<PAGE>


                       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
                                 [FEE REQUIRED]


                  For the fiscal year ended December 31, 2001

[  ]     Transition Report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
         [No Fee Required]

For the transition period from ________________ to _________________

Commission File Number:  0-20990
                         -------

                          HARBOR BANKSHARES CORPORATION
                          -----------------------------
             (Exact name of registrant as specified in its charter)


                Maryland                                    52-1786341
     --------------------------------------------------------------------------

         (State or other jurisdiction of          (IRS Employer Identification
                incorporation)                             Number)

         25 West Fayette Street                             21201
             Baltimore, Maryland
     --------------------------------------------------------------------------

         (Address of principal executive                   (Zip Code)
               offices)
     --------------------------------------------------------------------------

         Registrant's telephone number:                  (410) 528-1800


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

                    Common Stock, Par Value $0.01 per share
                    ---------------------------------------
                                (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

     Yes     XXX         No
        -------------      ------------

     Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]

     The number of shares outstanding of the issuer's classes of common stock
as of December 31, 2001, were 688,632 shares and 33,333 non-voting shares with
a par value of $0.01. (Note: This information is required as of the latest
practical date.)

<PAGE>

                          HARBOR BANKSHARES CORPORATION

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

                       SECURITIES AND EXCHANGE COMMISSION
                                  FORM 10-KSB

Table of Contents
-----------------

PART I...................................................................-2-

Item 1.  Business........................................................-2-

The Harbor Bank of Maryland..............................................-3-

Subsequent event.........................................................-3-

Competition..............................................................-4-

Supervision and Regulation...............................................-4-

Governmental Monetary Policies and Economic Controls.....................-4-

Employees................................................................-5-

Executive Officers.......................................................-5-

Statistical Information..................................................-5-

Asset Quality............................................................-5-6

Item 2.  Properties......................................................-6-

Item 3.  Legal Proceedings...............................................-7-

Item 4.  Submission of Matters to a Vote of Security Holders.............-7-

PART II..................................................................-7-

Item 5.  Market for Registrant's Common Equity and
            Related Stockholder Matters..................................-7-

Item 6.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................-7-

Item 7.  Financial Statements............................................-7-

Item 8.  Changes In and Disagreements with Accountants on
            Accounting and Financial Disclosure..........................-7-

PART III.................................................................-7-

Item 9.  Directors and Executive Officers of the Registrant..............-7-

                                      -i-

<PAGE>

Item 10.  Executive Compensation.........................................-7-

Item 11.  Security ownership of certain beneficial owners
             and management..............................................-8-

Item 12.  Certain relationships and related transactions.................-8-

PART IV..................................................................-8-

Item 13.  Exhibits and Reports on Form 8-K.............................-8-9-

CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS.................-10-

CAPITAL SCHEDULE........................................................-11-

CONSOLIDATED STATEMENTS OF INCOME.......................................-12-

AVERAGE RATES EARNED OR PAID FOR THE YEARS 2001, 2000 AND 1999..........-13-

Analysis of Changes in Net Interest Income..............................-14-

INTEREST VARIANCE ANALYSIS..............................................-14-

INVESTMENT SECURITIES...................................................-15-
   Maturity Distribution................................................-15-
   Weighted Average Interest Rate at December 31, 2001..................-15-
   Carrying amount and the market value at 2001 and 2000:...............-15-

FIVE-YEAR LOAN DISTRIBUTION.............................................-16-
   Five-Year Loan Distribution at December 31
   (dollars in thousands)...............................................-16-
   Five-Year Loan Distribution at December 31
   (expressed as percentages)...........................................-16-

SUMMARY OF LOAN LOSS EXPERIENCE.........................................-17-

RISK ELEMENTS OF LOAN PORTFOLIO.........................................-18-

NON-ACCRUAL LOANS AT DECEMBER 31, 2001 AND DECEMBER 31, 2000............-18-

Potential Problem Loans.................................................-18-

MATURITY OF LOANS AS OF DECEMBER 31, 2001...............................-19-

LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES............-19-

MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000
   OR MORE OUTSTANDING AT DECEMBER 31, 2001 AND 2000....................-20-

LONG AND SHORT TERM BORROWINGS..........................................-20-

BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000...............-20-

                                      -ii-

<PAGE>



                                                  HARBOR BANKSHARES CORPORATION

Documents Incorporated by Reference
-----------------------------------

         Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31,2001 and the Registrant's 2002 Proxy Statement are
incorporated by reference into Parts I and II.

PART I
------

Harbor Bankshares Corporation

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

         Harbor Bankshares Corporation (the Corporation) is a bank holding
company with one bank subsidiary.  The Corporation was organized under the laws
of the State of Maryland in 1992.  On November 2, 1992, Harbor Bankshares
Corporation acquired all outstanding stock of The Harbor Bank of Maryland (the
Bank), headquartered in Baltimore, Maryland.

The Harbor Bank of Maryland
---------------------------

         The Harbor Bank of Maryland is a state chartered institution in the
State of Maryland. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation.

         The Harbor Bank of Maryland is a commercial bank headquartered in
Baltimore, Maryland.  The Bank conducts a general commercial and retail
business.  The Bank was opened on September 13, 1982 and was incorporated under
the laws of the State of Maryland.  During the second and third quarters of
1994, the Corporation, through its subsidiary, The Harbor Bank of Maryland
acquired three (3) branch locations from the Resolution Trust Corporation; two
(2) located in Baltimore City, and one (1) located in Riverdale, Prince
George's County. A new branch location was opened during December 1995 in
Baltimore County, expanding the market area of the Bank.  During May 1997, The
Harbor Bank of Maryland opened a de novo branch location in the East side of
Baltimore City, and on January 19, 1999, a de novo branch was opened in the
West side of the City, creating a new market area for the Bank.  During
September 2000, a branch located in Baltimore City was closed.  The closing of
this facility will increase the profitability of the Bank.

         Harbor Financial Services, a company dealing with the sale of mutual
funds, stocks, insurance, etc., was established as a subsidiary of the Bank
during May 1997, in order to compete with that expanding market. This
subsidiary had a loss of $10 thousand during 2001.

         The Bank conducts general banking business in seven (7) locations and
serves primarily the Baltimore Metropolitan area.  It offers checking, savings
and time deposits, commercial, real estate, personal, home improvement,
automobile and other installment loans, credit cards and term loans.  The Bank
is also a member of a local and national ATM network.  The retail nature of the
Bank allows for full diversification of deposits and borrowers so it is not
dependent upon a single or a few customers.

                                      -2-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

Subsequent Event
----------------

         On January 17, 2002, the Bank entered into an agreement to sublet a
branch site from another commercial bank and purchase the related deposit
liabilities totaling approximately $24 million.  Upon regulatory approval the
transaction is expected to be consummated in the second quarter of 2002.  The
Bank will pay a deposit premium of 4%, which may be reduced based on the amount
of deposits retained (as defined) by the Bank.

                                      -3-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

Competition
-----------

         The Corporation's only subsidiary, The Harbor Bank of Maryland,
competes with virtually all banks and savings institutions, which offer
services in its market area.  The Bank directly competes with branches of most
of the State's largest banks, each of which has greater financial and other
resources to conduct large advertising campaigns and to allocate their
investment assets to regions of higher yield and demand.  To attract business
in this competitive environment, the Bank relies heavily on local promotional
activities and personal contact by its officers and directors and by its
ability to provide personalized services.

Supervision and Regulation
--------------------------

         Harbor Bankshares Corporation is a registered bank holding company
subject to regulation and examination by the board of governors of the Federal
Reserve System under the Bank Holding Company Act of 1956 (the "Act").  The
Corporation is required to file with the board of governors quarterly and
annual reports and any additional information that may be required according to
the Act.  The Act also requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank that is
not already majority owned.  The Act also prohibits a bank holding company,
with certain exceptions, from engaging in or acquiring direct or indirect
control of more than 5% of the voting shares of any company engaged in
non-banking activities.  One of the principal exceptions to these provisions is
for engaging or acquiring shares of a company engaged in activities found by
the Federal Reserve Board to be so closely related to banking or managing banks
to be a proper incident thereto.

         The Harbor Bank of Maryland is a state chartered institution insured by
the Federal Deposit Insurance Corporation ("FDIC") and subject to federal and
state laws applicable to commercial banks.  The Bank is examined regularly by
FDIC and the State of Maryland Banking Commissioner's office.

         In accordance with Federal Reserve regulation, the Bank is limited as
to the amount it may loan affiliates, including the Corporation, unless such
loans are collateralize by specific obligations.  Additionally, banking law
limits the amount of dividends that a bank can pay without prior approval from
bank regulators.

Governmental Monetary Policies and Economic Controls
----------------------------------------------------

         The earnings and growth of the banking industry and ultimately of The
Harbor Bank of Maryland, Harbor Bankshares Corporation's sole subsidiary, are
affected by the credit policies of monetary authorities including the Federal
Reserve System.  An important function of the Federal Reserve System is to
regulate the national supply of bank credit in order to control recessionary
and inflationary pressures.  Among the instruments of monetary policy used by
the Federal Reserve to implement these objectives are open market operations in
U.S. Government securities, changes in the discount rate of member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of
bank loans and investments and deposits, and may also affect interest rates
charged on loans or paid for deposits.  The monetary policies of the Federal
Reserve authorities have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to have such an
effect in the future.

                                      -4-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

         In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its subsidiary.

Employees
---------

         At December 31, 2001, Harbor Bankshares Corporation and its subsidiary
employed 80 individuals, of which 28 were officers and 52 were full-time
employees.

Executive Officers
------------------

         Information concerning executive officers of the Corporation is listed
below:

         Executive Officers      Age    Position

         Joseph Haskins, Jr.      54    Chairman, President and Chief Executive
                                        Officer of the Bank and Corporation

         John Paterakis           73    Chairman of the Executive Committee of
                                        the Corporation and the Bank

         Teodoro J. Hernandez     56    Treasurer of the Corporation and Senior
                                        Vice President and Cashier of the Bank

         George F. Vaeth, Jr.     68    Secretary of the Corporation and the
                                        Bank

Statistical Information
-----------------------

         The statistical information required in this section is incorporated
herein by reference from the Registrant's Annual Report to Shareholders for the
year ended December 31, 2001 and from pages 10 through 20 of this form 10-KSB.

Asset Quality
-------------

         One of the Corporation's main objectives has been and continues to be
the achievement of a high level of asset quality.  We maintain a large portion
of loans secured by residential one-to four- family properties and commercial
properties.  As of December 31, 2001, those loans totaled $72 million or 67.37
percent of total outstanding loans.  We set sound credit standards for new loan
originations, and follow careful loan administration procedures.  We
strengthened our focus on credit risk by having independent reviews of all
major credit with detailed reports to management.

         Delinquent Loans and Foreclosed Assets: The Corporation policies
require that management continuously monitor the status of the loan portfolio
and report to the Board of Directors on a monthly basis.

                                      -5-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

These reports include information on delinquent loans and foreclosed real
estate, and actions and plans to cure the delinquent status of the loans and to
dispose of the foreclosed properties.

         The following table presents information regarding total non-accrual
loans, accruing loans delinquent 90 days or more, and foreclosed real estate as
of the dates indicated.  At December 31, 2001, 2000 and 1999 we had $769
thousand, $308 thousand and $1.0 million, of non-performing loans.  If all
non-accrual loans had been performing in accordance with their original terms
and had been outstanding from the earlier of the beginning of the period
origination, we would have recorded additional interest income on these loans
of approximately $158 thousand from the year ended December 31, 2001.

                                             2001     2000      1999

Accruing Loans 90 Days Or More               $135     $  6     $   47
                                             ====     ====     ======

Total Non-Performing Loans                   $620     $265     $1,003
Foreclosed Real Estate                         14       37        217
                                             ----     ----     ------
Total Non-Performing Loans To Total Loans    $769     $308     $1,267
                                             ====     ====     ======

Non-Performing Loans To Total Loans          .72%     .24%       1.0%
                                             ====     ====     ======

Non-Performing Assets To Total Assets        .41%     .17%       .71%
                                             ====     ====     ======

We generally stop accruing income when interest or principal payments are
between 90 and 120 days in arrears.  We may stop accruing income on such loans
earlier than 90 days when we consider the timely collectibility of interest or
principal payment to be doubtful.

When we designate non-accrual loans, we reverse all outstanding interest that
we had previously credited.  If we receive a payment on a non-accrual loan, we
may recognize a portion of that payment as interest income if we determine that
the ultimate collectibility of principal is no longer in doubt.  However, such
loans may remain in non-accrual status.  Impaired loans are individually
assessed to determine whether the carrying value exceeds the fair value of the
collateral.

Foreclosed real estate consists of property we have acquired through foreclosed
or deed in lieu of foreclosure.  Foreclosed real estate properties are
initially recorded at the lower of the recorded investment in the loan or fair
value.  At December 31, 2001, 2000 and 1999, respectively, we had $14 thousand,
$437 thousand and $217 thousand in foreclosed real estate.

Allowance for Loan Losses - see Management's Discussion and Analysis of
Financial Condition and Results of Operations, Provision for Loan Losses and
Asset Quality on pages 3 and 4.

Item 2.  Properties
-------------------

         The Corporation's Headquarters is located at 25 West Fayette Street,
Baltimore, Maryland 21201.  The lease agreement for this location is
approximately 12,777 square feet with a term of ten (10) years, and a renewable
option of five (5) years.

         The Bank also maintains another six (6) leased branch offices; three
(3) located in Baltimore City, one (1) located in Prince George's County,
Maryland and two (2) located in Baltimore County, Maryland.

                                      -6-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

Item 3.  Legal Proceedings
--------------------------

         The Corporation and its subsidiaries, at times, and in the ordinary
course of business, are subject to legal actions.  Management does not believe
the outcome of such matters will have a material adverse effect on the
financial condition or results of operations of the Corporation.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

         None

PART II
-------

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------

         Information listed under, "Shareholder Information" in the Annual
Report to Shareholders for the year ended December 31, 2001 is incorporated
herein by reference with respect to prices for the Registrant's common stock
and the dividends paid thereon.  The number of Shareholders of Record as of
December 31, 2001 was 714.

Item 6.  Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------

         Information required by this item is incorporated by reference from
information appearing under the caption, "Corporate Financial Review" appearing
on pages 1 through 16 of the Management Discussion and Analysis section of the
Registrant's Annual Report to Shareholders for the year ended December 31,
2001, and from pages 8 through 18 of this Form 10-KSB.

Item 7.  Financial Statements
-----------------------------

         Information required by Item 7 is incorporated by reference from
information appearing on pages 1 through 26 in the Audited Consolidated
Financial Statements section of the Registrant's Annual Report to Shareholders
for the year ended December 31, 2001.

Item 8.  Changes In and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

         None

PART III
--------

Item 9.  Directors and Executive Officers of the Registrant
-----------------------------------------------------------

         Information required by this item is incorporated by reference from
information appearing under the caption, "Election of Directors" on pages 2 to
6 of the Registrant's 2002 Proxy statement and page 4 of this report under the
caption of "Executive Officers" of the Registrant.

Item 10. Executive Compensation
--------------------------------

         Information required by this item is incorporated by reference from
information appearing under the caption "Executive Compensation" on pages 7 and
8 of the Registrant's 2002 Proxy Statement.

                                      -7-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

Item 11. Security ownership of certain beneficial owners and management
------------------------------------------------------------------------

         Information required by Item 11 is incorporated by reference from
information appearing on pages 2 to 6 of the Registrant's 2002 Proxy Statement,
under the caption of "Election of Directors" of the Registrant.

Item 12. Certain relationships and related transactions
-------------------------------------------------------

         The information required by Item 12 is incorporated by reference from
Note 6 on page 15 in the Audited Consolidated Financial Statements section of
the Registrant's Annual Report to Shareholders.

PART IV
-------

Item 13. Exhibits and Reports on Form 8-K
------------------------------------------

(a)      Exhibits

         (1)  The following consolidated financial statements of the Registrant
and its subsidiary, included in the Annual Report to Stockholders for the year
ended December 31, 2001, are incorporated herein by reference in Item 8:

         Consolidated Balance Sheets
                 As of December 31, 2001 and 2000

         Consolidated Statements of Income
                 Years ended December 31, 2001 and 2000

         Consolidated Statements of Changes in Stockholders' Equity
                 Years ended December 31, 2001 and 2000

         Consolidated Statements of Cash Flows
                 Years ended December 31, 2001 and 2000

         Notes to Consolidated Financial Statements

         Report of Stegman & Company, Independent Auditors.

