<PAGE>



                                  Exhibit 13.0

ANNAPOLIS BANCORP, INC.

Corporate Profile

Annapolis Bancorp, Inc., (the "Company") formerly Annapolis National Bancorp,
Inc. and Maryland Publick Banks, Inc., is a bank holding company, incorporated
in May 1988 for the purpose of acquiring and holding all of the outstanding
stock of BankAnnapolis (the "Bank") (formerly Annapolis National Bank), a
federally insured community oriented bank and one of two independent commercial
banks headquartered in Annapolis, Maryland. The Bank currently operates as a
full service commercial bank from its headquarters in Annapolis, and its five
branches located in Anne Arundel County, Maryland and one branch located on Kent
Island in Queen Anne's County, Maryland. The Bank's principal business consists
of originating loans and attracting deposits. The Bank originates commercial
loans, commercial real estate loans, construction loans, one- to four-family
real estate loans, home equity and consumer loans. The Bank also invests in U.S.
Treasury and U.S. Government agency securities and other securities including
mortgage backed securities issued by or guaranteed by the federal government.

The Bank conducts a general commercial and retail banking business in its market
area, emphasizing the banking needs of small businesses, professional concerns
and individuals. The Bank draws most of its customer deposits from Anne Arundel
County, Maryland, and to a lesser extent, Queen Anne's County, Maryland. The
Bank's lending operations are centered in Anne Arundel County, but extend
throughout Central Maryland.

The Bank competes with numerous other financial intermediaries, commercial
banks, savings and loan associations, credit unions, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market mutual funds and other financial institutions operating in Anne
Arundel County and elsewhere. The Bank continually evaluates new products, and
implements such new products as deemed appropriate by management.

The Bank's Anne Arundel County service area is a highly concentrated, highly
branched banking market. Competition in Anne Arundel County for loans to small
businesses and professionals, the Bank's target market, is intense and pricing,
service and access to decision-makers are important. Deposit competition among
institutions in Anne Arundel County also is strong.

The Bank employed 70 full time and 11 part time individuals at December 31,
2002.

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

Overview

The following is management's discussion and analysis of the historical
financial condition and results of operations of Annapolis Bancorp, Inc. on a
consolidated basis with its wholly owned subsidiary, BankAnnapolis, for the
periods presented, and should be read in conjunction with the consolidated
statements and the related notes thereto appearing elsewhere in this annual
report.

Application of Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the industries in which it operates. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies inherently have a
greater reliance on the use of estimates, assumptions, and judgments and as such
have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.

The most significant accounting policies followed by the Corporation are
presented in Note 1 to the consolidated financial statements which can be found
on page 30. These policies, along with the disclosures presented in the other
financial statement notes and in this financial review, provide information on
how significant assets and liabilities are valued in the financial statements
and how those values are determined. Based on the valuation techniques used and
the sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has


                                       10

<PAGE>

identified the determination of the allowance for credit losses to be the
accounting area that requires the most subjective or complex judgments, and as
such could be most subject to revision as new information becomes available.

The allowance for credit losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for credit losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents the
largest asset type on the consolidated balance sheet. Note 1 found on page 31 to
the consolidated financial statements describes the methodology used to
determine the allowance for credit losses and a discussion of the factors
driving changes in the amount of the allowance for credit losses is included in
the Credit Risk Management section of this financial analysis.

Results of Operations for the Years Ended December 31, 2002 and 2001

The Company reported net income for 2002 of $1.2 million, a 142.5% increase from
2001 net income of $506 thousand. The increase in 2002 earnings was primarily
due to increased loan volumes in all categories and higher noninterest income.
Basic earnings per share was $0.41 per share compared to $0.17 per share in
2001.

The primary source of income of the Bank is interest on its loan and investment
portfolios. The principal expense of the Bank is interest on its deposit
accounts and borrowings. The difference between interest income on interest
earning assets and interest expense on interest bearing liabilities is referred
to as net interest income. Net interest income was $7.3 million for 2002, an
increase of $1.0 million or 16.4% compared to $6.3 million in 2001. Total assets
were $200.1 million as of December 31, 2002, a 20.0% increase over December 31,
2001 total assets of $166.7 million. The Company's return on average assets was
0.66% and 0.33% at December 31, 2002, and 2001 respectively. The Company's
return on average equity was 8.57% and 3.70% at December 31, 2002, and 2001
respectively.

At December 31, 2002 the Bank's gross loan portfolio net of deferred fees and
costs totaled $147.3 million. Of this amount, $32.4 million or 22.0% were
commercial loans, $41.2 million or 28.0% were commercial real estate loans,
$25.0 million or 17.0% were construction loans, $20.0 million or 13.6% were one-
to four-family residential mortgage loans, $14.3 million or 9.7% were home
equity loans, and $14.4 million or 9.7% were consumer and other loans.

Financial Condition

The Company, through its Bank subsidiary, functions as a financial intermediary,
and as such its financial condition can be examined in terms of developing
trends in its sources and uses of funds. These trends are the result of both
external environmental factors, such as changing economic conditions, regulatory
changes and competition, and also internal environmental factors such as
management's evaluation as to the best use of funds in these changing
conditions.

Total assets increased by 20.0% during 2002 to $200.1 million from $166.7
million at December 31, 2001. Total deposits and securities sold under
agreements to repurchase, the Company's primary source of funds, increased $21.9
million or 14.4% to $174.5 million from $152.6 million at December 31, 2001.
Time deposits comprise the largest portion of the Bank's total deposits,
totaling $65.2 million or 39.7% of the Bank's total deposits at December 31,
2002, compared to $62.0 million or 42.8% in 2001. Savings and money market
accounts totaled $44.4 million or 27.1% of the Bank's total deposits at December
31, 2002, compared to $40.0 million or 27.6% in 2001. NOW accounts totaled $24.9
million or 15.2% and $19.1 million or 13.2% of total deposits at December 31,
2002 and 2001, respectively. Demand, noninterest bearing accounts total $29.5
million or 18.0% of total deposits at December 31, 2002 and $23.7 million or
16.4% at December 31, 2001. Securities sold under agreements to repurchase
increased $2.8 million or 36.4% to $10.5 million from $7.7 million at December
31, 2001. Long-term borrowings were $10.0 million at December 31, 2002 compared
to zero at December 31, 2001.

The Company's primary use of funds are for loans and investments. Loans, less
deferred fees and discounts and the allowance for credit losses, increased by
$34.4 million or 30.9% to $145.7 million at December 31, 2002 from $111.3
million a year earlier. The increase in loan balances occurred primarily in the
real estate sector, which increased $20.9 million or 26.3% from 2001.

Operating Results

The following discussion outlines some of the more important factors and trends
affecting the earnings of the Company, as presented in its consolidated
statements of income.

Net Interest Income

Net interest income is the difference between interest income and interest
expense and is generally affected by increases or decreases in the amount of
outstanding interest earning assets and interest bearing liabilities (volume
variance). This


                                       11

<PAGE>

volume variance coupled with changes in interest rates on these same assets and
liabilities (rate variance) equates to the total change in net interest income
in any given period. The table on page 16 sets forth certain information
regarding changes in interest income and interest expense attributable to (1)
changes in volume (change in volume multiplied by the old rate); (2) changes in
rates (change in rate multiplied by the old volume); and (3) changes in
rate/volume (change in rate multiplied by change in volume).

Net interest income for the year ended December 31, 2002, was $7.3 million,
representing an increase of $1.0 million or 16.4% from net interest income of
$6.3 million for the year ended December 31, 2001. The increase in net interest
income is due primarily to increased loan volumes offset by lower investment and
loan yields. The net interest margin was 4.30% and 4.41% for the years ended
December 31, 2002 and 2001 respectively. Net interest income for 2002 includes
$50 thousand of interest collected on a cash basis related to loans on a
nonaccrual status, compared to $45 thousand of interest collected on various
nonaccrual loans in 2001.

Interest Income

The Company's interest income decreased $43 thousand or 0.4% for the year ended
December 31, 2002. The decrease in interest income can be attributed to a
decrease in the yield on loans to 7.11% for 2002 from 8.70% for the year ended
December 31, 2001 and a lower yield on federal funds sold and investment
securities due to the continued effect of Federal Reserve Board interest rate
cuts. Average loans increased $32.7 million or 32.6% and average federal funds
sold and other overnight investments decreased $3.8 million or 23.6%. Average
investment securities decreased $1.7 million or 6.4% with the yield on
investment securities also decreasing to 4.76% for the year ended December 31,
2002 from 5.87% at December 31, 2001.

Interest Expense

The Company's interest expense decreased $1.1 million or 23.5% to $3.5 million
for 2002, compared to $4.6 million for 2001. The decrease in interest expense
can be attributed to a decrease in the cost of interest bearing liabilities to
2.44% for the year ended December 31, 2002, compared to 3.87% in 2001. The
decrease in rate was primarily due to a decrease in certificate of deposit rates
to 3.75% in 2002 from 5.65% in 2001 offset by the cost of new long term
borrowings with an average balance of $6.7 million for the year ended December
31, 2002 compared to zero for 2001. The long term borrowings (Federal Home Loan
Bank convertible advances) were at an average cost of 4.50%.

Provision for Credit Losses

The Company recorded a provision for credit losses of $25,000 for the year ended
December 31, 2002 compared to zero for the year ended December 31, 2001. The
increase in provision was the result of higher overall loan volumes. See the
discussion under the heading "Credit Risk Management" for greater analysis
regarding the Allowance for Credit Losses and related provision.

