 109 - Accounting for Income Taxes. Under the asset
and liability method of SFAS Number 109, deferred tax assets and liabilities
are recognised for the future tax consequences attributable to differences
between the financial statement carrying amount of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS Number 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognised in income in the period that
includes the enactment date.Stock Based Employee Compensation PlansAt December 31, 2002 the Bank had five stock based employee compensation
plans, which are described more fully in Note 12. The Bank applies the
recognition and measurement principles of Accounting Principle Board (APB)
Opinion Number 25 - Accounting for Stock Issued to Employees, and related
Interpretations in accounting for those plans. Compensation expense is
recognised for the Banks share purchase plans due to the size of the purchase
discount compared to the market price of the shares. For the Banks stock
option plans no compensation expense is reflected in net income as the options
granted under those plans have an exercise price equal to the market value of
the underlying common stock on the date of the grant.The Bank has provided the disclosures required by SFAS Number 123 -
Accounting for Stock-Based Compensation, which describes a method of accounting
for stock compensation plans that is based on the fair value of the stock
options granted. The weighted average fair value of stock options granted in
the year ended December 31, 2002 was $13.13 (year ended December 31, 2001 -
$12.87; six months ended December 31, 2000 - $10.65; year ended June 30, 2000 -
$6.61) per share, using the Black-Scholes option-pricing model with the
following assumptions:F-12Table of Contents

|                        |  |              |       |              |  |                 |       |            |  |  |       |   |  |  |       |  
|----------------------- |  | ------------ | ----- | ------------ |  | --------------- | ----- | ---------- |  |  | ----- | - |  |  | ----- | -
|                        |  | Year Ended   |       | Year Ended   |  | Six
MonthsEnded |       | Year Ended
|                        |  | December 31, |       | December 31, |  | December 31,    |       | June 30,  
|                        |  | 2002         |       | 2001         |  | 2000            |       | 2000      
|                        |  |              |       |              |  |                 |       |           
|Dividend yield          |  |              | 3.59  | %            |  |                 | 2.26  | %          |  |  | 2.45  | % |  |  | 3.00  | %
|Risk free interest rate |  |              | 4.08  | %            |  |                 | 4.50  | %          |  |  | 4.64  | % |  |  | 6.10  | %
|Expected volatility     |  |              | 35.62 |              |  |                 | 26.64 |            |  |  | 30.63 |   |  |  | 29.71 |  
|Expected lives          |  | 9 years      |       | 10 years     |  | 10 years        |       | 10 years  

The following table illustrates the effect on net income and earnings per
share if the Bank had applied the fair value recognition provisions of FASB
Statement Number 123 to its stock plans:

|                                                                                                                                                            |  |                                           |        |              |  |              |        |            |  |            |        |   |  |  |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------ | ------------ |  | ------------ | ------ | ---------- |  | ---------- | ------ | - |  |  | ------- | -
|                                                                                                                                                            |  |                                           |        |              |  |              |        |            |  | Six Months |        |   |  | 
|                                                                                                                                                            |  | Year Ended                                |        | Year Ended   |  | Ended        |        | Year Ended
|                                                                                                                                                            |  | December 31,                              |        | December 31, |  | December 31, |        | June 30,  
|                                                                                                                                                            |  | 2002                                      |        | 2001         |  | 2000         |        | 2000      
|                                                                                                                                                            |  |                                           |        |              |  |              |        |           
|                                                                                                                                                            |  | (In US$ thousands, except per share data)
|Net income as reported                                                                                                                                      |  |                                           | 77,658 |              |  |              | 60,077 |            |  |            | 56,246 |   |  |  | 106,054 |  
|Add: stock based
employee compensation
expense included in
reported net income
net of related tax
effects                                                   |  |                                           | 2,033  |              |  |              | 3,516  |            |  |            | 1,087  |   |  |  | 1,576   |  
|Deduct: total stock
based employee
compensation expense
determined under fair
value methods,
(including options)
for all awards, net of
related tax effects |  |                                           | (9,816 | )            |  |              | (9,132 | )          |  |            | (2,926 | ) |  |  | (5,231  | )
|Net income  pro forma                                                                                                                                      |  |                                           | 69,875 |              |  |              | 54,461 |            |  |            | 54,407 |   |  |  | 102,399 |  
|Earnings per share                                                                                                                                          |  |                                           |        |              |  |              |        |            |  |            |        |   |  |  |         |  
| as reported (basic)                                                                                                                                       |  |                                           | 2.62   |              |  |              | 2.00   |            |  |            | 1.87   |   |  |  | 3.61    |  
| as reported (diluted)                                                                                                                                     |  |                                           | 2.53   |              |  |              | 1.91   |            |  |            | 1.81   |   |  |  | 3.53    |  
|Earnings per share                                                                                                                                          |  |                                           |        |              |  |              |        |            |  |            |        |   |  |  |         |  
| pro forma (basic)                                                                                                                                         |  |                                           | 2.36   |              |  |              | 1.82   |            |  |            | 1.81   |   |  |  | 3.49    |  
| pro forma (diluted)                                                                                                                                       |  |                                           | 2.28   |              |  |              | 1.74   |            |  |            | 1.75   |   |  |  | 3.41    |  

Recent Accounting Pronouncements

FASB Statement Number 143  Accounting for Asset Retirement Obligations

In
October 2001, the FASB issued Statement Number 143 - Accounting for
Asset Retirement Obligations. This standard applies to obligations that are
associated with the retirement of long-lived assets that result from the
acquisition, construction, development or normal operations of a long-lived
asset. This statement is effective for fiscal years beginning after June 15,
2002, with earlier application encouraged. The adoption of this standard is not
expected to have a significant impact on the Banks financial reporting.

FASB Statement Number 144  Accounting for the Impairment or Disposal of
Long-Lived Assets

In
October 2001, the FASB issued Statement Number 144 - Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived

F-13



---



##### Table of Contents



assets. This statement is effective for fiscal years beginning after
December 15, 2001. The adoption of this standard did not have a significant
impact on the Banks financial reporting.



| | FASB Statement Number 146  Accounting for Costs Associated with Exit or
Disposal Activities
| | --------------------------------------------------------------------------------------------

In
June 2002, the FASB issued Statement Number 146 - Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Number 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of this standard is not
expected to have a significant impact on the Banks financial reporting.



| | FASB Statement Number 147  Acquisition of Certain Financial
Institutions-an amendment of FASB Statements Numbers 72 and 144 and FASB
Interpretation Number 9
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

In
October 2002, the FASB issued Statement Number 147 - Acquisition of
Certain Financial Institutions- an amendment of FASB Statements Numbers 72 and
144 and FASB Interpretation Number 9. This statement removes acquisitions of
financial institutions from the scope of both Statement Number 72 and
Interpretation Number 9 and requires that those transactions be accounted for
in accordance with FASB Statement Number 141, Business Combinations, and number
142, Goodwill and Other Intangible Assets. In addition, this statement amends
FASB Statement Number 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and borrower-
relationship intangible assets and credit cardholder intangible assets. The
adoption of this standard is not expected to have a significant impact on the
Banks financial reporting.



| | FASB Statement Number 148  Accounting for Stock-based Compensation-
Transition and Disclosure- an amendment of FASB Statement Number 123
| | -----------------------------------------------------------------------------------------------------------------------------------------

In
December 2002, the FASB issued Statement Number 148 - Accounting for
Stock-based Compensation-Transition and Disclosure- an amendment of FASB
Statement Number 123. This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. At the present time the Bank does not
intend to change to the fair value based method of accounting for stock-based
employee compensation, although it may do so in the future. This statement
also amends the disclosure requirements of FASB Statement Number 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Bank has complied with the required
disclosure in this note under the heading, Stock Based Employee Compensation
Plans. This disclosure illustrates the impact that the adoption of the fair
value method of accounting for stock-based employee compensation under FASB
Number 148 would have, should the Bank elect to adopt this method.



| | FASB Interpretation Number 45  Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

In November 2002, the FASB issued Interpretation Number 45  Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures required by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognise, at the inception of a guarantee, a liability for the
fair value of the obligations it has undertaken in issuing the guarantee. The
initial recognition and measurement provisions of the interpretation are
applicable for all guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for fiscal years ending after December
15, 2002 and have been provided in Note 7 to the financial statements. The
adoption of this standard is not expected to have a significant impact on the
Banks financial reporting.

F-14



---



##### Table of Contents



FASB Interpretation Number 46  Consolidation of Variable Interest
Entities

In January 2003, the FASB issued Interpretation Number 46  Consolidation
of Variable Interest Entities. This interpretation of Accounting Research
Bulletin Number 51, Consolidated Financial Statements, addresses consolidation
by business enterprises of variable interest entities which have certain
characteristics. This interpretation applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies from July 2003 to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The adoption of this standard is not
expected to have a significant impact on the Banks financial reporting.



|2. |  | MARKETABLE SECURITIES
|-- |  | ---------------------

The following table summarises the amortised cost and fair values of
available for sale securities at:

|                               |  |                    |           |                   |  |        |        |            |  |           |         |            |  |        |           |            |  |  |           |  |  |  |        |  |  |  |         |   |  |  |           | 
|------------------------------ |  | ------------------ | --------- | ----------------- |  | ------ | ------ | ---------- |  | --------- | ------- | ---------- |  | ------ | --------- | ---------- |  |  | --------- |  |  |  | ------ |  |  |  | ------- | - |  |  | --------- | 
|                               |  | December 31, 2002  |           | December 31, 2001
|                               |  |                    |           |                  
|                               |  | Amortised          |           | Unrealised        |  |        |        |            |  | Amortised |         | Unrealised |  |        |           |           
|                               |  | Cost               |           | Gains             |  | Losses |        | Fair Value |  | Cost      |         | Gains      |  | Losses |           | Fair Value
|                               |  |                    |           |                   |  |        |        |            |  |           |         |            |  |        |           |           
|                               |  | (In US$ thousands)
|US government & agencies       |  |                    | 739,205   |                   |  |        | 2,713  |            |  |           | (814    | )          |  |        | 741,104   |            |  |  | 671,753   |  |  |  | 712    |  |  |  | (1,359  | ) |  |  | 671,106   | 
|Other governments & agencies   |  |                    | 145,857   |                   |  |        | 448    |            |  |           | (782    | )          |  |        | 145,523   |            |  |  | 127,145   |  |  |  | 182    |  |  |  | (446    | ) |  |  | 126,881   | 
|Corporate debt                 |  |                    | 2,915,507 |                   |  |        | 9,798  |            |  |           | (10,912 | )          |  |        | 2,914,393 |            |  |  | 3,255,889 |  |  |  | 350    |  |  |  | (15,265 | ) |  |  | 3,240,974 | 
|Mutual fund/equity investments |  |                    | 71,516    |                   |  |        | 2,615  |            |  |           | (21     | )          |  |        | 74,110    |            |  |  | 95,517    |  |  |  | 8,942  |  |  |  | (3,720  | ) |  |  | 100,739   | 
|                               |  |                    |           |                   |  |        |        |            |  |           |         |            |  |        |           |            |  |  |           |  |  |  |        |  |  |  |         |   |  |  |           | 
|Total                          |  |                    | 3,872,085 |                   |  |        | 15,574 |            |  |           | (12,529 | )          |  |        | 3,875,130 |            |  |  | 4,150,304 |  |  |  | 10,186 |  |  |  | (20,790 | ) |  |  | 4,139,700 | 
|                               |  |                    |           |                   |  |        |        |            |  |           |         |            |  |        |           |            |  |  |           |  |  |  |        |  |  |  |         |   |  |  |           | 

Investments in asset-backed and mortgage-backed securities comprised $722
million (December 31, 2001 - $649 million) of the total fair value of US
government and agency holdings and $99 million
(December 31, 2001 - $108
million) of the total corporate holdings as at December 31, 2002. At December
31, 2002, investments in asset-backed and mortgage-backed securities had gross
unrealised gains of $3 million (December 31, 2001 - $1 million) and gross
unrealised losses of $6 million (December 31, 2001 - $12 million).

The following table presents the maturity distribution of the available
for sale securities at December 31, 2002:

|                                       |  |                    |           |            |  |  |           | 
|-------------------------------------- |  | ------------------ | --------- | ---------- |  |  | --------- | 
|                                       |  | Amortised Cost     |           | Fair Value
|                                       |  |                    |           |           
|                                       |  | (In US$ thousands)
|Due in one year or less                |  |                    | 328,790   |            |  |  | 329,374   | 
|Due after one year through five years  |  |                    | 2,686,998 |            |  |  | 2,687,055 | 
|Due after five years through ten years |  |                    | 166,873   |            |  |  | 165,861   | 
|Due after ten years                    |  |                    | 617,908   |            |  |  | 618,730   | 
|Sub-total                              |  |                    | 3,800,569 |            |  |  | 3,801,020 | 
|Mutual fund/equity investments         |  |                    | 71,516    |            |  |  | 74,110    | 
|                                       |  |                    |           |            |  |  |           | 
|Total                                  |  |                    | 3,872,085 |            |  |  | 3,875,130 | 
|                                       |  |                    |           |            |  |  |           | 

Mortgage-backed securities with more than one maturity date have been
allocated in the above table by using a weighted average. Actual maturities
may differ from the above table as certain borrowers may prepay their
obligations without penalty.