         Harbor Bankshares Corporation 2002 Proxy Statement

                                      -8-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

         All other schedules to the consolidated financial statements required
by Article 9 of Regulation S-X and all other schedules to the financial
statements of the Registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.

         (2)  List of financial items attached:

              Consolidated Average Statements of Condition
              Consolidated Statements of Income
              Schedule of Average Rates
              Interest Variance Analysis
              Investment Securities -- Book Value
              Investment Securities -- Weighted Rate by Maturity
              Investment Securities -- Market Value
              Investment Securities -- Maturities
              Loan Distribution
              Risk Elements of Loan Portfolio
              Summary of Loan Loss Experience
              Loan Maturities and Sensitivity
              Time Certificates -- $100,000 Maturities

                                      -9-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

           CONSOLIDATED AVERAGE STATEMENTS OF CONDITION AND RATIOS
                            (dollars in thousands)

Year ended December 31,

                                                 2001       2000         1999
                                                 ----       ----         ----

ASSETS
U.S. Treasury Securities
                                            $   2,138   $    --     $      --

U.S. Government Agencies                       55,140      54,733      62,267
Interest-Bearing Deposits with Other Banks        998         546         654
FHLB Stock and Other Securities                   652         528         554
Federal Funds Sold                             18,805       2,492       7,881
                                               ------       -----       -----

                                               77,733      58,299      71,356
Loans
-----
Commercial Loans                               22,313      30,094      21,884
Real Estate Mortgages                          72,261      72,703      62,114
Consumer Loans                                 10,493       5,063       3,341
                                               ------     -------      ------
Loans Net of Unearned Income                  105,067     107,860      87,339
                                              -------     -------     -------
Total Earning Assets                          182,800     166,159     158,695
Allowance for Possible Losses                   (844)       (724)       (660)
Other Assets                                   16,283       9,471      12,604
                                               ------       -----      ------
   TOTAL ASSETS                             $ 198,239   $ 174,906   $ 170,639
                                            =========   =========   =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-Interest Bearing Deposits               $  21,341   $  19,326   $  14,744
Interest-Bearing Transaction Accounts          18,597      15,623      13,235
Savings                                        82,907      76,169      78,339
Time - $100,000 or more                        30,482      17,098      19,653
Other Time                                     29,907      30,165      28,736
                                               ------      ------      ------
   TOTAL Deposits                             183,234     158,381     154,707
                                              -------     -------
Other Borrowed Money                              137       4,547         800
Notes payable                                    2000       3,202       4,889
Other Liabilities                               1,168         742         961
                                                -----         ---         ---
   TOTAL Liabilities                          186,539     166,872     161,357
SHAREHOLDERS' EQUITY                           11,700       8,034       9,282
                                               ------       -----       -----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
                                            $ 198,239   $ 174,906   $ 170,639
                                            =========   =========   =========
RATIOS
Average Equity to Average Total Assets          5.90%       4.59%       5.44%
Return on Assets                                 .37%        .32%       --

                                      -10-

<PAGE>

                                                  HARBOR BANKSHARES CORPORATION

Return on Equity                                 6.24%      7.03%      --

Dividend Payout Ratio                             --         --        117.0%

CAPITAL SCHEDULE

         Risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more.  Harbor Bankshares
Corporation had total consolidated assets of $187 million at December 31, 2001.
Disclosed below are the capital ratios of the Corporation:

                         Harbor Bankshares      Regulatory Requirements
                         -----------------      -----------------------
                           Corporation
                           -----------
Primary Capital                5.1%                      4.0%

Risk-Based Capital             9.7%                      8.0%

                                      - 11 -

<PAGE>

                                                 HARBOR BANKSHARES CORPORATION

                       CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)

Year ended December 31,                             2001     2000       1999
                                                    ----     ----       ----
   INTEREST AND FEES ON LOANS
Commercial Loans                                 $ 2,056    $2,958    $1,996
Real Estate Mortgages                              6,133     6,288     5,503
Consumer Loans                                     1,098       586       408
                                                   -----       ---       ---
TOTAL Interest and Fees on Loans/(1)/              9,287     9,832     7,907
Interest on Taxable Investment Securities          3,543     3,659     4,008
Interest on Other Investments/(2)/                    48        31        38
Interest on Federal Funds Sold                       731       143       389
                                                     ---       ---       ---
TOTAL Interest Income                             13,609    13,665    12,342
INTEREST EXPENSE
Savings                                            2,519     3,002     2,822
Interest-Bearing Transaction Accounts                132       138       156
Time - $100,000 or more                            1,676       885     1,014
Other Time                                         1,497     1,615     1,390
Other Borrowed Money                                   8       310        40
Interest on Notes Payable                            141       249       296
                                                     ---       ---       ---
TOTAL Interest Expense                             5,973     6,199     5,718
Net Interest Income                                7,636     7,466     6,624
Provision for Possible Credit Losses                 400       346       803
                                                     ---       ---       ---
Net Interest Income After Provision for Possible   7,236     7,120     5,821
Credit Losses
Other Income                                       2,132     1,841     1,470
Investment Security Gains                            197       ---       ---
Other Expenses                                     8,526     8,109     7,284
                                                   -----     -----     -----
Income Before Taxes                                1,039       852         7
Applicable Income Tax                                309       287         6
                                                     ---       ---         -
NET INCOME                                       $   730     $ 565    $    1
                                                 =======     =====    ======
PER COMMON SHARE
   NET INCOME - BASIC                            $  1.03     $ .82    $-----
                                                 =======     =====    ======
   Dividends per Share                           $ -----     $----    $  .25
                                                 =======     =====    ======

NOTES ON CONSOLIDATED STATEMENTS OF INCOME:

/(1)/  Loan fees, which are included in Interest Income, were $481 in 2001, $577
       in 2000, $387 in 1999.
/(2)/  Certificates of Deposit with other financial institutions.

                                      -12-

<PAGE>

                                                 HARBOR BANKSHARES CORPORATION

         AVERAGE RATES EARNED OR PAID FOR THE YEARS 2001, 2000 AND 1999

Years ended December 31,                            2001    2000    1999
                                                    ----    ----    ----
       Commercial Loans                            9.10%   9.82%   9.12%
       Real Estate Loans                           8.53%   8.65%   8.86%
       Consumer Loans                             10.43%  11.57%  12.21%
       Taxable Investment Securities               6.12%   6.62%   6.37%
       Other Investments/(1)/                      4.81%   5.68%   5.81%
       Federal Funds Sold                          3.89%   5.73%   4.93%
          TOTAL Earning Assets                     7.44%   8.22%   7.78%

AVERAGE RATES PAID
       Interest Bearing Transaction Accounts        .71%    .88%   1.18%
       Savings                                     3.03%   3.94%   3.60%
       Time - $100,000 or more                     5.50%   5.18%   5.16%
       Other Time                                  5.00%   5.35%   4.83%
       Other Borrowed Money                        6.24%   6.82%   5.00%
       Notes Payable                               7.00%   7.77%   6.05%
       TOTAL Interest Bearing Deposits             3.64%   3.73%   3.93%
       NET YIELD ON EARNING ASSETS                 3.80%   4.49%   3.85%

/(1)/  Certificates of Deposit with other financial institutions.

                                      -13-

<PAGE>

                                                 HARBOR BANKSHARES CORPORATION

Analysis of Changes in Net Interest Income
------------------------------------------

                                 INTEREST VARIANCE ANALYSIS
                                 --------------------------
                                         (in thousands)

<TABLE>
<CAPTION>
                                2001 COMPARED TO 2000          2000 COMPARED TO 1999
                                Increase (Decrease) due to:    Increase (Decrease) due to:
                           ------------------------------------------------------------------
                             Volume       Rate       Net       Volume      Rate      Net
                             ------       ----       ---       ------      ----      ---

<S>                          <C>        <C>         <C>        <C>         <C>      <C>
INTEREST INCOME

Loans                        $(254)     $ (290)     $(544)    $ 1,858     $  67   $ 1,925

Investment Securities          177        (293)      (116)       (483)      133     (350)

Federal Funds Sold             935        (347)       588        (266)      20      (246)

Other Interest Bearing          26        (10)         16          --       (6)       (6)
                               ---       -----        ---        -----     ----     -----
Assets /(1)/

TOTAL Interest Income        $ 884      $ (940)     $ (56)    $ 1,109     $214    $1,323
                             ======     =======     ======    ========     ====    ======

INTEREST EXPENSE

Interest-Bearing
 Transaction  Accounts       $  26       $(32)       $(6)     $   41      $(88)   $ (47)

Savings                        265       (749)       (484)      (42)        251     209

Time - $100,000 or more        693         98         791      (132)         3     (129)

Other Time                     14       (132)        (118)      69          156     225

Short -Term Borrowings       (301)       ---         (301)      187          83     270

Notes Payable                (93)        (15)        (108)     (102)         55     (47)
                             ----       -----        -----     -----        ---     ----

TOTAL Interest Expense       $ 604      $(830)      $(226)     $ 21       $ 460   $  481
                             =====      ======      ======     ====       =====   ======

NET INTEREST INCOME          $ 280      $(110)      $  170    $1,088      $(246)  $  842
                             =====      ======      ======    ======      ======  ======

</TABLE>

Note: Loan fees, which were included in interest income were $481 in 2001,
      $577 in 2000, and $387 in 1999. A change in Rate/Volume has been
      allocated to the change in rate.

/(1)/ Certificates of Deposit with other financial institutions.

                                      -14-

<PAGE>

                                                 HARBOR BANKSHARES CORPORATION

                                  INVESTMENT SECURITIES  (dollars in thousands)
                                  ---------------------

Maturity Distribution
---------------------
<TABLE>
<CAPTION>
                                              U.S.    U.S. Government  Other Securities     TOTAL
                                        Treasuries           Agencies

<S>                                        <C>               <C>                  <C>      <C>
Maturing Within One Year                   $   --            $     --             $  --    $    --
Maturing After One But Within Five Years    6,822              22,507               508     29,837
Maturing After Five But Within Ten Years       --               9,664                --      9,664
Maturing After Ten Years                                       11,508                45     11,553
                                            -----             -------                --     ------
TOTAL                                      $6,822            $ 43,679             $ 553   $ 51,054
                                           ======            ========             =====   ========

</TABLE>

Weighted Average Interest Rate at December 31, 2000
---------------------------------------------------

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                    U.S. Treasury     U.S. Government   Other Securities    TOTAL
                                    -------------     ---------------   ----------------    -----
                                                            Agencies
                                                            --------
<S>                                         <C>                <C>                 <C>       <C>
Maturing Within One Year                       --                 --                  --        --
Maturing After One But Within Five
Years                                       3.25%              4.71%               3.50%     4.30%
Maturing After Five But Within Ten
Years                                          --              4.58%                  --     4.58%
Maturing After Ten Years                       --              6.35%               7.25%     6.01%
                                               --              -----               -----     -----
TOTAL                                       3.25%              4.98%               3.81%     4.74%
                                            =====              =====               =====     =====
--------------------------------------------------------------------------------------------------
</TABLE>

Carrying amount and the market value at 2001 and 2000:
------------------------------------------------------

<TABLE>
<CAPTION>
                                    2001                   2000                  1999
                          -------------------------------------------------------------------------
                            Amortized    Market    Amortized     Market    Amortized       Market
                            ---------    ------    ---------     ------    ---------       ------
                              Cost                   Cost                    Cost
                              ----                   ----                    ----
<S>                          <C>       <C>           <C>       <C>           <C>         <C>
U.S. Treasuries and          $ 50,879  $ 50,501      $ 56,625  $ 54,644      $ 54,750    $ 49,774
Government Agencies

Other Securities                  558       553            27       627           574         574
                                  ---       ---            --       ---           ---         ---

TOTAL                        $ 51,437  $ 51,054      $ 56,292  $ 54,671      $ 55,324    $ 50,348
                             ========  ========      ========  ========      ========    ========

</TABLE>

                                      -15-

<PAGE>

                                                 HARBOR BANKSHARES CORPORATION

                           FIVE-YEAR LOAN DISTRIBUTION
                           ---------------------------
Five-Year Loan Distribution at December 31 (dollars in thousands)
-----------------------------------------------------------------
                          2001       2000       1999      1998      1997
                          ----       ----       ----      ----      ----
Commercial Loans     $  23,126  $  33,515  $  31,801  $ 20,711  $  9,041
                        71,962     70,596
Real Estate Loans                             67,117    61,704    65,461
Consumer Loans          11,718      8,286
                        ------      -----
                                               3,583     3,381     3,768
                                              ------    ------    ------
  TOTAL              $ 106,806  $ 112,397  $ 102,501  $ 85,796  $ 78,270
                     =========  =========  =========  ========  ========

Five-Year Loan Distribution at December 31 (expressed as percentages)
---------------------------------------------------------------------
                         2001       2000       1999      1998      1997
                         ----       ----       ----      ----      ----
Commercial Loans       21.65%     29.82%     31.03%    24.14%    11.55%
Real Estate Loans      67.38%     62.80%     65.47%    71.92%    83.64%
Consumer Loans         10.97%      7.38%      3.50%     3.94%     4.81%
                       ------     ------     ------    ------    ------
  TOTAL                100.0%     100.0%     100.0%    100.0%    100.0%
                       ======     ======     ======    ======    ======

                                      -16-

<PAGE>

                                                 HARBOR BANKSHARES CORPORATION
<TABLE>
<CAPTION>

                          SUMMARY OF LOAN LOSS EXPERIENCE
                          -------------------------------
                               (dollars in thousands)

<S>                                  <C>         <C>        <C>        <C>        <C>
Year ended December 31,               2001        2000       1999       1998       1997
                                      ----        ----       ----       ----       ----

Balance at Beginning of Period   $     732   $     678   $    699   $    654   $    889
                                 ---------   ---------   --------   --------   --------

Loans Charged Off:
   Commercial Loans                     65         228        291         --         58
   Real Estate Mortgages                70          73        395         54         95
   Consumer Loans                      111         103        239        149        160
                                       ---         ---        ---        ---        ---
   TOTAL Loans Charged Off             246         404        925        203        313
                                       ---         ---        ---        ---        ---

Recoveries of Loans:
   Commercial Loans                     39          69         40         --          1
   Real Estate Mortgages                22          16         26          3        ---
   Consumer Loans                       12          27         35         32          5
                                        --          --         --         --          -
   TOTAL Loans Recovered                73         112        101         35          6
                                        --         ---        ---        ---          -

Net Loans Charged Off                  173         292        824        168        307
                                       ---         ---        ---        ---        ---

Provisions Charged to Operations       400         346        803        213         72
                                      ----        ----       ----       ----        ---

Balance at End of Period         $     959   $     732   $    678   $    699   $    654
                                 ---------   ---------   --------   --------   --------

Daily Average Amount of Loans    $ 105,067   $ 107,860   $ 87,399   $ 80,502   $ 82,432
                                 ---------   ---------   --------   --------   --------

Allowance for Possible Loan           .90%        .65%       .66%       .82%       .84%
                                       ===         ===        ===        ===        ===
Losses to Loans Outstanding

Net Charge Offs to Average Loans      .16%        .27%       .94%       .21%       .37%
                                       ===         ===        ===        ===        ===
Outstanding
</TABLE>

                                      -17-

<PAGE>


                                         HARBOR BANKSHARES CORPORATION

                       RISK ELEMENTS OF LOAN PORTFOLIO
                       -------------------------------
                                 (in thousands)

     December 31              2001        2000     1999       1998       1997
                              ----        -----    -----      -----     -----
     Non-Accrual Loans       $ 620       $ 265   $ 1,003    $ 1,107     $ 770

     Accruing Loans Past       135           6        47        547     1,948

     Due 90 Days or more

     Restructured Loans       none        none      none       none      none
                              ====        =====     =====      ====      ====

NON-ACCRUAL LOANS AT DECEMBER 31, 2001 AND DECEMBER 31, 2000
------------------------------------------------------------

                                                           2001          2000
                                                          -----         -----
     Interest Income that Would Have Been Recorded        $ 158         $ 104
                                                          -----         -----
     Under Original Terms
     Interest Income Recorded during the Period             $--           $--

     It is the policy of the Corporation to place a loan on non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit.  Management considers such
factors as payment history, the nature of the collateral securing the loan, and
the overall economic situation of the borrower when making a non-accrual
decision.  Non-accrual loans are closely monitored by management.  A
non-accruing loan is restored to accrual status when principal and interest
payments have been brought current or it becomes well-secured or is in the
process of collection and the prospects of future contractual payments are no
longer in doubt.