Noninterest Income

The Company's primary sources of noninterest income are fees charged on deposit
products and those generated by the Bank's VISA check card, fees recognized on
the broker origination of residential mortgage loans and rental income from
leasing space at the Bank's headquarters building. Noninterest income increased
$478 thousand or 41.1% to $1.6 million from $1.1 million in 2001. Mortgage
banking fees totaled $315 thousand for the year ended December 31, 2002, a 58%
increase over fees of $199 thousand for the year ended December 31, 2001. It
should be noted however that mortgage broker fee income may not continue at the
level experienced in 2002 as future mortgage refinancing volumes are affected by
interest rate fluctuations.

Noninterest Expense

Noninterest expense increased $390 thousand or 5.8% to $7.1 million at December
31, 2002, compared to $6.7 million at December 31, 2001. The increase in
noninterest expense was primarily due to increases in compensation expense,
higher data processing expenses and full year depreciation expense relating to
the headquarters building.

Personnel expense increased $273 thousand or 7.6% with $185 thousand related to
normal salary increases and the rest related to higher costs of employee benefit
programs. Occupancy and equipment expense increased $123 thousand or 14.5% due
to full year depreciation costs, compared to a partial year in 2001, associated
with the corporate headquarters building.

Data processing expense increased $93 thousand or 13.6% due to increased account
volumes especially in transaction oriented accounts. Other expenses decreased
$99 thousand or 6.4%, with lower marketing, legal and telephone expenses.



                                       12

<PAGE>

Provision for Income Taxes

The Company and the Bank file consolidated federal income tax returns and
separate Maryland income tax returns. The Company recognized $644 thousand and
$266 thousand in income tax expense for the years ended December 31, 2002 and
2001 respectively, for an effective tax rate of 34.4% in 2002 34.5% in 2001.

Results of Operations For The Years Ended December 31, 2001 and 2000

Net Income

Net income for the year ended December 31, 2001, totaled $506 thousand a 47.9%
decrease from 2000 earnings of $972 thousand. Basic earnings per basic share was
$0.17 compared to $0.32 per basic share for the year ended December 31, 2000.

Operating Results

The following discussion outlines some of the more important factors and tends
affecting the earnings of the Company, as presented in its consolidated
statements of income.

Net Interest Income

Net interest income decreased $467 thousand or 6.9% at December 31, 2001, to
$6.3 million from $6.8 million at December 31, 2000. This decrease was primarily
the result of a decrease in the Bank's overall yield on loans and investment
securities from 8.60% in 2000 to 7.63% in 2001.

Interest Income

Interest income increased $447 thousand or 4.3% in 2001 compared to 2000,
primarily due to an increase in the level of average loans and federal funds
sold. Average loans outstanding increased $18.8 million or 23.1% during 2001
while average federal funds sold increased $7.9 million or 95.5%. Offsetting
this increase was a decrease in investment securities of $5.3 million or 16.5%.

Interest Expense

Interest expense increased $914 thousand or 24.8% to $4.6 million in 2001
compared to $3.7 million at December 31, 2000. The increase can be attributed to
an increase in the cost of interest bearing liabilities to 3.87% for 2001 up
from 3.57% in 2000. Certificate of deposit rates increased to 5.65% in 2001 from
5.22% in 2000.

Provision for Credit Losses

The Company recorded net recoveries of charged off loans in both 2001 and 2000
and booked no provision for credit losses in 2001 and $36,000 in 2000. See the
discussion under the heading "Credit Risk Management" for greater analysis
regarding the Allowance for Credit Losses and related provision.

Noninterest Income

Noninterest income increased $278 thousand or 31.6% during 2001 as compared to
2000. The increase was attributable to higher fees charged on deposit products,
fees generated by the Bank's VISA check card and fees generated by the broker
origination of residential mortgage loans.

Noninterest Expense

Noninterest expense increased $551 thousand or 9.0% to $6.7 million at December
31, 2001, from $6.2 million at December 31, 2000. The increase in noninterest
expense was primarily due to increases in compensation expense related to the
full year salary impact of business development staff hired at the end of 2000
and additions to staff due to extending branch hours. Also contributing to the
increase in noninterest expense were higher data processing expenses associated
with the increased loan and deposit volumes.



                                       13

<PAGE>

Selected Consolidated Financial Highlights

Selected Consolidated Financial Data at and for years ended December 31,
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>

Selected Financial Data                        2002         2001          2000         1999         1998
-----------------------                        ----         ----          ----         ----         ----
<S>                                        <C>          <C>           <C>          <C>          <C>
Total assets                               $200,116     $166,681      $137,040     $126,733     $120,457
Total loans, net                            145,735      111,347        87,411       81,198       86,924
Total deposits                              163,939      144,884       118,020      105,094      100,742
Securities sold under agreement to           10,500        7,674         5,369        8,497        7,174
 repurchase
Long term debt                               10,000           --            --           --           --
Stockholder's equity                         15,078       13,860        13,362       12,727       12,091

Selected Operating Data
-----------------------
Interest income                             $10,858      $10,901       $10,454       $9,612       $9,813
Interest expense                              3,514        4,593         3,679        3,475        3,890
                                              -----        -----         -----        -----        -----

Net interest income                           7,344        6,308         6,775        6,137        5,923
Provision for credit losses                      25            -            36          432          300
                                                 --            -            --          ---          ---

Net interest income after provision           7,319        6,308         6,739        5,705        5,623
for credit losses

Noninterest income                            1,640        1,162           884          849          867
Noninterest expense                           7,088        6,698         6,147        5,488        4,965
                                              -----        -----         -----        -----        -----

Income before income taxes                    1,871          772         1,475        1,066        1,525
Income tax expense                              644          266           504          376          522
                                                ---          ---           ---          ---          ---
Net income                                   $1,227         $506          $972         $690       $1,003
                                             ------         ----          ----         ----       ------
Key Financial Ratios and Other Data
-----------------------------------
Return on average assets                      0.66%        0.33%         0.75%        0.55%        0.82%
    Net income divided by average assets
Return on average equity                      8.57%        3.70%         7.59%        5.69%        8.64%
    Net income divided by average equity
Equity to asset ratio                         7.69%        8.88%         9.93%        9.69%        9.54%
    Average equity divided by average
     assets
Basic earnings per share (1)                  $0.41        $0.17         $0.32        $0.22        $0.33
Book value per share (1)                      $5.01        $4.62         $4.44        $4.15        $3.95
Tangible book value per share (1)             $5.01        $4.62         $4.44        $4.13        $3.91
Number of shares outstanding              3,010,393    2,996,629     2,262,406    2,323,506    2,313,506
Efficiency ratio                             78.90%       89.67%        80.26%       78.55%       73.19%
Interest rate spread                          3.92%        3.76%         5.03%        4.76%        4.52%
Net interest margin                           4.30%        4.41%         5.57%        5.26%        5.11%
Risk based capital ratio - Tier 1             9.72%       11.14%        13.60%       13.70%       12.70%
Risk based capital ratio - Total             10.74%       12.64%        14.80%       15.00%       14.00%

</TABLE>

(1) Adjusted to effect a four for three stock split in the form of a stock
    dividend issued on August 24, 2001.

The following table presents a condensed average balance sheet as well as
income/expense and yields/costs of funds thereon for the years ended December
31, 2002, 2001 and 2000. The yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities for the periods shown.
Average balances are derived from average daily balances. The yields and costs
include loan fees that are considered adjustments to yields. Net interest
spread, the difference between the average rate on interest bearing assets and
the average rate on interest bearing liabilities, increased to 3.92% for the
year ended December 31, 2002 from 3.76% at December 31, 2001.


                                       14

<PAGE>

Consolidated Average Balances, Yields and Rates
(Balances in thousands)

<TABLE>
<CAPTION>

                                                             Years ended

                                           December 31, 2002             December 31, 2001            December 31, 2000
                                           -----------------             -----------------            -----------------
                                        Average           Yield/     Average            Yield/     Average            Yield/
                                        Balance  Interest  Rate      Balance  Interest   Rate      Balance  Interest   Rate
                                        -------  --------  -----     -------  --------  ------     -------  --------  ------
<S>                                    <C>       <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>
Assets
Interest Earning Assets
     Federal funds sold and other
      overnight investments             $12,975     $217    1.67%    $16,088     $616     3.83%     $8,229     $509     6.19%

     Investment Securities               24,845    1,183    4.76%     26,530    1,558     5.87%     31,789    2,020     6.35%
     Loans                              133,022    9,458    7.11%    100,341    8,727     8.70%     81,544    7,925     9.72%
                                        -------    -----    -----    -------    -----     -----     ------    -----     -----

          Total interest-earning assets 170,842   10,858    6.36%    142,959   10,901     7.63%    121,562   10,454     8.60%
                                        -------   ------    -----    -------   ------     -----    -------   ------     -----


Noninterest Earning Assets
     Cash and due from banks              5,827                        4,065                         3,647
     Other assets                         9,472                        6,894                         3,793
                                          -----                        -----                         -----
          Total Assets                 $186,141                     $153,918                      $129,002
                                       --------                     --------                      --------