F-15



---



##### Table of Contents



Gains/(losses) on available for sale securities for the period constitute
the following:

|                                                                                                 |  |                    |        |              |  |              |        |            |  |            |         |   |  |  |        |  
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ------------ |  | ------------ | ------ | ---------- |  | ---------- | ------- | - |  |  | ------ | -
|                                                                                                 |  |                    |        |              |  |              |        |            |  | Six Months |         |   |  | 
|                                                                                                 |  | Year Ended         |        | Year Ended   |  | Ended        |        | Year Ended
|                                                                                                 |  | December 31,       |        | December 31, |  | December 31, |        | June 30,  
|                                                                                                 |  |                    |        |              |  |              |        |           
|                                                                                                 |  | 2002               |        | 2001         |  | 2000         |        | 2000      
|                                                                                                 |  |                    |        |              |  |              |        |           
|                                                                                                 |  | (In US$ thousands)
|Gross realised gains on the sale of debt securities                                              |  |                    | 1,390  |              |  |              | 2,489  |            |  |            | 580     |   |  |  | 1,719  |  
|Gross realised losses on the sale of debt securities                                             |  |                    | (1,420 | )            |  |              | (4,531 | )          |  |            | (82     | ) |  |  | (307   | )
|Net realised gains/(losses) on the sale of equity
securities                                     |  |                    | 4,712  |              |  |              | 7,635  |            |  |            | 1,900   |   |  |  | (200   | )
|Charge for the other than temporary impairment of
assetbacked securities and equity investments |  |                    | (4,310 | )            |  |              | (5,300 | )          |  |            | (16,500 | ) |  |  | (2,169 | )
|                                                                                                 |  |                    |        |              |  |              |        |            |  |            |         |   |  |  |        |  
|Total gains/(losses)                                                                             |  |                    | 372    |              |  |              | 293    |            |  |            | (14,102 | ) |  |  | (957   | )
|                                                                                                 |  |                    |        |              |  |              |        |            |  |            |         |   |  |  |        |  

Interest on marketable securities includes $50.3 million (year ended
December 31, 2001 - $32.7 million; six months ended
December 31, 2000 - $18.9
million; year ended June 30, 2000 - $30 million) on trading account securities.



|3. |  | LOANS AND ALLOWANCE FOR LOAN LOSSES
|-- |  | -----------------------------------

The following is an analysis of loans and the allowance for loan losses by
category and by location of ultimate risk at:

|                                            |  |                    |           |                   |  |  |           | 
|------------------------------------------- |  | ------------------ | --------- | ----------------- |  |  | --------- | 
|                                            |  | December 31, 2002  |           | December 31, 2001
|                                            |  |                    |           |                  
|                                            |  | (In US$ thousands)
|Commercial loans  Bermuda                  |  |                    | 217,421   |                   |  |  | 174,421   | 
|Personal loans  Bermuda                    |  |                    | 199,674   |                   |  |  | 161,641   | 
|Commercial & personal loans  international |  |                    | 161,294   |                   |  |  | 145,467   | 
|Secured short-term investment loans         |  |                    | 360,426   |                   |  |  | 243,526   | 
|Mortgages                                   |  |                    | 853,928   |                   |  |  | 780,133   | 
|                                            |  |                    |           |                   |  |  |           | 
|Total loans                                 |  |                    | 1,792,743 |                   |  |  | 1,505,188 | 
|Less allowance for loan losses              |  |                    | 24,394    |                   |  |  | 27,611    | 
|                                            |  |                    |           |                   |  |  |           | 
|Net loans                                   |  |                    | 1,768,349 |                   |  |  | 1,477,577 | 
|                                            |  |                    |           |                   |  |  |           | 

Commercial and personal loans are predominantly secured by deposits, deeds
to property and shares or other assets of individuals or companies. Secured
short-term investment loans are generally limited to amounts less than 25% of
the borrowers investment portfolio and are primarily issued to international
clients. A substantial majority of mortgages are issued in Bermuda and
represent first mortgages which are callable on 90 days notice.

The following is an analysis of impaired loans and the related specific
allowance for loan losses:

|                           |  |                    |        |                   |  |     |       |       |  |           |        |     |  |  |        |  |  |  |       |  |  |  |        | 
|-------------------------- |  | ------------------ | ------ | ----------------- |  | --- | ----- | ----- |  | --------- | ------ | --- |  |  | ------ |  |  |  | ----- |  |  |  | ------ | 
|                           |  | December 31, 2002  |        | December 31, 2001
|                           |  |                    |        |                  
|                           |  | Gross              |        | Allowance         |  | Net |       | Gross |  | Allowance |        | Net
|                           |  |                    |        |                   |  |     |       |       |  |           |        |    
|                           |  | (In US$ thousands)
|Commercial
loans  Bermuda |  |                    | 3,723  |                   |  |     | 791   |       |  |           | 2,932  |     |  |  | 6,356  |  |  |  | 3,517 |  |  |  | 2,839  | 
|Personal loans  Bermuda   |  |                    | 3,516  |                   |  |     | 1,450 |       |  |           | 2,066  |     |  |  | 4,361  |  |  |  | 2,115 |  |  |  | 2,246  | 
|Mortgages                  |  |                    | 12,928 |                   |  |     | 1,504 |       |  |           | 11,424 |     |  |  | 15,002 |  |  |  | 1,840 |  |  |  | 13,162 | 
|                           |  |                    |        |                   |  |     |       |       |  |           |        |     |  |  |        |  |  |  |       |  |  |  |        | 
|Total                      |  |                    | 20,167 |                   |  |     | 3,745 |       |  |           | 16,422 |     |  |  | 25,719 |  |  |  | 7,472 |  |  |  | 18,247 | 
|                           |  |                    |        |                   |  |     |       |       |  |           |        |     |  |  |        |  |  |  |       |  |  |  |        | 

For the year ended December 31, 2002, the amount of gross interest income
that would have been recorded had non-accrual loans been current was $2.4
million (year ended December 31, 2001 - $2.7 million; six months ended December
31, 2000 - $1 million; year ended June 30, 2000 - $2.7 million). In 2002 the
Bank recovered overdue interest of $3.5 million on impaired loans that were
repaid in the year (year ended December 31, 2001 -
$1.8 million; six months ended December 31, 2000 - $0.1 million; year
ended June 30, 2000 - $0.2 million). The

F-16



---



##### Table of Contents



average balance of impaired loans
during the year ended December 31, 2002 was $23.1 million (year ended December
31, 2001 - $24 million; six months ended December 31, 2000 - $23.3 million;
year ended June 30, 2000 - $30 million).

The following is an analysis of the movement in the total allowance for
loan losses:

|                                 |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |        |  
|-------------------------------- |  | ------------------ | ------ | ------------ |  | ------------ | ------ | ---------- |  | ---------- | ------ | - |  |  | ------ | -
|                                 |  |                    |        |              |  |              |        |            |  | Six Months |        |   |  | 
|                                 |  | Year Ended         |        | Year Ended   |  | Ended        |        | Year Ended
|                                 |  | December 31,       |        | December 31, |  | December 31, |        | June 30,  
|                                 |  | 2002               |        | 2001         |  | 2000         |        | 2000      
|                                 |  |                    |        |              |  |              |        |           
|                                 |  | (In US$ thousands)
|Opening balance                  |  |                    | 27,611 |              |  |              | 26,017 |            |  |            | 24,243 |   |  |  | 30,025 |  
|(Recovered)/provided from income |  |                    | (1,971 | )            |  |              | 2,662  |            |  |            | 2,589  |   |  |  | 916    |  
|Loans written off and other      |  |                    | (4,443 | )            |  |              | (2,935 | )          |  |            | (973   | ) |  |  | (6,889 | )
|Loan recoveries                  |  |                    | 3,197  |              |  |              | 1,867  |            |  |            | 158    |   |  |  | 191    |  
|                                 |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |        |  
|Closing balance                  |  |                    | 24,394 |              |  |              | 27,611 |            |  |            | 26,017 |   |  |  | 24,243 |  
|                                 |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |        |  



|4. |  | PREMISES, EQUIPMENT AND COMPUTER SOFTWARE
|-- |  | -----------------------------------------

The following is an analysis of premises, equipment, and computer software
at:

|                   |  |                    |         |              |  |             |         |          |  |          |         |  |  |  |         | 
|------------------ |  | ------------------ | ------- | ------------ |  | ----------- | ------- | -------- |  | -------- | ------- |  |  |  | ------- | 
|                   |  | December 31,       |         | December 31,
|                   |  | 2002               |         | 2001        
|                   |  |                    |         |             
|                   |  |                    |         |              |  | Accumulated |         | Net Book |  | Net Book
|                   |  | Cost               |         | Depreciation |  | Value       |         | Value   
|                   |  |                    |         |              |  |             |         |         
|                   |  | (In US$ thousands)
|Land and buildings |  |                    | 143,239 |              |  |             | 48,887  |          |  |          | 94,352  |  |  |  | 99,170  | 
|Equipment          |  |                    | 119,244 |              |  |             | 77,959  |          |  |          | 41,285  |  |  |  | 32,706  | 
|Computer software  |  |                    | 29,808  |              |  |             | 20,120  |          |  |          | 9,688   |  |  |  | 7,228   | 
|                   |  |                    |         |              |  |             |         |          |  |          |         |  |  |  |         | 
|Total              |  |                    | 292,291 |              |  |             | 146,966 |          |  |          | 145,325 |  |  |  | 139,104 | 
|                   |  |                    |         |              |  |             |         |          |  |          |         |  |  |  |         | 

Depreciation of premises, equipment and computer software, including
amortisation of leasehold improvements, amounted to $20.4 million for the year
ended December 31, 2002 (year ended December 31, 2001 - $22.7 million; six
months ended December 31, 2000 - $8.8 million; year ended
June 30, 2000 - $19.1
million).

During the year ended December 31, 2002 the Bank reduced its operations in
the Cayman Islands and transferred the administration of the majority of its
Cayman-based clients to its offices in Bermuda and New York. In connection with
this downsizing the Banks office building was put up for sale. The Bank
received a bid for the property which, together with other market information,
indicated that the carrying value of the building was greater than its fair
value. As a result of this information, its carrying value was written down by
$2.5 million to its estimated fair value of $4 million. The charge is recorded
within Other income/(loss) in the Consolidated Statement of Income and is
reported as part of operating expenses within the Other segment in Note 10
Business Segments.



|5. |  | SHAREHOLDERS EQUITY
|-- |  | --------------------

The Banks authorised and issued common share capital are shown on the
Consolidated Balance Sheet.

On July 29, 2002 the Board of Directors approved a number of minor
amendments to the Shareholder Rights Plan implemented in December 1997. Under
the Shareholder Rights Plan, under certain circumstances following a persons
acquisition of 15% or more of the Banks shares, each shareholder other than
the 15% or greater shareholder is entitled to purchase additional shares of the
Bank at half their market price. The shareholder rights plan is designed as a
protective measure to discourage a third party from obtaining a significant
investment in the Bank without the approval of the Board of Directors.

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The Banks warrant programme expired on January 31, 2000. At that time,
all remaining outstanding warrants were converted to shares (at a ratio of 1
warrant to 1.1 shares) at an exercise price of $22.73 per share.

In September 1999, the Bank distributed a 1-for-10 (10%) stock dividend to
shareholders of record on August 31, 1999. In August 2000, the Bank
distributed a 1-for-7 (14.29%) stock dividend to shareholders of record on
August 18, 2000. In January 2002, the Bank distributed a 1-for-10 (10%) stock
dividend to shareholders of record on December 31, 2001. All prior period
share and per share amounts have been restated to reflect the stock dividends.

As a capital management tool, the Bank acquires its securities pursuant to
its authorised stock buy-back programme. During the year ended December 31,
2002 the Bank purchased 1,349,000 shares (year ended December 31, 2001 -
457,000 shares) at an average price of $38.66 (year ended December 31, 2001 -
$41.76) as part of its authorised stock buy-back programme, which permits the
repurchase of up to 2.5 million shares. The authorised 2.5 million shares
represents 8.15% of average diluted shares outstanding during the year ended
December 31, 2002 (year ended December 31, 2001 - 7.97%).



|6. |  | FINANCIAL INSTRUMENTS
|-- |  | ---------------------

Fair Value Hedge of Interest Rate Risk and/or Foreign Currency Risk

The Bank holds fixed rate marketable securities that are designated as
available for sale securities under SFAS Number 115 - Accounting for Certain
Investments in Debt and Equity Securities. Certain of these fixed rate
instruments are denominated in foreign currencies.

Management believes that it is prudent to hedge its exposure to changes in
the fair value of fixed rate instruments due to movements in the benchmark
interest rate and movements in exchange rates. The benchmark interest rate is
the three-month Libor rate for the currency of the instrument. Management
identifies and monitors interest rate risk for each large subsidiary and for
the Bank as a whole. Interest rate risk is assessed by quantifying exposures,
through the use of fundamental and technical analyses and by identifying any
offsetting positions. The Banks Capital Markets Products division is
responsible for foreign exchange risk management on a Bank-wide basis. Foreign
exchange guidelines are set and monitored in quantitative terms, using value at
risk and absolute limits, as appropriate for the underlying instrument class.

To hedge these risks, the Bank enters into risk management contracts such
as interest rate and foreign currency swaps that have the effect of turning the
fixed rate income stream (which may be denominated in non-US dollars) into a
floating rate US dollar income stream.

Each swap contract is acquired with the underlying fixed rate marketable
security as a package. The swaps are structured so the terms of the pay side
are the same as the terms of the security: that is notional amount, currency,
payment frequency, maturity date, payment dates and coupon are matched. The
receive side of the swap is indexed to the relevant currency Libor with
re-pricing sufficiently frequent to remain at the market rate. At the inception
of the swap contract, hedge effectiveness is assessed on a prospective basis
and management reviews the ongoing effectiveness of the hedges on a
retrospective basis each quarter. The cumulative change of both the value of
the swap and the value of the related security due to the hedged risk are
examined to ensure that effectiveness is maintained.