Potential Problem Loans
-----------------------

     At December 31, 2001, the Corporation had $649 thousand of impaired loans
for which the borrowers were experiencing financial difficulties.  Those loans
are subject to constant management attention and their classification is
reviewed monthly.

     As of December 31, 2001, 67.4% of the Corporation's loan portfolio was
secured by real estate properties.

     Management analyzes the reserve for possible loan losses on a quarterly
basis.  Those factors considered in determining the adequacy of the reserve
include specific identification of known risk loans, adequacy of collateral on
specific past due and non-accrual loans, past experience, the ratio of the
reserve to net loans and current and anticipated economic conditions affecting
the customer base in the area the Bank serves.

     Management allocates the reserve for possible loan losses by type of loan
based on the experience method and actual potential losses.  Both performing
and non-performing loans are also reviewed periodically to identify high risk
assets and their potential impact upon the reserve.  Based on all information
known to date, management does not expect net losses as a percentage of average
loans in 2002 to exceed the 2001 levels.

                                     -18-

<PAGE>
                                         HARBOR BANKSHARES CORPORATION

MATURITY OF LOANS AS OF DECEMBER 31, 2001
-----------------------------------------

                           Commercial  Real Estate  Consumer      TOTAL
                                Loans        Loans     Loans
Maturing Within One Year     $ 19,018     $  6,982  $  2,186  $  28,125
Maturing After One Year But     3,057       14,403     9,532  $  26,123
Within Five Years
Maturing After Five Years       1,051       50,577        --  $  52,558
                              -------     --------     -----   --------
TOTAL                        $ 23,126     $ 71,962  $ 11,718  $ 106,806
                             ========     ========  ========  =========

LOANS CLASSIFIED BY SENSITIVITY TO CHANGES IN INTEREST RATES
------------------------------------------------------------
                                   Fixed Interest Adjustable Interest    TOTAL
                                       Rate Loans         Rate Loans     -----
                                       ----------        -----------
Maturing Within One Year                 $  7,550           $ 21,297  $  28,846
Maturing After One But Within Five         24,667                 86     24,753
Years
Maturing After Five Years                  52,628                579     53,207
                                           ------                ---     ------
TOTAL                                    $ 84,845           $ 21,962  $ 106,806
                                         ========           ========  =========

                                     -19-

<PAGE>

                                         HARBOR BANKSHARES CORPORATION

MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE OUTSTANDING AT
-----------------------------------------------------------------------------
DECEMBER 31, 2001 AND 2000
--------------------------

                          2001      2000
                          ----      ----
Three months or less  $ 14,207  $  6,447
Three to six months      2,750     2,297
Six to twelve months     5,299     8,246
Over twelve months       6,965    12,508
                         -----    ------
TOTAL                 $ 29,221  $ 29,498
                      ========  ========

LONG AND SHORT TERM BORROWINGS
------------------------------

     Short term borrowings consist of borrowings from the FHLB.  These
borrowings re-price daily, have maturities of one year or less and may be
prepaid without penalty.  Long term borrowings for the year 2001 and 2000
consist of a note payable due July 1, 2012 at a fixed rate of 7.0% with
interest payments only from August 2001to August 2002 and equal principal and
interest payments from August 2002 to July 1, 2012.

BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
---------------------------------------------------------
(dollars in thousands)

                                                               2001     2000
                                                               ----     ----
          Amount outstanding at period-end:
             Long-term debt                                 $ 2,000  $ 2,000
             Short-term borrowings                                0  $ 2,000

          Average outstanding:
             Long-term debt                                 $ 2,000  $ 3,202
             Short-term borrowings                              137    4,547

          Weighted average interest rate during the period:
             Long-term debt                                   7.00%    7.77%
             Short-term borrowings                            6.24%    6.81%

                                     -20-

<PAGE>

                                         HARBOR BANKSHARES CORPORATION

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

         HARBOR BANKSHARES CORPORATION

By:      /s/ Teodoro J. Hernandez
         ---------------------------------------------------

Title:   Teodoro J. Hernandez
         ---------------------------------------------------

Date:    Treasurer
         ---------------------------------------------------

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

By:      /s/ Joseph Haskins, Jr.
         ---------------------------------------------------

Title:   Chairman & CEO
         ---------------------------------------------------

Date:    3/26/02
         ---------------------------------------------------


By:      ____________________________________________________

Title:   ____________________________________________________

Date:    ____________________________________________________


By:      ____________________________________________________

Title:   ____________________________________________________

Date:    ____________________________________________________

                                     -21-

<PAGE>



                          HARBOR BANKSHARES CORPORATION
                                AND SUBSIDIARIES

                              REPORT ON AUDITS OF
                              FINANCIAL STATEMENTS

                              FOR THE YEARS ENDED
                           DECEMBER 31, 2001 AND 2000

<PAGE>

                                TABLE OF CONTENTS

INDEPENDENT AUDITORS' REPORT

CONSOLIDATED FINANCIAL STATEMENTS                                 Page
                                                                  ----

     Balance Sheets                                               1 - 2

     Statements of Income                                           3

     Statements of Changes in Stockholders' Equity                  4

     Statements of Cash Flows                                     5 - 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                        7 - 26

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
 of Harbor Bankshares Corporation
Baltimore, Maryland

     We have audited the accompanying consolidated balance sheets of Harbor
Bankshares Corporation and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the management of Harbor Bankshares Corporation. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harbor
Bankshares Corporation and subsidiaries as of December 31, 2001 and 2000 and
the results of their operations and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.

Baltimore, Maryland
January 11, 2002

<PAGE>

                HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                            DECEMBER 31, 2001 AND 2000

                                    ASSETS

<TABLE>
<CAPTION>
                                                             2001           2000
                                                        ------------   ------------
<S>                                                     <C>            <C>
Cash and due from banks                                 $  6,992,077   $  5,223,521

Federal funds sold                                        10,553,426           -

Interest bearing deposits in other banks                   1,161,517        641,354

Investment securities:
  Held to maturity at amortized cost (fair value of
   $2,121,120 in 2001 and $27,268 in 2000)                 2,064,156         27,268

  Available for sale - at fair value                      48,932,420     54,643,679
                                                        ------------   ------------
                                                          50,996,576     54,670,947
                                                        ------------   ------------
Loans                                                    106,806,899    112,397,881

Allowance for loan losses                                   (959,574)      (732,636)
                                                        ------------   ------------

     Net loans                                           105,847,325    111,665,245
                                                        ------------   ------------

Premises and equipment, net                                  995,609      1,346,375

Stock in Federal Home Loan Bank of Atlanta - at cost         600,000        600,000

Goodwill                                                   2,506,226      2,837,498

Accrued interest receivable                                1,077,140      1,772,029

Cash surrender value of life insurance                     3,500,335      3,312,067

Deferred income taxes                                        552,898        826,439

Other assets                                               1,802,533      1,621,298
                                                        ------------   ------------

     TOTAL ASSETS                                       $186,585,662   $184,516,773
                                                        ============   ============
</TABLE>

                                       1

See accompanying notes.

<PAGE>

                            LIABILITIES AND STOCKHOLDERS' EQUITY

                                                        2001           2000
                                                    ------------   ------------
LIABILITIES:
  Deposits:
    Noninterest bearing demand                      $ 19,979,053   $ 18,882,984
    Interest bearing transaction accounts             21,205,840     16,535,184
    Savings                                           75,330,105     76,362,022
    Time, $100,000 or more                            29,221,626     29,498,290
    Other time                                        25,794,564     28,003,244
                                                    ------------   ------------
       Total deposits                                171,531,188    169,281,724
    Short-term borrowings                                  -          2,000,000
    Long-term debt                                     2,000,000      2,000,000
    Accrued interest payable                             538,383        741,610
    Other liabilities                                    274,712        247,362
                                                    ------------   ------------

       Total liabilities                             174,344,283    174,270,696
                                                    ------------   ------------

STOCKHOLDERS' EQUITY:
  Common stock (par value $0.01):
    Authorized 10,000,000 shares; issued 721,965
      and 689,788 at December 31, 2001 and 2000,
      including 33,333 common non-voting,
respectively                                               7,219          6,897
    Capital surplus                                    6,986,078      6,500,537
    Retained earnings                                  5,538,547      4,808,669
    Accumulated other comprehensive loss                (290,465)    (1,070,026)
                                                    ------------   ------------

       Total stockholders' equity                     12,241,379     10,246,077
                                                    ------------   ------------

       TOTAL LIABILITIES AND STOCKHOLDERS'
         EQUITY                                     $186,585,662   $184,516,773
                                                    ============   ============

                                      2

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

                                                     2001               2000
                                                ------------       ------------
INTEREST INCOME:
   Interest and fees on loans                   $  9,287,266       $  9,831,611
   Interest on investments - taxable               3,542,796          3,658,682
   Interest on deposits in other banks                47,749             31,695
   Interest on federal funds sold                    731,248            143,112
                                                ------------       ------------
      Total interest income                       13,609,059         13,665,100
                                                ------------       ------------

INTEREST EXPENSE:
   Interest bearing transaction accounts             132,015            137,533
   Savings                                         2,518,970          3,003,128
   Time, $100,000 or more                          1,675,514            884,843
   Other time                                      1,496,596          1,614,471
   Notes payable                                     141,556            249,438
   Interest on short-term borrowings                   8,553            309,547
                                                ------------       ------------

      Total interest expense                       5,973,204          6,198,960
                                                ------------       ------------

NET INTEREST INCOME                                7,635,855          7,466,140

PROVISION FOR LOAN LOSSES                            399,996            346,000
                                                ------------       ------------

NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                 7,235,859          7,120,140
                                                ------------       ------------

NONINTEREST INCOME:
   Service charges on deposit accounts               965,095          1,068,529
   Other service charges                             862,823            587,749
   Securities gains                                  197,072                 -
   Gain on sales of loans                             45,341             10,951
   Awards and grants                                 229,053            126,690
   Loan servicing fees                                27,350             46,163
   Other income                                        2,755              1,495
                                                ------------       ------------
      Total noninterest income                     2,329,489          1,841,577
                                                ------------       ------------

NONINTEREST EXPENSES:
   Salaries and employee benefits                  3,989,234          3,622,265
   Occupancy expense of premises                     777,500            808,878
   Equipment expense                                 654,061            802,427
   Data processing fees                              918,231            791,326
   Professional fees                                 199,069            387,894
   Goodwill amortization                             331,272            331,272
   Other expenses                                  1,657,374          1,365,401
                                                ------------       ------------

      Total noninterest expense                    8,526,741          8,109,463
                                                ------------       ------------

INCOME BEFORE INCOME TAXES                         1,038,607            852,254

APPLICABLE INCOME TAXES                              308,729            287,410
                                                ------------       ------------

NET INCOME                                      $    729,878       $    564,844
                                                ============       ============

BASIC EARNINGS PER SHARE                               $1.03               $.82
                                                       =====               ====

DILUTED EARNINGS PER SHARE                             $1.00               $.80
                                                       =====               ====

See accompanying notes.

                                      3

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                         Accumu-
                                                                                          lated
                                                                                          Other
                                                                                         Compre-
                                                                                         hensive              Total
                                                Common      Capital       Retained        Income           Stockholders'
                                                 Stock      Surplus       Earnings        (Loss)              Equity
                                              --------   ------------   ------------    ------------      -------------
<S>                                           <C>        <C>            <C>             <C>               <C>
Balance at January 1, 2000                    $  6,895   $  6,497,416   $  4,243,825    $ (3,284,270)     $   7,463,866

Comprehensive income:
   Net income                                     -             -            564,844           -                564,844
   Unrealized gains on securities available-
      for-sale, net of taxes                      -             -              -           2,214,244          2,214,244
                                                                                                          -------------

         Total comprehensive income               -             -              -               -              2,779,088

      Exercise of stock options                      2          3,121          -               -                  3,123
                                              --------   ------------   ------------    ------------      -------------

Balance at December 31, 2000                     6,897      6,500,537      4,808,669      (1,070,026)        10,246,077

Comprehensive income:
   Net income                                     -             -            729,878           -                729,878
   Unrealized gains on securities available-
      for-sale, net of reclassification
      adjustment, net of taxes                    -             -              -             779,561            779,561
                                                                                                          -------------

         Total comprehensive income                                                                           1,509,439

   Sales of common stock                            28         41,936          -               -                 41,964
   Exercise of stock options                       294        443,605          -               -                443,899
                                              --------   ------------   ------------    ------------      -------------

Balance at December 31, 2001                  $  7,219   $  6,986,078   $  5,538,547    $   (290,465)     $  12,241,379
                                              ========   ============   ============    ============      =============
</TABLE>

See accompanying notes.

                                      4

<PAGE>

                HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                           2001           2000
                                                                       ------------   ------------
<S>                                                                    <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                            $    729,878   $    564,844
 Adjustments to reconcile net income to net
  cash provided by operating activities:
  Depreciation and amortization                                             941,558        997,939
  Provision for loan losses                                                 399,996        346,000
  Deferred income taxes                                                    (128,052)      (128,074)
  Increase in cash surrender value of life insurance                       (188,268)       (51,024)
  Gains on sales of loans                                                   (45,341)       (10,951)
  Gain on sale securities                                                  (197,072)          -
  Origination of loans held for sale                                     (4,643,621)    (2,581,847)
  Proceeds from sales of loans held for sale                              4,688,962      2,592,798
  Decrease (increase) in accrued interest receivable and other assets       261,424     (1,274,761)
  (Decrease) increase in accrued interest payable and other liabilities    (175,877)       357,925
                                                                       ------------   ------------

    Net cash provided by operating activities                             1,643,587        812,849
                                                                       ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Net increase in deposits at other banks                                   (520,163)       (88,624)
 Purchases of investment securities held to maturity                     (2,040,530)        (7,629)
 Purchases of investment securities available for sale                  (71,311,142)    (1,684,952)
 Proceeds from maturities of investment securities held to maturity           -             63,000
 Proceeds from sales, maturities and principal payments
  of investment securities available for sale                            22,438,448         61,479
 Proceeds from called securities available for sale                      56,000,000           -
 Investment in life insurance policies                                        -         (3,261,043)
 Net decrease (increase) in loans                                         5,590,982    (10,267,954)
 Proceeds from sales of other real estate owned                              62,000        259,063
 Purchase of other real estate owned                                        (39,000)          -
 Purchases of premises and equipment - net                                 (237,527)      (397,483)
                                                                       ------------   ------------
    Net cash provided (used) by investing activities                      9,943,068    (15,324,143)
                                                                       ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net increase in deposits                                                 2,249,464      3,741,211
 Proceeds from sale of common stock                                         485,863          3,123
 Proceeds from long-term debt                                                  -         2,000,000
 Repayment of long-term debt                                                   -        (3,982,547)
 Net (decrease) increase in short-term borrowings                        (2,000,000)     2,000,000
                                                                       ------------   ------------

    Net cash provided by financing activities                               735,327      3,761,787
                                                                       ------------   ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         12,321,982    (10,749,507)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                            5,223,521     15,973,028
                                                                       ------------   ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                               $ 17,545,503   $  5,223,521
                                                                       ============   ============
</TABLE>

                                      5

<PAGE>

HARBOR BANKSHARES CORPORATION

Consolidated Statements of Cash Flows (Continued)
For the Years ended December 31, 2001 and 2000

                                                           2001        2000
                                                        ----------  ----------
Supplemental disclosure of cash flows information:

  Cash paid for income taxes                            $  308,729  $  287,410
                                                        ==========  ==========

  Cash paid for interest                                $6,034,876  $5,907,149
                                                        ==========  ==========

Supplemental disclosure noncash investing and
  financing activities:

  Conversion of loans receivable to other
  real estate owned                                     $    -      $   79,234
                                                        ==========  ==========

See accompanying notes.

