SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 FORM 10 - KSB

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

  For the fiscal year ended December 31, 1997. Commission file number 0-22536

                           Monocacy Bancshares, Inc.
             (Exact name of Registrant as specified in its charter)

          Maryland                                       52-1824297
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

222 East Baltimore Street, Taneytown, Maryland              21787
 (Address of principal executive offices)                 (Zip Code)

         Registrant's telephone number including area code: (410) 756-2655
         Securities registered pursuant to section 12(b) of the Act: None
         Securities registered pursuant to section 12(g) of the Act:

                      Common Stock, Par Value $5 per share
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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.

                     Yes   X                      No

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

The Registrant's revenues for the most recent fiscal year were $23,706,596.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 1998, was $46,215,978.

As of March 20, 1998, Monocacy Bancshares, Inc. had 1,798,325 shares of common
stock outstanding, par value $5.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Monocacy Bancshares, Inc. Annual Report to Shareholders for the year
ended December 31, 1997, are incorporated by reference into Parts I, II and III.

Portions of the Definitive Proxy Statement for the annual shareholders' meeting
to be held April 27, 1998, are incorporated by reference in Part III.

<PAGE>



PART I

ITEM 1  DESCRIPTION OF BUSINESS

     Monocacy Bancshares, Inc. ("Monocacy" or "Registrant") commenced business
     on October 1, 1993, and is a Maryland corporation and a bank holding
     company. Taneytown Bank & Trust Company ("Bank") is a wholly owned
     subsidiary of Monocacy and its primary operating entity. The primary
     regulator of Monocacy is the Board of Governors of the Federal Reserve
     System ("Federal Reserve Board"), while the Bank, as a state chartered
     commercial bank, is regulated by the Federal Deposit Insurance Corporation
     ("FDIC") and the Maryland State Banking Commission. On December 31, 1995,
     the Registrant acquired Royal Oak Savings Bank, F.S.B. ("Royal Oak") as a
     subsidiary of Monocacy. The transaction was accounted for as a purchase and
     the results of operations for the year 1995 properly do not include any
     income from Royal Oak. The purchase price of the assets and costs
     associated therewith were approximately equal to the liabilities and
     capital assumed and no goodwill was recorded in the transaction. A $3.6
     million deposit premium was paid in the transaction. Royal Oak was merged
     with and into the Bank in April, 1996. On April 1, 1996, the Registrant
     acquired Classic Mortgage Company ("Classic"), which was merged into the
     Bank. It is now operated as a division of the Bank. The purchase price was
     approximately $250,000. On May 15, 1997, the Bank signed a management
     agreement with Franey, Parr & Associates, Inc. for the purpose of managing
     the Bank's newly formed insurance center ("TBT Insurance Center"), which
     began marketing and selling insurance on September 1, 1997. On September
     22, 1997, the Bank entered into a service agreement with TrustCorp America
     (the "Trust Company") for the Trust Company to provide trust services to
     the Bank's existing trust customers as successor fiduciary and to provide
     ongoing service through operation of a referral program for future trust
     business.

     The Bank, which operates as a commercial bank and trust company, operates
     in Carroll County, Baltimore County and Howard County, Maryland, as well as
     Adams County, Pennsylvania. The Bank is engaged in commercial and savings
     business, as authorized by the banking statutes of the State of Maryland,
     including the receiving of demand and time deposits and the making of loans
     to individuals, associations, partnerships and corporations. The Bank is
     also engaged in trust business through the Trust Company as described
     above. Real estate financing comprises residential first and second
     mortgages, home equity lines of credit and commercial mortgages. Consumer
     lending is primarily made directly to individuals. Commercial lending is
     made primarily to small businesses in the Bank's trade area in the form of
     equipment and other fixed asset loans and short term lines of credit
     supported by current assets. The Bank offers fiduciary and trust services
     (through the Trust Company, as described above), as well as other
     specialized services in connection with its general banking and trust
     business in keeping with the current trends of the banking industry. The
     Bank also owns and operates TBT Insurance, Inc., a Maryland corporation and
     wholly-owned subsidiary of the Bank offering Single Premium and IRA
     annuities. Investors Marketplace, Inc., is a separate division that offers
     mutual funds. TBT Insurance Center offers a full range of insurance
     products and Classic, described above, provides the Bank's mortgage-banking
     operations.

     Competition

     The Bank operates in a very competitive market that is served primarily by
     several locally headquartered community banks, several large regional
     banks, as well as other financial intermediaries including brokerage firms,
     savings and loan associations and savings banks, credit unions, consumer
     loan companies, finance companies, insurance companies and certain
     government agencies. The Bank operates 11 branches, as well as 6 automatic
     teller machines and employed the equivalent of 147 employees (full-time
     equivalents) at December 31, 1997. Carroll County, Baltimore County and
     Howard County, as well as Adams County, Pennsylvania are largely
     agriculture, light industry and retail business economies and are
     residential areas for metropolitan Baltimore and Washington, D.C. The Bank
     does not experience any significant fluctuations in loan or deposit
     activity that are seasonal in nature. However, the competition for loans
     does vary from time to time depending on such factors as the general
     availability of credit, general and local economic conditions, current
     interest rate levels, conditions in the mortgage market and other factors
     that are not readily predictable. The Bank does not engage in any
     operations involving foreign countries.