Liabilities and Stockholders' Equity
Interest Bearing Deposits
     NOW accounts                       $22,321      $62    0.28%    $17,367     $132     0.76%    $19,952     $228     1.14%
     Money market accounts               26,608      386    1.45%     19,567      583     2.98%     12,984      438     3.37%
     Savings accounts                    17,357      185    1.07%     15,166      283     1.89%     16,149      377     2.33%
     Certificates of deposit             62,571    2,344    3.75%     59,403    3,357     5.65%     44,055    2,301     5.22%
     Repurchase agreements                8,752      232    2.65%      7,395      238     3.22%      9,851      335     3.40%
     Long term borrowings                 6,685      305    4.50%         --       --     0.00%         --       --     0.00%
                                          -----      ---    -----         --       --     -----         --       --     -----
          Total interest bearing        144,294    3,514    2.44%    118,898    4,593     3.87%    102,991    3,679     3.57%
           liabilities                  -------    -----    -----    -------    -----     -----    -------    -----     -----


Noninterest Bearing Liabilities
     Demand deposit accounts             26,937                       20,986                        12,715
     Other liabilities                      588                          373                           489

Stockholders' Equity                     14,322                       13,661                        12,807
                                         ------                       ------                        ------

          Total Liabilities and        $186,141                     $153,918                      $129,002
           Stockholders' Equity        --------                     --------                      --------

Interest rate spread                                        3.92%                         3.76%                         5.03%
                                                            -----                         -----                         -----

Ratio of interest earning assets
 to interest bearing liabilities                          118.40%                       120.24%                       118.03%


Net interest income and net                       $7,344    4.30%              $6,308     4.41%              $6,775     5.57%
 interest margin                                  ------    -----              ------     -----              ------     -----


<CAPTION>

Rate/Volume Analysis
(Dollars in thousands)

                                          2002 vs. 2001                                2001 vs. 2000
                                          -------------                                -------------

                               Increase   Due to Change                     Increase    Due to Change
                                   or          in                 Rate/        or           in                 Rate/
                              (Decrease)     Volume      Rate    Volume    (Decrease)     Volume       Rate   Volume
                              ----------  ------------- ------  --------  ------------  ------------- ------ --------
 <S>                          <C>         <C>           <C>     <C>       <C>           <C>           <C>     <C>
  Interest income on:
      Loans                        $731      $2,842    $(1,592)   $(519)       $802       $1,827      $(833)   $(192)
      Investment securities       (375)         (99)      (295)       19      (462)        (334)       (153)       25
      Federal funds sold and
       other overnight
       investments                (399)        (107)      (353)       61        107          486       (194)    (185)
                                  -----       -----       -----       --        ---          ---       -----    -----

  Total interest income            (43)       2,636     (2,240)    (439)        447        1,979     (1,180)    (352)

  Interest expense on:
      NOW accounts                 (70)          37        (83)     (24)       (96)         (30)        (76)       10
      Money market accounts       (197)         210       (299)    (108)        145          222        (51)     (26)
      Savings accounts             (98)          40       (121)     (17)       (94)         (23)        (76)        5
      Certificates of deposit   (1,012)         179     (1,131)     (60)      1,056          801         189       66
      Repurchase agreements         (7)          44        (43)      (8)       (97)         (83)        (18)        4
      Long term borrowings          305         195          --      110         --           --          --       --
                                    ---         ---          --      ---         --           --          --       --

  Total interest expense        (1,079)         705     (1,677)    (107)        914          887        (32)       59
                                -------         ---     -------    -----        ---          ---        ----       --

  Net interest income            $1,036      $1,931      $(563)   $(332)     $(467)       $1,092    $(1,148)   $(411)
                                 ------      ------      ------   ------     ------       ------    --------   ------
</TABLE>


                                       15

<PAGE>


Risk Management

The Board of Directors is the foundation for effective corporate governance and
risk management. The Board demands accountability of management, keeps
stockholders' and other constituencies' interests in focus, advocates the
upholding of the Company's code of ethics, and fosters a strong internal control
environment. Through its Audit Committee the Board actively reviews critical
risk positions, including market, credit, liquidity, and operational risk. The
Company's goal in managing risk is to reduce earnings volatility, control
exposure to unnecessary risk, and ensure appropriate returns for risk assumed.
Senior management manages risk at the business line level, supplemented with
corporate-level oversight through the Asset Liability Committee, internal audit
and quality control functions.

Liquidity Risk Management and Capital Resources

The objective of liquidity management is to ensure the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of the Company,
are met, taking into account all on- and off-balance sheet funding demands.
Liquidity management also includes ensuring cash flow needs are met at a
reasonable cost. Liquidity risk arises from the possibility the Company may not
be able to satisfy current or future financial commitments, or the Company may
become unduly reliant on alternative funding sources. The Company maintains a
liquidity risk management policy to address and manage this risk. The policy
identifies the primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity, and establishes minimum liquidity
requirements which comply with regulatory guidance. The liquidity position is
continually monitored and reported on monthly to the Board of Directors.

Deposits, commercial reverse repurchase agreements, and lines of credit are the
primary source of the Bank's funds for lending and investing activities.
Secondary sources of funds are derived from loan repayments and investment
maturities. Loan repayments and investment maturities can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates, general market conditions and competition.

The Bank offers a variety of retail deposit account products to both consumer
and commercial deposit customers. The Bank's deposit accounts consist of
savings, NOW accounts, checking accounts, money market accounts and certificate
of deposit accounts. The Bank also offers individual retirement accounts. Time
deposits comprised 39.7% of the deposit portfolio at December 31, 2002. Core
deposits, considered to be noninterest bearing and interest bearing demand
deposit accounts, savings deposits and money market accounts accounted for 60.3%
of the deposit portfolio at December 31, 2002. This represents a 19.2% increase
in core deposits, which accounted for 57.2% of the deposit portfolio at December
31, 2001.

The Bank intends to continue to emphasize retail deposit accounts as its primary
source of funds. Deposit products are promoted in periodic newspaper
advertisements, along with notices provided in customer account statements. The
Bank does not pay a fee for brokered deposits. The Bank's market strategy is
based on its reputation as a community bank that provides quality products and
personal customer service.

The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area, and in certain deposit categories may lead the market. Interest rates on
deposits are reviewed by management which considers a number of factors
including: (1) the Bank's internal cost of funds; (2) rates offered by competing
financial institutions; (3) investing and lending opportunities; and (4) the
Bank's liquidity position.

Jumbo certificates of deposit are accounts of $100,000 or more. These accounts
totaled $17.8 million at December 31, 2002 and consisted principally of time
certificates of deposit. The following table sets forth the amount and maturity
of jumbo certificates of deposit at December 31, 2002:

($000)

<TABLE>
<CAPTION>

                              Greater than      Greater than
        Three Months or    Three Months to     Six Months to   Greater than
                   Less         Six Months          One Year       One Year        Total

       <S>                <C>                 <C>             <C>             <C>
                 $1,745             $1,709            $4,385         $9,918      $17,757
                 ------             ------            ------         ------      -------

</TABLE>

Securities sold under agreements to repurchase represent transactions with
customers for correspondent or commercial account cash management services.
These are overnight borrowing arrangements with interest rates discounted from
the federal funds sold rate. Securities underlying the repurchase agreements are
maintained in the Company's control. At December 31, 2002, and 2001, the average
cost of these borrowings were 2.65% and 3.22% respectively.

The Bank maintains a secured borrowing line with the Federal Home Loan Bank
(FHLB) with the ability to draw up to $70.0 million, and may borrow up to $8.3
million under secured and unsecured lines established with correspondent
commercial banks. In addition, the Bank has the ability to borrow directly from
the Federal Reserve Bank discount window. At December 31, 2002, the Bank had
advances outstanding of $10.0 million under the Federal Home Loan Bank's
convertible advance program.


                                       16

<PAGE>

Potential adverse impacts on liquidity can occur as a result of changes in the
estimated cash flows from investment, loan, and deposit portfolios. The Bank
manages this inherent risk by maintaining a portfolio of available for sale
investments, and secondary sources of liquidity from FHLB advances and reverse
repurchase agreements. In addition, the Bank has the ability to increase its
liquidity by raising interest rates on deposit accounts, selling loans in the
secondary market or curtailing the volume of loan originations.

The Bank maintains the majority of the assets held for liquidity purposes in
overnight federal funds.

Interest Rate Risk Sensitivity

Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's interest earning assets
and funding sources. Additionally, the Bank's profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest bearing assets, such as loans and investments, and
its interest expense on its funding sources, such as deposits and borrowings.
Accordingly, the Bank's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets in response to such movements.

The Bank attempts to manage fluctuations in interest rates by matching the
maturities of its interest earning assets and interest bearing liabilities. The
Bank's current strategy to manage its sensitivity to interest rate fluctuations
is to emphasize short term and adjustable rate loans and to invest in short term
U.S. Government agency securities with maturities or call dates of two years or
less. Prior to the most recent Federal Reserve rate changes the Bank increased
its activity in fixed rate loans to stabilize the net interest margin. To reduce
the negative impact of engaging in excessive fixed rate lending in a volatile
rate environment, the Bank uses a third party for settlement of the majority of
long term fixed rate loans.

The following table summarizes the anticipated maturities or repricing of the
Company's interest earning assets and interest bearing liabilities as of
December 31, 2002, and the Company's interest sensitivity gap (i.e., interest
earning assets less interest bearing liabilities). A positive gap for any time
period indicates that more interest earning assets will mature or reprice during
that period than interest bearing liabilities. The Company's goal is to maintain
a cumulative gap position for the period of one year or less of plus or minus
fifteen percent in order to mitigate the impact of changes in interest rates on
liquidity, interest margins and operating results.