                                      6

<PAGE>

                 HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

1.     NATURE OF OPERATIONS

         Harbor Bankshares Corporation (the "Corporation") is a bank holding
company organized under the laws of the State of Maryland in 1992. The
Corporation owns all of the outstanding stock of the Harbor Bank of Maryland
(the "Bank") which owns all of the outstanding stock of the Bank's subsidiary,
Harbor Financial Services.

         The Bank is a commercial bank headquartered in Baltimore, Maryland.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation. The Bank conducts general banking business in seven locations and
primarily serves the Baltimore, Maryland metropolitan area. The Bank also has a
branch in Riverdale, Prince George's County, Maryland. It offers checking,
savings and time deposits, commercial real estate, personal, home improvement,
automobile, and other installment and term loans. The Bank is also a member of
a local and national ATM network. The retail nature of the Bank allows for
diversification of depositors and borrowers so it is not dependent upon a
single or a few customers.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The accounting and reporting policies of the Corporation and its
subsidiaries conform to accounting principles generally accepted in the United
States of America and to general practice within the banking industry. Certain
reclassifications have been made to amounts previously reported to conform to
the classifications made in 2001. The following is a summary of the more
significant accounting policies:

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

              The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

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

              Securities are classified as held to maturity when management
has the positive intent and ability to hold the securities to maturity.
Securities held to maturity are carried at amortized cost.

              Securities not classified as held to maturity or trading are
classified as available for sale. Securities available for sale are carried at
fair value with unrealized gains and losses reported separately through
accumulated other comprehensive income, net of tax.

                                      7

<PAGE>

              Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income. The
adjusted cost of specific securities sold is used to compute gains or losses on
sales.

         Loans
         -----

              Loans are stated at their principal balance outstanding net of
any deferred fees and costs. Interest income on loans is accrued at the
contractual rate based on the principal outstanding. The Corporation places
loans, except for consumer installment loans, on non-accrual when any portion
of the principal or interest is ninety days past due and collateral is
insufficient to discharge the debt in full. Interest accrual may also be
discontinued earlier if, in management's opinion, collection is unlikely.
Generally, consumer installment loans are not placed on non-accrual, but are
charged off when they are five months past due.

              Loans are considered impaired when, based on current information,
it is probable that the Corporation will not collect all principal and interest
payments according to contractual terms. Generally, loans are considered
impaired once principal or interest payments become ninety days or more past
due and they are placed on non-accrual. Management also considers the financial
condition of the borrower, cash flows of the loan and the value of the related
collateral. Impaired loans do not include large groups of smaller balance
homogeneous credits such as residential real estate and consumer installment
loans, which are evaluated collectively for impairment. Loans specifically
reviewed for impairment are not considered impaired during periods of "minimal
delay" in payment (ninety days or less) provided eventual collection of all
amounts due is expected. The impairment of a loan is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or the fair value of the collateral if repayment is expected to
be provided by the collateral. Generally, the Corporation's impairment on such
loans is measured by reference to the fair value of the collateral. Income on
impaired loans is recognized on the cash basis and is first applied against the
principal balance outstanding.

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

              The allowance for loan losses represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans that may become uncollectible. The allowance for loan losses consists of
an allocated component and an unallocated component. The components of the
allowance for loan losses represent an estimation done pursuant to either
Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for
Contingencies, or SFAS No. 114, Accounting by Creditors for Impairment of a
Loan. The adequacy of the allowance for loan losses is determined through
careful and continuous review and evaluation of the loan portfolio and involves
the balancing of a number of factors as outlined below to establish a prudent
level. Loans deemed uncollectible are charged against, while recoveries are
credited to, the allowance. Management adjusts the level of the allowance
through the provision for loan losses, which is recorded as a current period
operating expense. The Corporation's methodology for assessing the
appropriateness of the allowance consists of several key elements, which
include the formula allowance, specific allowances and the unallocated
allowance.

                                      8

<PAGE>

              The formula for the allowance is calculated by applying loss
factors to corresponding categories of outstanding loans. Loss factors are
based on the Corporation's historical loss experience. The use of these loss
factors is intended to reduce the difference between estimated losses inherent
in the portfolio and observed losses.

              Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a loan that
management believes indicate the probability that a loss may be incurred in an
amount different from the amount determined by application of the formula
allowance. For other problem graded credits, allowances are established
according to the application of credit risk factors. These factors are set by
management to reflect its assessment of the relative level of risk inherent in
each grade.

              The unallocated allowance is based upon management's evaluation
of various conditions that are not directly measured in the determination of
the formula and specific allowances. Such conditions include general economic
and business conditions affecting key lending areas, credit quality trends
(including trends in delinquencies and nonperforming loans expected to result
from existing conditions), loan volumes and concentrations, specific industry
conditions within portfolio categories, recent loss experience in particular
loan categories, duration of the current business cycle, bank regulatory
examination results, findings of internal loan examiners, and management's
judgment with respect to various other conditions including loan administration
and management and the quality of risk identification systems. Executive
management reviews these conditions quarterly.

              Management believes that the allowance for loan losses is
adequate. However, the determination of the allowance requires significant
judgment, and estimates of probable losses inherent in the loan portfolio can
vary significantly from the amounts actually observed. While management uses
available information to recognize probable losses, future additions to the
allowance may be necessary based on changes in the loans comprising the loan
portfolio and changes in the financial condition of borrowers, such as may
result from changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's loan portfolio and allowance for loan losses. Such review may result
in recognition of additions to the allowance based on their judgments of
information available to them at the time of their examination.

         Premises and Equipment
         ----------------------

              Premises and equipment are stated at cost less accumulated
depreciation and amortization computed using the straight-line method. Premises
and equipment are depreciated over the useful lives of the assets, except for
leasehold improvements which are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
The costs of major renewals and betterments are capitalized, while the costs of
ordinary maintenance and repairs are expensed as incurred.

                                      9

<PAGE>

         Other Real Estate Owned (OREO)
         ------------------------------

              OREO comprises properties acquired in partial or total
satisfaction of problem loans. The properties are recorded at the lower of cost
or fair value at the date acquired. Losses arising at the time of acquisition
of such properties are charged against the allowance for loan losses.
Subsequent write-downs that may be required are added to a valuation reserve.
Gains and losses realized from the sale of OREO, as well as valuation
adjustments, are included in noninterest income. Expenses of operation are
included in noninterest expense.

         Goodwill
         --------

              Goodwill represents the excess of the cost of assets acquired in
business combinations accounted for under the purchase method over the fair
value of the net assets at dates of acquisition and is being amortized on the
straight-line method over fifteen years.

         Cash Surrender Value of Life Insurance
         --------------------------------------

              The Corporation is the beneficiary of insurance policies on the
lives of officers and some employees of the Bank. The Corporation has
recognized the amount that could be realized under the insurance policies as an
asset in the consolidated balance sheets.

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

              Income tax expense is based on the results of operations, adjusted
for permanent differences between items of income or expense reported in the
financial statements and those reported for tax purposes. Under the liability
method, deferred income taxes are determined based on the differences between
the financial statement carrying amounts and the income tax basis of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.

         Loan Servicing
         --------------

              The cost of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing revenue. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value.

              When participating interests in loans sold have an average
contractual interest rate, adjusted for normal servicing fees, that differs
from the agreed yield to the purchaser, gains or losses are recognized equal to
the present value of such differential over the estimated remaining life of
such loans. The resulting "excess servicing receivable" or "deferred servicing
revenue" is amortized over the estimated life using a method approximating the
interest method.

                                      10

<PAGE>

              Quoted market prices are not available for the excess servicing
receivables. Thus, the excess servicing receivables and the amortization
thereon are periodically evaluated in relation to estimated future servicing
revenue, taking into consideration changes in interest rates, current repayment
rates, and expected future cash flows. The Corporation evaluates the carrying
value of the excess servicing receivables by estimating the future servicing
income of the excess servicing receivables based on management's best estimate
of remaining loan lives and discounted at the original discount rate.

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

              Basic net earnings per common share is computed by dividing net
earnings applicable to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings per common
share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options.

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

              The Corporation's stock-based compensation plan is accounted for
based on the intrinsic value method set forth in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation expense for stock options is generally not
recognized if the exercise price of the option equals or exceeds the fair
market value of the stock on the date of grant.

         Advertising
         -----------

              Advertising costs are expensed as incurred. Advertising expense
was $115,290 and $114,465 for the years ended December 31, 2001 and 2000,
respectively.

         Statement of Cash Flows
         -----------------------

              The Corporation has defined cash and cash equivalents in the
statements of cash flows as those amounts included in the consolidated balance
sheet captions "cash and due from banks" and "federal funds sold".

3.     RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No.
133, as amended by SFAS No. 137 and No. 138, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 was effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133, as
amended, had no impact on the Corporation's consolidated financial statements
as the Corporation does not utilize derivatives.

                                      11

<PAGE>

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations (SFAS No. 141) and No. 142 Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 141 changes the accounting for
business combinations, requiring that all business combinations be accounted
for using the purchase method and that intangible assets be recognized as
assets apart from goodwill if they arise from contractual or other legal
rights, or if they are separable or capable of being separated from the
acquired entity and sold, transferred, licensed, rented or exchanged. SFAS No.
141 is effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 specifies the financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001.

         SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001 be reassessed and the remaining
amortization periods adjusted accordingly. Previously recognized intangible
assets deemed to have indefinite lives shall be tested for impairment. The
Corporation has not fully assessed the potential impact of the adoption of SFAS
No. 142, but believes it will not have a material impact on its financial
statements.

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of intangible long-lived assets and the associated asset retirement
costs and is effective for the fiscal years beginning after June 15, 2002.
Management does not expect the impact of SFAS No. 143 to be material to the
Corporation's consolidated financial statements.

         In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No.
144 amends SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and establishes a single accounting
model for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management does
not expect the impact of SFAS No. 144 to be material to the Corporation's
consolidated financial statements.

4.     RESTRICTIONS ON CASH AND DUE FROM BANKS

         The Bank is required by the Federal Reserve to maintain a reserve
balance based principally on deposit liabilities. The balance maintained is
included in cash and due from banks. The reserve balances kept at the Federal
Reserve Bank as of December 31, 2001 were $25,000.

                                      12

<PAGE>

5.   INVESTMENT SECURITIES

          The amortized cost and estimated fair values of investments
securities are as follows:

<TABLE>
<CAPTION>
                                                                   Gross         Gross
                                           Amortized            Unrealized     Unrealized      Estimated
                                             Cost                  Gains         Losses       Fair Value
                                          -----------             -------      ----------    ------------
<S>                                       <C>                    <C>           <C>            <C>

Balance at December 31, 2001
Available for sale:
 U.S. Treasury and government agencies    $41,227,200            $160,858     $ (457,068)     $40,930,990
 Mortgage-backed securities                 7,633,242              10,382       (149,848)       7,493,776
 State and municipals                         512,076                 -           (4,422)         507,654
                                          -----------            --------     ----------      -----------
      Total                               $49,372,518            $171,240     $ (611,338)     $48,932,420
                                          ===========            ========     ==========      ===========

Held to maturity:
 U.S. Government agencies                 $ 2,018,656            $ 56,964     $     -         $ 2,075,620
 Other                                         45,500                 -             -              45,500
                                          -----------            --------     ----------      -----------
      Total                               $ 2,064,156            $ 56,964     $     -         $ 2,121,120
                                          ===========            ========     ==========      ===========

                                                                  Gross         Gross
                                            Amortized           Unrealized    Unrealized      Estimated
                                              Cost                Gains         Losses        Fair Value
                                          -----------           ----------    ----------    ------------

Balance at December 31, 2000
Available for sale:
 U.S. Treasury and government agencies    $55,560,984            $  -        $(1,600,845)     $53,960,139
 Mortgage-backed securities                   703,947               -            (20,407)         683,540
                                          -----------            --------      ---------      -----------
      Total                               $56,264,931            $  -        $(1,621,252)     $54,643,679
                                          ===========            ========      ==========     ===========

Held to maturity - Other                  $    27,268            $  -        $    -           $    27,268
                                          ===========            ========      ==========     ===========
</TABLE>

     The amortized cost and estimated fair value of debt securities at December
31, 2001, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers have the right to call or
repay obligations without call or prepayment penalties.

                                            Amortized       Fair
                                              Cost          Value
                                            ---------      --------
Available for sale:
 Due after one year through five years      $27,739,276  $27,761,754
 Due after five years through ten years      10,000,000    9,664,370
 Due after ten years                          4,000,000    4,012,520
 Mortgage-backed securities                   7,633,242    7,493,776
                                            -----------  -----------
      Total                                 $49,372,518  $48,932,420
                                            ===========  ===========

Held to maturity:
 Due after one year through five years      $ 2,018,656  $ 2,075,620
 Due after ten years                             45,500       45,500
                                            -----------  -----------
      Total                                 $ 2,064,156  $ 2,121,120
                                            ===========  ===========

                                      13

<PAGE>

          During the year ended December 31, 2001 available-for-sale securities
were sold resulting in gross proceeds of $22,438,448 and gross gains of
$197,072. There were no sales of securities for the year ended December
31, 2000.

          Securities with a value of $15,251,496 at December 31, 2001 have been
pledged as collateral for money market and certificate of deposit accounts.

6.   LOANS AND ALLOWANCE FOR LOAN LOSSES

          The composition of loans, net of unearned income at December 31 is
as follows:

                                 2001          2000
                             -----------   -----------

Real estate - mortgage      $ 71,961,877  $ 70,593,670
Commercial                    23,125,985    33,516,529
Consumer                      10,612,351     6,981,154
Credit card loans              1,106,686     1,306,528
                             -----------   -----------
                            $106,806,899  $112,397,881
                             ===========   ===========

          Transactions in the allowance for loan losses are summarized as
follows:

                                            2001       2000
                                         ---------    --------

Balance at January 1                      $732,636   $678,567
                                          --------   ---------
Provision charged to operating expense     399,996    346,000
                                          --------   ---------
Loans charged-off                         (246,168)  (403,514)
Recovery on loans previously charged-off    73,110    111,583
                                          --------   ---------
    Net loans charged-off                 (173,058)  (291,931)
                                          --------   ---------

Balance at December 31                    $959,574   $732,636
                                          ========   =========

          Information with respect to impaired loans at December 31, 2001 and
2000 and for the years then ended is as follows:

                                                       2001      2000
                                                     --------  --------

Impaired loans with a valuation allowance            $285,574  $352,453
Impaired loans without a valuation allowance          363,687   468,712
                                                      -------   -------

     Total impaired loans                            $649,261  $821,165
                                                     ========  ========

Allowance for loan losses related to impaired loans  $ 70,059  $125,325
Allowance for loan losses related to other than
impaired loans                                        889,515   607,311
                                                     --------  --------

     Total allowance for loan losses                 $959,574  $732,636

Average impaired loans for the year                  $756,213  $410,076
                                                     ========  ========
Interest income on impaired loans recognized
 on the cash basis                                       -         -

                                      14

<PAGE>

         The Bank has sold certain real estate mortgage loans without
recourse and retained the related servicing rights. The principal balances of
these serviced loans, which are not included in the accompanying consolidated
balance sheets, totaled $8,419,720 and $9,962,481 at December 31, 2001 and 2000,
respectively. There were no loans held for sale at December 31, 2001 and 2000.

         At December 31, 2001 and 2000 the net carrying amount of mortgage
servicing rights was $31,640 and $53,634, respectively, which approximated fair
value and are included in other assets.

         The Bank has granted loans to certain officers and directors of the
Bank and their associates. Related party loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve more
than the normal risk of collectibility. The aggregate dollar amount of these
loans was $5,585,520 and $8,843,783 at December 31, 2001 and 2000, respectively.
During 2001, $2,125,070 of new loans were made while repayments totaled
$5,383,333. During 2000, $1,925,451 of new loans were made while repayments
totaled $811,246.