For the year ended December 31, 2002 a net loss of $0.4 million (year
ended December 31, 2001  net loss of $0.3 million; six months ended December
31, 2000  net gain of $0.3 million) was recognised in gains/(losses) on
marketable securities, representing the amount of hedge ineffectiveness for the
period.

Cash flow hedge of foreign currency risk

The Bank and its subsidiaries incur expenses in currencies other than
their respective functional currencies. As a result the Banks cash flows are
exposed to foreign currency risk.

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Management believes it is prudent to minimise the variability in cash
flows caused by foreign currency risk. The Banks hedging strategy is to use
foreign currency forward contracts to hedge foreign currency cash flow
exposure. The forward contracts exchange the Banks or subsidiaries
functional currency for exact amounts of specified forecasted foreign currency
denominated expenses that could affect reported consolidated net income. The
expenses include salaries, interest and other operating expenses payable to
external parties.

Management assesses foreign currency cash flow risk by regularly
identifying and monitoring changes in foreign exchange rate exposures that may
adversely impact expected future cash flows and by evaluating hedging
opportunities. On a monthly basis, the hedged transactions are reviewed in
order to determine that the hedged transactions remain probable.

Changes in the value of forward contracts designated as and qualifying as
cash flow hedges of forecasted operating expenses are reported initially in
accumulated other comprehensive income. The gains and losses are reclassified
into the Consolidated Statement of Income, as a component of operating expenses
or interest expense, as appropriate, in the same period as the underlying
expenses affect consolidated net income.

For the year ended December 31, 2002 $nil (year ended December 31, 2001 -
$nil; six months ended December 31, 2000 - $nil) was recognised in the
Consolidated Statement of Income, which represents the amount of hedge
ineffectiveness during the period.

At December 31, 2002, it is expected that $1.3 million (December 31, 2001
- $0.2 million; December 31, 2000 - $0.2 million) of gains recorded in
accumulated other comprehensive income relating to the fair value of foreign
currency forward contracts will be expensed during the subsequent year, as the
Bank records the previously hedged interest and operating expenses. At December
31, 2002, the maximum length of time over which the Bank is hedging its
exposure to the variability in future cash flows associated with foreign
currency forecasted expenses is 12 months (December 31,
2001  5 months;
December 31, 2000  8 months).

Other derivative instruments

Interest rate futures contracts and interest rate swaps are held in the
trading portfolio in order to reduce the overall duration of certain assets for
risk management purposes. At December 31, 2002, interest rate futures contracts
with a fair value of $0.1 million (December 31, 2001  $(1.5) million) were
held in the trading portfolio. At December 31, 2002, interest rate swaps with
a fair value of $(1.2) million (December 31, 2001 - $nil) were held in the
trading portfolio.

The Bank also uses foreign exchange over-the-counter contracts to meet the
financing needs of its customers and to increase revenue. These contracts are
generally closed out with offsetting contracts with other banks. At December
31, 2002, such open foreign exchange contracts had an unrealised gain of $4.7
million (December 31, 2001 - $2.8 million). Total revenue derived from client
activity for the year was $39 million (year ended
December 31, 2001 - $37.9
million; six months ended December 31, 2000 - $19.2 million; year ended June
30, 2000 - $32.8 million) which is included in foreign exchange earnings in the
Consolidated Statement of Income. Proprietary trading income for the year ended
December 31, 2002 was $3.4 million (year ended
December 31, 2001 - $4.5
million; six months ended December 31, 2000 - $1.2 million; year ended June 30,
2000 - $4 million).

In entering into these financial instruments the Bank incurs credit and/or
position risk. The Banks policy is primarily to use exchange-traded
instruments which greatly reduces credit risk. Any credit exposure, measured as
the unrealised gains on these instruments, is minimised by Bank policies which
only allow contractual relationships with strong financial institutions.
Position risk is the risk of fluctuation in the fair value of financial
instruments and is managed centrally within the Banks Capital Markets Products
division.

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|7. |  | COMMITMENTS, CREDIT RELATED ARRANGEMENTS AND CONTINGENCIES
|-- |  | ----------------------------------------------------------

Commitments

Rental expense for premises leased on a long-term basis for the year ended
December 31, 2002 amounted to $9.5 million (year ended
December 31, 2001 - $9.8
million; six months ended December 31, 2000 - $4.7 million; year ended June 30,
2000 - $9.3 million).

Payments due for premises rented under long-term leases at December 31,
2002:

|                  |  |                    |        | 
|----------------- |  | ------------------ | ------ | 
|Years             |  | (In US$ thousands)
|                  |  |                   
|2003              |  |                    | 10,996 | 
|2004              |  |                    | 7,469  | 
|2005              |  |                    | 5,563  | 
|2006              |  |                    | 4,733  | 
|2007              |  |                    | 4,543  | 
|2008 & thereafter |  |                    | 55,776 | 

Credit Related Arrangements

In the normal course of business, the Bank enters into various commitments
to meet the credit requirements of its customers. Such commitments, which are
not included in the Consolidated Balance Sheet, include:

A.     Commitments to extend credit which represent undertakings to make
credit available in the form of loans or other financing for specific amounts
and maturities, subject to certain conditions.

B.     Standby letters of credit, which represent irrevocable obligations to
make payments to third parties in the event that the customer is unable to meet
their financial obligations.

C.     Documentary and commercial letters of credit, primarily related to the
import of goods into Bermuda by customers, which represent agreements to honour
drafts presented by third parties upon completion of specific activities.

D.     Forward guarantees to third parties with respect to the performance of
certain mutual funds. These guarantees, which are fully collateralised, would
result in obligations to make payments to third parties in the event that the
mutual funds net asset values have not grown by a specified amount over a
specified period.

These credit arrangements are subject to the Banks normal credit
standards and collateral is obtained where appropriate. The contractual amounts
for these commitments set out in the table below represent the maximum payments
the Bank would have to make should the contracts be fully drawn, the
counterparty default, and any collateral held prove to be of no value. As many
of these arrangements will expire or terminate without being drawn upon, or are
fully collateralised, the contractual amounts do not necessarily represent
future cash requirements. The Bank does not carry any liability for these
obligations. In 2002 the Bank earned fee revenue from the provision of standby
letters of credit and forward guarantees of $1.2 million (year ended December
31, 2001 - $1 million; six months ended December 31, 2000 - $0.5 million; year
ended June 30, 2000 - $0.9 million).

The Bank has entered into credit related arrangements with contractual
amounts representing credit risk as follows:

|                             |  |                    |           |                   |  |  |           | 
|---------------------------- |  | ------------------ | --------- | ----------------- |  |  | --------- | 
|                             |  | December 31, 2002  |           | December 31, 2001
|                             |  |                    |           |                  
|                             |  | (In US$ thousands)
|Commitments to extend credit |  |                    | 1,741,273 |                   |  |  | 1,430,245 | 
|Letters of credit            |  |                    |           |                   |  |  |           | 

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|                           |  |                    |           |                   |  |  |           | 
|-------------------------- |  | ------------------ | --------- | ----------------- |  |  | --------- | 
|                           |  | December 31, 2002  |           | December 31, 2001
|                           |  |                    |           |                  
|                           |  | (In US$ thousands)
|Standby                    |  |                    | 298,204   |                   |  |  | 223,887   | 
|Documentary and commercial |  |                    | 1,767     |                   |  |  | 1,233     | 
|Securities lending         |  |                    | 32,067    |                   |  |  | 1,030     | 
|Forward guarantees         |  |                    | 171,510   |                   |  |  | 94,998    | 
|                           |  |                    |           |                   |  |  |           | 
|Total                      |  |                    | 2,244,821 |                   |  |  | 1,751,393 | 
|                           |  |                    |           |                   |  |  |           | 

Of the total contingent liability for standby letters of credit, $279.6
million (December 31, 2001 - $169 million) is fully collateralised by cash and
securities held by the Bank. The contractual terms of these guarantees vary
but are generally under one year with multi-year agreements required to be
renewed on an annual basis.

Of the total contingent liability for documentary and commercial letters
of credit, $1.7 million (December 31, 2001 - $1.1 million) is fully
collateralised by cash and securities held by the bank.

The contingent liability for forward guarantees is fully collateralised by
US government and US and OECD corporate notes held by the Bank. Generally
these are zero coupon notes that are designed to accrete in value over time to
equal the underlying guaranteed amount. The contractual terms of these
guarantees expire between November 2003 and November 2006.

The Bank enters into securities lending transactions through an agent,
with counterparties that are pre-approved by the Bank. These transactions are
treated as secured borrowings. All transactions are fully cash collateralised.
The amount above represents the fair value of securities loaned and the
equivalent cash collateral received.

In addition to credit related commitments, the Bank had outstanding
commitments to invest a total of $3.9 million (December 31,
2001 - $6.7
million) in unquoted equity investments at December 31, 2002.

Credit Card Losses

In late 1999, a client of the Banks e-commerce division entered into a
business relationship with certain online merchants and began processing credit
card transactions with these merchants. These transactions were passed onto
the Bank for settlement. Some of these merchants were allegedly involved in the
fraudulent use of certain credit card numbers resulting in customer
charge-backs and losses to the client. In accordance with MasterCard and Visa
procedures, the Bank, as the card processor, is ultimately liable for such
charge-backs if the payment gateway company is unable to meet them. The client
was unable to meet these charge-backs and they were funded through an overdraft
facility with the Bank.

At June 30, 2000, the amount of the Banks total exposure was estimated to
be $3 million. This was based upon information provided to the Bank about the
extent of the total internet sales by the particular merchants and the amount
of customer charge-back activity that had been experienced up to that date.
This amount was provided for in the financial statements at June 30, 2000.

In the six month period ended December 31, 2000, additional information
became available about the extent of the alleged fraudulent sales activity and
additional amounts of customer charge-backs were experienced through an
overdraft account. During that period the outstanding overdraft facility was
converted into an equity investment of $4 million in the client and an
additional loan of $1.7 million was granted. At December 31, 2000, total
charge-backs were $5.7 million and the Bank had a specific allowance against
the loan of $1.7 million and had written down the equity investment to $nil,
due to its impairment. An additional reserve of $1.3 million was recorded in
respect of the estimated additional charge-backs that had been incurred, but
not yet reported to the client at that date.

In the year ended December 31, 2001, no further chargebacks occurred and
the Bank released the $1.3 million reserve for the estimated additional
chargebacks. In addition, recoveries from insurers of $1 million were

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received
in 2001. During the year ended December 31, 2002, the Bank recovered $1.8
million. Of this amount $1 million was repaid to insurers, who as part of the
earlier agreement on insurance recoveries, had first rights to any
subsequent subrogation. The remaining $0.8 million was recorded as a loan
recovery to allowance for loan losses and the remaining loans and specific
allowances were written off. No further recoveries are expected.

Legal Proceedings

In the ordinary course of business the Bank and its subsidiaries are
routinely defendants in, or parties to, a number of pending and threatened
legal actions and proceedings. Except as outlined in the following paragraphs,
management believes, based on information currently available to it, that the
actions and proceedings and losses, if any, resulting from the final outcome
thereof will not be material in the aggregate to the Banks financial position
or results of operations.

In October 2001, the Bank and two of its subsidiaries, the Bank of Bermuda
(Cayman) Limited and Bermuda Trust (Cayman) Limited, settled, among other
things, two civil actions brought against the Bank and those subsidiaries in US
federal district courts in Florida and Illinois relating to the alleged
involvement by the Bank and those subsidiaries in a scheme to defraud investors
in a business known as Cash 4 Titles. The Florida action was brought on behalf
of a class of investors in Cash 4 Titles. On March 6, 2002, an amended
complaint was filed in an action styled Norton et al. v. Homa et al. in US
federal district court in Florida against Bank of Bermuda (Cayman) Limited on
behalf of 46 individuals and entities that purported to opt out of the class
action settlement. The plaintiffs claimed losses totalling about $10.3
million. After the claims alleged by many of the named plaintiffs were
dismissed from that action, on June 11, 2002, the Bank and its subsidiaries
entered into a settlement agreement with the 14 plaintiffs remaining in the
Norton action. Under the terms of the Norton settlement, the Bank and its
subsidiaries paid $1.3 million to the Norton plaintiffs in full and complete
satisfaction of all claims that were or could have been asserted in the Norton
action. On June 26, 2002, the Norton action was dismissed with prejudice.

Bank of Bermuda (Cayman) Limited and Bermuda Trust (Cayman) Limited also
were named as defendants in a civil action in the Cayman Islands relating to
Cash 4 Titles. The Cayman Islands case was commenced on October 28, 1999 in the
Grand Court of the Cayman Islands against two Cash 4 Titles-related entities
and Bank of Bermuda (Cayman) Limited by a Cayman Islands corporation that
allegedly invested in Cash 4 Titles. Plaintiffs claimed approximately $22
million in damages as well as interest and costs. In February 2002, this was
settled as between the plaintiffs and Bank of Bermuda (Cayman) Limited and
Bermuda Trust (Cayman) Limited. The actions were discontinued with no finding
of liability against either the Banks subsidiaries. Under the terms of
settlement, the Banks subsidiaries paid a total sum of $10 million to the
plaintiffs, including all fees and costs.

The Bank recorded a net expense of approximately $43.4 million for the
year ended December 31, 2001. This charge represented the Banks maximum $67.5
million liability related to the US settlement of the Cash 4 Titles litigation
offset by $34.1 million of insurance recoveries as well as an additional
provision of $10 million at December 31, 2001, representing managements then
best estimate of the liabilities and expenses with respect to all remaining
current and potential Cash 4 Titles related litigation.