The analysis presented below represents a static gap position for interest
sensitive assets and liabilities at December 31, 2002, and does not give effect
to prepayment or extension of loans as a result of changes in general market
rates.

Interest Sensitivity Gap Analysis
December 31, 2002

<TABLE>
<CAPTION>

                                                       Within    After three    After one
                                                        three     but within   but within    After five
    ($000)                                             months  twelve months   five years         years      Total
                                                       ------  -------------   ----------    ----------      -----
 <S>                                                 <C>       <C>             <C>           <C>         <C>
    Assets
      Federal funds sold and other overnight
       investments                                    $15,529            $--          $--           $--    $13,529
      Investment securities (1)                         6,024          8,266          367         4,692     19,349
      Loans (2), (3)                                   54,435         19,402       46,786        26,635    147,258
                                                       ------         ------       ------        ------    -------
                                                      $75,988        $27,668      $47,153       $31,327   $182,136
                                                      -------        -------      -------       -------   --------
    Liabilities
      Interest bearing liabilities
          NOW accounts                                $24,879            $--          $--           $--    $19,142
          Money market accounts                        18,345             --           --            --     14,292
          Savings accounts                             26,074             --           --            --     25,611
          Certificates of deposit (4)                  10,690         28,512       25,955            --     65,157
      Commercial repurchase agreements                 10,500             --           --            --     10,500
      Long term borrowings                                 --             --        5,000         5,000     10,000
                                                           --             --        -----         -----     ------
                                                      $90,488        $28,512      $30,955        $5,000   $154,955
                                                      -------        -------      -------        ------   --------

    Interest sensitivity gap                         (14,500)          (844)       16,198        26,327     27,181
    Cumulative interest sensitivity gap              (14,500)       (15,344)          854        27,181
    Cumulative interest sensitivity gap as a
     percentage of total assets                       (7.96%)        (8.42%)        0.47%        14.92%

</TABLE>

(1) Net of Federal Reserve Bank and Federal Home Loan Bank stock, by call date.
(2) Loans scheduled by contractual maturities.
(3) Net of non-accrual loans of $55 thousand.
(4) Certificates of deposits scheduled by contractual maturities.


                                       17

<PAGE>

Investment Portfolio

At December 31, 2002, the Bank's investment portfolio, which totaled $20.2
million, consisted of U.S. Government Agency securities and mortgage-backed
securities. The Company invests primarily in state tax exempt U.S. Government
Agency securities in order to minimize its state income tax liability.
Additionally, the Company owns $357,950 in stock of the Federal Reserve Bank of
Richmond and $500,000 in stock of the Federal Home Loan Bank of Atlanta (FHLB).
Management generally maintains an investment portfolio with relatively short
maturities to minimize overall interest rate risk. At December 31, 2002,
approximately 75.6% of the investment securities portfolio had maturities of
five year or less.

Investment decisions are made within policy guidelines established by the Board
of Directors. It is the Bank's policy to invest in non-speculative debt
instruments, particularly debt instruments that are guaranteed by the U.S.
Government or an agency thereof, to maintain a diversified investment portfolio
which complements the overall asset/liability and liquidity objectives of the
Bank, while limiting the related credit risk to an acceptable level. To meet the
credit risk objectives, non-government debt instruments must have a rating of
"B" or better to be held in the portfolio. The Bank's investment policy
designates the investment portfolio to be classified as "available-for-sale,"
unless otherwise designated. At December 31, 2002, 100% of the investment
portfolio was classified available-for-sale. The composition of securities at
December 31, for each of the past five fiscal years was:

<TABLE>
<CAPTION>


      ($000)                        2002        2001         2000         1999        1998
                                    ----        ----         ----         ----        ----
<S>                             <C>          <C>           <C>         <C>         <C>
      Available for Sale
        U. S. Treasury               $--         $--          $--          $--         $--
        U. S. Agency              14,657      23,346       33,565       23,103      13,511
        Mortgage-backed            4,692       4,931           --           --         980
        Equity Securities            858         718          718          721         699
                                     ---         ---          ---          ---         ---
            Total  Securities     20,207      28,995       34,283       23,824      15,190


</TABLE>

The following table presents maturities and weighted average yields for
investments in available-for-sale securities.

December 31, 2002

<TABLE>
<CAPTION>
                                                   YEARS TO MATURITY

                                                                                              WITHIN 5
                                       WITHIN                       WITHIN 1                     TO 10
                                     ONE YEAR                     TO 5 YEARS                     YEARS
      ($000)                          AMOUNT/         YIELD          AMOUNT/        YIELD      AMOUNT/         YIELD
                                    ---------         -----       ----------        -----     --------         -----
<S>                                 <C>             <C>          <C>               <C>        <C>             <C>
      Available for Sale
        U. S. Treasury                    $--           --%              $--          --%           $--          --%
        U. S. Agency                       --           --%           14,657        4.20%            --          --%
                                           --
      Mortgage-backed                      --           --%               --          --%         2,363        5.50%
                                           --           ---               --          ---         -----        -----
        Total Debt Securities             $--           --%          $14,657        4.20%        $2,363        5.50%
<CAPTION>
                                      GREATER
                                     THAN TEN
                                        YEARS
                                      AMOUNT/         YIELD            TOTAL
                                      -------         -----            -----
<S>                                 <C>             <C>             <C>
      Available for Sale
        U. S. Treasury                    $--           --%              $--
        U. S. Agency                       --           --%           14,657
      Mortgage-backed                   2,329         5.32%            4,692
                                        -----         -----            -----
        Total Debt Securities          $2,329         5.32%          $19,349
</TABLE>

Lending Activities

The types of loans that the Bank may originate are subject to federal laws and
regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors.

These factors are, in turn, affected by, among other things, economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, and legislative tax policies.


                                       18

<PAGE>



Analysis of Loans

The following table presents the composition of the loan portfolio over the
previous five years:

Years ended December 31,
(Dollars in thousands)

<TABLE>
<CAPTION>

                                     2002               2001                2000                1999               1998
                                     ----               ----                ----                ----               ----
                               Amount   Percent    Amount   Percent   Amount   Percent    Amount   Percent   Amount    Percent
<S>                          <C>        <C>       <C>       <C>      <C>       <C>       <C>       <C>       <C>       <C>
Commercial loans              $32,445     22.0%   $24,368     21.5%  $19,323     21.6%   $19,261     23.2%   $26,895     30.4%
Real estate loans:
  Commercial                   41,219     28.0%    38,498     34.0%   33,434     37.5%    35,032     42.3%    29,373     33.3%
  Construction                 25,060     17.0%    17,712     15.7%   16,945     19.0%    15,030     18.1%    17,875     20.2%
  One-to four-family           20,233     13.7%    17,083     15.1%   11,036     12.4%     7,329      8.8%     8,620      9.8%
  Home equity                  14,319      9.7%     6,568      5.8%    4,372      4.9%     3,686      4.5%     3,219      3.6%
Consumer loans                 14,140      9.6%     8,887      7.9%    4,107      4.6%     2,565      3.1%     2,400      2.7%
                               ------      ----     -----      ----    -----      ----     -----      ----     -----      ----
          Total loans         147,416    100.0%   113,116    100.0%   89,217    100.0%    82,903    100.0%    88,382    100.0%

Less:
  Unearned income               (103)               (193)              (250)               (222)               (299)
  Allowance for credit losses (1,578)             (1,576)            (1,556)             (1,483)             (1,159)
                              -------             -------            -------             -------             -------
Net loans receivable         $145,735            $111,347            $87,411             $81,198             $86,924
                             --------            --------            -------             -------             -------
</TABLE>

The Bank's loan portfolio consists of commercial, commercial real estate,
residential construction, one- to four-family residential mortgage, home equity
and consumer loans. At December 31, 2002 the Bank's loan portfolio totaled
$147.4 million, of which $32.5 million, or 22.0%, were commercial loans; $41.2
million, or 28.0%, were commercial real estate loans; $25.1 million, or 17.0%,
were construction loans; $20.2 million, or 13.7%, were one- to four-family
residential mortgage loans; $14.3 million, or 9.7% were home equity loans and
$14.1 million, or 9.6%, were consumer and other loans. All of the loans in the
Bank's portfolio are either adjustable-rate or short term fixed-rate loans with
terms to maturity of 30 days to 30 years.

The Bank does not engage in longer term fixed-rate portfolio lending. Any
long-term fixed-rate loans made by the Bank are sold in the secondary market.

Commercial Lending. The Bank offers commercial business loans to businesses
operating in the Bank's primary market area. These loans consist of lines of
credit, which typically require an annual repayment, adjustable-rate loans with
terms of five to seven years, and short-term fixed-rate loans with terms of up
to five years. Such loans are generally secured by receivables, inventories,
equipment and other assets of the business. The Bank generally requires personal
guarantees on its commercial loans. The Bank also offers unsecured commercial
loans to businesses on a selective basis. These types of loans are made to
existing customers and are of a short duration, generally one year or less. The
Bank also originates commercial loans which are guaranteed by the Small Business
Administration. The Bank has been an active participant in a variety of SBA loan
programs.