7.     PREMISES AND EQUIPMENT

         The major classes of premises and equipment at December 31 are
summarized as follows:

<TABLE>
<CAPTION>
                                                                         2000                   2001
                                                                       ----------           -----------
<S>                                                                    <C>                   <C>
Land                                                                   $   30,000            $   30,000
Buildings                                                                 129,510               129,510
Furniture, fixtures and equipment                                       3,008,180             2,792,100
Leasehold improvements                                                    626,587               605,295
                                                                       ----------            ----------
                                                                        3,794,277             3,556,905
  Less accumulated depreciation and amortization                        2,798,668             2,210,530
                                                                       ----------            ----------
         Total                                                         $  995,609            $1,346,375
                                                                       ==========            ==========
</TABLE>

         Depreciation expense was $588,293 and $666,667 for the years ended
December 31, 2001 and 2000.

         The Bank leases branch and office facilities. The lease agreements
provide for the payment of utilities and taxes by the lessee. Future minimum
payments for each of the five succeeding years under noncancelable operating
leases consisted of the following at December 31, 2001:

2002                                           $  549,123
2003                                              568,115
2004                                              552,322
2005                                              479,267
2006                                              437,416
Thereafter                                      1,169,298

         Total rental expense under operating leases amounted to $482,119
and $498,223 for the years ended December 31, 2001 and 2000, respectively.

                                      15

<PAGE>

8.     INCOME TAX

         The Corporation's provision for income taxes for the years ended
December 31, is summarized as follows:

<TABLE>
<CAPTION>
                                                                      2000                       2001
                                                                    ---------                  ---------
<S>                                                                  <C>                        <C>
Taxes currently payable                                              $436,781                   $415,484
Deferred taxes (benefit)                                             (128,052)                  (128,074)
                                                                     --------                   --------
Income tax expense for the year                                      $308,729                   $287,410
                                                                     ========                   ========
</TABLE>

         A reconcilement of the difference between the statutory federal
income tax rate and the effective tax rate for the Corporation is as follows:

<TABLE>
<CAPTION>
                                                                     2000                      2001
                                                                    --------                  -------
<S>                                                                   <C>                      <C>
Federal income tax rate                                               34.0%                    34.0%
Increase (decrease) resulting from:
  Increase in cash surrender value of life insurance                  (6.6)                    (2.0)
  Other                                                                2.3                      1.7
                                                                      ----                     ----
Effective tax rate                                                    29.7%                    33.7%
                                                                      ====                     ====
</TABLE>

         Significant components of the Corporation's deferred tax liabilities
and assets included in other assets at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                         2000                    2001
                                                                      ----------                ---------
<S>                                                                     <C>                      <C>
Deferred tax liabilities -
   Prepaid expenses                                                     $  9,018                 $ 12,845
                                                                        --------                 --------

Deferred tax assets:
   Loan loss reserve                                                     212,744                  133,629
   Deferred loan origination fees                                         32,536                   47,592
   Depreciation                                                          115,161                   96,469
   Deferred compensation                                                  51,842                   10,368
   Unrealized loss on investment securities available for sale           149,633                  551,226
                                                                        --------                 --------

       Total deferred tax assets                                         561,916                  839,284
                                                                        --------                 --------

       Net deferred tax asset                                           $552,898                 $826,439
                                                                        ========                 ========
</TABLE>

         No valuation allowance was recorded for the deferred tax assets at
December 31, 2001 or 2000.

                                      16

<PAGE>

9.     SHORT-TERM BORROWINGS

         Short-term borrowings consist entirely of an advance from the Federal
Home Loan Bank ("FHLB"). Information related to these advances for the years
ended December 31, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                           2000                2001
                                                                         --------            --------
<S>                                                                      <C>                 <C>
Balance at December 31                                                   $   -               $2,000,000
Maximum amount outstanding at any month-end                              2,000,000            9,000,000
Daily average amount outstanding                                           137,000            4,546,585
Weighted daily average interest rate                                         6.24%                6.81%
Weighted average interest rate at December 31                                -                    6.35%
</TABLE>

         The FHLB advances are collateralized by a blanket lien on all 1 - 4
family residential mortgage loans. As of December 31, 2001, the Bank had an
unused available line of credit of $18,600,000.

10.    LONG-TERM DEBT

         Long-term debt consists of the following at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                            2000                 2001
                                                                         ----------            ----------
<S>                                                                      <C>                   <C>
Note payable - due July 1, 2012. Interest only payments
 from August 10, 2001 to August 1, 2002. From August 2002
 to July 2012, equal principal monthly and interest payments
 of $23,087 to maturity. Interest rate is fixed at 7.0%
 for the term of the note.                                               $2,000,000            $2,000,000
                                                                         ==========            ==========
</TABLE>

11.    EMPLOYEE BENEFIT PLANS

       .     Stock Options
             -------------

                The Corporation has stock option award arrangements which
provide for the granting of options to acquire common stock to directors and
key employees. Option prices are equal to or greater than the estimated fair
market value of the common stock at the date of the grant. Options are
generally exercisable immediately after the date of the grant.

                                      17

<PAGE>

                  A summary of the Corporation's stock options as of December
31, 2001 and 2000 and changes during the years ended on those dates is presented
below:

<TABLE>
<CAPTION>
                                                      2001                2000
                                                ------------------  ------------------
                                                          Weighted            Weighted
                                                           Average             Average
                                                          Exercise            Exercise
                                                 Shares     Price    Shares     Price
                                                --------   -------  --------   -------
<S>                                             <C>         <C>     <C>         <C>

Outstanding at the beginning of the year        195,828     $15.18  171,799     $15.09
Granted                                           4,307      17.00   29,000      15.62
Exercised                                       (29,398)     14.80     (211)     14.80
Forfeited                                       (14,052)     14.80   (4,760)     14.80
                                                -------             -------
Outstanding at end of year                      156,685      15.26  195,828      15.18
                                                =======             =======
Options exercisable at year-end                 156,685     $15.26  195,828     $15.18
                                                =======             =======
Weighted average fair value of options
 granted during the year                                     $7.76               $7.83
</TABLE>

                  The following table summarizes information about stock options
outstanding at December 31, 2001:

               Options Outstanding and Exercisable
            ----------------------------------------
                                     Weighted-
                                      Average      Weighted-
                                     Remaining      Average
    Exercise            Number          Life        Exercise
   Price Range       Outstanding      (Years)        Price
   -----------       -----------      -------        -----
$ 9.87 to $14.00         1,013          2.96        $ 9.87
$14.80 to $15.24       123,147          3.68        $14.83
$15.75 to $17.00        32,525          7.06        $16.17

                  The fair value of each option is estimated on the date of the
grant using Black-Scholes option pricing model. The Black-Scholes option pricing
model was originally developed for use in estimating the fair value of traded
options, which have different characteristics from the Corporation's employee
stock options. The model is also sensitive to changes in the subjective
assumptions, which can materially affect the fair value estimate. As a result,
management believes the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.

                  The following weighted average assumptions were used for the
years ended December 31, 2001 and 2000:

                                        2000                  2001
                                       ------                ------
Dividend yield                            .00%                  .00%
Expected volatility                     20.00%                20.00%
Risk-free interest rate                  5.106%                5.967%
Expected lives (in years)                5                     5

                                      18

<PAGE>

                  For purpose of pro forma disclosures, the estimated minimum
value of the options is amortized to expense over the options' vesting period.
Note that the effects of applying SFAS No. 123 for pro forma disclosure in the
current year are not necessarily representative of the effects on pro forma net
income for future years.

                  Options under the Plans are granted with an exercise price
equal to the fair value of the shares of the date of grant. As allowed by SFAS
No. 123, the Corporation has elected to continue applying Accounting Principles
Board Opinion No. 25. Accordingly, no compensation cost has been recognized for
the Plans. Had compensation cost for the Plans been determined consistent with
SFAS No. 123, the Corporation's net income and earnings per share on a pro forma
basis in 2001 and 2000 would have been as set out below follows:

                                                  2001                  2000
                                                --------              --------
Net income:
  As reported                                   $729,878               $564,844
  Pro forma                                      709,361                434,395
Basic net income per share:
  As reported                                      $1.03                   $.82
  Pro forma                                         1.00                    .63
Diluted net income per share:
  As reported                                      $1.01                   $.80
  Pro forma                                          .98                    .62

             Profit Sharing Retirement Savings Plan
             --------------------------------------

                  The Corporation has established a defined contribution plan
covering employees meeting certain age and service eligibility requirements. The
plan provides for cash deferrals qualifying under Section 401(k). Matching
contributions made by the Corporation totaled $54,842 and $42,068 for the years
ended December 31, 2001 and 2000, respectively.

             Deferred Compensation
             ---------------------

                  The Bank has entered into deferred compensation agreements
with two of its executive officers. Under the agreements, the Bank is obligated
to provide for each such officer or his beneficiaries, during a period of
fifteen years after the employee's death, disability or retirement, annual
benefits ranging from $90,000 to $200,000. The estimated present value of future
benefits to be paid is being accrued over the period from the effective date of
the agreements until the full eligibility dates of the participants. The expense
incurred for this plan for the years ended December 31, 2001 and 2000 was
$121,980 and $30,495, respectively. The Bank, is the beneficiary of life
insurance policies, with an aggregate cash surrender value of $3,500,335 at
December 31, 2001, that was purchased as a method of partially financing
benefits under this plan.

12.    CONCENTRATIONS OF CREDIT RISK

         Real estate mortgages comprise $71,961,877 and $70,593,670 of the
total loan portfolio at December 31, 2001 and 2000, respectively. All real
estate mortgage loans are collateralized by real property and/or other assets.

                                      19

<PAGE>

13.    CONTINGENT LIABILITIES

         The Corporation and its subsidiary at times, and in the ordinary
course of business, are subject to legal actions. Management does not believe
the outcome of such matters will have a material adverse effect on the financial
condition, results of operations, or cash flows of the Corporation.

14.    REGULATORY MATTERS

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

         Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 2001, the capital
levels of the Corporation and the Bank exceed all minimum capital adequacy
requirements to which they are subject.

         The Corporation's and the Bank's actual capital amounts and ratios
are also presented in the table: (in thousands)

<TABLE>
<CAPTION>
                                                                                                         To Be Well
                                                                                                       Capitalized Under
                                                                            For Capital                Prompt Corrective
                                                      Actual              Adequacy Purposes            Action Provisions
                                                  -------------        ----------------------        ---------------------
                                                                       Minimum       Required        Minimum       Required
                                                  Amount  Ratio         Amount         Ratio          Amount         Ratio
                                                  ------  -----        -------       --------        -------       --------
<S>                                               <C>     <C>          <C>             <C>           <C>             <C>
As of December 31, 2001:
  Total Capital (to risk-weighted total assets)
    Harbor Bankshares Corporation                $10,984   9.71%       $9,043          8.0%          $11,308         10.0%
    Harbor Bank of Maryland                       12,936  11.44%        9,043          8.0%           11,304         10.0%

  Tier 1 Capital (to risk weighted assets)
    Harbor Bankshares Corporation                 10,025   8.87%        4,522          4.0%            6,782          6.0%
    Harbor Bank of Maryland                       11,997  10.61%        4,522          4.0%            6,783          6.0%

  Tier 1 Capital (to average assets)
    Harbor Bankshares Corporation                 10,025   5.13%        7,823          4.0%            9,775          5.0%
    Harbor Bank of Maryland                       11,997   6.13%        7,823          4.0%            9,779          5.0%
</TABLE>

                                      20

<PAGE>

<TABLE>
<CAPTION>
                                                                                                         To Be Well
                                                                                                       Capitalized Under
                                                                            For Capital                Prompt Corrective
                                                      Actual              Adequacy Purposes            Action Provisions
                                                  -------------        ----------------------        ---------------------
                                                                       Minimum       Required        Minimum       Required
                                                  Amount  Ratio         Amount         Ratio          Amount         Ratio
                                                  ------  -----        -------       --------        -------       --------
<S>                                               <C>       <C>        <C>             <C>           <C>             <C>
As of December 31, 2000:
  Total Capital (to risk-weighted total assets)
    Harbor Bankshares Corporation                 $ 9,212   7.81%      $9,269          8.0%          $11,691         10.0%
    Harbor Bank of Maryland                        11,116   9.34%       9,269          8.0%           11,586         10.0%

  Tier 1 Capital (to risk weighted assets)
    Harbor Bankshares Corporation                   8,479   7.13%       4,634          4.0%            7,043          6.0%
    Harbor Bank of Maryland                        10,383   8.73%       4,634          4.0%            6,952          6.0%

  Tier 1 Capital (to average assets)\
    Harbor Bankshares Corporation                   8,479    4.9%       6,996          4.0%            8,699          5.0%
    Harbor Bank of Maryland                        10,383    6.0%       6,996          4.0             8,745          5.0%
</TABLE>

         The ability of the Corporation to pay dividends is limited by the
level of dividends which can be paid by the Bank. The ability of the Bank to pay
dividends is limited by the provisions of Maryland law, which requires the
maintenance of a capital surplus account equal to the par value of the
outstanding common stock.

         The Bank may make dividend distributions to the Corporation up to
100% of its net income in the calendar year. At December 31, 2001, the total
allowable dividend distributions was $823,000.

15.    EARNINGS PER SHARE

         Basic and diluted net income per common share calculations for the
years ended December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                               2001               2000
                                                                             --------            --------
<S>                                                                          <C>                 <C>
BASIC:
  Net income                                                                 $729,878            $564,844
                                                                             --------            --------

  Average common shares outstanding                                           707,217             689,788
                                                                             --------            --------

  Net income per common share - basic                                         $1.03                $.82
                                                                              =====                ====

DILUTED:
  Net income                                                                 $729,878            $564,844
                                                                             --------            --------

  Average common shares outstanding                                           707,217             689,788

  Stock option adjustment                                                      19,690              13,286
                                                                             --------            --------

  Average common shares outstanding - diluted                                 726,907             703,074
                                                                             --------            --------

  Net income per common share - diluted                                       $1.00                $.80
                                                                              =====                ====
</TABLE>

                                      21

<PAGE>

         Basic net income per common share is calculated by dividing net
income by the weighted-average number of common shares outstanding for the
period.

         Diluted net income per common shares takes into consideration the
pro forma dilution assuming the Corporation's outstanding in-the-money stock
options were converted or exercised into common shares. The average price of the
Corporation's common stock for the period is used to determine the dilutive
effect of outstanding stock options.

16.    COMPREHENSIVE INCOME

         The following table summarizes the related tax effect of unrealized
gains (losses) on securities available-for-sale, with the net amount included in
"Accumulated Other Comprehensive Income (Loss)", as shown in the Consolidated
Statement of Changes in Stockholders' Equity:

<TABLE>
<CAPTION>
                                                       2001                                2000
                                         ---------------------------------   ------------------------------------
                                                         Tax                                 Tax
                                           Pretax     (Expense)      Net       Pretax     (Expense)        Net
                                           Amount      Benefit     Amount      Amount      Benefit       Amount
                                         ----------   ---------   --------   ----------  -----------   ----------
<S>                                      <C>          <C>         <C>         <C>        <C>           <C>

Unrealized gains (losses) on securities
  available-for-sale:
  Unrealized holding gains (losses)
   arising during the year               $1,378,226   $(468,597)  $909,629   $3,354,916  $(1,140,672)  $2,214,244
  Reclassification adjustment for
   (gains) losses included in
   net income                              (197,072)     67,004   (130,068)        -            -            -
                                         ----------   ---------   --------   ----------  -----------   ----------
Total                                    $1,181,154   $(401,593)  $779,561   $3,354,916  $(1,140,672)  $2,214,244
                                         ==========   =========   ========   ==========  ===========   ==========
</TABLE>

17.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

         In the normal course of business, the Corporation has various
outstanding credit commitments which are properly not reflected in the financial
statements. These commitments are made to satisfy the financing needs of the
Corporation's clients. The associated credit risk is controlled by subjecting
such activity to the same credit and quality controls as exist for the
Corporation's lending and investing activities. The commitments involve diverse
business and consumer customers and are generally well collateralized.
Management does not anticipate that losses, if any, which may occur as a result
of these commitments would materially affect the stockholders' equity of the
Corporation. Since a portion of the commitments have some likelihood of not
being exercised, the amounts do not necessarily represent future cash
requirements.