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<PAGE>




     In order to compete with other institutions in the market area, Monocacy
     relies heavily on the personal contacts of officers, directors and
     employees, in addition to a high level of personalized service that is an
     advantage of a community oriented banking institution.

     Government Policy

     The earnings of the Registrant are affected not only by general economic
     conditions, but also by the policies of various governmental regulatory
     authorities. The Federal Reserve Board, through its monetary and credit
     policies, has significant influence on overall growth and distribution of
     bank loans, investments and deposits and affects interest rates. The
     Registrant cannot accurately predict the effect such policies may have on
     the future of its business and earnings.

     Interstate Banking

     Under current law, Monocacy can, under certain circumstances, participate
     in interstate affiliations with banks and bank holding companies located in
     the District of Columbia, Pennsylvania, Delaware, Virginia, West Virginia
     and several other southeastern states. During 1996, the Company opened its
     first interstate branch in Gettysburg, Pennsylvania. There are no recent or
     known future legislative changes, events or trends, except as discussed in
     a subsequent section, that would have a material adverse impact on the
     financial condition or results of operations of Monocacy.

     Additional Subsidiary Banks

     The overall strategy of Monocacy is to expand its operations throughout the
     Baltimore-Washington corridor as well as in south central Pennsylvania by
     organizing new community banks and/or selectively acquiring existing
     institutions. Additional subsidiary banks will tailor their marketing
     strategies to the needs of the communities in which they serve. Capital for
     the additional subsidiary banks may come from borrowings, dividends from
     existing banks, the sale of additional securities of Monocacy, or some
     combination of such methods. Specific locations, number and timing for
     additional subsidiary banks is not known and will depend, in part, on
     factors beyond Monocacy's control, including the financial condition of
     Monocacy, the economy, the regulatory environment, and the success of
     Monocacy's existing operations.

     Supervision and Regulation - Registrant

     Monocacy is subject to the jurisdiction of the Securities and Exchange
     Commission (the "Commission") and of state securities commissions for
     matters relating to the offering and sale of its securities. Issuances of
     stock to raise capital and for dividend reinvestment, stock option and
     other plans are subject to registration, absent any exemption from
     registration with the Commission. Monocacy is subject to the reporting
     requirements of the Securities Exchange Act of 1934, as amended, and,
     accordingly, files reports, proxy statements and other information with the
     Commission.

     Monocacy is prohibited from engaging in or acquiring direct or indirect
     control of more than five percent (5%) of the voting shares of any company
     engaged in non-banking activities unless the Federal Reserve Board, by
     order or regulation, has found such activities to be so closely related to
     banking or managing or controlling banks as to be a proper incident
     thereto. In making this determination, the Federal Reserve Board considers
     whether these activities offer benefits to the public that outweigh any
     possible adverse effects. Currently, Monocacy does not engage in any
     activities not permitted.

     As a bank holding company, Monocacy is required to file an annual report
     with the Federal Reserve Board, as well as, any additional information that
     the Federal Reserve Board may require by regulation promulgated pursuant to


                                       3

<PAGE>



     the Bank Holding Company Act of 1956, as amended ("the Act"). The Federal
     Reserve Board may also make examinations of Monocacy and any or all of its
     subsidiaries. Further, under Section 106 of the 1970 amendments to the Act
     and the Federal Reserve Board's regulations, a bank holding company and its
     subsidiaries are prohibited from engaging in certain tie-in arrangements in
     connection with any extension of credit or provision of credit or provision
     of any property or services. The so-called "anti-tie-in" provisions state,
     generally, that a bank may not extend credit, lease, sell property, or
     furnish any service to a customer on the condition that the customer
     provide additional credit or service to the bank, to its bank holding
     company or to any other subsidiary of its bank holding company or on the
     condition that the customer not obtain other credit or service from a
     competitor of the bank, its bank holding company or any subsidiary of its
     bank holding company. Subsidiary banks of a bank holding company are
     subject to certain restrictions imposed by the Act on any extensions of
     credit to the bank holding company or any of its subsidiaries, on
     investments in the stock or other securities of the bank holding company
     and on taking of such stock or securities as collateral for loans to any
     borrower.

     Supervision and Regulation - The Bank
     The Bank is subject to supervision, regulation and examination by the
     Maryland Department of Licensing and Regulation and the FDIC. In addition,
     the Bank is subject to a variety of local, state and federal laws that
     affect its operations. From time to time, various types of federal and
     state legislation are proposed that could result in additional regulation
     of, and restrictions on, the business of the Bank. As a consequence of the
     extensive regulation of commercial banking and thrift activities in the
     United States, the Bank's business is particularly susceptible to federal
     and state legislation and regulations that may increase the costs of doing
     business.

     The Federal Reserve System is managed through a tripartite hierarchy headed
     by the Federal Reserve Board which oversees the entire system. The Federal
     Reserve System is at the center of the nation's stable financial and
     economic systems, and the Federal Reserve member banks are the means
     through which the Federal Reserve System effectuates its goals of
     maintaining financial and economic stability.

     The earnings of the Bank are affected by domestic economic conditions and
     the monetary and fiscal policies of the United States Government and its
     agencies. An important function of the Federal Reserve System is to
     regulate the money supply and interest rates. Among the instruments used to
     implement those objectives are open market operations in United States
     government securities and changes in reserve requirements against member
     bank deposits. These instruments are used in varying combinations to
     influence overall growth and distribution of bank loans, investments and
     deposits, and their use may also affect rates charged on loans or paid on
     deposits.