The Bank recorded a net recovery of $5.4 million for the year ended
December 31, 2002 relating to the Cash 4 Titles related litigation. This
amount represents further insurance recoveries of $6.7 million offset by the
$1.3 million paid in the Norton action. The Bank continues to pursue
additional potential recoveries under its insurance policies; however, nothing
has been accrued for such recoveries as at December 31, 2002.

The Bank is aware that there may exist another potential claim in
connection with Cash 4 Titles. As of the balance sheet date no such claim has
been made against the Bank. Based upon information currently known to the Bank,
it is not possible to determine the probability that such a claim will be
asserted, and if asserted, the probability that a liability will result. Any
such claim would be defended vigorously.



|8. |  | PENSION PLANS AND POST-RETIREMENT BENEFITS
|-- |  | ------------------------------------------

The Bank provides non-contributory defined contribution pension plans to
its employees in the majority of its locations. Employees are able to make
voluntary payments to the defined contribution plans. The Bank has a

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defined
benefit plan for most of its employees in the Isle of Man, Jersey and Guernsey
(Sterling area). Defined benefits are based upon length of service and the
employees level of compensation. The Banks funding policy in
respect of its defined benefit plan is to contribute amounts to ensure
that benefit obligations are adequately funded. Certain group companies also
provide a non-contributory post retirement benefit plan that provides health
care for retired employees.

Defined Benefit Plan

The following table provides summaries of the defined benefit pension
plans estimated financial position at:

|                                                    |                                         |  |                    |        |                   |  |     |          |  
|--------------------------------------------------- | --------------------------------------- |  | ------------------ | ------ | ----------------- |  | --- | -------- | -
|                                                    |                                         |  | December 31, 2002  |        | December 31, 2001
|                                                    |                                         |  |                    |        |                  
|                                                    |                                         |  | (in US$ thousands)
|Benefit Obligations                                 |                                         |  |                    |        |                   |  |     |         
|                                                    | Beginning of period                     |  |                    | 30,849 |                   |  |     | 121,544  |  
|                                                    | Current service cost                    |  |                    | 4,614  |                   |  |     | 4,014    |  
|                                                    | Interest cost                           |  |                    | 1,835  |                   |  |     | 5,554    |  
|                                                    | Actuarial (gain)/loss                   |  |                    | (9,472 | )                 |  |     | 338      |  
|                                                    | Benefits paid                           |  |                    | (445   | )                 |  |     | (1,638   | )
|                                                    | Benefit improvement                     |  |                    |       |                   |  |     | 5,335    |  
|                                                    | Plan settlement                         |  |                    |       |                   |  |     | (104,298 | )
|                                                    |                                         |  |                    |        |                   |  |     |          |  
|                                                    | End of period                           |  |                    | 27,381 |                   |  |     | 30,849   |  
|                                                    |                                         |  |                    |        |                   |  |     |          |  
|Plan Assets at Fair Value                           |                                         |  |                    |        |                   |  |     |         
|                                                    | Beginning of period                     |  |                    | 20,576 |                   |  |     | 120,345  |  
|                                                    | Actual return on plan assets            |  |                    | (1,801 | )                 |  |     | 1,670    |  
|                                                    | Employer contributions and transfers in |  |                    | 2,450  |                   |  |     | 2,131    |  
|                                                    | Benefits paid                           |  |                    | (445   | )                 |  |     | (1,638   | )
|                                                    | Plan settlement                         |  |                    |       |                   |  |     | (93,360  | )
|                                                    | Assets withdrawn from pension plan      |  |                    |       |                   |  |     | (8,572   | )
|                                                    |                                         |  |                    |        |                   |  |     |          |  
|                                                    | End of period                           |  |                    | 20,780 |                   |  |     | 20,576   |  
|                                                    |                                         |  |                    |        |                   |  |     |          |  
|Accrued Benefit                                     |                                         |  |                    |        |                   |  |     |         
|                                                    | Funded status of plan                   |  |                    | (6,601 | )                 |  |     | (10,273  | )
|                                                    | Unrecognised net asset at transition    |  |                    | (82    | )                 |  |     | (79      | )
|                                                    | Unrecognised net (gain) loss            |  |                    | (182   | )                 |  |     | 5,744    |  
|                                                    | Unrecognised prior service costs        |  |                    | 2,333  |                   |  |     | 2,200    |  
|                                                    |                                         |  |                    |        |                   |  |     |          |  
|                                                    | Total accrued benefit                   |  |                    | (4,532 | )                 |  |     | (2,408   | )
|                                                    |                                         |  |                    |        |                   |  |     |          |  
|Actuarial Assumptions:                              |                                         |  |                    |        |                   |  |     |         
|Discount rate used to determine benefit
obligations |                                         |  | 5.8                | %      |                   |  | 5.5 | %       
|Rate of increase for future compensation            |                                         |  | 3.8                | %      |                   |  | 4.5 | %       
|Expected long  term rate of return on assets       |                                         |  | 8.0                | %      |                   |  | 8.0 | %       

As at December 31, 2002, the pension plan assets consisted of equities
20.5% (December 31, 2001 - 76.9%), fixed income investments 13.5% (December 31,
2001 - 18.2%) other investments - 5.9% (December 31, 2000 - Nil%) and cash and
cash equivalents 60.1% (December 31, 2001 - 4.9%).

Effective January 1, 2000, the Bank changed to a defined contribution
pension plan from the previous defined benefit plan for Bermuda based
employees. Employees were offered the choice of remaining in the defined
benefit plan, or joining the defined contribution plan. Those joining the
defined contribution plan received a transfer value from the defined benefit
plan in settlement of any liability of the plan. Almost all of the employees
decided to join the defined contribution plan. Acceptance of this change by
the employees was finalised during the year ended December 31, 2001. Partial
transfers took place during the year ended June 30, 2000 totalling $66.5
million. During the year ended December 31, 2001, the final transfer of assets
took place with a total payment of $59.3 million. During 2001, a decision was
made to purchase annuities in respect of former employees receiving a pension
and those electing not to transfer to the defined contribution plan. The plan
purchased annuities at a cost of $34 million from an insurance company in
respect of these individuals. This cost is included in the plan settlement

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amounts shown in the table above. As a result of the final settlement of the
Bermuda plan, the Bank recorded a gain on settlement of $5.6 million
representing the excess assets in the plan at the completion of the settlement.

The balance in the pension plan at December 31, 2002 and 2001 relates to
the Sterling area plan only and no further obligation exists for the Bermuda
defined benefit plan. Effective January 1, 2002, the Sterling area plan no
longer accepted new employees into the defined benefit plan and a new defined
contribution plan was commenced. Existing members of the Sterling area defined
benefit plan may continue to have their contributions paid into the Sterling
area defined benefit plan or can choose to have their contributions paid into
the new defined contribution plan. In addition, existing members of the
Sterling area defined benefit plan have the choice to transfer their funds to
the new defined contribution plan or leave their funds in the Sterling area
defined benefit plan.

The following table shows the expense for the Banks defined benefit
pension plans:

|                               |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |         |  
|------------------------------ |  | ------------------ | ------ | ------------ |  | ------------ | ------ | ---------- |  | ---------- | ------ | - |  |  | ------- | -
|                               |  |                    |        |              |  |              |        |            |  | Six Months |        |   |  | 
|                               |  | Year Ended         |        | Year Ended   |  | Ended        |        | Year Ended
|                               |  | December 31,       |        | December 31, |  | December 31, |        | June 30,  
|                               |  | 2002               |        | 2001         |  | 2000         |        | 2000      
|                               |  |                    |        |              |  |              |        |           
|                               |  | (In US$ thousands)
|Service cost                   |  |                    | 4,614  |              |  |              | 4,014  |            |  |            | 1,853  |   |  |  | 6,799   |  
|Interest cost                  |  |                    | 1,835  |              |  |              | 5,554  |            |  |            | 4,289  |   |  |  | 4,514   |  
|Expected return on plan assets |  |                    | (2,226 | )            |  |              | (6,059 | )          |  |            | (4,706 | ) |  |  | (33,047 | )
|Net amortisation               |  |                    | 81     |              |  |              | 170    |            |  |            | 7      |   |  |  | 25,884  |  
|                               |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |         |  
|Periodic pension cost          |  |                    | 4,304  |              |  |              | 3,679  |            |  |            | 1,443  |   |  |  | 4,150   |  
|Gain on pension settlement     |  |                    |       |              |  |              | 5,562  |            |  |            |       |   |  |  |        |  
|                               |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |         |  
|Net expense/(income)           |  |                    | 4,304  |              |  |              | (1,883 | )          |  |            | 1,443  |   |  |  | 4,150   |  
|                               |  |                    |        |              |  |              |        |            |  |            |        |   |  |  |         |  

Defined Contribution Plans

Effective January 1, 2000, the Bank adopted a non-contributory defined
contribution plan for its Bermuda based employees. The net pension cost for the
defined contribution plan for the year ended December 31, 2002 was $7.4 million
(year ended December 31, 2001 - $7.3 million; six months ended December 31,
2000 - $4.1 million; year ended June 30, 2000 - $2.8 million).

Effective January 1, 2002, the Bank adopted a non-contributory defined
contribution plan for its Sterling area employees. The net pension cost for the
defined contribution plans of employees of a number of overseas subsidiary
companies was $5.4 million for the year ended December 31, 2002 (year ended
December 31, 2001 - $4 million; six months ended
December 31, 2000 - $1.2
million; year ended June 30, 2000 - $2.6 million).

Post-Retirement Benefit Plan

The following table provides a summary of the post-retirement benefit
plans estimated financial position at:

|                    |                      |  |                    |        |                   |  |  |        |  
|------------------- | -------------------- |  | ------------------ | ------ | ----------------- |  |  | ------ | -
|                    |                      |  | December 31, 2002  |        | December 31, 2001
|                    |                      |  |                    |        |                  
|                    |                      |  | (in US$ thousands)
|Benefit Obligations |                      |  |                    |        |                   |  |  |       
|                    | Beginning of period  |  |                    | 25,352 |                   |  |  | 18,298 |  
|                    | Current service cost |  |                    | 1,488  |                   |  |  | 943    |  
|                    | Interest cost        |  |                    | 1,896  |                   |  |  | 1,391  |  
|                    | Actuarial loss       |  |                    | 5,030  |                   |  |  | 6,345  |  
|                    | Plan curtailment     |  |                    |       |                   |  |  | (1,003 | )
|                    | Amendments           |  |                    | (440   | )                 |  |  |       |  
|                    | Net benefits paid    |  |                    | (595   | )                 |  |  | (622   | )
|                    |                      |  |                    |        |                   |  |  |        |  

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|                                                    |                                 |  |                    |         |                   |  |     |         |  
|--------------------------------------------------- | ------------------------------- |  | ------------------ | ------- | ----------------- |  | --- | ------- | -
|                                                    |                                 |  | December 31, 2002  |         | December 31, 2001
|                                                    |                                 |  |                    |         |                  
|                                                    |                                 |  | (in US$ thousands)
|                                                    | End of period                   |  |                    | 32,731  |                   |  |     | 25,352  |  
|                                                    |                                 |  |                    |         |                   |  |     |         |  
|Accrued Benefit Expense                             |                                 |  |                    |         |                   |  |     |        
|                                                    | Funded status of plan           |  |                    | (32,731 | )                 |  |     | (25,352 | )
|                                                    | Unrecognised prior service cost |  |                    | (425    | )                 |  |     |        |  
|                                                    | Unrecognised net actuarial loss |  |                    | 5,710   |                   |  |     | 690     |  
|                                                    |                                 |  |                    |         |                   |  |     |         |  
|                                                    | Total accrued expense           |  |                    | (27,446 | )                 |  |     | (24,662 | )
|                                                    |                                 |  |                    |         |                   |  |     |         |  
|Discount rate used to determine benefit obligations |                                 |  | 6.75               | %       |                   |  | 7.0 | %      

The assumed health care cost trend rate used in measuring the
post-retirement benefit plan obligations was 10% for 2003 (2002  8.5%). The
ultimate health care trend rate used was 4.75% (December 31,
2001  5%) which
will be reached in 2011 (December 31, 2001  2009). The health care trend rate
is expected to fall by 0.75% each year until the ultimate rate is reached.

The following table presents the expenses for the Banks post-retirement
benefit plan:

|                                   |  |                    |       |              |  |              |       |          |  |  |       |   |  |  |       |  
|---------------------------------- |  | ------------------ | ----- | ------------ |  | ------------ | ----- | -------- |  |  | ----- | - |  |  | ----- | -
|                                   |  | Year               |       | Year         |  | Six Months   |       | Year    
|                                   |  | Ended              |       | Ended        |  | Ended        |       | Ended   
|                                   |  | December 31,       |       | December 31, |  | December 31, |       | June 30,
|                                   |  | 2002               |       | 2001         |  | 2000         |       | 2000    
|                                   |  |                    |       |              |  |              |       |         
|                                   |  | (In US$ thousands)
|Service cost                       |  |                    | 1,488 |              |  |              | 943   |          |  |  | 468   |   |  |  | 1,009 |  
|Interest cost                      |  |                    | 1,896 |              |  |              | 1,391 |          |  |  | 675   |   |  |  | 1,255 |  
|Amortisation of net gain           |  |                    | 11    |              |  |              | (233  | )        |  |  | (127  | ) |  |  | (182  | )
|Amortisation of prior service cost |  |                    | (15   | )            |  |              |      |          |  |  |      |   |  |  |      |  
|Curtailment gain                   |  |                    |      |              |  |              | (425  | )        |  |  |      |   |  |  |      |  
|                                   |  |                    |       |              |  |              |       |          |  |  |       |   |  |  |       |  
|Total                              |  |                    | 3,380 |              |  |              | 1,676 |          |  |  | 1,016 |   |  |  | 2,082 |  

If the health care cost trend rates were increased by 1%, the
post-retirement benefit obligation as of December 31, 2002 would have increased
by 18.9% and the aggregate expense for service and interest costs for the year
ended December 31, 2002 would have increased by 24.5%. Conversely, if the
health care cost trend rates were decreased by 1%, the post-retirement benefit
obligation as of December 31, 2002 would have decreased 16.4%, and the
aggregate expense for service and interest costs for the period would have
decreased by 19.3%.