         Loan and credit line commitments, totaled $25,323,000 at December
31, 2001 and $20,863,000 at December 31, 2000. These commitments are contingent
upon continuing customer compliance with the terms of the agreement.

         Commercial letters of credit, totaling $760,361 at December 31,
2001 and $293,353 at December 31, 2000, are obligations to make payments under
certain conditions to meet contingencies related to customers' contractual
agreements. They are primarily used to guarantee a customer's contractual and/or
financial performance, and are seldom exercised.

                                      22

<PAGE>

18.    FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107, Disclosure About Fair Value of Financial Instruments
requires the Corporation to disclose fair value information about financial
instruments for which it is practicable to estimate, whether or not such fair
values are reflected in the consolidated balance sheets. Estimated fair value
amounts have been determined using available market information and other
valuation methodologies. However, considerable judgment is required to interpret
market data in developing the estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amount that could be
realized in a current market exchange. The use of different market assumptions
and estimation methodologies may have a material effect on the estimated fair
value amounts.

             Cash and Due from Banks and Federal Funds Sold
             ----------------------------------------------

                  The carrying amount approximated fair value.

             Interest-Bearing Deposits in Other Banks
             ----------------------------------------

                  Due to their short-term nature, the carrying amount
approximated fair value.

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

                  The fair values of securities are based upon quoted market
prices when available. If quoted market prices are not available, fair values
are based upon quoted market prices of comparable instruments.

             Loans
             -----

                  The fair values of variable-rate loans and fixed-rate loans
that reprice within one year, with no significant credit risk, are based upon
their carrying amounts. The fair values of all other loans are estimated using
discounted cash flow analysis, which utilizes interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. The
reserve for possible loan losses is allocated to the various components of the
loan portfolio in determining the fair value.

             Stock in FHLB
             -------------

                  Due to its restrictive nature, the fair value of stock in FHLB
approximates its carrying value.

             Accrued Interest Receivable
             ---------------------------

                  The carrying amount reported in the consolidated balance
sheets is a reasonable estimate of fair value.

             Cash Surrender Value of Life Insurance
             --------------------------------------

                  The carrying amount reported in the consolidated balance
sheets represents cash to be received on the surrender value of life insurance
policies and is a reasonable estimate of value.

                                      23

<PAGE>

             Deposits
             --------

                  The fair value for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date. The carrying amounts for
variable rate deposits and fixed-rate certificates of deposit that reprice
within one year approximates their fair values at the reporting date. Fair
values for longer-term fixed-rate certificates of deposit are estimated using
discounted cash flow analysis that applies interest rates currently being
offered on certificates.

             Accrued Interest Payable
             ------------------------

                  Accrued interest payable includes interest expensed but not
yet paid for deposits and notes payable. The carrying amount approximates its
fair value.

             Short-Term Borrowings
             ---------------------

                  The carrying amounts of short-term borrowings approximate
their fair values.

             Long-Term Debt
             --------------

                  Long-term debt is discounted on a cash flow approach based on
market rates as of December 31, 2001 and 2000.

             Off-Balance Sheet Financial Instruments
             ---------------------------------------

                  The fair value of loan commitments and letters of credit was
estimated based upon the estimated amount of unamortized fees collected or paid
incident to granting or receiving the commitment.

                  The carrying values and estimated fair values of the
Corporation's financial assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                      December 31, 2001             December 31, 2000
                                    ------------------------      ------------------------
                                                  Estimated                     Estimated
                                      Carrying       Fair           Carrying       Fair
                                       Value        Value            Value        Value
                                    -----------  ----------       -----------  -----------
<S>                                 <C>          <C>              <C>          <C>
Financial assets:
  Cash and due from banks           $ 6,992,077  $ 6,992,077      $ 5,223,521  $ 5,223,521
  Federal funds sold                 10,553,426   10,553,426             -            -
  Interest bearing deposits
    in other banks                    1,161,517    1,161,517          641,354      641,354
  Investment securities              50,996,576   51,053,540       55,270,947   55,270,947
  Loans, net of reserves            105,847,325  103,435,500      111,665,245  110,573,525
  Stock in FHLB                         600,000      600,000          600,000      600,000
  Accrued interest receivable         1,077,140    1,077,140        1,772,029    1,772,029
  Cash surrender of life insurance    3,500,335    3,500,335        3,312,067    3,312,067

Financial liabilities:
  Deposits                          171,531,188  171,290,300      169,281,724  167,538,916
  Short-term borrowings                    -            -           2,000,000    2,000,000
  Long-term debt                      2,000,000    1,975,200        2,000,000    1,952,150
  Accrued interest payable              538,383      538,383          741,610      741,610
</TABLE>

                                      24

<PAGE>

             Off-Balance Sheet Financial Assets
             ----------------------------------

                                       2001                      2000
                              -----------------------   -----------------------
                               Estimated    Estimated    Estimated    Estimated
                                 Amount    Fair Value      Amount    Fair Value
                               ---------   ----------    ---------   ----------

Commitments to extend credit  $15,586,000    $(32,500)  $10,336,000    $(21,500)
Other unused commitments        9,747,000     (12,500)   10,527,000     (14,250)
Commercial letters of credit      760,361         -         293,353         -

19.    SUBSEQUENT EVENT

         On January 17, 2002, the Bank entered into an agreement to sublet a
branch site from another commercial bank and purchase the related deposit
liabilities totaling approximately $24 million. Upon regulatory approval the
transaction is expected to be consumated in the second quarter of 2002. The Bank
will pay a deposit premium of 4% which may be reduced based on the amount of
deposits retained (as defined) by the Bank.

20.    PARENT COMPANY ONLY FINANCIAL STATEMENTS

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                            2001                   2000
                                                                          -----------            -----------
<S>                                                                       <C>                    <C>
Assets:
  Investment in bank subsidiary                                           $14,193,248            $12,150,487
  Due from bank subsidiary                                                     48,131                 95,590
                                                                          -----------            -----------

      Total assets                                                        $14,241,379            $12,246,077
                                                                          ===========            ===========
Liabilities -
  Long-term debt                                                          $ 2,000,000            $ 2,000,000

Stockholders' equity                                                       12,241,379             10,246,077
                                                                          -----------            -----------
      Total liabilities and stockholders' equity                          $14,241,379            $12,246,077
                                                                          ===========            ===========
</TABLE>

                          CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                            2001                   2000
                                                                          -----------            -----------
<S>                                                                       <C>                    <C>

Dividend from subsidiary                                                   $141,556              $ 2,263,702
Interest and other expenses                                                 141,556                 (281,155)
Income tax benefit                                                           48,131                   95,590
Equity in undistributed income of subsidiary                                681,747               (1,513,293)
                                                                           --------              -----------

Net income                                                                 $729,878              $   564,844
                                                                           ========              ===========
</TABLE>

                                      25

<PAGE>

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                            2001                   2000
                                                                          -----------            -----------
<S>                                                                       <C>                    <C>

Operating activities:
   Net income                                                               $ 729,878            $   564,844
   Adjustment to reconcile net income to net
     cash provided by operating activities
   Change in other assets and liabilities, net                                 47,459                  5,029
   Equity in undistributed income of subsidiary                              (681,747)             1,513,293
                                                                          -----------            -----------

         Net cash provided by operating activities                             95,590              2,083,166
                                                                          -----------            -----------

Investing activities - Investment in subsidiary                              (581,453)              (103,742)
                                                                          -----------            -----------

Financing activities:
   Proceeds from long-term debt                                                -                   2,000,000
   Repayment of long-term debt                                                 -                  (3,982,547)
   Proceeds from sale of common stock                                         485,863                  3,123
   Payments of cash dividends                                                  -                      -
                                                                          -----------            -----------

        Net cash used in financing activities                                 485,863             (1,979,424)
                                                                          -----------            -----------

Change in cash and cash equivalents                                             -                     -

Cash and cash equivalents at beginning of year                                  -                     -
                                                                          -----------            -----------

Cash and cash equivalents at end of year                                  $     -                $    -
                                                                          ===========            ===========
</TABLE>

                                      26

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                          Harbor Bankshares Corporation

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

                  Table of Contents: Corporate Financial Review
                  -----------------  --------------------------

CONSOLIDATED FIVE-YEARS SELECTED FINANCIAL DATA............................- 1 -

OVERVIEW...................................................................- 2 -

NET INTEREST INCOME........................................................- 2 -

PROVISION FOR LOAN LOSSES AND ASSET QUALITY................................- 3 -

           Non-Performing Assets...........................................- 3 -


NON INTEREST INCOME........................................................- 4 -
           Non-Interest Income Summary

NON INTEREST EXPENSES......................................................- 5 -
           Non-Interest Expenses Summary

APPLICABLE INCOME TAXES....................................................- 5 -

CREDIT RISK ANALYSIS.......................................................- 5 -

ASSET AND LIABILITY MANAGEMENT.............................................- 6 -

         Introduction......................................................- 6 -

         Liquidity.........................................................- 6 -

         Interest Rate Sensitivity.........................................- 7 -

LONG AND SHORT TERM BORROWINGS.............................................- 7 -

CAPITAL RESOURCES..........................................................- 8 -

CHANGES IN FINANCIAL POSITION..............................................- 8 -

                                    - i -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------
OTHER INFORMATION..........................................................- 8 -
         Recent Account Pronouncements.....................................- 9 -


SUPPLEMENT TO 2001 ANNUAL REPORT TO STOCKHOLDERS..........................- 10 -
         BOARD OF DIRECTORS...............................................- 10 -
         EXECUTIVE OFFICERS...............................................- 10 -
         ADVISORY BOARD...................................................- 10 -

SHAREHOLDERS INFORMATION..................................................- 11 -

         MARKET SUMMARY OF STOCK..........................................- 11 -

         CASH DIVIDENDS...................................................- 11 -

         TRANSFER AGENT AND REGISTRAR.....................................- 11 -

         SEC FORM 10-KSB..................................................- 11 -

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

Table of Exhibits
-----------------

         A    Consolidated Three-years Statement: Average Balances,
              Yields/Rates, Income and Expense at December 31 for each of the
              three years from 1999 through 2001

         B    Summary of Loan Loss Experience and Allocation of Allowance for
              Loan Losses

         C    Interest Variance Analysis: A summary of the changes in interest
              earned and interest paid resulting from changes in volume and
              changes in rates

         D    Data and information at December 31, 2001 as to: 1) Maturities of
              Certificates of Deposit of $100,000 or more, 2) the Corporation's
              loan portfolio by type of loan, and 3) a Summary of the
              Corporation's Investment Securities portfolio as of that date.

         E    Consolidated Quarterly Results of Operations, Market Prices and
              Dividends

                                  - ii -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                CONSOLIDATED FIVE-YEARS SELECTED FINANCIAL DATA
                HARBOR BANKSHARES CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
(In thousands, except per share data)
                                                                   Year ended December 31,
                                                 2001          2000            1999           1998           1997
                                                 ----          ----            ----           ----           ----
<S>                                          <C>           <C>             <C>           <C>            <C>
OPERATING DATA
--------------
Interest Income                               $13,609       $13,665         $12,342       $ 11,083       $ 10,369
Interest Expense                                5,973         6,199           5,718          5,143          4,797
                                                -----         -----          ------        -------        -------
Net Interest Income                             7,636         7,466           6,624          5,940          5,572
Provision for Loan Losses                         400           346             803            213             72

Other Operating Income                          2,329         1,841           1,470          1,302          1,441
 Other Operating Expenses                       8,526         8,109           7,284          5,984          5,840
                                              -------       -------          ------        -------        -------
Income Before Taxes                             1,039           852               7          1,045          1,101
Income Taxes                                      309           287               6            317            401
                                             --------       -------        --------        -------        -------
Net Income                                  $     730       $   565        $      1        $   728        $   700
                                             ========       =======        ========        =======        =======
PER SHARE DATA
--------------
Net Income - Basic                       $       1.03       $   .82        $      -        $  1.06        $  1.07
Net Income - Diluted                             1.01           .80               -             .-             99
Dividend                                         -               -              .25           . 25            .20
Book Value                               $      16.95       $ 14.85        $  10.82        $ 15.54        $ 15.07
Book Value excluding unrealized                 17.36         16.40           15.58          15.83          15.07
securities gains (Losses)

BALANCE SHEET DATA
------------------
Total Assets                                 $186,586      $184,517        $177,618       $184,723       $135,874
Deposits                                      171,531       169,282         165,541        167,482        118,935
Total Net Loans                               105,847       111,665         101,823         85,097         77,616
Total Stockholder's Equity                     12,241        10,246           7,464         10,669         10,301
Return on Average Assets                         .37%          .32%               -          . 50%           .53%
Return on Average Equity                         6.2%          7.0%               -           6.9%           7.3%
Tier 1 Regulatory Capital to Assets              5.4%          4.6%            4.3%           3.9%           4.9%
Dividend Payout Ratio %                            -              -          117.0%          23.4%          18.1%
</TABLE>

                                    - 1 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

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

                           CORPORATE FINANCIAL REVIEW
                           --------------------------

OVERVIEW - 2001 COMPARED TO 2000
--------------------------------

         Harbor Bankshares Corporation (the "Corporation") improved its
performance for the year 2001, when compared to the prior year. Earnings for the
year were $730 thousand compared to $565 thousand earned during 2000, an
increase of $165 thousand or 29.2 percent.

         The Corporation's subsidiary, The Harbor Bank of Maryland (The Bank),
achieved earnings of $823 thousand compared to $750 thousand from the prior
year. The return on average assets for the Bank was .42%.

         Return on average assets (ROAA) and average equity (ROAE) for the
Corporation were .37% and 6.24% respectively.


NET-INTEREST INCOME
-------------------

         Net interest income is the difference between interest income and
related fees on earning assets and the interest expense incurred on deposits and
other borrowings. Net interest income continued to be the Corporation's main
source of earnings. Net interest income increased by $170 thousand or 2.3
percent. The slight increase reflects the down turn in interest rates during
2001 and its adverse effect on earnings. The discount and prime interest rates
dropped 4.75 percent, during the year, beginning January, 2001.

         Total interest income decreased by $56 thousand to $13.6 million for
2001 when compared to the $13.7 million earned during 2000. As stated above,
lower interest rates resulted in the almost flat interest earnings for the year.

         Total interest expense also decreased by $226 thousand or 3.6% to $6.0
million in 2001 from $6.2 million in 2000. Lower interest rates resulted in a
lower interest expense due to the repricing of liabilities through out the year.

         Net interest margin for 2001 was 4.36% compared to 5.00% for 2000.

         The table attached as Exhibit A compares the consolidated average
balances, interest income, interest expense and yields for a five-year period.

                                   - 2 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

PROVISION FOR LOAN LOSSES AND ASSET QUALITY
-------------------------------------------

         For the year ended December 31, 2001, we recorded a $400 thousand
provision for loan losses, compared to $346 thousand for the year ended December
31, 2000. Gross charge-offs totaled $246 thousand for the year ended December
31, 2001, as compared to the prior year total of $404 thousand. These
charge-offs in 2001 primarily relate to credit cards, consumer and mortgage
loans. The lower provision in 2001 reflects:

         (1)      net charge-offs for the year ended December 31, 2001 of $173
                  thousand compared to net charge-offs of $292 thousand for the
                  year ended December 31, 2000. The lower charge-offs were a
                  result of the management collection's efforts and emphasis on
                  quality loans.

         (2)      a decline in the overall loan portfolio of $5.6 million,
                  mainly in the commercial loan category.

         The allowance for loan losses as of December 31, 2001 was .89% of total
loans and .65% at the end of the comparable 2000 period. The increase in the
coverage ratio reflects the lower charge-off levels and a higher provision for
the year 2001.

         Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and its underlying collateral, the mix
of loans within the portfolio, delinquency trends, economic conditions, current
and prospective trends in real estate values, and other relevant factors.