     Although the Bank is not a member of the Federal Reserve System, the
     policies and regulations of the Federal Reserve Board have a significant
     effect on the Bank's deposit, loan and investment growth, as well as the
     rate of interest earned and paid, and are expected to affect the Bank's
     operations in the future. The effect of such policies and regulations upon
     the future business and earnings of the Bank cannot be predicted.

     Under the Community Reinvestment Act of 1977, as amended ("CRA"), federal
     regulatory authorities are required to assess the record of financial
     institutions to determine if these institutions are meeting the credit
     needs of the community (including low and moderate income neighborhoods)
     which they serve and to take this record into account in the evaluation of
     any application made by any institution for, among other things, approval
     of a branch or other deposit facility, office relocation, a merger or any
     acquisition of bank shares. The Financial Institutions Reform, Recovery and
     Enforcement Act of 1989, discussed below, amended the CRA to require, among
     other things, that the Bank's evaluation of meeting the credit needs of its
     entire community, including low and moderate income neighborhoods be made
     public. This evaluation includes a descriptive rating ("outstanding",
     "satisfactory', "needs to improve" or "substantial noncompliance") and a
     statement describing the basis for the rating. These ratings are publicly
     disclosed.

     In 1995, federal regulators revised the CRA rules to emphasize performance
     over process and documentation. Under the revised rules, the five-point
     rating scale is still used. A bank's compliance is determined by a
     three-prong test whereby examiners assign a numerical score for a bank's
     performance in each of three areas: lending, service and


                                       4

<PAGE>

     investment. The area of lending is weighted to increase its importance in
     the application of the test. The rule became effective July 1, 1995. When
     rating a bank in the area of lending, regulators examine the number and
     amount of loan originations, the location of where the loans were made, and
     the income levels of the borrowers. Although banks, under the revised
     rules, are not required to make loans in every area, if there are apparent
     tracts in which there is little lending, examiners will focus their
     investigations in that area. The service prong evaluates how a bank
     delivers its products to the community through branching. As with lending,
     banks are not required to branch in every area, although conspicuous gaps
     will be investigated. The third prong, investment in community, examines
     how the bank meets the investment needs in the community within which it
     operates. Assessment of investment is accomplished using a "performance
     context" pursuant to which regulators meet with civic, community and bank
     officials in order to determine the credit needs of the community. Expanded
     Home Mortgage Disclosure Act reporting requirements were also approved for
     large banks and thrifts which require reporting of census tract data on
     mortgages made outside of the delineated communities. In addition,
     effective March 1, 1997, institutions with assets above $250 million will
     be required to report their aggregate small business loans made by
     geographic region. Independent banks with total assets of less than $250
     million and bank subsidiaries with total assets of less than $250 million
     that have holding companies with total assets of less than $1 billion will
     be subjected to less stringent CRA examinations.

     Under the new regulation, banks enjoy a reduction in compliance burden.
     Specifically, banks are not required to keep extensive documentation to
     prove that directors have participated in drafting and review of CRA
     policies. A formal CRA statement does not have to be prepared. The efforts
     banks make to market in low-and moderate-income communities do not have to
     be documented, nor will banks have to justify the basis for their community
     delineation or the methods utilized to determine the credit needs of the
     community.

     Under the Bank Secrecy Act ("BSA"), banks and other financial institutions
     are required to report to the Internal Revenue Service currency
     transactions of more than $10,000 or multiple transactions of which the
     Bank is aware in any one day that aggregate in excess of $10,000. Civil and
     criminal penalties are provided under the BSA for failure to file a
     required report, for failure to supply information required by the BSA or
     for filing a false or fraudulent report.

     An omnibus federal banking bill, known as the Competitive Equality Banking
     Act ("CEBA"), was signed into law in August of 1987. Included in the
     legislation were measures: (1) imposing certain restrictions on
     transactions between banks and their affiliates; (2) expanding the powers
     available to Federal bank regulators in assisting failed or failing banks;
     (3) limiting the amount of time banks may hold certain deposits prior to
     making such funds available for withdrawal and any interest thereon; and
     (4) requiring that any adjustable rate mortgage loan secured by a lien on a
     one-to-four family dwelling include a limitation on the maximum rate at
     which interest may accrue on the principal balance during the term of such
     loan. This legislation has not had a material adverse effect on the Bank's
     operations or its competitive position.

     The Garn - St. Germain Depository Institutions Act of 1982 ("1982 Act")
     removed certain restrictions on a bank's lending powers and liberalized its
     depository capabilities. The 1982 Act, however, tightened the provisions of
     the Financial Institutions Regulatory and Interest Rate Control Act of 1978
     ("FIRA") respecting management interlocks and correspondent bank
     relationships involving a bank's management personnel.