Year Ended December 31, 2002

<TABLE>
<CAPTION>

                                                     DUE AFTER
                                DUE IN     ONE YEAR                       NON
                              ONE YEAR   BUT BEFORE     DUE AFTER     ACCRUAL     90 DAYS
($000)                         OR LESS   FIVE YEARS    FIVE YEARS       LOANS    PAST DUE     TOTAL
                                  ----   ----------    ----------       -----    --------     -----
<S>                          <C>         <C>           <C>           <C>         <C>         <C>
Real estate loans
    Construction               $23,566       $1,494          $--         $--         $--     $25,060
    Mortgage                     4,008       10,838        5,387          --          --      20,233
    Commercial                   8,185       23,127        8,567          --       1,340      41,219
Commercial loans                21,344        7,312        3,750          39          --      32,445
Home equity loans               14,175           --          144          --          --      14,319
Consumer loans                   1,323        4,016        8,785          16          --      14,140
                                 -----        -----        -----          --          --      ------
Total loans                    $72,601      $46,787      $26,633         $55      $1,340    $147,416
                               -------      -------      -------         ---      ------    --------
<CAPTION>
DUE AFTER ONE YEAR
                                 FIXED     VARIABLE
($000)                            RATE        RATE        TOTAL
                                  ----        ----        -----
<S>                            <C>         <C>           <C>
Real estate loans
    Construction                $1,494          $--       $1,494
    Mortgage                     5,019       11,206       16,225
    Commercial                  10,220       21,474       31,694
Commercial loans                 8,307        2,755       11,062
Home equity loans                  144           --          144
Consumer loans                   4,604        8,197       12,801
                                 -----        -----       ------
Total loans                    $29,788      $43,632      $73,420
                               -------      -------      -------
</TABLE>


                                       19

<PAGE>

Commercial Real Estate Lending. The Bank originates adjustable-rate commercial
real estate loans that are generally secured by properties used for business
purposes such as small office buildings or a combination of residential and
retail facilities located in the Bank's primary market area. The Bank's
underwriting procedures provide that commercial real estate loans may generally
be made in amounts up to 80-85% of the lower of the appraised value or sales
price of the property, subject to the Bank's current loans-to-one-borrower
limit, which at December 31, 2002, was $2.4 million. These loans may be made
with terms up to 25 years and are generally offered at interest rates, which
adjust annually or annually after an initial five-year period in accordance with
the prime rate or the 3 and 5 year U.S. Constant Maturity Indices as reported in
the Wall Street Journal. In reaching a decision as to whether to make a
commercial real estate loan, the Bank considers the value of the real estate to
be financed and the credit strength of the borrower and/or the lessee of the
real estate project. The Bank has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 1.2:1.

Loans secured by commercial real estate properties generally involve larger
principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's value, debt service ratio and, under certain
circumstances, additional collateral. The Bank generally requires personal
guarantees on its commercial real estate loans.

Construction Lending. The Bank originates construction loans on both one- to
four-family residences and on commercial real estate properties. The Bank
originates two types of residential construction loans, consumer and builder.
The Bank originates consumer construction loans to build a primary residence, a
secondary residence, or an investment or rental property. The Bank will
originate builder construction loans to companies engaged in the business of
constructing homes for resale. These loans may be for homes currently under
contract for sale, model homes from which other homes will be marketed within a
subdivision or, on a very limited basis, homes built for speculative purposes to
be marketed for sale during construction. The Bank offers permanent
end-financing to the Bank's construction loan customers generally on a 3/1 or
5/1 ARM basis.

The Bank originates land acquisition and development loans with the source of
repayment being either the sale of finished lots or the sale of homes to be
constructed on the finished lots. The Bank will originate land acquisition,
development, and construction loans on a revolving line of credit basis for
subdivisions whereby the borrower may draw upon such line of credit as lots are
sold for the purpose of improving additional lots. Construction loans are
generally offered with terms up to twelve months for consumer and builder loans,
and up to twenty-four months for land development loans.

Construction loans are generally made in amounts up to 80% to 90% of the
appraised market value of the security property. During construction, loan
proceeds are disbursed in draws as construction progresses based upon
inspections of work in place by independent construction inspectors.

At December 31, 2002, the Bank had construction loans, including land
acquisition and development loans totaling $25.1 million, or 17.0% of the Bank's
total loan portfolio, of which $13.1 million consisted of one- to four-family
residential construction loans, $5.3 million consisted of commercial real estate
construction loans and $6.7 million consisted of land acquisition and
development loans. Construction loans are generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the security property's
value upon completion of construction as compared to the estimated costs of
construction, including interest. Also, the Bank assumes certain risks
associated with the borrowers' ability to complete construction in a timely and
workmanlike manner. If the estimate of value proves to be inaccurate, or if
construction is not performed timely or accurately, the Bank may be confronted
with a project which, when completed, has a value that is insufficient to assure
full repayment.

One- to Four-Family Residential Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage loans, first and second mortgage loans
secured by one- to four-family residences and lot loans for one- to four-family
residences located throughout the Baltimore-Washington Metropolitan area. It is
currently the general policy of the Bank to originate for sale in the secondary
market one- to four-family fixed-rate residential mortgage loans which conform,
except as to size, to the underwriting standards of Fannie Mae and Freddie Mac,
and to originate for investment adjustable rate one- to four-family residential
mortgage loans. The Bank generally does not retain the servicing rights of loans
it sells and sells such loans without recourse, with the exception of recourse
in the event of breaches in any representations or warranties made by the Bank.
The Bank recognizes, at the time of sale, the cash gain or loss on the sale of
the loans based on the difference between the net cash proceeds received and the
carrying value of the loans sold. One- to four-family mortgage loan originations
are generally obtained from the Bank's loan representatives and their contacts
with the local real estate industry, direct contacts made by the Bank's and the
Company's directors, existing or past customers, and members of the local
communities.

At December 31, 2002, one- to four-family residential mortgage loans totaled
$20.2 million, or 13.7% of total loans. Of the one-to four-family mortgage loans
outstanding at that date, $1.7 million were fixed-rate loans with terms of up to
three


                                       20

<PAGE>


years with a balloon payment at the end of the term, and $10.7 million with
terms of up to 30 years and interest rates which adjust annually from the outset
of the loan or which adjust annually after a 1 or 3 year initial period in which
the loan has a fixed rate. The interest rates for the majority of the Bank's
adjustable-rate mortgage loans are indexed to the one-year Treasury Constant
Maturity Index. Interest rate adjustments on such loans are limited to a 2%
annual adjustment cap with a maximum adjustment of 6% over the life of the loan.

The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps to reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Although the Bank offers adjustable-rate loans at below
market interest rates, all loans are underwritten to assure that the borrower is
qualified on a fully indexed basis.

Periodic and lifetime caps on interest rate increases help to reduce the risks
associated with the Bank's adjustable-rate loans, but also limit the interest
rate sensitivity of its adjustable-rate mortgage loans.

The Bank currently originates one- to four-family residential mortgage loans in
amounts up to 80% (or higher with private mortgage insurance) of the lower of
the appraised value or the selling price of the property securing the loan.
Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the yields on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.

Home Equity Lending. As of December 31, 2002, home equity loans totaled $14.3
million, or 9.7% of the Bank's total loan portfolio. Fixed-rate, fixed-term home
equity loans and adjustable rate home equity lines of credit are generally
offered in amounts up to 85% of the market value of the security property.
Fixed-rate, fixed-term home equity loans are offered with terms up to ten years
and home equity lines of credit are offered with terms up to twenty years.
Substantially all of the Bank's home equity loans are adjustable rate and
reprice with changes in the Wall Street Journal prime rate.

Consumer Lending. The Bank's portfolio of consumer loans primarily consists of
adjustable rate, personal lines of credit and installment loans secured by new
or used automobiles, new or used boats, and loans secured by deposit accounts.
Unsecured consumer loans are made with a maximum term of three years and a
maximum loan amount based on a borrower's financial condition. At December 31,
2002, consumer loans totaled $14.1 million or 9.6% of total loans outstanding.
Consumer loans are generally originated in the Bank's primary market area.

Credit Risk Management

The Bank's allowance for credit losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for credit losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The Bank estimates a range of acceptable
allowance for credit loss based upon loan risk ratings, prior periods'
charge-offs and specific loss reserves. This methodology is appropriate as the
Bank has ten years of loan loss history, has a sufficient number of loans for
broader base estimation processes to be meaningful and has a risk rating review
system established for the purpose of maintaining accurate risk ratings on
individual loans. Management believes this approach effectively measures the
associated risk with any particular loan or group of loans. Management also
considers other factors including current economic conditions, actual loss
experience and industry trends. The board of directors engages an independent
loan review consultant to evaluate the adequacy of the Bank's allowance for
credit losses. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for credit
losses. Such agencies may require the Bank to make additional provisions for
estimated loan losses based upon judgments different from those of management.
As of December 31, 2002, the Bank's allowance for credit losses was $1.6 million
or 1.07% of total loans and 113.2% of non-performing loans as compared to $1.6
million, or 1.40% of total loans and 1,581.0% of non-performing loans as of
December 31, 2001. The Bank had total non-performing loans of $1.4 million and
$100 thousand at December 31, 2002 and December 31, 2001, respectively, and
non-performing loans to total loans of 0.95% and 0.09%, at December 31, 2002,
and December 31, 2001, respectively. The increase in nonperforming assets from
December 31, 2001 is attributable to a $1.3 million participation loan to a
single borrower that matured on October 1, 2002 but remained current through
December 31, 2002. Due to delays by the lead bank in obtaining executed renewal
documentation, the Bank was required to classify this loan as nonperforming. The
executed documentation was received on January 10, 2003 and the loan was
restored to performing status. Excluding this loan, nonperforming assets were
$55,000 or 0.04% of total gross loans.