         The table below shows the non-performing assets for a five-year period:


Non-Performing Assets (in thousands except percentages)

<TABLE>
<CAPTION>
                                                 2001          2000            1999           1998           1997
                                                 ----          ----            ----           ----           ----
<S>                                            <C>         <C>            <C>            <C>             <C>
Non-accrual Loans                               $ 620       $   265        $  1,003       $  1,107        $   770
Accruing Loans past due 90 days
  or more                                         135             6              47            547          1,948
Foreclosed Real Estate                             14            37             217            638           none
Total Non-performing assets and
  past due Loans                                  769           308           1,267          2,292          2,718
Total Non-performing Assets and
  past due Loans to Year-End Assets              .41%          .17%            .71%           1.2%           2.0%
Total Non-performing Loans to
  Year-End Loans                                 .72%          .24%            1.0%           1.9%           3.5%
</TABLE>

                                   - 3 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

         Our allowance for loan loss methodology is a loan classification based
system. We base the required reserve on a percentage of the loan balance for
each type of loan and classification level. Watch, special mention, substandard
and doubtful loans are reserved at 5.0%, 10.0%, 20.0% and 50.0% respectively.
Reserve percentages are based on each individual lending program, its loss
history and underwriting characteristics including loan to value, credit score,
debt coverage, collateral, and capacity to service debt. This analysis is used
to validate the loan loss reserve matrix as well as assist in establishing
overall lending direction.

         While management considers the Corporation's allowance for loan losses
to be adequate based on information currently available, future adjustments to
the allowance may be necessary due to changes in economic conditions,
management's assumptions as to future delinquencies or loss rates, and
management's intent with regard to asset disposition options. In addition, the
Corporation's allowance for loan losses is periodically reviewed by the bank
regulatory agencies as an integral part of their examination process. Based on
their review, the agencies may require the Corporation to adjust the allowance.

         The allocation of the allowance for loan losses is detailed in Exhibit
B.


NON-INTEREST INCOME
-------------------

         Non-interest income increased by $488 thousand or 26.5% to $2.3 million
in 2001. ATM fees were $240 thousand for 2001, representing 10.4% of other
operating income. Included in the 2001 non-interest income were $45 thousand of
gains on sale of loans, a $229 thousand award from CDFI (Treasury Department),
$27 thousand of servicing fees and a gain on sale of securities of $197
thousand. The 2000 non-interest income reflects a $11 thousand gain on sale of
loans, a $127 thousand award from the Treasury Department, and $46 thousand of
servicing fees.

Non-Interest Income Summary (in thousands)

<TABLE>
<CAPTION>
                                                 2001          2000            1999           1998           1997
                                                 ----                          ----           ----           ----
<S>                                           <C>           <C>            <C>               <C>            <C>
Service charges on deposit accounts            $  965        $1,069          $  845         $  609         $  610
ATM fees                                          166           147             155            336            299
Awards & Grants                                   229           127              --             --             --
Gain on sale of Real Estate                        --            --             112             --             --
Gain on sale of loans                              45            11               7             --             42
Gain on sale of securities                        197            --              --             26            212
Servicing Fees                                     27            46              32             42             90
Other non-interest income                         604           441             319            289            188
                                               ------           ---          ------           ----           ----
Total non-interest income                      $2,329        $1,841          $1,470         $1,302         $1,441
                                               ======        ======          ======         ======         ======
</TABLE>

                                   - 4 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------


NON-INTEREST EXPENSES
---------------------

         Non-interest expenses of $8.5 million in 2001, increased by $417
thousand or 5.1% when compared to $8.1 million in 2000. Salaries and benefits of
$4.0 million in 2001 reflect an increase of $367 thousand or 10.1% when compared
to the prior year salaries and benefits cost. Equipment expense decreased by
$148 thousand or 18.5% due to less cost associated with purchases during 2001.
Professional fees decreased by $189 thousand or 48.7% due to less consulting
fees related to development of new products and services. FDIC Insurance
increased by $58 thousand due to additional assessments in relation to the
Corporation subsidiary, The Harbor Bank of Maryland. Other expenses increased by
$234 thousand or 17.5% reflecting general expense increases. Goodwill
amortization of $331 thousand in 2001 remained the same as 2000.

Non-Interest Expenses Summary (In thousands)

<TABLE>
<CAPTION>
                                                 2001          2000            1999           1998           1997
                                                 ----                          ----           ----           ----
<S>                                         <C>            <C>             <C>            <C>            <C>
Salaries and employee benefits                $ 3,989       $ 3,622         $ 3,220        $ 2,672        $ 2,611
Occupancy expense, net                            778           809             831            737            678
Equipment Expenses                                654           802             728            408            386
Data Processing Fees                              918           791             679            604            565
Professional Fees                                 199           388             199            117            131
Goodwill Amortization                             331           331             331            331            331
FDIC Insurance                                     87            29              44             37             36
Other Non-Interest Expense                      1,571         1,337           1,252          1,078          1,102
                                              -------         -----           -----          -----          -----
Total Non-Interest Expense                    $ 8,527       $ 8,109         $ 7,284        $ 5,984        $ 5,840
                                              =======       =======         =======        =======        =======
</TABLE>

APPLICABLE INCOME TAXES
-----------------------

         Applicable income taxes includes current and deferred portions which
are detailed in Note 7 of the audited consolidated financial statements. Taxes
for 2001 were $309 thousand compared to $287 thousand for 2000. The effective
tax rate for the year ended December 31,2001 was 29.7% compared to 33.7% for the
year ended December 31, 2000. The decrease in the effective rate was caused by
an increase in the cash surrender value of officers life insurance, which is
non-taxable.

CREDIT RISK ANALYSIS
--------------------

         The Corporation, through its subsidiary, The Harbor Bank of Maryland,
has in place credit policies and procedures designed to control and monitor
credit risk. Credit analysis and loan review functions have provided a check and
balance system for assessing initial and ongoing risk associated with the
lending process.

                                   - 5 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

         Credit risk is mitigated through portfolio diversification, limiting
exposure to any single industry or customer, requiring collateral and employing
standard lending policies and underwriting criteria across the Corporation. Note
2, to the consolidated financial statements describes the Corporation's
accounting policies related to nonperforming loans and charge-offs and describes
the methodologies used to develop the allowance, including both the allocated
and unallocated components. The Corporation's policies are consistent with
regulatory standards.

ASSET AND LIABILITY MANAGEMENT
------------------------------

         INTRODUCTION
         ------------

         The Investment Committee of the Corporation reviews policies regarding
the sources and uses of funds, maturity distribution, and associated interest
rate sensitivities. This effort is aimed at minimizing risks associated with
fluctuating interest rates, as well as maintaining sufficient liquidity.

         LIQUIDITY
         ---------

         Liquidity describes the ability of the Corporation to meet financial
obligations, including lending commitments and contingencies, that arise during
the normal course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of the customers of the
Corporation, as well as to meet current and planned expenditures. The
Corporation through the Bank, is required to maintain adequate sources of cash
in order to meet its financial commitments in an organized manner without
incurring substantial losses. These commitments relate principally to changes in
the Bank's deposit base through withdrawals and changes in funds required to
meet normal and seasonal loan demands. The Bank, and thereby the Corporation,
derives liquidity through the maturity distribution of the investment portfolio,
loan repayments and income from earning assets. The Bank maintains a portion of
its investment portfolio as a liquidity reserve, which can be converted to cash
on an immediate basis.

         The Bank has also established secured lines of credit with the FHLB as
an additional source of liquidity. Collateral must be pledged to the FHLB before
advances can be obtained. At December 31, 2001, the Corporation had sufficient
collateral in order to borrow up to an aggregate of $18.6 million from the FHLB
under the established lines of credit, if necessary. Liquidity is also provided
through the Corporation's portfolio of liquid assets, consisting of cash and due
from banks, interest-bearing deposits in other banks and investment securities
available for sale. Such assets totaled $69.7 million or 37.4% of total assets
at December 31, 2001.

         The Corporation derives its cash from a combination of operating
activities, investing activities and financing activities as disclosed in the
consolidated statement of cash flows. Cash flows from operating activities
consists of interest income collected on loans and investments, interest expense
paid on deposits and other borrowings, other income collected such as cash
received relating to service charges, and cash payments for other operating
expenses including income taxes.

                                   - 6 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

Cash flows from investing activities include the purchase, sale and maturity of
investments and interest bearing deposits in other banks, the net decrease in
the level of loans, and purchases of premises and equipment. Cash flows from
financing activities consist of movements in the level of deposits and other
borrowings, and proceeds from the issuance of stock.

         For the year ended December 31, 2001, net cash provided by operating
activities totaled $1.6 million. Net cash provided by investing activities
totaled $9.9 million resulting primarily from the proceeds of called investment
securities totaling $56.0 million, proceeds from sale of securities of $22.3
million, purchase of investment securities of $71.2 million and a net decrease
in loans of $5.6 million. Net cash provided by financing activities totaled $735
thousand. Proceeds from the sales of common stock totaled $ 486 thousand.

         INTEREST RATE SENSITIVITY
         -------------------------

         Interest rate sensitivity refers to the degree that earnings will be
affected by changes in the general level of interest rates. Interest sensitive
assets are typically loans which have interest rates related to the prime
interest rate or other type of index. Interest sensitive liabilities have
interest rates, which likewise vary based upon market changes. Reducing the net
interest rate sensitivity of the Corporation's balance sheet is the goal of the
asset/liability management process.

         One measure of interest rate sensitivity is the difference between
interest sensitive assets and interest sensitive liabilities, called the
"interest sensitivity gap." The following table shows an analysis of the
Corporation's cumulative interest sensitivity gap position.

         Cumulative Interest Sensitive Gap

                                                  1 year
                                                  ------
Interest sensitive assets                        $ 81.6
Interest sensitive liabilities                     92.1
                                                  ------
Interest sensitivity gap                        ($ 10.5)
                                                ========
Gap to total assets                               (5.6%)
                                                  ------

Exhibit C, "Interest Variance Analysis", sets forth, for the period indicated, a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates.

LONG AND SHORT TERM BORROWINGS
------------------------------

         As of December 31, 2001, the Corporation had a $2.0 million long term
borrowing arrangement with The National Investment Community Fund (NCIF) at a
fixed rate of 7.0%, payable July 1, 2012. The interest paid on the debt for
2001, totaled $142 thousand. There were no short-term borrowings as of December
31, 2001.

                                   - 7 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

CAPITAL RESOURCES
-----------------

         Stockholders' equity increased by $2.0 million or 19.5% to $12.2
million. This increase was mainly due to net income of $730 thousand, proceeds
from the sale of common stock of $486 thousand and the unrealized loss of
securities held for sale, net of income taxes, which for the year ended December
31, 2001 was $290 thousand compared to a loss of $1.0 million for 2000. This
loss is a mark to market value of these securities. Losses will not be realized
unless the securities are sold. As of year end, the Corporation had sufficient
liquidity to withstand any unusual demand of funds without liquidating these
securities, such as borrowing arrangements with the Federal Home Loan Bank and
Bank of America of $18.6 million and $2.0 million respectively. Stockholders'
equity was 6.6% of total assets as of the year-end. The Tier 1 capital ratio as
of December 31, 2001 was 5.4%, and the risk based capital ratio was 9.7%. The
requirements established by regulators are 4.0% for tier 1 capital and 8.0% for
total risk based capital. The book value of each share of common stock excluding
the unrealized losses on securities held for sale was $17.36 as of December 31,
2001.

         The Tier I capital ratio for the Corporation's subsidiary, The Harbor
Bank of Maryland as of December 31, 2000 was 6.5% and the risk based capital
ratio was 11.4%, both above the established regulatory requirements.

CHANGES IN FINANCIAL POSITION
-----------------------------

         The Corporation through its subsidiary, The Harbor Bank of Maryland,
continued its growth during 2001. Total assets increased by $2.1 million or 1.1
percent.

         Deposits increased from $169.3 million in 2000 to $171.5 million in
2001, an increase of $2.2 million or 1.3%. Net loans decreased to $105.8 million
in 2001 from $111.6 million in 2000, a decrease of $5.8 million or 5.2%.

         The Corporation plans to continue its expansion through marketing
efforts by its Management and Board of Directors.

         Exhibit D presents data and information at December 31, 2001 as to: 1)
Maturities of Certificates of Deposit of $100,000 or more, 2) the Corporation's
loan portfolio by type of loan, and 3) a Summary of the Corporation's Investment
Securities portfolio as of that date.


OTHER INFORMATION
-----------------

     RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging

                                   - 8 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

Activity. SFAS No. 133, as amended by SFAS No. 137 and No. 138, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and measures those
instruments at fair value. SFAS No. 133 was effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133, as
amended, had no impact on the Company's consolidated financial statements as
the Company does not utilize derivatives.

         During June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141) and No. 142 Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 changes the accounting for business combinations, requiring that
all business combinations be accounted for using the purchase method and that
intangible assets be recognized as assets apart from goodwill if they arise
from contractual or other legal rights, or if they are separable or capable of
being separated from the acquired entity and sold, transferred, licensed,
rented or exchanged. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001. SFAS No. 142 specifies the financial accounting
and reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets that have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment.  SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001.

         SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001 be reassessed and the remaining amortization
periods adjusted accordingly. Previously recognized intangible assets deemed to
have indefinite lives shall be tested for impairment. The Company has not fully
assessed the potential impact of the adoption of SFAS No. 142, but believes that
it will not have a material impact on its financial statements.

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of intangible long-lived assets and the associated asset retirement
costs and is effective for the fiscal years beginning after June 15, 2002.
Management does not expect the impact of SFAS No. 143 to be material to the
Company's consolidated financial statements.

         In August 2001, the FASB issued SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 amends SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and establishes a single accounting model for the impairment or
disposal of long-lived assets. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. Management does not expect the impact of
SFAS No. 144 to be material to the Company's consolidated financial statements.

                                   - 9 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                          HARBOR BANKSHARES CORPORATION
                SUPPLEMENT TO 2001 ANNUAL REPORT TO STOCKHOLDERS

BOARD OF DIRECTORS
------------------

Joseph Haskins, Jr.                         Chairman and Chief Executive Officer
James H. DeGraffenreidt, Jr.                Chairman and CEO/WGL Holdings, Inc.
Joe Louis Gladney                           President/Gladney Transportation and
                                               Oil Company
Louis J. Grasmick                           President and CEO/Louis J. Grasmick
                                               Lumber Co., Inc.
Sachinder Gupta                             President/E2CR, Inc.
Nathaniel Higgs, Th.B., D.D.                Pastor/Southern Baptist Church
Delores G. Kelley, Ph.D.                    Senator/Maryland State Senate
Erich March                                 Vice President/William C. March
                                               Funeral Home
John Paterakis                              President and Chief Executive
                                               Officer/H&S Bakery
John D. Ryder                               President/AXS Technologies
Edward St. John                             President and Chief Executive
                                               Officer/MIE Investment Co.
James Scott, Jr.                            Principal/Penan & Scott, P.C.
Walter S. Thomas                            Pastor/New Psalmist Church
Stanley W. Tucker                           President/Meridian Management Group,
                                               Inc.
George F. Vaeth, Jr.                        Architect/George Vaeth Associates,
                                               Inc.


EXECUTIVE OFFICERS
------------------

Joseph Haskins, Jr.                         Chairman and CEO/Corporation and
                                               Bank
John Paterakis                              Chairman, Executive
                                               Committee/Corporation and Bank
Teodoro J. Hernandez                        Treasurer/Corporation - Senior Vice
                                               President and Cashier/Bank
George F. Vaeth, Jr.                        Secretary/Corporation and Bank


ADVISORY BOARD
--------------

Gary L. Attman                              Principal/Attman Properties Company
Henry Baines                                President/Stop, Shop and Save
                                               Supermarkets
Kenneth Banks                               President/Banks Contracting Co.,
                                               Inc.
Robert L. Haynes                            Pastor/New Pleasant Grove Missionary
                                               Baptist Church
Walter W. Hill, Jr.                         Vice President/ECS Technologies,
                                               Inc.
Dr. Derek Lindsey                           Physician and CEO/True Health Care
Joshua Matthews                             President/JCM Control Systems, Inc.
Hassan Murphy                               Attorney/William H. Murphy Jr. and
                                               Associates, P.A.
William Villanueva                          Vice President/M&W Medical Equipment
James Watkins, (Col.)                       President/Watkins Security Agency
Kenneth O. Wilson                           President and Owner/Inner Harbor
                                               Marina

                                  - 10 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

 STOCKHOLDERS INFORMATION
 ------------------------

         MARKET SUMMARY OF STOCK
         -----------------------

         Harbor Bankshares Corporation is traded privately and is not listed by
any exchange. During 2001 and 2000, there was little trading activity in the
stock. The bid and ask prices during 2001 varied from $17.00 to $18.00 per
share. During 2000 the bid and ask price varied from $15.75 to $17.00 per share.
At December 31, 2001 the Corporation had 714 common stockholders of record.