     The Financial Institutions Reform, Recovery and Enforcement Act of 1989
     ("FIRREA") was primarily enacted to improve the supervision of savings
     associations by strengthening capital, accounting and other supervisory
     standards. In addition, FIRREA reformed real estate appraisal procedures
     and the existing supervisory/enforcement powers and penalty provisions in
     connection with the regulation of the Bank. Under FIRREA, civil penalties
     are classified into three levels, with amounts increasing with the severity
     of the violation. The first tier provides for civil penalties of up to
     $5,000 per day for any violation of law or regulation. A civil penalty of
     up to $25,000 per day may be assessed if more than a minimal loss or a
     pattern of misconduct is involved. Finally, a civil penalty of up to $1
     million per day may be assessed for knowingly or recklessly causing a
     substantial loss to an institution or taking action that results in a
     substantial pecuniary gain or other benefit. Criminal penalties are
     increased to $1 million per violation, up to $5 million for continuing
     violations or for the actual amount of gain or loss. These monetary
     penalties may be combined with

                                       5

<PAGE>

     prison sentences for up to five years. Management is of the opinion that
     these additional reforms will have no material impact upon the anticipated
     results of operations of the Bank.

     Insurance

     The Bank's deposits are insured by the FDIC pursuant to the system of
     federal deposit insurance initially established by the Banking Act of 1933.
     The Monetary Control Act of 1980 increased coverage of FDIC insurance from
     $40,000 to $100,000 per deposit account. The Bank pays insurance premiums
     according to rates established by the FDIC. The payment of deposit
     insurance premiums is a significant cost to the Bank.

      The operations of Monocacy and the Bank are affected by new federal and
      state laws. The federal Economic Growth and Regulatory Paperwork Reduction
      Act of 1996 ("New Act"), enacted in September 1996, includes provisions
      that affect banks, bank holding companies, and savings institutions. The
      New Act had, and is expected to have in the future, its most significant
      effect upon bank and savings institutions that hold deposits assessed at
      Savings Deposit Insurance Fund ("SAIF") rates. Among other things, the New
      Act recapitalized the SAIF through a special assessment on savings
      association deposits and bank deposits that had been acquired from savings
      associations. The deposits acquired through the acquisition of Royal Oak
      Savings Bank, a thrift acquired on December 31, 1995, were included in
      this assessment. Accordingly, 1996 earnings reflect this assessment of
      approximately $245,000.

      The New Act may increase competition from savings associations by
      equalizing, over time, the amount of federal insurance premiums paid on
      savings association and bank deposits. The New Law also provides that,
      beginning in 1997, institutions with deposits insured by the Bank
      Insurance Fund, as well as those with SAIF insured deposits, will be
      responsible for payment of certain bonds issued in connection with the
      resolution of failed savings associations.

      The New Act also simplifies the regulatory approval process for new
      activities of banks and bank holding companies, and reduces a number of
      other regulatory burdens. None of these changes is expected to have a
      significant effect on Monocacy or the Bank.

     The FDIC Improvement Act of 1991 ("FDICIA"), enacted in part to prevent the
     deposit insurance funds from becoming insolvent, authorized the FDIC to
     raise insurance premium assessments in order to achieve and maintain an
     adequate level of funds. The depletion of the deposit insurance funds was
     due, in part, to a large number of failed financial institutions in the
     1980's, in combination with the increased coverage per deposit account. As
     a result, the future cost of deposit insurance for the Bank is in large
     part dependent upon the extent of future bank failures and the amount of
     insurance coverage provided by the FDIC per deposit account, both of which
     are not within the Bank's control. Moreover, FDICIA required the FDIC to
     establish a risk-based insurance premium assessment system that
     differentiates between higher and lower risk institutions, with lower
     premiums assessed against institutions in a lower risk category. The Bank's
     cost of deposit insurance; therefore, depends upon its risk-rating. During
     1995, the Bank Insurance Fund of the FDIC became fully capitalized and
     during 1996, the SAIF of the FDIC was fully capitalized through the
     one-time special assessment mentioned above. Going forward, overall
     premiums should be reduced.

      Under FDICIA, banks must be classified in one of five defined categories
      (well capitalized, adequately capitalized, undercapitalized, significantly
      undercapitalized and critically undercapitalized).


                                       6

 <PAGE>





<TABLE>
<CAPTION>

                                           Total                        Tier 1                                           Under a
                                           Risk-                        Risk-                          Tier 1            Capital
                                           Based                        Based                          Leverage          Order or
                                           Ratio                        Ratio                          Ratio             Directive
                                           ------                       -------                        ---------         ----------
Capital Category
----------------
<S><C>

Well capitalized             (greater than or equal to)10.0  (greater than or equal to)6.0   (greater than or equal to)5.0   No
Adequately capitalized       (greater than or equal to) 8.0  (greater than or equal to)4.0   (greater than or equal to)4.0 *
Undercapitalized                            (less than) 8.0                 (less than)4.0                  (less than)4.0 *
Significantly undercapitalized              (less than) 6.0                 (less than)3.0                  (less than)3.0
Critically undercapitalized                                                                     (less than or equal to)2.0

</TABLE>

* 3.0 for those banks having the highest available regulatory rating.

      In the event an institution's capital deteriorates to the undercapitalized
      category or below, FDICIA prescribes an increasing amount of regulatory
      intervention, including: (1) the institution by a bank of a capital
      restoration plan and a guarantee of the plan by a parent institution; and
      (2) the placement of a hold on increases in assets, number of branches or
      lines of business. If capital has reached the significantly or critically
      undercapitalized levels, further material restrictions can be imposed,
      including restrictions on interest payable on accounts, dismissal of
      management and (in critically undercapitalized situations) appointment of
      a receiver. For well capitalized institutions, FDICIA provides authority
      for regulatory intervention where the institution is deemed to be engaging
      in unsafe or unsound practices or receives a less than satisfactory
      examination report rating for asset quality, management, earnings or
      liquidity. All but well capitalized institutions are prohibited from
      accepting brokered deposits without prior regulatory approval. Management
      believes that full implementation of FDICIA has had no material impact on
      the Registrant's or the Bank's liquidity, capital resources or reported
      results of operations. If all FDIC insurance premium assessments increase
      in the future, Management believes that such increase might have a
      material impact on future reported results of operations.