During the year ended December 31, 2001, the post-retirement benefit plan
for the Banks European offices was curtailed and resulted in a gain to the
Bank of $425,000. The plan will continue for the Banks Bermuda based
employees.



|9. |  | FAIR VALUE
|-- |  | ----------

The amounts set out in the following table represent the fair values of
the Banks financial instruments using the valuation methods and assumptions
described below:

|            |                       |  |                   |        |                   |  |            |        |            |  |            |     |            |  |  |       |  |  |  |       |  |  |  |    |  
|----------- | --------------------- |  | ----------------- | ------ | ----------------- |  | ---------- | ------ | ---------- |  | ---------- | --- | ---------- |  |  | ----- |  |  |  | ----- |  |  |  | -- | -
|            |                       |  | December 31, 2002 |        | December 31, 2001
|            |                       |  |                   |        |                  
|            |                       |  | Book Value        |        | Fair Value        |  | Difference |        | Book Value |  | Fair Value |     | Difference
|            |                       |  |                   |        |                   |  |            |        |            |  |            |     |           
|            |                       |  | (In US$ millions)
|Assets      |                       |  |                   |        |                   |  |            |        |            |  |            |     |            |  |  |       |  |  |  |       |  |  |  |   
|            | Cash and deposits     |  |                   | 4,677  |                   |  |            | 4,677  |            |  |            |    |            |  |  | 3,570 |  |  |  | 3,570 |  |  |  |   |  
|            | Marketable securities |  |                   | 4,370  |                   |  |            | 4,370  |            |  |            |    |            |  |  | 5,468 |  |  |  | 5,468 |  |  |  |   |  
|            | Loans                 |  |                   | 1,768  |                   |  |            | 1,758  |            |  |            | (10 | )          |  |  | 1,478 |  |  |  | 1,474 |  |  |  | (4 | )
|            | Other                 |  |                   | 275    |                   |  |            | 275    |            |  |            |    |            |  |  | 153   |  |  |  | 153   |  |  |  |   |  
|Liabilities |                       |  |                   |        |                   |  |            |        |            |  |            |     |            |  |  |       |  |  |  |       |  |  |  |   
|            | Customer deposits     |  |                   | 10,165 |                   |  |            | 10,165 |            |  |            |    |            |  |  | 9,943 |  |  |  | 9,943 |  |  |  |   |  
|            | Other                 |  |                   | 263    |                   |  |            | 263    |            |  |            |    |            |  |  | 235   |  |  |  | 235   |  |  |  |   |  

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The fair value of cash and deposits, other assets and other liabilities
are considered to approximate book value as the items are predominately
short-term in nature, or are variable rate instruments.

The fair value of marketable securities is assumed to approximate their
market value as provided in Note 2. Variable rate loans are assumed to have
fair values that approximate book value as the interest rates on these loans
automatically reprice every three months to market. Fair values of longer term
fixed rate loans are estimated using discounted cash flows at prevailing market
rates. Staff home loans at preferential rates account for the majority of the
difference between the fair and book values of the loan portfolio.

The fair values of customer deposits payable on demand, payable after
notice and floating rate deposits payable on a fixed date are considered to be
approximate to their book values. The majority of fixed deposits mature within
three months and market value approximates book value.

The fair value amounts are designed to approximate amounts at which these
instruments could be exchanged in a current transaction between willing
parties; however, in some circumstances financial instruments may lack an
available trading market. Therefore, fair values are based on estimates using
present value and other valuation techniques which are significantly affected
by the assumptions used concerning the amount and timing of estimated future
cash flows and discount rates which reflect varying degrees of risk.



|10. |  | BUSINESS SEGMENTS
|--- |  | -----------------

SFAS
Number 131 - Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about business
segments in the footnotes to annual financial statements. The statement
requires disclosure on a business segment basis, as defined by the Bank,
including a description of products and services and profit or loss, as
measured by the Banks management, in assessing sector performance and
geographic information on assets and revenue.

Various lines of business that offer different products and services but
that share similar basic and economic characteristics have been combined into
four major business segments: Global Fund Services, Private Client Services,
Corporate Banking and Community Banking.

During 2002 Retail Client Services was renamed Community Banking and
Corporate Cash Management was renamed Corporate Banking. Retail Client
Services was renamed to reflect the fact that this business focuses on local or
community banking. Corporate Cash Management was renamed to recognise that the
business provides a broader range of banking services to business entities. In
addition to the name changes, the comparative information has been restated to
reflect an improved allocation of certain elements of other income that was
made in the current year which the Bank believes more accurately reflects the
true performance of the four business divisions.

The Global Fund Services segment represents global custody services,
accounting, valuation, administration and general banking services provided to
collective investment vehicles and trusts. Private Client Services include
global custody services, investment advisory services, administration of trusts
and private banking services provided to high net worth individuals and
families. The Corporate Banking segment includes banking and financial services
such as interest rate and foreign exchange risk management, electronic banking
and credit provided to corporate clients. Community Banking activities include
retail banking services, credit cards and lending, which are primarily
delivered in Bermuda.

Revenues and expenses that do not relate directly to these segments are
included in the Other category. This segment captures non-client specific
revenues and expenses such as proprietary trading income, return on investment
of unallocated capital and certain corporate expenses.

The Banks management reporting system incorporates processes for
allocating revenue and expenses to each segment, as well as for attributing
assets, liabilities and the applicable interest income and expense. All
revenues are from external customers who are identified as either Global Fund
Services, Private Client Services, Corporate Banking or Community Banking.
Total revenues generated by providing those clients with the Banks products
and services are recorded within the relevant client group. Direct expenses are
attributed to each group,

F-26



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##### Table of Contents



with the remaining operating expense being allocated
based on a number of matrices. Capital is allocated based on the risk-weighted
assets employed. The capital allocations may not, however, be representative of
the capital that
would be required if the segments operated as independent entities.
Capital not attributable to any of the four client business segments is
allocated to the Other category.

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##### Table of Contents



The following tables represent the performance of each of the segments.

|                                                     |                                            |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |       |        |  |  |         |         | 
|---------------------------------------------------- | ------------------------------------------ |  | ---------------------------- | ------- | -------- |  | --------- | ------ | --------- |  | ------ | ------ | ----- |  | ------ | ------ |  |  | ----- | ------ |  |  | ------- | ------- | 
|                                                     |                                            |  | Year Ended December 31, 2002
|                                                     |                                            |  |                             
|                                                     |                                            |  | Global                       |         | Private  |  |           |        |           |  |        |        |       |  |        |        |  |  |       |        | 
|                                                     |                                            |  | Fund                         |         | Client   |  | Corporate |        | Community |  |        |        |       |  |        |        | 
|                                                     |                                            |  | Services                     |         | Services |  | Banking   |        | Banking   |  | Other  |        | Total
|                                                     |                                            |  |                              |         |          |  |           |        |           |  |        |        |      
|                                                     |                                            |  | (In US$ thousands)          
|Non-interest and other income                        |                                            |  | 146,689                      |         |          |  | 67,111    |        |           |  | 6,159  |        |       |  | 16,248 |        |  |  | 7,045 |        |  |  | 243,252 |        
|Net interest income, after provision for
loan losses |                                            |  | 43,836                       |         |          |  | 22,843    |        |           |  | 48,439 |        |       |  | 58,132 |        |  |  | 4,495 |        |  |  | 177,745 |        
|                                                     |                                            |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |       |        |  |  |         |        
|                                                     | Total revenue                              |  |                              | 190,525 |          |  |           | 89,954 |           |  |        | 54,598 |       |  |        | 74,380 |  |  |       | 11,540 |  |  |         | 420,997 | 
|Operating expenses                                   |                                            |  | 170,571                      |         |          |  | 77,264    |        |           |  | 26,545 |        |       |  | 60,053 |        |  |  | 2,673 |        |  |  | 337,106 |        
|                                                     | Income from operations before income taxes |  |                              | 19,954  |          |  |           | 12,690 |           |  |        | 28,053 |       |  |        | 14,327 |  |  |       | 8,867  |  |  |         | 83,891  | 
|Income taxes                                         |                                            |  | 3,623                        |         |          |  | 1,413     |        |           |  | 287    |        |       |  | 128    |        |  |  | 782   |        |  |  | 6,233   |        
|                                                     |                                            |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |       |        |  |  |         |        
|                                                     | Net income                                 |  |                              | 16,331  |          |  |           | 11,277 |           |  |        | 27,766 |       |  |        | 14,199 |  |  |       | 8,085  |  |  |         | 77,658  | 
|                                                     |                                            |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |       |        |  |  |         |        
|Average total division assets (in US$ millions)      |                                            |  | 3,573                        |         |          |  | 1,665     |        |           |  | 2,724  |        |       |  | 1,850  |        |  |  | 168   |        |  |  | 9,980   |        

|                                                     |                                                   |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |        |         |   |  |         |         | 
|---------------------------------------------------- | ------------------------------------------------- |  | ---------------------------- | ------- | -------- |  | --------- | ------ | --------- |  | ------ | ------ | ----- |  | ------ | ------ |  |  | ------ | ------- | - |  | ------- | ------- | 
|                                                     |                                                   |  | Year Ended December 31, 2001
|                                                     |                                                   |  |                             
|                                                     |                                                   |  | Global                       |         | Private  |  |           |        |           |  |        |        |       |  |        |        |  |  |        |         |  
|                                                     |                                                   |  | Fund                         |         | Client   |  | Corporate |        | Community |  |        |        |       |  |        |        | 
|                                                     |                                                   |  | Services                     |         | Services |  | Banking   |        | Banking   |  | Other  |        | Total
|                                                     |                                                   |  |                              |         |          |  |           |        |           |  |        |        |      
|                                                     |                                                   |  | (In US$ thousands)          
|Non-interest and other income                        |                                                   |  | 140,260                      |         |          |  | 68,831    |        |           |  | 12,507 |        |       |  | 24,034 |        |  |  | 3,164  |         |   |  | 248,796 |        
|Net interest income, after provision for
loan losses |                                                   |  | 48,975                       |         |          |  | 30,587    |        |           |  | 50,041 |        |       |  | 55,087 |        |  |  | 10,322 |         |   |  | 195,012 |        
|                                                     |                                                   |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |        |         |   |  |         |        
|                                                     | Total revenue                                     |  |                              | 189,235 |          |  |           | 99,418 |           |  |        | 62,548 |       |  |        | 79,121 |  |  |        | 13,486  |   |  |         | 443,808 | 
|Operating expenses                                   |                                                   |  | 162,218                      |         |          |  | 76,280    |        |           |  | 23,457 |        |       |  | 57,569 |        |  |  | 57,436 |         |   |  | 376,960 |        
|                                                     | Income/(loss) from operations before
income taxes |  |                              | 27,017  |          |  |           | 23,138 |           |  |        | 39,091 |       |  |        | 21,552 |  |  |        | (43,950 | ) |  |         | 66,848  | 
|Income taxes                                         |                                                   |  | 2,784                        |         |          |  | 2,506     |        |           |  | 291    |        |       |  | 40     |        |  |  | 1,150  |         |   |  | 6,771   |        
|                                                     |                                                   |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |        |         |   |  |         |        
|                                                     | Net income/(loss)                                 |  |                              | 24,233  |          |  |           | 20,632 |           |  |        | 38,800 |       |  |        | 21,512 |  |  |        | (45,100 | ) |  |         | 60,077  | 
|                                                     |                                                   |  |                              |         |          |  |           |        |           |  |        |        |       |  |        |        |  |  |        |         |   |  |         |        
|Average total division assets (in US$ millions)      |                                                   |  | 3,261                        |         |          |  | 2,028     |        |           |  | 3,274  |        |       |  | 1,866  |        |  |  | 398    |         |   |  | 10,827  |        