The Bank places loans on a nonaccrual status after 90 days of not having
received contractual principal or interest payments unless the loan is well
secured and in the process of collection. In addition the Bank maintains a watch
list of loans on a monthly basis that warrant more than the normal level of
management supervision. At December 31, 2002 the Bank had approximately $9.4
million in watch list loans.


                                       21

<PAGE>


The Bank continues to monitor and modify its allowances for credit losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for credit losses is sufficient to
cover losses inherent in its loan portfolio at this time, no assurances can be
given that the Bank's level of allowance for credit losses will be sufficient to
cover future loan losses incurred by the Bank or that future adjustments to the
allowance for credit losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions at the
time management determined the current level of the allowance for credit losses.
Management may in the future increase the level of allowances as a percentage of
total loans and non-performing loans as its loan portfolio increases or as
circumstances dictate.

The following table presents a three-year history for the allocation of the
allowance for credit losses, reflecting use of the methodology presented above,
along with the percentage of total loans and leases in each category.

At December 31,
(Dollars in thousands)

<TABLE>
<CAPTION>

                                              2002                      2001                    2000
                                      Amount       Loan Mix     Amount       Loan Mix    Amount      Loan Mix
<S>                                  <C>           <C>          <C>          <C>         <C>         <C>
Amount applicable to:
Commercial                             $509        22.0%         $475         21.5%        $484        21.6%
Real estate:
  Commercial                            567        28.0%          692         34.0%         626        37.5%
  Residential                            45        23.4%          103         20.9%          68        17.3%
  Construction                          250        17.0%           33         15.7%          20        19.0%
Consumer                                 83         9.6%           60          7.9%          37         4.6%
Unallocated                             124                       213                       321
                                        ---                       ---                       ---
      Total allowance                $1,578                    $1,576                    $1,556
                                     ------                    ------                    ------
</TABLE>

Analysis of Credit Risk

Activity in the allowance for credit losses for the preceding three years ended
December 31 is shown below:

 (Dollars in thousands)

<TABLE>
<CAPTION>
                                                             2002            2001           2000
                                                             ----            ----           ----
<S>                                                      <C>             <C>             <C>
   Total loans outstanding - at December 31              $147,313        $112,923        $88,967
   Average loans outstanding for the year                $133,022        $100,341        $81,544

   Allowance for credit losses at beginning of period      $1,576          $1,556         $1,483
   Provision charged to expense                                25               -             36
                                                               --               -             --
   Chargeoffs:
         Commercial loans                                      53               4              -
         Consumer and other loans                              19               -              -
                                                               --               -              -
               Total                                           72               4              -
   Recoveries:
         Residential/commercial real estate loans              --              --             --
         Commercial loans                                      47              24             36
         Consumer and other loans                               2               -              1
                                                                -               -              -
               Total                                           49              24             37
                                                               --              --             --

   Net chargeoffs                                              23            (20)           (37)
   Allowance for credit losses at end of year              $1,578          $1,576         $1,556
                                                           ------          ------         ------
   Allowance for credit losses as a percent of total loans  1.07%           1.40%          1.75%
                                                            -----           -----          -----
   Net chargeoffs as a percent of average loans             0.02%         (0.02)%        (0.04)%
                                                            -----         -------        -------
</TABLE>

Capital Management

During 2002, Stockholders' Equity increased $1.2 million or 8.8% to $15.1
million from $13.9 million at December 31, 2001. The increase was primarily due
to net income of $1.2 million.

In April 1997, the Company's employee incentive stock option plan was approved
by shareholders at the annual meeting. Under the plan, up to 133,333 shares of
the Company's common stock may be awarded under the direction of the Company's
compensation committee. Incentive stock options vest over a five year period.
During April 2000, a new Company incentive stock option plan was approved by
shareholders at the annual meeting. Under the plan, up to 266,666 shares of the
Company's common stock may be awarded under the direction of the Company's
compensation committee. Incentive stock options and grants vest over a five-year
period. During 2002, 32,500 shares of common stock were granted under the 2000
Stock Incentive Plan. During 2002, 65,998 shares granted in prior years were
forfeited and 8,899 shares were exercised. At December 31, 2002, the Company had
a total of 206,918 options and 6,603 restricted shares granted and outstanding.

See Note 14 to the Consolidated Financial Statements for more information on the
Company's stock option plans.


                                       22

<PAGE>

A table of the Equity Compensation Plan Information is shown below:

<TABLE>
<CAPTION>

                                                                                                       Number of securities
                                                                                                      remaining available for
                                  Number of securities to be     Weighted average exercise         future issuance under equity
                                    issued upon exercise of         price of outstanding        compensation plans excluding
                                     outstanding options,          options, warrants and             securities reflected in
                                     warrants and rights                   rights                          column (a)
  Plan category                              (a)                             (b)                                (c)

<S>                               <C>                            <C>                            <C>
Equity compensation plans
  approved by security holders              213,521                        $4.08                         186,478
Equity compensation plans not
   approved by security holders                   -                            -                               -
           Total                            213,521                        $4.08                         186,478

</TABLE>

Regulatory Capital Requirements

The Federal Reserve's capital regulations require state member banks to meet two
minimum capital standards: a 4% Tier 1 capital to total adjusted assets ratio
for the most highly rated banks (the "leverage" ratio), and an 8% risk-based
capital ratio. Tier 1 capital is defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related paid in capital, and minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and credit card relationships.

The risk-based capital standard requires the maintenance of Tier 1 and Total
capital (which is defined as Tier 1 capital plus Tier 2 capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the
Federal Reserve capital regulations based on the risks the agency believes are
inherent in the type of asset. The regulators have recently added a market risk
adjustment to cover a bank's trading account, and foreign exchange and commodity
positions. The components of Tier 1 capital are equivalent to those discussed
above. Tier 2 capital may include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt,
intermediate preferred stock, and the allowance for credit losses limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital
included as part of total capital cannot exceed 100% of Tier 1 capital.

At December 31, 2002, both the Company's and the Bank's Tier 1 and Total
Risk-based capital ratios were 9.7% and 10.7%, respectively. The Bank was
considered well capitalized for regulatory purposes. See Note 19 of the
Consolidated Financial Statements for more information on the Bank's risk-based
capital ratios.

Regulation and Supervision

The Company, by virtue of its control of the Bank, is a registered bank holding
company as amended under the Bank Holding Company Act of 1956 ("the Act"). As a
bank holding company, the Company is required to file certain reports with, and
otherwise comply with the rules and regulations of, the Federal Reserve Board
("FRB") under the Act.

Effective November 1, 2000, the Company changed the Bank charter from a national
charter to a state charter. As a result, the Bank is now regulated by the State
of Maryland Department of Labor, Licensing and Regulation. The Bank is subject
to extensive regulation, examination and supervision by the State of Maryland as
its primary regulator, the Federal Reserve Bank of Richmond as its secondary
regulator and the FDIC, as the deposit insurer. The Bank's deposit accounts are
insured up to applicable limits by the FDIC's Bank Insurance Fund ("BIF"). The
Bank must file reports with the Federal Reserve and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of other institutions. The state and the Federal Reserve conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. Many aspects of the Bank's operations are
regulated by federal law including allowable activities, reserves against
deposits, branching, mergers and investments. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the state of Maryland, the Federal Reserve, the FDIC or the
Congress, could have a material adverse impact on the Company or the Bank and
their operations.

On October 26, 2001, the USA PATRIOT (Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act of
2001 became law. The Act, passed in response to the September 11 tragedy,
includes several money laundering and banking provisions that significantly
impact financial institutions. The most


                                       23

<PAGE>

important of which is the requirement for all financial institutions, to develop
anti-money laundering programs. The Treasury Department is still releasing
additional regulations that will further define the requirements of financial
institutions under the Act. The Bank has developed policies and procedures to
comply with all provisions of the Act that have been finalized to date.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley"). Sarbanes-Oxley represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
It is applicable to all companies with equity or debt securities registered
under the Securities Exchange Act of 1934. Some provisions of Sarbanes-Oxley
took effect upon passage while the rest take effect over a period of 30 to 270
days after passage and are subject to rulemaking by the Securities and Exchange
Commission and the self regulatory organizations. Some of the changes included
in the new, amended and proposed regulations:

     o    Require accelerated annual and quarterly reporting and require the
          CEOs and CFOs to certify their company's financial reports, filings
          amd control systems;

     o    Require increased disclosure and reporting obligations for the
          company, its officers and directors, and its affiliates;

     o    Require that the company comply with new audit committee independence
          and auditor independence requirements; and

     o    Implement new corporate responsibility requirements and provide
          additional corporate and criminal fraud accountability.


The Company is continuing to monitor the passage of the new and amended
regulations and is taking appropriate measures to comply with them. Although the
Company will incur additional expense in complying with the various provisions
of Sarbanes-Oxley and the new and amended regulations, management does not
expect that such compliance will have a material impact on the Company's results
of operations or financial condition.

Market Value and Dividend Information

The Company's Common stock is listed on "The NASDAQ Stock Market(R) SmallCap
Market" under the symbol "ANNB." The Company's stock began trading on October 1,
1997. The Company has traded an average daily volume of 2,753 shares during
2002. At December 31, 2002 the closing price was $5.50 per share.