      FDICIA also requires that banking agencies reintroduce loan-to-value
      ("LTV") ratio regulations which were previously repealed by the 1982 Act.
      LTV's will limit the amount of money a financial institution may lend to a
      borrower, when the loan is secured by real estate, to no more than a
      percentage to be set by regulation of the value of the real estate.

      Under the Federal Deposit Insurance Act (the "FDIA"), federal regulatory
      agencies possess the power to prohibit institutions from engaging in any
      activity that would be an unsafe or unsound banking practice or would
      otherwise be in violation of the law. Moreover, the Financial Institutions
      Regulatory and Interest Rate Control Act of 1978 ("FIRA") generally
      expanded the circumstances under which officers or directors of a bank may
      be removed by the institution's federal supervisory agency, restricts
      lending by a bank to its executive officers, directors, principal
      shareholders or related interests thereof and restricts management
      personnel of a bank from serving as directors or in other management
      positions with certain depository institutions whose assets exceed a
      specified amount or which have an office within a specified geographic
      area, and restricts the relationships of management personnel of a bank
      with securities companies and securities dealers. Additionally, FIRA
      prohibits acquisition of control of a bank unless the appropriate federal
      supervisory agency has received sixty (60) days prior written notice and,
      within that time, has not disapproved the acquisition of control, or
      otherwise extended the period for disapproval. Control, for purposes of
      FIRA, means the power to direct, either directly or indirectly, the
      management or policies or to vote twenty-five percent (25 %) or more of
      any class of outstanding stock of a financial institution or its
      respective holding company. A person or group holding revocable proxies to
      vote twenty-five percent (25 %) or more of the outstanding common stock of
      a financial institution or holding company would be presumed to be in
      control the institution for purposes of FIRA.

      Annual full-scope, on site examinations are required for all the
      FDIC-insured institutions except institutions with assets under $250
      million which are well capitalized, well-managed and not subject to a
      recent change in control, in which case, the examination period is every
      eighteen (18) months. Moreover, effective after December 31, 1992, banks
      with total assets of $500 million or more as of the beginning of the
      fiscal year, are required to submit to their supervising federal and state
      banking agencies a publicly available annual audit report. The independent
      accountants of such banks shall attest to the accuracy of management's
      report. The accountants shall also monitor management's


                                       7

<PAGE>



      compliance with governing laws and regulations. In addition, such banks
      are also required to select an independent audit committee composed of
      outside directors who are independent of management, to review with the
      management and the independent accountants, the reports that must be
      submitted to the bank regulatory agencies. If the independent accountants
      resign or are dismissed, written notification must be given to the bank's
      supervising government banking agencies. These accounting and reporting
      reforms do not apply to an institution with total assets at the beginning
      of its fiscal year of less than $500 million, such as the Bank.
      Furthermore, the supervising banking agency may exempt institutions with
      assets in excess of $500 million from these accounting and reporting
      requirements.

      The FDIC and other federal bank regulatory agencies have issued risk-based
      capital guidelines which supplement leverage capital requirements. As of
      December 31, 1992, the guidelines required all United States banks and
      bank holding companies to maintain a minimum risk-based capital ratio of
      8% (of which at least 4% must be in the form of common stockholders'
      equity). Assets are assigned to four risk categories, with higher levels
      of capital required for the categories perceived as representing greater
      risk. The required capital ratios represent equity and (to the extent
      permitted) non-equity capital as a percentage of total risk-weighted
      assets. The risk-based capital rules are designed to make regulatory
      capital requirements more sensitive to differences in risk profiles among
      banks and bank holding companies and to minimize disincentives for holding
      liquid assets.

      In July 1996, the federal bank regulatory agencies issued a joint policy
      statement regarding the evaluation of commercial bank's capital adequacy
      for interest rate risk. Under the policy, the assessment of a bank's
      capital adequacy includes an assessment of the bank's exposure to adverse
      changes in interest rates. Banks that are found to have a high level of
      interest rate risk exposure or weak interest rate risk management systems
      may be required by the regulators to take corrective actions. Management
      believes its interest rate risk management systems and its capital
      relative to its interest rate risk are adequate.


      Riegle - Neal Act

      On September 29, 1994, President Clinton signed into law the Riegle-Neal
      Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
      Banking and Branch Act"). The legislation permits interstate banking
      twelve months after its enactment into law. Bank holding companies,
      pursuant to an amendment to the Bank Holding Company Act, can acquire a
      bank located in any state, as long as the acquisition does not result in
      the bank holding company controlling more than 10% of the deposits in the
      United States, or 30% of the deposits in the target bank's state. The
      legislation permits states to waive the concentration limits and require
      that the target institution be in existence for up to five years before it
      can be acquired by an out-of-state bank or bank holding company.
      Interstate branching and merging of existing banks is permitted after
      three years from the enactment of the Interstate Banking and Branching
      Act, if the bank is adequately capitalized and demonstrates good
      management. The Interstate Banking and Branching Act also amends the
      International Banking Act to allow a foreign bank to establish and operate
      a federal branch or agency upon approval of the appropriate federal and
      state banking regulator.