         CASH DIVIDENDS
         --------------

         No dividends were paid during the year 2001. Exhibit E sets forth
"Consolidated Quarterly Results of Operations, Market Prices and Dividends".


         TRANSFER AGENT AND REGISTRAR
         ----------------------------

                  American Stock Transfer and Trust Company
                  40 Wall Street
                  New York, New York 10005
                  (718) 921-8206


         SEC FORM 10-KSB
         ---------------

         The Corporation files an Annual Report on Form 10-KSB with the
Securities and Exchange Commission. A copy of this report will be sent without
charge to any shareholder who submits a request in writing to:

                  Teodoro J. Hernandez, Treasurer
                  Harbor Bankshares Corporation
                  25 West Fayette Street
                  Baltimore, Maryland 21201

This report also includes exhibits, a copy of which the Corporation will furnish
its shareholders upon payment or a reasonable fee.

                                  - 11 -

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                                                                       Exhibit A
                          HARBOR BANKSHARES CORPORATION
                       CONSOLIDATED THREE-YEARS STATEMENT:
                AVERAGE BALANCES, YIELDS/RATES AND INCOME EXPENSE
                             (dollars in thousands)

<TABLE>
<CAPTION>
Year ended December 31,                     Average     2001                          2000                          1999
                                            -------   Yields/    Income   Average   Yields/    Income    Average  Yields/    Income
                                           Balances     Rates   Expense  Balances     Rates   Expense   Balances    Rates   Expense
                                           --------     -----   -------  --------     -----   -------   --------    -----   -------
<S>                                       <C>         <C>       <C>     <C>          <C>     <C>       <C>         <C>     <C>
ASSETS
U.S. Treasury Securities                   $  2,138      4.07%   $   87  $    -         -  %  $   -     $    -         - %  $   -
U.S. Government Agencies                     55,140      6.19     3,411    54,733      6.61     3,616     62,267     6.37     3,966
Interest-Bearing Deposits with Other Banks      998      4.81        48       546      5.68        31        654     5.81        38
FHLB Stock and Other Securities                 652      6.90        45       528      8.14        43        554     7.58        42
Federal Funds Sold                           18,805      3.89       731     2,492      5.73       143      7,881     4.93       389
                                             ------                 ---     -----                 ---      -----                ---
                                             77,733      5.56%    4,322    58,299      6.58%    3,833     71,356     6.21%    4,435
                                             ------               -----    ------               -----     ------              -----
Loans
-----
Commercial Loans                             22,313      9.10     2,032    30,094      9.82     2,958     21,884     9.12     1,996
Real Estate Mortgages                        72,261      8.53     6,161    72,703      8.65     6,288     62,114     8.86     5,503
Consumer Loans                               10,493     10.43     1,094     5,063     11.57       586      3,341    12.21       408
                                             ------               -----     -----                 ---      -----                ---
Loans Net of Unearned Income                105,067      8.84     9,287   107,860      9.11     9,832     87,339     9.05     7,907
                                            -------                       -------               -----     ------              -----
Total Earning Assets                        182,800      7.44%  $13,609   166,159      8.22%  $13,665    158,695     7.78%  $12,342
                                                                =======                       =======                       =======
Allowance for Possible Losses                 (844)                         (724)                          (660)
Other Assets                                 16,283                         9,471                         12,604
                                            -------                        ------                       --------
         TOTAL ASSETS                      $198,239                      $174,906                       $170,639
                                           ========                      ========                       ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Non-Interest Bearing Deposits              $ 21,341       -  %   $  -   $  19,326       -  %  $    -    $ 14,744     -   %  $   -
                                             ------                        ------                         ------
Interest-Bearing Transaction Accounts        18,597       .71       132    15,623       .88       138     32,225     2.85       918
Savings                                      82,907      3.03     2,518    76,169      3.94     3,002     59,349     3.47     2,060
Time - $100,000 or more                      30,482      5.50     1,675    17,098      5.18       885     19,653     5.16     1,014
Other Time                                   29,907      5.00     1,497    30,165      5.35     1,615     28,736     4.83     1,390
                                            -------              ------   -------              ------    -------             ------
Savings and Time Deposits                   161,893      3.59%    5,822   139,055      4.05%    5,640    139,963     3.84%    5,382
                                            -------                       -------                        -------
         TOTAL Deposits                     183,234                       158,381                        154,707
Other Borrowed Money                            137      6.24%        9     4,547      6.82%      310        800     5.00%       40
Notes payable                                 2,000       7.0       142     3,202      7.77       249      4,889     6.05       296
Other Liabilities                             1,168         -         -       742         -         -        961        -         -
                                            -------                         -----                        -------
         TOTAL Liabilities                  186,539      3.64%  $ 5,973   166,872      3.73%  $ 6,199    161,357     3.93%  $ 5,718
                                                                =======                       =======                       =======
STOCKHOLDERS' EQUITY                         11,700                         8,034                          9,282
                                            -------                         -----                        -------
TOTAL LIABILITIES AND STOCKHOLDER' S
   EQUITY                                  $198,239                      $174,906                       $170,639
                                           ========                      ========                       ========

Net Yield on Interest Earning Assets                     3.80%                         4.49%                        3.85%
Benefit of Non-Interest Bearing Funds                     .56%                          .51%                         .37%
Net Interest Margin                                      4.36%                         5.00%                        4.22%
</TABLE>

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                                                                       Exhibit B
                         SUMMARY OF LOAN LOSS EXPERIENCE
                             (dollars in thousands)

<TABLE>
<CAPTION>
Year ended December 31,                                2001           2000            1999             1998            1997
                                                       ----           ----            ----             ----            ----
<S>                                                  <C>            <C>             <C>              <C>             <C>
Balance at Beginning of Period                    $     732       $    678         $   699          $   654         $   889

Loans Charged Off:
      Commercial Loans                                   65            228             291                -              58
      Real Estate Mortgages                              70             73             395               54              95
      Consumer Loans                                    111            103             239              149             160
                                                        ---            ---             ---              ---             ---
      TOTAL Loans Charged Off                           246            404             925              203             313
                                                        ---            ---             ---              ---             ---

Recoveries of Loans:
      Commercial Loans                                   39             69              40                -               1
      Real Estate Mortgages                                             16              26                3
                                                         22                                                               -
      Consumer Loans                                     12             27              35               32               5
                                                         --             --              --               --               -
      TOTAL Loans Recovered                              73            112             101               35               6
                                                         --            ---             ---               --               -
                                                                                       824
                                                                                    ------
Net Loans Charged Off                                   173            292                              168             307
                                                     ------         ------                           ------           ------

Provisions Charged to Operations                        400            346             803              213              72
                                                      -----         ------          ------           ------           ------

Balance at End of Period                          $     959       $    732         $   678          $   699         $   654
                                                  =========       ========         =======          =======         =======

Daily Average Amount of Loans                     $ 105,067       $107,860         $87,399          $80,502         $82,432
                                                  =========       ========         =======          =======         =======

Allowance for Possible Loan Losses to Loans            .90%           .65%            .66%             .82%            .84%
Outstanding                                            ====           ====             ===             ====            =====

Net Charge Offs to Average Loans Outstanding           .16%           .27%            .94%             .21%            .37%
                                                       ====           ====            ====             ====            ====
</TABLE>

                  ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
                           (dollars in thousands)

<TABLE>
<CAPTION>
As of December 31,                                  2001             2000             1999             1998            1997
                                                    ----             ----             ----             ----            ----
<S>                                                <C>              <C>              <C>              <C>            <C>
Commercial Loans                                     557              442             $317             $ 59           $ 118
Real Estate Loans                                    110              127              131               34              45
Consumer Loans                                        80               17                4               34              46
Credit Cards                                          55               16               10               37              35
Unallocated                                          157              130              216              535             410
                                                     ---              ---              ---              ---             ---
TOTAL Allowance for
Loan Losses                                       $  959            $ 732             $678            $ 699           $ 654
                                                  ======            =====             ====            =====           =====
</TABLE>

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

Analysis of Changes in Net Interest Income                             Exhibit C
------------------------------------------                             ---------

                           INTEREST VARIANCE ANALYSIS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                               2001 COMPARED TO 2000                         2000 COMPARED TO 1999
                                            Increase (Decrease) due to:                   Increase (Decrease) due to:
                                            ---------------------------                   ---------------------------
                                        Volume          Rate           Net           Volume           Rate            Net
                                        ------          ----           ---           ------           ----            ---
<S>                                   <C>             <C>            <C>           <C>                <C>          <C>
INTEREST INCOME

Loans                                  $  (254)        $ (290)        $ (544)       $ 1,858            $ 67         $ 1,925

Investment Securities                      177           (293)          (116)          (483)            133            (350)

Federal Funds Sold                         935           (347)           588           (266)             20            (246)


Other Interest Bearing Assets /(1)/         26            (10)            16           --                (6)             (6)
                                       -------         -------        -------       -------           ------         -------

TOTAL Interest Income                  $   884         $ (940)        $  (56)       $ 1,109           $ 214         $ 1,323
                                       =======         =======        =======       =======           ======        ========


INTEREST EXPENSE

Interest-Bearing Transaction
Accounts                                 $  26        $  (32)          $ (6)          $  41          $  (88)         $  (47)

Savings                                    265           (749)          (484)           (42)            251             209

Time - $100,000 or more                    693             98            791           (132)              3            (129)

Other Time                                  14           (132)          (118)            69             156             225

Other Borrowed Money                      (301)            --           (301)           187              83             270

Notes Payable                              (93)           (15)          (108)          (102)             55             (47)
                                          ----        --------         ------        -------        -------            -----

TOTAL Interest Expense                   $ 604         $ (830)        $ (226)          $ 21           $ 460           $ 481
                                         =====         =======        =======          ====           =====           =====

NET INTEREST INCOME                     $  280         $ (110)         $ 170         $1,088          $ (246)          $ 842
                                        ======         =======         =====         ======          =======          =====
</TABLE>

Note:  Loan fees, which were included in interest income, were $481 in 2001,
       $577 in 2000, and $387 in 1999.
       A change in Rate/Volume has been allocated to the change in rate.

/(1)/ Certificates of Deposit with other financial institutions.

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                                                                       Exhibit D
               Other Financial Information at December 31, 2001

<TABLE>
<CAPTION>
Maturities of Certificates of Deposit of $100,000 or More
(dollars in Thousands)
------------------------------------------------------------------------------------------------------------------------------
MATURITIES                Three months or less   Over three months to six   Over six months to 12   Over 12 months     Total
                                                          months                    months
------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                      <C>                       <C>                 <C>           <C>
Balance                         $ 14,207                 $ 2,750                   $ 5,299             $ 6,965       $ 29,221
------------------------------------------------------------------------------------------------------------------------------
Percent to Total                   48.7%                    9.4%                     18.1%               23.8%         100.0%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Loan Portfolio by Type of Loan
(dollars in Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
                                 2001                  2000                   1999                 1998                1997
<S>                        <C>           <C>      <C>          <C>       <C>         <C>      <C>         <C>     <C>        <C>
Commercial                 $  23,126      21.7%   $  33,515     29.8%    $  31,801    31.0%    $ 20,711    24.1%   $  9,041   11.6%
Real Estate Commercial        36,807      34.5%      32,500     28.9%       24,789    24.2%      17,026    19.8%     17,014   21.7%
Real Estate Construction       2,699       2.5%       2,836      2.5%        2,992     2.9%       2,014     2.3%      2,020    2.6%
Real Estate Residential       32,456      30.4%      35,260     31.4%       39,336    38.4%      42,664    49.8%     46,427   59.3%
Consumer                      11,718      10.9%       8,286      7.4%        3,583     3.5%       3,381     4.0%      3,768    4.8%
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS                $ 106,806     100.0%   $ 112,397    100.0%    $ 102,501   100.0%    $ 85,796   100.0%   $ 78,270  100.0%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investments Securities Summary
(dollars in Thousands)
--------------------------------------------------------------------------------------------------------------------
                                                  2001          2000            1999            1998           1997
--------------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>             <C>             <C>            <C>
Securities Available for Sale:
   U.S. Treasury and Government Agency         $41,438       $52,379         $49,061         $38,771        $11,993
   Mortgage Backed Securities                    7,494         2,265             712          15,845          1,917
--------------------------------------------------------------------------------------------------------------------
   TOTAL Securities Available for Sale         $48,932       $54,671          49,773          54,616         13,910
--------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
   U.S. Treasury and Government Agencies         2,019            --              --          17,152         14,002
   Mortgage Backed Securities                       --            --              --              --          1,000
   Other Debt Securities                            45            27              20              15             15
--------------------------------------------------------------------------------------------------------------------
   TOTAL Securities Held to Maturity             2,064            27              20          17,167         15,017
--------------------------------------------------------------------------------------------------------------------
TOTAL Investment Securities Portfolio          $50,996       $54,671         $50,348         $72,253        $29,512
====================================================================================================================
TOTAL PORTFOLIO YIELD                             6.1%          6.6%            6.4%            6.7%           6.6%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

                                                   HARBOR BANKSHARES CORPORATION
--------------------------------------------------------------------------------

                                                                       Exhibit E
                  Harbor Bankshares Corporation and Subsidiary
          Consolidated Quarterly Results of Operations, Market Prices and
                                  Dividends
                     (in thousands except per share data)

<TABLE>
<CAPTION>
Year ended December 31,                                   2001                                              2000
                                    ----------------------------------------------  -----------------------------------------------
                                       Fourth      Third      Second       First        Fourth        Third      Second      First
                                       Quarter    Quarter     Quarter     Quarter       Quarter      Quarter     Quarter    Quarter
                                       -------    -------     -------     -------       -------      -------     -------    -------
<S>                                  <C>         <C>          <C>        <C>           <C>          <C>          <C>      <C>
Interest Income                       $ 3,024     $ 3,395      $3,600     $ 3,590       $ 3,561      $ 3,538      $3,284   $ 3,282
Interest Expense                        1,058       1,465       1,680       1,770         1,734        1,541       1,459     1,465
                                    ----------------------------------------------  -----------------------------------------------
Net Interest Income                     1,966       1,930       1,920       1,820         1,827        1,997       1,825     1,817
Provision for Loan Losses                 100         100         100         100            60           90         136        60
                                    ----------------------------------------------  -----------------------------------------------
Net Interest Income after Provision     1,866       1,830       1,820       1,720         1,767        1,907       1,689     1,757
for Loan Losses
Non-Interest Income                       418         443         474         524           519          415         427       344
Gains on sale of Securities               102          49          28          18            --           --          --        --
CDFI Awards                                --         229          --          --            --          126          --        --
Gains on sale of Loans                     11          29           5          --             4           --           5         2
Non-Interest Expense                    2,186       2,160       2,138       2,043         2,257        2,034       1,937     1,882
                                    ----------------------------------------------  -----------------------------------------------
Income Before Taxes                       211         420         189         219            33          414         184       221
Income Tax Expense                         49         135          58          67             8          141          63        75
                                    ----------------------------------------------  -----------------------------------------------
Net Income                             $  162       $ 285      $  131       $ 152         $  25        $ 273      $  121     $ 146
                                    ----------------------------------------------  -----------------------------------------------
Per Share Amount
Net Income - Basic                     $  .23       $ .39      $  .19       $ .22         $ .05        $ .39      $  .17     $ .21
Net Income - Diluted                   $  .23       $ .39      $  .18       $ .21         $ .07        $ .39      $  .17     $ .17
                                    ----------------------------------------------  -----------------------------------------------
Market Price -        High             $18.00      $17.00     $ 17.00      $17.00        $17.00       $15.75     $ 15.75    $17.00
                      Low              $18.00      $18.00     $ 17.00      $17.00        $15.75       $15.75     $ 15.75    $15.75
Dividends Paid
                                    ----------------------------------------------  -----------------------------------------------
</TABLE>