The Company's high and low stock price during the last quarter of 2002 was $5.60
and $4.90, respectively.

As of March 21, 2003 the Company has outstanding 3,013,893 shares of common
stock and no preferred stock issued or outstanding. The Company paid dividends
for the first time to its stockholders during 1999. During 2002 dividends paid
to the stockholders equaled $0.01 per share.

The Company also paid a 4 for 3 dividend in the form of a stock split on August
24, 2001. The split added 746,740 shares to those previously outstanding.

Quarterly Average Stock Information:

<TABLE>
<CAPTION>
                                     2002                              2001                              2000
                  Stock  Price Range      Per Share  Stock Price Range      Per Share   Stock Price Range     Per Share
Quarter            High         Low        Dividend      High        Low     Dividend     High        Low     Dividend
<S>               <C>          <C>         <C>           <C>        <C>     <C>         <C>         <C>       <C>
1st                $6.25       $4.35       $0.0100       $4.30      $3.23    $0.0075      $3.75      $2.63    $0.0075
2nd                 6.10        5.50        0.0000        4.49       3.75     0.0150       3.70       2.91     0.0075
3rd                 5.85        5.30        0.0000        6.38       4.28          *       4.31       3.00     0.0075
4th                 5.60        4.90        0.0000        5.35       4.20     0.0100       4.13       2.91     0.0075

</TABLE>


*Four for three stock split in the form of a stock dividend.


                                       24

<PAGE>

[LOGO OF STEGMAN & COMPANY
 APPEARS HERE]

ANNAPOLIS BANCORP, INC.

                         Report of Independent Auditors

Audit Committee of the
Board of Directors and Stockholders
Annapolis Bancorp, Inc. and Subsidiary

         We have audited the accompanying consolidated balance sheets of
Annapolis Bancorp, Inc. and Subsidiary as of December 31, 2002, 2001 and 2000
and the related statements of income, changes in stockholders' equity, and cash
flows for each of the three years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Annapolis
Bancorp, Inc. and Subsidiary as of December 31, 2002, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years
then ended in conformity with accounting principles generally accepted in the
United States of America.

                                            /s/ Stegman & Company

Baltimore, Maryland
January 10, 2003


                                       25

<PAGE>

ANNAPOLIS BANCORP, INC.

Consolidated Balance Sheets ($000)
<TABLE>
<CAPTION>
December 31,                                                                          2002            2001             2000
<S>                                                                                 <C>            <C>           <C>
Assets
Cash and due from banks                                                              $6,725          $3,632          $3,177
Federal funds sold                                                                   15,529          13,710           4,724
Investment securities available for sale                                             20,207          28,995          34,283
Loans, less allowance for credit losses of $1,578;
  $1,576 and $1,556                                                                 145,735         111,347          87,411
Premises and equipment, net                                                           7,114           7,375           5,302
Accrued interest receivable                                                             732             855           1,152
Deferred income taxes                                                                   363             335             461
Investment in bank owned life insurance                                               3,223              --              --
Other assets                                                                            488             432             530
          Total assets                                                             $200,116        $166,681        $137,040

Liabilities and Stockholders' Equity
Deposits
  Noninterest bearing                                                               $29,534         $23,721         $13,752
  Interest bearing                                                                  134,455         121,163         104,268
Securities sold under agreements to repurchase                                       10,500           7,674           5,369
Long term borrowings                                                                 10,000              --              --
Accrued interest payable and other liabilities                                          549             263             289
          Total liabilities                                                         185,038         152,821         123,678

Stockholders' Equity
  Common stock, par value $0.01 per share; authorized
    10,000,000 shares; issued and outstanding 3,010,393
    shares in 2002, 2,996,629 shares in 2001 and
    2,262,406 shares in 2000                                                             30              30              23
  Paid in capital                                                                    12,859          12,796          12,881
  Retained earnings                                                                   2,030             833             425
  Accumulated other comprehensive income                                                159             201              33
          Total stockholders' equity                                                 15,078          13,860          13,362
          Total liabilities and stockholders' equity                               $200,116        $166,681        $137,040
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       26

<PAGE>

ANNAPOLIS BANCORP, INC.

Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,                                                               2002            2001            2000
<S>                                                                                <C>             <C>             <C>
Interest Income
   Loans, including fees                                                             $9,458          $8,727          $7,926
   Federal funds sold                                                                   217             616             509
   Mortgage-backed securities                                                           257              69               -
   U.S. Treasury securities and obligations of other
     U.S. Government agencies                                                           926           1,489           2,020
        Total interest income                                                        10,858          10,901          10,455
Interest  Expense
   Certificates of deposit, $100,000 or more                                            627             744             394
   Other deposits                                                                     2,350           3,610           2,951
   Securities sold under agreements to repurchase                                       232             239             335
   Interest on long term borrowings                                                     305               -               -
        Total interest expense                                                        3,514           4,593           3,680
        Net interest income                                                           7,344           6,308           6,775
Provision for Credit Losses                                                              25               -              36
        Net interest income after provision for credit losses                         7,319           6,308           6,739
Noninterest Income
   (Loss)/gain on disposal/sale of equipment                                              -            (24)            (51)
   Service charges and fees on deposits                                                 694             602             469
   Mortgage banking fees                                                                315             199             100
   Rental income                                                                        167              77               -
   Other income                                                                         464             308             366
        Total noninterest income                                                      1,640           1,162             884
Noninterest Expense
   Personnel                                                                          3,885           3,612           3,034
   Occupancy and equipment                                                              968             845             959
   Data processing                                                                      775             682             603
   Marketing and advertising                                                            285             325             391
   Other operating                                                                    1,175           1,234           1,117
   Amortization of core deposit premium                                                   -               -              43
         Total noninterest expense                                                    7,088           6,698           6,147

Income before income taxes                                                            1,871             772           1,476
Income tax expense                                                                      644             266             504
Net income                                                                           $1,227            $506            $972

Basic earnings per share                                                              $0.41           $0.17           $0.32
Diluted earnings per share                                                            $0.41           $0.17           $0.32
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                       27

<PAGE>

ANNAPOLIS BANCORP, INC.

Consolidated Statements of Changes in Stockholders' Equity
($000) except share data
<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                                                             Other          Total
                                                Common Stock       Paid in   Retained    Comprehensive   Stockholders' Comprehensive
                                            Shares    Par value    Capital   Earnings        Income         Equity         Income
<S>                                         <C>       <C>          <C>       <C>         <C>             <C>            <C>
 BALANCE,
   JANUARY 1, 2000                          2,323,506       $23    $13,192      $(454)         $(34)        $12,727
 Net income                                         -         -          -        972             -             972         $ 972
 Dividends paid ($0.0300 per share)                 -         -          -        (93)            -             (93)
 Stock repurchase                             (61,100)        -       (311)         -             -            (311)
 Unrealized gain on investment securities
   available for sale net of income taxes           -         -          -          -            67              67            67

 BALANCE,
   DECEMBER 31, 2000                        2,262,406        23     12,881        425            33          13,362         1,039
                                                                                                                            =====
 Net income                                         -         -          -        506             -             506           506
 Dividends paid ($0.0325 per share)                 -         -          -        (98)            -             (98)
 4:3 stock split in the form of a
   stock dividend                             745,860         8         (8)         -             -               -
 Stock repurchase                             (24,500)       (1)      (127)         -             -            (128)
 Stock options exercised                        6,666         -         24          -             -              24
 Issuance of restricted stock                   6,197         -         26          -             -              26
 Unrealized gain on investment
   securities available for sale net
   of income taxes                                  -         -          -          -           168             168           168

 BALANCE,
   DECEMBER 31, 2001                        2,996,629        30     12,796        833          $201          13,860           674
                                                                                                                              ===
 Net income                                         -         -          -      1,227             -           1,227         1,227
 Dividends paid ($0.0100 per  share)                -         -          -        (30)            -             (30)
 Stock options exercised                        8,899         -         35          -             -              35
 Issuance of restricted stock                   4,865         -         28          -             -              28
 Unrealized (loss) on investment
   securities available for sale net
   of income taxes                                  -         -          -          -           (42)            (42)          (42)

BALANCE
   DECEMBER 31, 2002                        3,010,393       $30    $12,859     $2,030          $159         $15,078        $1,185
                                                                                                                           ======
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       28

<PAGE>

ANNAPOLIS BANCORP, INC.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended December 31,                                                                  2002            2001           2000
<S>                                                                                   <C>               <C>           <C>
Cash Flows from Operating Activities
    Net income                                                                          $1,227            $506           $972
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation and amortization                                                      448             424            314
        Provision for credit losses                                                         25               -             36
        Deferred income taxes                                                                1              42             (6)
        Amortization of premiums and accretion of discounts, net                            24             (24)          (174)
        Amortization of core deposit premium                                                 -               -             43
        Loans charged off, net                                                             (23)             20             37
        Loss on sale or disposal of equipment                                                -              24             50
        Decrease (increase) in:
           Accrued interest receivable                                                     123             297           (331)
           Other assets                                                                   (177)             97            (77)
        Increase (decrease) in:
           Accrued interest payable                                                         62             (16)            26
           Accrued income taxes, net of taxes refundable                                   (62)             49            (54)
           Deferred loan origination fees                                                   90             (58)            28
           Other liabilities                                                               284             (57)           (98)
        Net cash provided from operations                                                2,022           1,304            766