      From time to time, various types of federal and state legislation have
      been proposed that could result in additional regulation of, and
      restrictions on, the business of the Bank. It cannot be predicted whether
      any such legislation will be adopted or, if adopted, how such legislation
      would affect the business of the Bank. As a consequence of the extensive
      regulation of commercial banking activities in the United States, the
      Bank's business is particularly susceptible to being affected by federal
      legislation and regulations that may increase the costs of doing business.

                                       8


<PAGE>

      Statistical Data

      The statistical information required by Item I is in the Registrant's
      Annual Report to Shareholders for the year ended December 31, 1997, which
      is set forth in Exhibit 13, hereto, and is incorporated herein by
      reference, as follows except as noted:

<TABLE>
<CAPTION>

                                                                                Page in the Registrant's Annual
                                                                                Report to Shareholders for
         Guide 3 Disclosure                                                     the year ended December 31, 1997
         ------------------                                                     --------------------------------

<S><C>

      I.  Distribution of Assets, Liabilities and
              Stockholders' Equity; Interest Rates and
              Interest Differential
              A.  Average Balance Sheet                                                    8
              B.  Net Interest Income Analysis                                           8 & 9
              C.  Rate/Volume Analysis                                                     9

       II. Investment Portfolio
              A. Book Value of Investment Securities                                      13
              B. Maturities of Investment Securities                                      14
              C. Investment Securities Concentrations                                   13 & 14

      III. Loan Portfolio
              A. Types of Loans                                                         14 & 15
              B. Maturities and Sensitivities of
                 Loans to Changes in Interest Rates                                       16
              C. Risk Elements
                  1.  Nonaccrual, Past Due and Restricted Loans                      15, 16 & 17
                  2.  Potential Problem Loans                                             17
                  3.  Foreign Outstandings                                           Not Applicable
              D. Other Interest Bearing Assets                                       Not Applicable

       IV.    Summary of Loan Loss Experience
              A. Analysis of Allowance for Loan Losses                                    10
              B. Allocation of the Allowance for Loan Losses                              11

        V.    Deposits
              A. Average Balances                                                          8
              B. Maturities of Large Denomination Certificates                            17
              C. Foreign Deposit Liability Disclosure                                Not Applicable

       VI.    Return on Equity and Assets
              A. Return on Assets                                                          5
              B. Return on Equity                                                          5
              C. Dividend Payout Ratio                                                See Item 6
              D. Equity to Assets Ratio                                                    5

      VII.    Short-Term Borrowings                                                       34

</TABLE>

                                       9

<PAGE>



      ITEM 2  PROPERTIES

         Monocacy Bancshares, Inc., Corporate Office
         222 East Baltimore Street
         Taneytown, Maryland  21787


         Taneytown Bank & Trust Company:

<TABLE>
<S><C>

         Main Office                        Columbia Branch *            Randallstown Branch
         222 East Baltimore Street          5565 Sterrett Place          9337 Liberty Road
         Taneytown, MD  21787               Columbia, MD  21044          Randallstown, MD  21133

         Westminster Branch *               Uniontown Branch             140 Express Branch
         402 Englar Road                    3462 Uniontown Road          747 Baltimore Boulevard
         Westminster, MD  21157             Westminster, MD  21158       Westminster, MD  21157

         Taneytown Branch                   Keymar Branch                Gettysburg Branch *
         500 East Baltimore Street          6690 Middleburg Road         545 West Middle Street
         Taneytown, MD  21787               Keymar, MD  21757            Gettysburg, PA  17325

         Carroll Lutheran Village *         Eldersburg Branch *
         205 St. Mark Way                   1350 Liberty Road
         Westminster, MD  21157             Eldersburg, MD  21784

</TABLE>

       * These properties are leased. Lease expiration dates are November 19,
         2006, for the Westminster branch, October 1, 1998 for Carroll Lutheran
         Village, March 31, 1998, for the Columbia branch, December 29, 2006 for
         the Eldersburg branch and October 28, 2006 for the Gettysburg branch.
         All other properties are owned in fee and without liens. All properties
         owned and operated by the Registrant and its subsidiary are adequate
         for the business to be conducted at each such location.

      ITEM 3  LEGAL PROCEEDINGS

      The Bank was named as a defendant in a legal proceeding in the circuit
      Court for Baltimore City, wherein it was alleged that the Bank permitted
      the improper withdrawal or transfer of funds from a deposit account
      containing escrow monies at the Bank. The Bank was also alleged to have
      misapplied certain sums of money by depositing them in an unrelated
      account holder's deposit account. The complaint initially sought recovery
      against the Bank in the amount of $482,000 and was later amended to seek
      an amount in excess of $1 million. In January, 1998, the Bank, with the
      approval of the Court, orally agreed to execute a Settlement Agreement and
      Mutual Release. Under the terms, the Bank will pay $230,000 and release
      any claims against other parties. In return, the Bank will receive a
      General Release from all parties to the litigation. The Bank expects to
      execute the Settlement Agreement and Mutual Release in the near future.