|                                                     |                                                       |  |        |                                    |  |          |        |           |  |           |        |        |  |       |        |        |  |  |        |        |   |  |         |         |  | 
|---------------------------------------------------- | ----------------------------------------------------- |  | ------ | ---------------------------------- |  | -------- | ------ | --------- |  | --------- | ------ | ------ |  | ----- | ------ | ------ |  |  | ------ | ------ | - |  | ------- | ------- |  | 
|                                                     |                                                       |  |        | Six Months Ended December 31, 2000
|                                                     |                                                       |  |        |                                   
|                                                     |                                                       |  |        | Global                             |  | Private  |        |           |  |           |        |        |  |       |        |        |  |  |        |        |   | 
|                                                     |                                                       |  |        | Fund                               |  | Client   |        | Corporate |  | Community |        |        |  |       |        |        |  | 
|                                                     |                                                       |  |        | Services                           |  | Services |        | Banking   |  | Banking   |        | Other  |  | Total
|                                                     |                                                       |  |        |                                    |  |          |        |           |  |           |        |        |  |      
|                                                     |                                                       |  |        | (In US$ thousands)                
|Non-interest and other income/(loss)                 |                                                       |  | 61,308 |                                    |  |          | 38,070 |           |  |           | 8,277  |        |  |       | 13,610 |        |  |  | (3,408 | )      |   |  | 117,857 |        
|Net interest income, after provision for
loan losses |                                                       |  | 28,840 |                                    |  |          | 16,794 |           |  |           | 25,596 |        |  |       | 27,775 |        |  |  | 3,171  |        |   |  | 102,176 |        
|                                                     |                                                       |  |        |                                    |  |          |        |           |  |           |        |        |  |       |        |        |  |  |        |        |   |  |         |         |  | 
|                                                     | Total revenue/(loss)                                  |  |        | 90,148                             |  |          |        | 54,864    |  |           |        | 33,873 |  |       |        | 41,385 |  |  |        | (237   | ) |  |         | 220,033 | 
|Operating expenses                                   |                                                       |  | 74,036 |                                    |  |          | 38,976 |           |  |           | 11,031 |        |  |       | 29,721 |        |  |  | 8,312  |        |   |  | 162,076 |        
|                                                     | Income/(loss) from operations, before
income taxes    |  |        | 16,112                             |  |          |        | 15,888    |  |           |        | 22,842 |  |       |        | 11,664 |  |  |        | (8,549 | ) |  |         | 57,957  | 
|Income taxes                                         |                                                       |  | 1,157  |                                    |  |          | 1,259  |           |  |           | 68     |        |  |       | 61     |        |  |  | 683    |        |   |  | 3,228   |        
|                                                     | Income/(loss) from operations, after income
taxes     |  |        | 14,955                             |  |          |        | 14,629    |  |           |        | 22,774 |  |       |        | 11,603 |  |  |        | (9,232 | ) |  |         | 54,729  | 
|                                                     | Cumulative effect of a change in accounting
principle |  |        |                                   |  |          |        |          |  |           |        |       |  |       |        |       |  |  |        | 1,517  |   |  |         | 1,517   | 
|                                                     |                                                       |  |        |                                    |  |          |        |           |  |           |        |        |  |       |        |        |  |  |        |        |   |  |         |         |  | 
|                                                     | Net income/(loss)                                     |  |        | 14,955                             |  |          |        | 14,629    |  |           |        | 22,774 |  |       |        | 11,603 |  |  |        | (7,715 | ) |  |         | 56,246  | 
|                                                     |                                                       |  |        |                                    |  |          |        |           |  |           |        |        |  |       |        |        |  |  |        |        |   |  |         |         |  | 
|Average total division assets (in US$ millions)      |                                                       |  | 3,316  |                                    |  |          | 2,089  |           |  |           | 2,680  |        |  |       | 2,060  |        |  |  | 279    |        |   |  | 10,424  |        

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|                                                     |  |                          |         |          |  |           |         |           |  |       |        |       |  |  |        |   |  |  |        |  |  |  |         | 
|---------------------------------------------------- |  | ------------------------ | ------- | -------- |  | --------- | ------- | --------- |  | ----- | ------ | ----- |  |  | ------ | - |  |  | ------ |  |  |  | ------- | 
|                                                     |  | Year Ended June 30, 2000
|                                                     |  |                         
|                                                     |  | Global                   |         | Private  |  |           |         |           |  |       |        |       |  |  |        |   |  |  |        | 
|                                                     |  | Fund                     |         | Client   |  | Corporate |         | Community |  |       |        |       |  |  |        |  
|                                                     |  | Services                 |         | Services |  | Banking   |         | Banking   |  | Other |        | Total
|                                                     |  |                          |         |          |  |           |         |           |  |       |        |      
|                                                     |  | (In US$ thousands)      
|Non-interest and other income                        |  |                          | 113,728 |          |  |           | 72,819  |           |  |       | 13,972 |       |  |  | 25,873 |   |  |  | 11,327 |  |  |  | 237,719 | 
|Net interest income, after provision for
loan losses |  |                          | 52,301  |          |  |           | 28,255  |           |  |       | 38,992 |       |  |  | 57,805 |   |  |  | 3,940  |  |  |  | 181,293 | 
|                                                     |  |                          |         |          |  |           |         |           |  |       |        |       |  |  |        |   |  |  |        |  |  |  |         | 
|Total revenue                                        |  |                          | 166,029 |          |  |           | 101,074 |           |  |       | 52,964 |       |  |  | 83,678 |   |  |  | 15,267 |  |  |  | 419,012 | 
|Operating expenses                                   |  |                          | 133,445 |          |  |           | 74,995  |           |  |       | 24,961 |       |  |  | 59,635 |   |  |  | 11,784 |  |  |  | 304,820 | 
|Income from operations, before income taxes          |  |                          | 32,584  |          |  |           | 26,079  |           |  |       | 28,003 |       |  |  | 24,043 |   |  |  | 3,483  |  |  |  | 114,192 | 
|Income taxes/(recovery)                              |  |                          | 3,872   |          |  |           | 2,533   |           |  |       | 200    |       |  |  | (66    | ) |  |  | 1,599  |  |  |  | 8,138   | 
|                                                     |  |                          |         |          |  |           |         |           |  |       |        |       |  |  |        |   |  |  |        |  |  |  |         | 
|Net income                                           |  |                          | 28,712  |          |  |           | 23,546  |           |  |       | 27,803 |       |  |  | 24,109 |   |  |  | 1,884  |  |  |  | 106,054 | 
|                                                     |  |                          |         |          |  |           |         |           |  |       |        |       |  |  |        |   |  |  |        |  |  |  |         | 
|Average total division assets (in US$ millions)      |  |                          | 3,283   |          |  |           | 2,159   |           |  |       | 2,350  |       |  |  | 2,156  |   |  |  | 153    |  |  |  | 10,101  | 

Geographic Disclosures

A significant portion of the Banks assets and earnings is derived from
the activities of subsidiaries based overseas. The following is a summary of
the Banks results by geographic region net of inter-company eliminations:

|              |  |                              |            |          |  |           |         |        |  |        |         |  |  |  |       |  |  |  |        | 
|------------- |  | ---------------------------- | ---------- | -------- |  | --------- | ------- | ------ |  | ------ | ------- |  |  |  | ----- |  |  |  | ------ | 
|              |  | Year Ended December 31, 2002
|              |  |                             
|              |  | Total                        |            | Total    |  | Operating |         | Income |  | Net   
|              |  | Assets                       |            | Revenues |  | Expenses  |         | Taxes  |  | Income
|              |  |                              |            |          |  |           |         |        |  |       
|              |  | (In US$ thousands)          
|North America |  |                              | 6,526,916  |          |  |           | 235,729 |        |  |        | 185,763 |  |  |  | 34    |  |  |  | 49,932 | 
|Europe        |  |                              | 2,718,893  |          |  |           | 97,882  |        |  |        | 81,283  |  |  |  | 3,410 |  |  |  | 13,189 | 
|Asia-Pacific  |  |                              | 1,844,159  |          |  |           | 87,386  |        |  |        | 70,060  |  |  |  | 2,789 |  |  |  | 14,537 | 
|              |  |                              |            |          |  |           |         |        |  |        |         |  |  |  |       |  |  |  |        | 
|Total Bank    |  |                              | 11,089,968 |          |  |           | 420,997 |        |  |        | 337,106 |  |  |  | 6,233 |  |  |  | 77,658 | 

|              |  |                              |            |          |  |           |         |        |  |        |         |  |  |  |       |  |  |  |        | 
|------------- |  | ---------------------------- | ---------- | -------- |  | --------- | ------- | ------ |  | ------ | ------- |  |  |  | ----- |  |  |  | ------ | 
|              |  | Year Ended December 31, 2001
|              |  |                             
|              |  | Total                        |            | Total    |  | Operating |         | Income |  | Net   
|              |  | Assets                       |            | Revenues |  | Expenses  |         | Taxes  |  | Income
|              |  |                              |            |          |  |           |         |        |  |       
|              |  | (In US$ thousands)          
|North America |  |                              | 6,474,575  |          |  |           | 255,538 |        |  |        | 229,774 |  |  |  | 21    |  |  |  | 25,743 | 
|Europe        |  |                              | 2,620,630  |          |  |           | 100,279 |        |  |        | 80,207  |  |  |  | 3,044 |  |  |  | 17,028 | 
|Asia-Pacific  |  |                              | 1,712,814  |          |  |           | 87,991  |        |  |        | 66,979  |  |  |  | 3,706 |  |  |  | 17,306 | 
|              |  |                              |            |          |  |           |         |        |  |        |         |  |  |  |       |  |  |  |        | 
|Total Bank    |  |                              | 10,808,019 |          |  |           | 443,808 |        |  |        | 376,960 |  |  |  | 6,771 |  |  |  | 60,077 | 

|               |  |                                    |            |          |  |           |         |        |  |        |         |  |  |  |       |  |  |  |        | 
|-------------- |  | ---------------------------------- | ---------- | -------- |  | --------- | ------- | ------ |  | ------ | ------- |  |  |  | ----- |  |  |  | ------ | 
|               |  | Six Months Ended December 31, 2000
|               |  |                                   
|               |  | Total                              |            | Total    |  | Operating |         | Income |  | Net   
|               |  | Assets                             |            | Revenues |  | Expenses  |         | Taxes  |  | Income
|               |  |                                    |            |          |  |           |         |        |  |       
|               |  | (In US$ thousands)                
|North America* |  |                                    | 6,608,573  |          |  |           | 130,308 |        |  |        | 96,946  |  |  |  | 68    |  |  |  | 34,811 | 
|Europe         |  |                                    | 2,879,269  |          |  |           | 48,337  |        |  |        | 34,299  |  |  |  | 1,511 |  |  |  | 12,527 | 
|Asia-Pacific   |  |                                    | 1,885,917  |          |  |           | 41,388  |        |  |        | 30,831  |  |  |  | 1,649 |  |  |  | 8,908  | 
|               |  |                                    |            |          |  |           |         |        |  |        |         |  |  |  |       |  |  |  |        | 
|Total Bank     |  |                                    | 11,373,759 |          |  |           | 220,033 |        |  |        | 162,076 |  |  |  | 3,228 |  |  |  | 56,246 | 

* North Americas net income includes the gain of $1.5 million recognised
due to the change in accounting principle.

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##### Table of Contents



|              |  |                          |            |          |  |           |         |        |  |        |         |  |  |  |       |   |  |  |         | 
|------------- |  | ------------------------ | ---------- | -------- |  | --------- | ------- | ------ |  | ------ | ------- |  |  |  | ----- | - |  |  | ------- | 
|              |  | Year Ended June 30, 2000
|              |  |                         
|              |  | Total                    |            | Total    |  | Operating |         | Income |  | Net   
|              |  | Assets                   |            | Revenues |  | Expenses  |         | Taxes  |  | Income
|              |  |                          |            |          |  |           |         |        |  |       
|              |  | (In US$ thousands)      
|North America |  |                          | 6,216,159  |          |  |           | 246,386 |        |  |        | 181,191 |  |  |  | (134  | ) |  |  | 65,329  | 
|Europe        |  |                          | 2,614,796  |          |  |           | 91,641  |        |  |        | 71,716  |  |  |  | 3,918 |   |  |  | 16,007  | 
|Asia-Pacific  |  |                          | 1,519,618  |          |  |           | 80,985  |        |  |        | 51,913  |  |  |  | 4,354 |   |  |  | 24,718  | 
|              |  |                          |            |          |  |           |         |        |  |        |         |  |  |  |       |   |  |  |         | 
|Total Bank    |  |                          | 10,350,573 |          |  |           | 419,012 |        |  |        | 304,820 |  |  |  | 8,138 |   |  |  | 106,054 | 

Segment assets at December 31, 2002 include premises, equipment and
computer software of $145.3 million (December 31, 2001 - $139.1 million;
December 31, 2000 - $137.3 million; June 30, 2000
- $133.9 million) broken down
by geographic region as follows:

|              |  |                    |         |              |  |              |         |          |  |  |         |  |  |  |         | 
|------------- |  | ------------------ | ------- | ------------ |  | ------------ | ------- | -------- |  |  | ------- |  |  |  | ------- | 
|              |  | December 31,       |         | December 31, |  | December 31, |         | June 30,
|              |  | 2002               |         | 2001         |  | 2000         |         | 2000    
|              |  |                    |         |              |  |              |         |         
|              |  | (In US$ thousands)
|North America |  |                    | 127,746 |              |  |              | 123,522 |          |  |  | 122,409 |  |  |  | 119,606 | 
|Europe        |  |                    | 11,846  |              |  |              | 10,386  |          |  |  | 10,447  |  |  |  | 10,633  | 
|Asia-Pacific  |  |                    | 5,733   |              |  |              | 5,196   |          |  |  | 4,425   |  |  |  | 3,689   | 
|              |  |                    |         |              |  |              |         |          |  |  |         |  |  |  |         | 
|Total         |  |                    | 145,325 |              |  |              | 139,104 |          |  |  | 137,281 |  |  |  | 133,928 | 



|11. |  | RELATED PARTY TRANSACTIONS
|--- |  | --------------------------

Sale of Investment

During the year ended December 31, 2002 the Bank entered into an agreement
with a related party, whereby the Bank agreed to the repurchase of its shares
in the company that were held as an investment by the Bank. One of the Banks
directors is a shareholder and director of the company. The company
repurchased the Banks holding for an aggregate consideration of $1.95 million.
The amount of the gain arising from the transaction of $1.59 million has been
recorded in the Consolidated Statement of Income as part of gains/(losses) on
available for sale marketable securities.