      Monocacy and the Bank are involved in other matters of litigation
      incidental to their business. In Management's opinion, the outcome of
      these matters will not have a material impact on the financial statements
      of Monocacy, or the Bank.

      ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

      None

                                       10

<PAGE>



      PART II

      ITEM 5  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

      Registrant's Common Stock is traded on the National Association of
      Securities Dealers' Automated Quotation System under the symbol MNOC.

      The Bank has paid cash dividends for at least 20 years. The Registrant has
      paid dividends since the effective date of its formation as a bank holding
      company, October 1, 1993. The Registrant's Board of Directors intends to
      continue the dividend payment policy; however, future dividends must
      necessarily depend upon net income, capital requirements, appropriate
      legal restrictions and other factors relevant at the time the Board of
      Directors of the Registrant considers dividend policy. Pages 18 and 42 of
      the Registrant's Annual Report to Shareholders discusses the regulatory
      restrictions that impact the Registrant's and the Bank's ability to pay
      dividends. The following tables set forth the high and low bid prices for
      each quarter of 1997 and 1996.


<TABLE>
<CAPTION>
                                                       1997                                  1996

                                         Fourth   Third    Second   First      Fourth    Third    Second     First
                                           Qtr.    Qtr.      Qtr.    Qtr.       Qtr.      Qtr.      Qtr.      Qtr.
                                         ------  -------   -------  ------    -------    ------   -------    ------
<S><C>
       Per Common Share:*
         Cash dividends declared         $  .10   $ .10    $  .10   $  .10     $.0825    $.0825    $.0825    $.0825

       Bid Prices:
          High                           $32.00   $24.50   $23.00   $24.75     $25.50    $25.50    $25.50    $25.00
          Low                            $22.00   $21.00   $20.50   $20.50     $22.50    $22.50    $22.50    $22.00

</TABLE>



      *  Amounts have been restated to reflect the February, 1997 and February,
         1998 10% stock dividends.

      As of March 20, 1998, there were approximately 950 stockholders holding an
aggregate of 1,798,325 shares.

                                       11

<PAGE>

 ITEM 6  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

 The information required to be set forth herein is included in the Registrant's
 Annual Report to Shareholders, at pages 7 through 22, which is attached hereto
 in Exhibit 13 and is incorporated herein by reference.

 Five Year Comparative Summary
 (dollars in thousands)

<TABLE>
<CAPTION>
                                               1997         1996          1995         1994         1993
<S><C>
 Summary of Operations:
    Interest Income                          $20,856       19,593        17,079       14,997       12,441
    Interest Expense                          10,687       10,421         7,852        6,271        5,224
                                             --------     -------       -------      -------      -------
    Net interest income                       10,169        9,172         9,227        8,726        7,217
    Provision for loan losses                  1,110          300           885          687          375
                                             --------     -------       -------      -------      -------
    Net interest income after provision
      for loan losses                          9,059        8,872         8,342        8,039        6,842
    Other income                               2,850        2,039         1,427        1,081        1,644
    Other expenses                             9,651        8,762         6,536        6,121        5,904
                                             --------     -------       -------      -------      -------
      Income before income taxes               2,258        2,149         3,233        2,999        2,582
    Income taxes                                 140          538           882          777          621
                                             --------     -------       -------      -------      -------
      Net income                              $2,118        1,611         2,351        2,222        1,961
                                             ========     =======       =======      =======      =======
 Per Share Data*:
    Net income - basic                         $1.19         0.91          1.33         1.27         1.12
    Net income - diluted                        1.16         0.90          1.32         1.26         1.12
    Dividend paid                                .40         0.33          0.30         0.21         0.17
    Book Value                                 13.49        12.18         12.01        10.63         9.88
 Shares outstanding*                       1,791,369    1,777,998     1,765,310    1,756,584    1,753,955

 Other Data:
    Total assets                            $290,240      263,015       266,194      211,249      191,768
    Total deposits                           228,870      225,039       223,412      171,873      155,722
    Total loans-net of allowance for
      loan losses                            155,716      156,690       137,222      145,564      121,370
    Total equity                              24,168       21,648        21,169       18,610       17,289

 Key Ratios:
    Return on average
      stockholders' equity                     9.25%         7.81         11.83        12.19        11.27
    Return on average total assets             0.77%         0.61          1.07         1.08         1.09
    Equity to assets                           8.33%         8.23          7.95         8.81         9.02
    Dividend payout ratio                     33.61%        36.26         22.56        16.54        15.18

</TABLE>

 * Per share data and shares outstanding for all years have been restated to
   reflect the 10% common stock dividends issued in 1998,  1997 and 1996.

 ITEM 7  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 The information required to be set forth herein is included in the Registrant's
 Annual Report to Shareholders, at pages 23 through 42, which is attached hereto
 in Exhibit 13 and is incorporated herein by reference. Supplemental data
 required under 302 (a) (5) is not applicable.

 ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

 None.

                                       12

<PAGE>



 PART III

 ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy Statement, dated March 25, 1998, at pages 6 and 7, which is
 attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 10 EXECUTIVE COMPENSATION

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy Statement, dated March 25, 1998, at pages 8 through 12, which
 is attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy Statement, dated March 25, 1998, at pages 3 and 4, which is
 attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 The information required to be set forth herein is included in the Registrant's
 definitive Proxy Statement, dated March 25, 1998, at pages 12 through 14, which
 is attached hereto in Exhibit 99 and is incorporated herein by reference.

 ITEM 13 EXHIBITS AND REPORTS ON 8-K

 (a)  Documents filed as part of this report:

   (1)  The following financial statements of the Registrant are set forth on
        page 23 through 42 of the Registrants' 1997 Annual Report to
        Shareholders, which is included herein at Exhibit 13 and is incorporated
        herein by reference:

        Consolidated Balance Sheets at December 31, 1997 and 1996.

        Consolidated Statements of Income for the years ended December 31, 1997,
        1996 and 1995.

        Consolidated Statements of Changes in Stockholders' Equity for the years
        ended December 31, 1997, 1996 and 1995.

        Consolidated Statements of Cash Flows for the years ended December 31,
        1997, 1996 and 1995.

        Notes to Consolidated Financial Statements for the years ended December
        31, 1997, 1996 and 1995.

        Independent Auditors' Report for the year ended December 31, 1997.

   (2)  Financial statement schedules are omitted from this 10-KSB because the
        required information is either not applicable or is not deemed material
        to the Registrant.

   (3)  Listing of Exhibits:

        The following documents are attached as Exhibits to this Form 10-KSB as
        indicated by the Exhibit number or are incorporated by reference to the
        prior filings of the Registrant with the Commission.

                                       13

<PAGE>

<TABLE>
<CAPTION>

        Form 10-KSB Exhibit #              Exhibit
        ---------------------              -------
<S><C>
        Exhibit (3i)                       Articles of Incorporation*
        Exhibit (3ii)                      Bylaws of the Corporation (Incorporated by reference to Exhibit 3(ii) to
                                           Registration Statement number 33-82332 filed with the Securities and Exchange
                                           Commission)
        Exhibit (10i)                      Employment Agreement, dated June 16, 1993, by and between Taneytown Bank and
                                           Trust Company and Francis W. Neubauer, Jr. (Incorporated herein by reference to
                                           the Registrant's Current Report on Form 8-K, filed with the Commission on March
                                           24, 1997)
        Exhibit (10ii)                     Supplemental  Retirement Plan Agreement, dated April 25, 1994, by and between
                                           Taneytown Bank and Trust Company and Francis W. Neubauer, Jr. (Incorporated
                                           herein by reference to the Registrant's Current Report on Form 8-K, filed with the
                                           Commission on March 24, 1997)
        Exhibit (10iii)                    Stock Option Plan (Incorporated herein by reference to Exhibit 4.4 to Registration
                                           Statement number 33-82332 filed with the Securities and Exchange Commission)
        Exhibit (10iv)                     1997 Independent Directors Stock Option Plan (Incorporated herein by reference to
                                           Exhibit 4.3 to Registration Statement number 33-82332 filed with the Securities
                                           and Exchange Commission)
        Exhibit (11)                       Information used in the computation of net income per share**
        Exhibit (13)                       Annual Report to Shareholders
        Exhibit (21)                       List of Registrant's Subsidiaries
        Exhibit (23)                       Consent of Independent Auditors
        Exhibit (27)                       Financial Data Schedule
        Exhibit (27(i))                    Restated December 31, 1996 Financial Data Schedule
        Exhibit (99)                       Proxy Statement, Notice and Form of Proxy for 1997 Annual Meeting of
                                           Shareholders to be held on April 27, 1998.

</TABLE>

 * Incorporated by reference to Exhibit (3i) to the Annual Report on Form 10-KSB
   for the year ended December 31, 1996 filed with the Securities and Exchange
   Commission.

 ** Exhibit is incorporated herein by reference to page 39 of Exhibit (13) -
    Annual Report to Shareholders

 ITEM 13 (b)  REPORTS ON FORM 8-K

 None.
                                       14

<PAGE>


                                   SIGNATURES

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

                                                      MONOCACY BANCSHARES, INC.
                                                            (Registrant)

 Date: March 20, 1998             By:  /s/ Frank W. Neubauer
                                      ________________________________
                                      Frank W. Neubauer, President and
                                      Chief Executive Officer

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


<TABLE>
<S><C>
   /s/ Eric E. Glass                                     Chairman of the Board,                      Date  March 20 ,1998
   _______________________________                          Director
   Eric E. Glass

   /s/ Frank W. Neubauer                                 Director, President & CEO                   Date  March 20 ,1998
  _______________________________                         (Principal Executive Officer)
   Frank W. Neubauer

   /s/ David M. Abramson                                        Director                             Date  March 20 ,1998
  _______________________________
   David M. Abramson

   /s/ E. Wayne Baumgardner                                     Director                             Date  March 20 ,1998
  _______________________________
   E. Wayne Baumgardner

   /s/ George B. Crouse                                         Director                             Date  March 20 ,1998
  _______________________________
   George B. Crouse

   /s/ Glenn E. Eaves                                           Director                             Date  March 20 ,1998
  _______________________________
   Glenn E. Eaves

   /s/ Donald R. Hull                                           Director                             Date  March 20 ,1998
  _______________________________
   Donald R. Hull

   /s/ Michael K. Walsch                                       CFO & COO                             Date  March 20 ,1998
  _______________________________
   Michael K. Walsch                                     (Principal Accounting and
                                                           Financial Officer and Principal
                                                            Operating Officer)
</TABLE>


                                       15