Share Interests

Effective December 2002 the Bank changed the structure of senior
management. The Office of the Chief Executive, which previously consisted of
the Chief Executive Officer, the Chief Operating Officer and the Chief
Financial Officer, was expanded to include the heads of Global Fund Services,
Private Client Services and Banking Services (the latter oversees Corporate
Banking and Community Banking) and renamed the Executive Office. These six
individuals represent the Banks executive officers. The previous executive
group are now referred to as Senior Management. In this note the comparative
information for common shares outstanding, subscriptions outstanding under the
Banks Employee Share Purchase Plans, restricted common shares under the
Executive Share Plan, Performance Accelerated Restricted Shares issued to date,
options outstanding and connected lending have been restated to reflect this
change.

At December 31, 2002, the directors and executive officers of the Bank had
combined interests in 1,369,131 (December 31, 2001 - 1,433,316) of the Banks
common shares.

Executive officers of the Bank currently have subscriptions outstanding
for 3,688 common shares under the Banks Employee Share Purchase Plans and
21,170 restricted common shares under the Executive Share Plan at December 31,
2002 (December 31, 2001  3,430 common shares and 26,723 restricted common
shares). In addition, 66,850 Performance Accelerated Restricted Shares have
been issued under the Executive Share Plan to date (December 31,
2001  64,601). A total of 1,202,902 options granted to current and retired executive
officers at the market price of the Banks shares on the grant date were
outstanding at December 31, 2002 (December 31, 2001  1,111,753).

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A total of 101,082 options granted to current and former non-executive
directors of the Bank at the market price of the Banks shares on the grant
date were outstanding at December 31, 2002 (December 31,
2001  78,888).

Directors Compensation

During the year ended December 31, 2002, directors who were not also
employees of the Bank, other than the chairman and deputy chairman of the
board, received compensation at the rate of $5,000 per annum for their service
as board members and $500 per board meeting and committee meeting attended.
Committee chairmen received an additional $15,000 per annum. The chairman and
deputy chairman of the board received an all-inclusive fee of $65,000 and
$45,000 per annum respectively. In addition, 2,000 options to purchase common
shares of the Bank were issued to eligible directors at an exercise price equal
to the market price on the date of the grants. Henry B. Smith, who is an
employee of the Bank, did not receive additional compensation for his service
as a director.

Connected Lending

In the ordinary course of business, as a significant lender in the Bermuda
market, the Bank makes loans to directors and their associates at substantially
the same terms, including interest rates and collateral requirements, as those
prevailing at the time of origination for comparable transactions with other
borrowers. The Bank provides, as a benefit to non-executive employees, loan
facilities at preferred lending rates. Prior to July 30, 2002, the Bank
provided loan facilities to executive officers of the Bank at preferred lending
rates. There is no preferred lending to associates of executive officers. The
term associates means immediate family members and entities in which the
directors, executive officers or their families have a beneficial ownership of
10% or more.

The total amounts due from directors, executive officers, and their
associates were $14.3 million at December 31, 2002
(December 31, 2001 - $13.4
million). During the year ended December 31, 2002, new loans totalling $7.3
million (year ended December 31, 2001 - $1.8 million) were granted and
reductions were made to outstanding loan balances totalling $6.4 million (year
ended December 31, 2001 - $1.1 million).

Sale of Subsidiary

On June 18, 2001, the Bank sold its remaining 50% ownership of First
Ecommerce Data Services Limited (FEDS) to a former related party, First
Ecom.com (First Ecom), for $4.2 million which resulted in a net gain to the
Bank of $2 million. On October 6, 2000, the Bank sold the first 50% of its
interest in FEDS to First Ecom for $3 million, which resulted in a net gain to
the Bank of $2.8 million.

First Ecom was a joint venture partner in the FEDS initiative to provide
multi-currency credit card processing solutions to online merchants and the
Bank owned 10.4% of First Ecom at December 31, 2000. On November 2, 2001, the
Bank completed the sale of its investment in First Ecom for $150,000 resulting
in a cumulative net loss of $14.15 million, of which $10 million was recognised
in the six months ended December 31, 2000 and $4.15 million in the year ended
December 31, 2001.



|12. |  | SHARE PLANS
|--- |  | -----------

Employee Share Purchase Plan

In August 1998, the Bank introduced the Third Employee Share Purchase Plan
and this replaced all previous plans. Under this new plan, all employees may
subscribe to purchase shares at a discounted value not exceeding 10% of their
annual gross salary, or $25,000, whichever is less. The purchase price of the
shares is 75% of the market price on the plans subscription date. Employees
pay the cost of the shares over a one year period, at which point they are
fully vested. At the conclusion of the plan year, shares purchased are issued
from authorised, unissued share capital or supplied by purchases in the open
market.

Due to the size of the purchase discount compared to the market price of
the shares at the subscription date, the Bank treats its Third Employee Share
Purchase Plan as a compensatory plan under the guidance provided by APB Number
25 - Accounting for Stock Issued to Employees and FASB Interpretation Number 44
- Accounting for

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Certain Transactions involving Stock Compensation, an Interpretation of
APB Number 25 (FIN Number 44). A compensation expense is measured at the
subscription date equal to the amount of discount on the purchase of the shares
and this is recognised as an expense over the vesting period.

During the year ended December 31, 2002, employees subscribed to 182,539
shares (year ended December 31, 2001  166,183; six months ended December 31,
2000  214,322; year ended June 30, 2000  222,244) under the plan. The Bank
has recorded compensation expense for its Third Employee Share Purchase Plan of
$1,471,000 in the year ended December 31, 2002 (year ended December 31, 2001 -
$1,659,000; six months ended December 31, 2000 - $899,000; year ended June 30,
2000 - $1,329,000).

Executive Share Plan

In July 1998 the Bank introduced an Executive Share Plan. The plan has two
main components:

 Executive Share Purchase Plan

 Performance Accelerated Restricted Share element (PARS)

Under the Executive Share Purchase Plan, 20% of each annual cash bonus
must be used to subscribe for common shares in the Bank at a discount of 25% of
their market value. These shares are held in trust and are restricted from sale
or use by the executive officer for three years. Due to the size of the
purchase discount compared to the market price of the shares at the
subscription date, the Bank treats this plan as compensatory under the guidance
provided by APB Number 25 and FIN Number 44. A compensation expense is measured
at the subscription date equal to the amount of discount on the purchase of the
shares and this is recognised as an expense over the vesting period of three
years.

During the year ended December 31, 2002, executive officers and key
employees subscribed to 10,337 shares (year ended December 31,
2001  10,193;
six months ended December 31, 2000  26,078; year ended
June 30, 2000  21,809)
under this plan. The Bank has recorded compensation expense for the Executive
Share Purchase Plan of $155,000 (year ended December 31, 2001 - $163,000; six
months ended December 31, 2000 - $65,000; year ended
June 30, 2000 - $80,000).

Under the PARS element, the compensation committee determines which of the
executive officers and key employees may participate. These participants are
entitled to receive an award of common shares that will be held by trustees and
restricted from sale or use for a period of between three and seven years. The
vesting period cannot be less than three years and will depend upon the
performance criteria as established by the compensation committee of the board.
The common shares awarded under the PARS element are issuable out of authorised
unissued share capital or by purchases in the open market.

During the year ended December 31, 2002, the Bank granted 20,720 shares
(year ended December 31, 2001  8,209; six months ended
December 31, 2000 
16,092; year ended June 30, 2000  23,093) under this plan. The Bank recognises
compensation expense for the PARS based upon the market value of the shares
awarded. This compensation cost is being recognised over the vesting period of
seven years. The Bank has recorded compensation expense for the PARS of
$407,000 for the year ended December 31, 2002 (year ended December 31, 2001 -
$294,000; six months ended December 31, 2000 - $123,000; year ended June 30,
2000 - $167,000).

Executive Share Option Plan

In June 1997, the Bank adopted an Executive Share Option Plan. Executive
officers of the Bank, certain key employees and others that may be approved by
the compensation committee, are eligible to be granted options under the plan.
A total of 2,280,569 common shares have been registered for issuance under the
plan. At December 31, 2002, a total of 753,153 options
(December 31, 2001 
753,153) granted to certain executive officers and 1,330,343 options (December
31, 2001  1,620,736) to key employees of the Bank were outstanding.

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The exercise price is equal to the fair market value of the Banks shares
at the date of grant. The options become exercisable on a cumulative basis of
25% on each of the first, second, third and fourth anniversaries of the date of
grant. No options may be exercised after a period of ten years from the date of
grant.

Share Option Plan 2000

In September 2000, the Bank adopted the Share Option Plan 2000. The 2000
plan expands eligibility to include all Bank employees. The Bank uses option
grants to retain key and high-performing employees who are not executives in
addition to supporting the Banks current executive compensation structure and
to support a performance based compensation by providing options for
outstanding performance. A total of 2,999,786 common shares have been
registered for issuance under the plan. At December 31, 2002, a total of
449,749 options (December 31, 2001  358,600) granted to certain executive
officers and 1,385,141 options (December 31, 2001  756,941) to key employees
of the Bank were outstanding under the Share Option Plan 2000. Key provisions
of this plan are the same as the Executive Share Option Plan adopted in 1997.

Director Share Option Plan

In September 1999, the Bank adopted the Director Share Option Plan. Under
the plan, non-executive directors are eligible to receive 2,000 options to
purchase Bank shares each year. The options are granted at an exercise price
equal to the market price of the shares as at the date of the grant. A total
of 195,676 common shares have been registered for issuance under the plan. The
options vest over four years at 25% per year and must be exercised within ten
years from the date of the grant.

At
December 31, 2002, 101,082 options (December 31, 2001  78,888) granted
to non-executive directors were outstanding.

The following tables present the options granted under the Executive Share
Option Plan, the Share Option Plan 2000, and the Director Share Option Plan:

|                                  |           |  |                   |          |                   |  |           |       |                |  |           |           |          |  |       |       | 
|--------------------------------- | --------- |  | ----------------- | -------- | ----------------- |  | --------- | ----- | -------------- |  | --------- | --------- | -------- |  | ----- | ----- | 
|                                  |           |  | Year Ended        |          | Year Ended       
|                                  |           |  | December 31, 2002 |          | December 31, 2001
|                                  |           |  |                   |          |                  
|                                  |           |  | (In US $)        
|                                  |           |  |                   |          |                   |  | Weighted  |       |                |  |           |           | Weighted
|                                  |           |  | Number            |          | Average           |  | Number    |       | Average       
|                                  |           |  | Of Shares         |          | Exercise Price    |  | of Shares |       | Exercise Price
|Outstanding  beginning of period |           |  | 3,568,318         |          |                   |  | 28.82     |       |                |  | 2,698,512 |           |          |  | 21.21 |      
|                                  | Granted   |  |                   | 881,236  |                   |  |           | 43.41 |                |  |           | 1,278,340 |          |  |       | 42.41 | 
|                                  | Cancelled |  |                   | (201,448 | )                 |  |           | 36.70 |                |  |           | (120,540  | )        |  |       | 32.27 | 
|                                  | Exercised |  |                   | (228,638 | )                 |  |           | 19.76 |                |  |           | (287,994  | )        |  |       | 16.43 | 
|                                  |           |  |                   |          |                   |  |           |       |                |  |           |           |          |  |       |      
|Outstanding  end of period       |           |  | 4,019,468         |          |                   |  | 32.00     |       |                |  | 3,568,318 |           |          |  | 28.82 |      
|Exercisable  end of period       |           |  | 1,939,758         |          |                   |  | 23.95     |       |                |  | 1,548,171 |           |          |  | 19.71 |      

|                                  |           |  |                   |         |                |  |           |       |                |  |           |         |          |  |       |       | 
|--------------------------------- | --------- |  | ----------------- | ------- | -------------- |  | --------- | ----- | -------------- |  | --------- | ------- | -------- |  | ----- | ----- | 
|                                  |           |  | Six Months Ended  |         | Year Ended    
|                                  |           |  | December 31, 2000 |         | June 30, 2000 
|                                  |           |  |                   |         |               
|                                  |           |  | (In US $)        
|                                  |           |  |                   |         |                |  | Weighted  |       |                |  |           |         | Weighted
|                                  |           |  | Number            |         | Average        |  | Number    |       | Average       
|                                  |           |  | Of Shares         |         | Exercise Price |  | of Shares |       | Exercise Price
|Outstanding  beginning of period |           |  | 2,380,652         |         |                |  | 19.72     |       |                |  | 1,710,595 |         |          |  | 18.62 |      
|                                  | Granted   |  |                   | 361,585 |                |  |           | 31.05 |                |  |           | 774,212 |          |  |       | 22.27 | 
|                                  | Cancelled |  |                   | (22,186 | )              |  |           | 22.85 |                |  |           | (90,326 | )        |  |       | 20.97 | 
|                                  | Exercised |  |                   | (21,539 | )              |  |           | 20.87 |                |  |           | (13,829 | )        |  |       | 17.49 | 
|                                  |           |  |                   |         |                |  |           |       |                |  |           |         |          |  |       |      
|Outstanding  end of period       |           |  | 2,698,512         |         |                |  | 21.21     |       |                |  | 2,380,652 |         |          |  | 19.72 |      
|Exercisable  end of period       |           |  | 1,162,975         |         |                |  | 17.89     |       |                |  | 1,020,580 |         |          |  | 17.05 |      

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##### Table of Contents



The following table presents the characteristics of the options granted
under the Executive Share Option Plan, the Share Option Plan 2000, and the
Director Share Option Plan at December 31, 2002:

|                     |  |                  |           |                |  |                  |     |                  |  |                |       |  |  |                  |           |  |  |  |       | 
|-------------------- |  | ---------------- | --------- | -------------- |  | ---------------- | --- | ---------------- |  | -------------- | ----- |  |  | ---------------- | --------- |  |  |  | ----- | 
|                     |  | Outstanding      |           | Exercisable   
|                     |  |                  |           |               
|Exercise price range |  |                  |           |                |  | Weighted average |     | Weighted average |  |                |       |  |  | Weighted average
|(in US $)            |  | Number of shares |           | life remaining |  | exercise price   |     | Number of shares |  | exercise price
|                     |  |                  |           |                |  |                  |     |                  |  |               
|10.00
 15.00        |  |                  | 637,342   |                |  |                  | 3.8 |                  |  |                | 14.46 |  |  |                  | 637,342   |  |  |  | 14.46 | 
|20.00  25.00        |  |                  | 801,373   |                |  |                  | 6.3 |                  |  |                | 22.00 |  |  |                  | 566,384   |  |  |  | 21.80 | 
|25.00  30.00        |  |                  | 494,791   |                |  |                  | 6.2 |                  |  |                | 28.23 |  |  |                  | 382,040   |  |  |  | 27.81 | 
|30.00  35.00        |  |                  | 141,350   |                |  |                  | 7.8 |                  |  |                | 32.51 |  |  |                  | 59,400    |  |  |  | 32.73 | 
|35.00  40.00        |  |                  | 554,959   |                |  |                  | 8.5 |                  |  |                | 37.60 |  |  |                  | 136,502   |  |  |  | 37.66 | 
|40.00  45.00        |  |                  | 786,376   |                |  |                  | 9.1 |                  |  |                | 44.40 |  |  |                  | 5,452     |  |  |  | 43.16 | 
|45.00  50.00        |  |                  | 603,277   |                |  |                  | 8.1 |                  |  |                | 45.44 |  |  |                  | 152,638   |  |  |  | 45.44 | 
|                     |  |                  | 4,019,468 |                |  |                  | 7.1 |                  |  |                | 32.00 |  |  |                  | 1,939,758 |  |  |  | 23.95 | 

The number of shares that each option entitles the holder to subscribe for
increased by 10% following a stock dividend to shareholders of record on August
31, 1999, by 14.29% following a 1-for-7 stock dividend to shareholders of
record on August 18, 2000, and by 10% following a stock dividend to
shareholders of record on December 31, 2001 (see Note 5), while the exercise
price per share reduced so that the total cost of exercising each option was
unchanged. The amounts shown in the above tables have been adjusted to reflect
the impact of all stock dividends.

The Bank applies APB Number 25 and FIN Number 44 in accounting for the
option plans. No compensation expense was recognised for grants during the year
as the market price of the Banks stock was equal to the option exercise price
on the date of grant. During the year ended December 31, 2001, the Bank
recorded compensation expense of $1.4 million relating to the modification of
certain grants under the Executive Share Option Plan.



|13. |  | INCOME TAXES
|--- |  | ------------

The Banks income tax expense for all periods presented relates to income
from continuing operations and is attributable to income tax expense of certain
non-Bermuda subsidiaries. Under current Bermuda law the Bank is not required to
pay any taxes in Bermuda on either income or capital gains. The Bank has
received an undertaking from the Minister of Finance in Bermuda that in the
event of such taxes being imposed, the Bank will be exempted from taxation
until the year 2016.

Income tax expense/(recovery) attributable to continuing operations
consists of:

|         |  |                    |       |              |  |              |       |            |  |            |       |  |  |  |       |  
|-------- |  | ------------------ | ----- | ------------ |  | ------------ | ----- | ---------- |  | ---------- | ----- |  |  |  | ----- | -
|         |  |                    |       |              |  |              |       |            |  | Six Months |       |  |  | 
|         |  | Year Ended         |       | Year Ended   |  | Ended        |       | Year Ended
|         |  | December 31,       |       | December 31, |  | December 31, |       | June 30,  
|         |  | 2002               |       | 2001         |  | 2000         |       | 2000      
|         |  |                    |       |              |  |              |       |           
|         |  | (In US$ thousands)
|Current  |  |                    | 6,402 |              |  |              | 6,606 |            |  |            | 2,961 |  |  |  | 8,314 |  
|Deferred |  |                    | (169  | )            |  |              | 165   |            |  |            | 267   |  |  |  | (176  | )
|         |  |                    |       |              |  |              |       |            |  |            |       |  |  |  |       |  
|Total    |  |                    | 6,233 |              |  |              | 6,771 |            |  |            | 3,228 |  |  |  | 8,138 |  

Current year income tax expense attributable to continuing operations
differed from the amounts computed at the Bermuda tax rate of nil. This
difference is attributable to the various income tax rates imposed in certain
jurisdictions in which the Bank or its subsidiaries may operate and certain
permanent differences in calculating taxable income, such as non-deductible
business development costs, donations, capital expenditures, special deductions
and non-taxable interest income.

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The following is an analysis of deferred tax assets and deferred tax
liabilities at:

|                             |                               |  |                    |        |              |  |       |        |  
|---------------------------- | ----------------------------- |  | ------------------ | ------ | ------------ |  | ----- | ------ | -
|                             |                               |  | December 31,       |        | December 31,
|                             |                               |  | 2002               |        | 2001        
|                             |                               |  |                    |        |             
|                             |                               |  | (In US$ thousands)
|Deferred tax assets:         |                               |  |                    |        |              |  |       |       
|                             | Tax loss carryforward         |  |                    | 2,741  |              |  |       | 1,825  |  
|                             | Other                         |  |                    | 210    |              |  |       | 45     |  
|                             |                               |  |                    |        |              |  |       |        |  
|Gross deferred tax asset     |                               |  | 2,951              |        |              |  | 1,870 |       
|                             | Less: Valuation allowance     |  |                    | (2,112 | )            |  |       | (1,254 | )
|                             |                               |  |                    |        |              |  |       |        |  
|Total deferred tax asset     |                               |  | 839                |        |              |  | 616   |       
|                             |                               |  |                    |        |              |  |       |        |  
|Deferred tax liabilities:    |                               |  |                    |        |              |  |       |       
|                             | Depreciation                  |  |                    | (277   | )            |  |       | (140   | )
|                             | Capitalised development costs |  |                    | (266   | )            |  |       | (311   | )
|                             | Other                         |  |                    | (111   | )            |  |       | (148   | )
|                             |                               |  |                    |        |              |  |       |        |  
|Total deferred tax liability |                               |  | (654               | )      |              |  | (599  | )     
|                             |                               |  |                    |        |              |  |       |        |  
|Net deferred tax asset       |                               |  | 185                |        |              |  | 17    |       
|                             |                               |  |                    |        |              |  |       |        |  

The deferred tax asset arose due to tax losses carried forward, which begin to expire in 2019.

The Bank has not established any deferred taxes with respect to its
investments in the stock of subsidiaries because 1) the recognition of a gain
or loss on the disposition of the stock would not occur within a taxable
jurisdiction and/or 2) it is not apparent that any such difference would
reverse in the foreseeable future. A deferred tax liability will be recognised
if/when the Bank expects that any such differences would reverse in a taxable
manner. As of December 31, 2002, the determination of the effect of such
differences is not practicable.

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|14. |  | EARNINGS PER SHARE
|--- |  | ------------------

The following table presents the computation of basic and diluted earnings
per share:

|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|--------------------------------------------------------------- |  | ----------------------------------------- | ------ | ------------ |  | ------------ | ------ | ---------- |  | ---------- | ------ |  |  |  | ------- | 
|                                                                |  |                                           |        |              |  |              |        |            |  | Six Months |        |  |  | 
|                                                                |  | Year Ended                                |        | Year Ended   |  | Ended        |        | Year Ended
|                                                                |  | December 31,                              |        | December 31, |  | December 31, |        | June 30,  
|                                                                |  | 2002                                      |        | 2001         |  | 2000         |        | 2000      
|                                                                |  |                                           |        |              |  |              |        |           
|                                                                |  | (In US$ thousands, except per share data)
|Net income available to common shareholders                     |  |                                           | 77,658 |              |  |              | 60,077 |            |  |            | 56,246 |  |  |  | 106,054 | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Weighted average number of common
shares outstanding            |  |                                           | 29,601 |              |  |              | 29,977 |            |  |            | 30,060 |  |  |  | 29,355  | 
|Basic earnings per share:                                       |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Income from operations, after income taxes                      |  |                                           | 2.62   |              |  |              | 2.00   |            |  |            | 1.82   |  |  |  | 3.61    | 
|Cumulative effect of a change in accounting principle           |  |                                           |       |              |  |              |       |            |  |            | 0.05   |  |  |  |        | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Net income                                                      |  |                                           | 2.62   |              |  |              | 2.00   |            |  |            | 1.87   |  |  |  | 3.61    | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Net income available to common shareholders                     |  |                                           | 77,658 |              |  |              | 60,077 |            |  |            | 56,246 |  |  |  | 106,054 | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Weighted average number of common
shares outstanding            |  |                                           | 29,601 |              |  |              | 29,977 |            |  |            | 30,060 |  |  |  | 29,355  | 
|Plus: incremental shares from assumed
exercise of stock options |  |                                           | 1,090  |              |  |              | 1,409  |            |  |            | 1,081  |  |  |  | 486     | 
|exercise of warrants                                            |  |                                           |       |              |  |              |       |            |  |            |       |  |  |  | 188     | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Adjusted weighted average number of common
shares outstanding   |  |                                           | 30,691 |              |  |              | 31,386 |            |  |            | 31,141 |  |  |  | 30,029  | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Diluted earnings per share:                                     |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Income from operations, after income taxes                      |  |                                           | 2.53   |              |  |              | 1.91   |            |  |            | 1.76   |  |  |  | 3.53    | 
|Cumulative effect of a change in accounting principle           |  |                                           |       |              |  |              |       |            |  |            | 0.05   |  |  |  |        | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 
|Net income                                                      |  |                                           | 2.53   |              |  |              | 1.91   |            |  |            | 1.81   |  |  |  | 3.53    | 
|                                                                |  |                                           |        |              |  |              |        |            |  |            |        |  |  |  |         | 

As at December 31, 2002, the Bank had 4,019,468 options outstanding
(December 31, 2001  3,568,318; December 31, 2000
 2,698,512; June 30, 2000 
2,380,651). As at December 31, 2002, the Bank had no warrants outstanding
(December 31, 2001  nil; December 31, 2000 - nil;
June 30, 2000  nil).

The earnings per share amounts presented have been calculated giving
effect to the stock dividends discussed in Note 5.



|15. |  | CONCENTRATIONS OF CREDIT RISK
|--- |  | -----------------------------

Concentrations of credit risk exist if a number of clients or
counterparties are engaged in similar activities, are located in the same
geographic region or have similar economic characteristics such that their
ability to meet contractual obligations would be similarly affected by changes
in economic or political conditions.

Details of the Banks loan portfolio are discussed in Note 3. The majority
of personal, mortgage and commercial lending is made in Bermuda to Bermudian
businesses and residents of the island. The Bermuda economy is largely
dependent upon tourism and international business services and the health of
these sectors depends to a large extent upon the strength of the US and
European economies.

There are no material concentrations of risk in the international lending
portfolio in terms of geographic region or underlying business activity. The
Bank is also engaged in short-term lending to mutual fund and trust clients for
the purposes of liquidity and for investment. This lending is normally
collateralised by assets held in the custody of the Bank. There is no material
concentration of credit risk for this activity in terms of geographic region or
underlying business activity.

The
Banks total interbank deposits averaged 32% (December 31, 2001 - 38%)
of total assets during the period. As a result of this high level of liquidity,
the Bank frequently has a number of individual deposits that represent 10% or
more of shareholders equity. The Bank manages this exposure by placing its
deposits with well-rated financial institutions and by diversifying its
deposits on a geographic basis.

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The Banks marketable securities portfolio is discussed in more detail in
Note 2. Total marketable securities at December 31, 2002 were $4.4 billion
(December 31, 2001 - $5.5 billion). The Banks trading portfolio balance at
December 31, 2002 was $0.5 billion (December 31, 2001 - $1.3 billion).

The Banks trading portfolio is managed by a third party investment
management firm, in accordance with strict portfolio quality and duration
guidelines and has an average credit quality of triple-A. The maximum duration
for the portfolio is 0.5 years. The portfolio must also adhere to sector
limits.

The Banks portfolio of available for sale marketable securities totalled
$3.9 billion at December 31, 2002 (December 31, 2001 - $4.1 billion). The
Banks available for sale portfolio is managed in-house by the Banks Capital
Markets Products division and consists primarily of debt instruments issued by
governments and government agencies of OECD countries and debt instruments
issued by financial institutions organised in these countries. The entire
available for sale portfolio must have a minimum average credit quality of A
and no single issue is to be rated below BBB at the time of purchase.

The majority of investments in floating rate notes and debt securities are
in OECD government and government agency issues and corporate debt. Investments
in corporate debt and equity instruments are well diversified with no
investment in a single issuer exceeding 12.4% of shareholders equity at
December 31, 2002 (December 31, 2001 - 19%).



|16. |  | AFFILIATES
|--- |  | ----------

Investment in Affiliate

The Bank currently holds an investment in Measurisk, a start up company
offering risk management analytical information to financial companies. During
the year ended December 31, 2001 the Bank invested $4.2 million in the company,
bringing the total investment to $11.5 million. The Banks share of the
companys losses was $nil for the year ended December 31, 2002 and $4.2 million
for the year ended December 31, 2001. In 2001 the Bank also expensed $1.3
million relating to the amortisation of goodwill acquired upon the investment
in the company. At December 31, 2001, the Bank determined the investment was
other than temporarily impaired and a write down against the remaining carrying
value of the investment of $6 million was made. The Bank is currently carrying
this investment at a value of $nil.

F-37