Cash Flows from Investing Activities
  Proceeds from sales and maturities of securities
     available for sale                                                                 33,683          45,505         21,884
  Purchase of securities available for sale                                            (24,982)        (39,942)       (32,117)
  Net (increase) decrease in federal funds sold                                         (1,819)         (8,987)         6,709
  Loans made, net of principal collected                                               (34,480)        (23,898)        (6,277)
  Purchase of bank owned life insurance                                                 (3,110)              -              -
  Purchases of premises and equipment                                                     (187)         (2,521)        (2,904)
  Proceeds from sale of other real estate owned                                              -               -             57
        Net cash used by investing activities                                          (30,895)        (29,843)       (12,648)

Cash Flows from Financing Activities
  Net increase (decrease) in
     Time deposits                                                                       3,179          10,757          5,612
     Other deposits                                                                     15,928          16,106          7,314
     Securities sold under agreements to repurchase                                      2,826           2,305         (3,128)
     Long term borrowings                                                               10,000               -              -
  Payment of cash dividends                                                                (30)            (97)           (92)
  Proceeds from sale of stock and options exercised                                         35              14              -
  Issuance of restricted stock                                                              28              36              -
  Repurchase of common stock                                                                 -            (127)          (312)
          Net cash provided by financing activities                                     31,966          28,994          9,394

Net increase (decrease) in cash and cash equivalents                                     4,093             455         (2,488)

Cash and cash equivalents at beginning of year                                           3,632           3,177          5,665

Cash and cash equivalents at end of year                                                $6,725          $3,632         $3,177

Supplemental Cash Flow Information
    Interest paid, including interest credited to accounts                              $3,452          $4,609         $3,793
    Income taxes paid                                                                      638             240            557
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       29

<PAGE>

ANNAPOLIS BANCORP, INC.
Notes to Consolidated Financial Statements

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting and reporting policies in the financial statements conform
with accounting principles generally accepted in the United States of America
and to general practices within the banking industry. Management makes 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. These estimates and assumptions may affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates. Certain reclassifications have been made to the 2001 and
2000 consolidated financial statements to conform with the 2002 presentation.

Business

     The Company was incorporated on May 26, 1988, under the laws of the State
of Maryland to serve as a bank holding company. The Company, registered as a
bank holding company, formed Annapolis National Bank (the "Bank"), a nationally
chartered financial institution. Effective June 1, 2001 the Company changed its
name to Annapolis Bancorp, Inc. Effective November 1, 2000 the Bank changed its
charter from a national charter to a state charter and joined the State of
Maryland and the Federal Reserve banking systems. Also effective November 1,
2000 the Bank changed its name from Annapolis National Bank to BankAnnapolis.
The Company (as a bank holding company) and the Bank are subject to governmental
supervision, regulation, and control.

     The principal business of BankAnnapolis is to make loans and other
investments and to accept time and demand deposits. The Bank's primary market
area is in Anne Arundel County, Maryland, although the Bank's business
development efforts generate business outside of the area. The Bank offers a
broad range of banking products, including a full line of business and personal
savings and checking accounts, money market demand accounts, certificates of
deposit and other banking services.

     The Bank funds a variety of loan types including commercial and residential
real estate loans, commercial term loans and lines of credit, consumer loans,
and letters of credit. The Bank's customers are primarily individuals and small
businesses.

Principles of consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, BankAnnapolis. All significant intercompany
balances and transactions have been eliminated in consolidation. The financial
statements of Annapolis Bancorp, Inc. (Parent only) include its investment in
the Bank under the equity method of accounting.

Cash equivalents

     For purposes of reporting cash flows, cash and demand balances due from
banks are considered "cash equivalents" for financial reporting purposes.

Investment securities

     As securities are purchased, management determines if the securities should
be classified as held to maturity or available for sale. Securities which
management has the intent and ability to hold to maturity are recorded at
amortized cost. Securities which may be sold before maturity are classified as
available for sale and carried at fair value with unrealized gains and losses
included in accumulated other comprehensive income, a separate component of
stockholders' equity, on an after-tax basis. Investments in Federal Home Loan
Bank and Federal Reserve stock are included with securities classified as
available for sale and carried at cost.

Premises and equipment

     Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the assets. Useful lives
range from three to 10 years for furniture, fixtures, and equipment; three to
five years for software, hardware, and data handling equipment; and 10 to 40
years for buildings and building improvements. Land improvements are amortized
over a period of 15 years; and leasehold improvements are amortized over the
term of the respective lease plus the first optional renewal period, if
applicable. Maintenance and repairs are charged to expense as incurred, while
improvements which extend the useful life are capitalized and depreciated over
the estimated remaining life of the asset.

Loans

     Loans are stated at their principal balance outstanding, plus deferred
origination costs, less unearned discounts, deferred origination fees, and the
allowance for credit losses.

     Interest on loans is credited to income based on the principal amounts
outstanding. Origination fees and costs are amortized to income over the
contractual life of the related loans as an adjustment of yield. Discounts on
the purchase of mortgage loans are amortized to income over the contractual
lives of the loans.


                                       30

<PAGE>

     Accrual of interest on a loan is discontinued when the loan is delinquent
more than ninety days unless the collateral securing the loan is sufficient to
liquidate the loan. Management considers all loans where the accrual of interest
has been discontinued to be impaired.

Allowance for Credit Losses

     The allowance for credit losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio and is
based on the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans, actual loss experience, current economic
events in specific industries and geographic areas including unemployment levels
and other pertinent factors including regulatory guidance and general economic
conditions. Determination of the allowance is inherently subjective as it
requires significant estimates, including the amounts and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogenous
loans based on historical loss experience and consideration of economic trends,
all of which may be susceptible to significant change. Credit losses are charged
off against the allowance, while recoveries of amounts previously charged off
are credited to the allowance. A provision for credit losses is charged to
operations based on management's periodic evaluation of the factors previously
mentioned, as well as other pertinent factors. Evaluations are conducted at
least quarterly and more often if deemed necessary.

     The allowance for credit losses consists of a specific component and a
nonspecific component. The components of the allowance for credit 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 specific component
of the allowance for credit losses reflects expected losses resulting from
analysis developed through credit allocations for individual loans and
historical loss experience for each loan category. The credit allocations are
based on a regular analysis of all loans over a fixed-dollar amount where the
internal credit rating is at or below a predetermined classification. The
historical loan loss element is determined statistically using a loss migration
analysis that examines loss experience and the related internal gradings of
loans charged off. The loss migration analysis is performed quarterly and loss
factors are updated regularly based on actual experience. The specific component
of the allowance for credit losses also includes management's determination of
the amounts necessary for concentrations and changes in portfolio mix and
volume.

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

Real estate owned

     Real estate acquired in satisfaction of a debt is carried at the lower of
cost or net realizable value. Costs incurred in maintaining foreclosed real
estate and write-downs to reflect declines in the fair value of the properties
after acquisition are included in noninterest expenses.

Advertising Costs

     Advertising costs are generally expensed when incurred.

Income taxes

     The Corporation and its subsidiaries file a consolidated federal income tax
return. The provision for income taxes is based upon income in the financial
statements, rather than amounts reported on the Company's income tax return.

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.

Stock based compensation

     The Company accounts for stock based compensation using the intrinsic value
method set forth in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." For disclosure purposes, pro forma
net income and earnings per share are provided as if the fair value method has
been applied, in accordance with SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure."

Earnings per share

     Basic earnings per common share are determined by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per share are calculated by including the average
dilutive common stock equivalents outstanding during the period.

     Dilutive common equivalent shares consist of stock options, calculated
using the treasury stock method.

                                       31

<PAGE>

New Accounting Pronouncements

     In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses how and when to measure impairment on long-lived assets and how to
account for long-lived assets that an entity plans to dispose of either through
sale, abandonment, exchange, or distribution to owners. The statement's
provisions supercede SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" which addressed asset impairment, and certain
provisions of APB Opinion No. 30 related to reporting the effects of the
disposal of a business segment and requires expected future operating losses
from discontinued operations to be recorded in the period in which the losses
are incurred rather than the measurement date. Under SFAS No. 144, more
dispositions may qualify for discontinued operations treatment in the income
statement. The provisions of SFAS No. 144 became effective for the Company on
January 1, 2002, and did not have a material impact on results of operations,
financial position, or liquidity.

     In December 2002, the Financial Accounting Standards Board issued SFAS
No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require additional and more frequent disclosures in financial statements about
the effects of stock-based compensation. Adoption of SFAS No. 148 had no effect
on the financial position or results of operations of the Company.

2.  CASH AND DUE FROM BANKS

     Banks are required to carry cash reserves of specified percentages of
deposit balances. The Bank's normal balances of cash on hand and on deposit with
other banks are sufficient to satisfy these reserve requirements.

     The Bank normally maintains balances with other banks that exceed the
federally insured limit. The average balance maintained in excess of the limit,
including federal funds sold to the same bank, was approximately $4.6 million.

3.  INVESTMENT SECURITIES

     Investment securities are summarized as follows:
<TABLE>
<CAPTION>

                                   Amortized     Unrealized     Unrealized    Estimated Fair
December 31, 2002                       Cost          Gains         Losses             Value
<S>                                <C>           <C>            <C>           <C>
Available for sale
  U.S. Government agency             $14,503           $154             $-           $14,657
  Mortgage-backed securities           4,605             87              -             4,692
  Federal Home Loan Bank stock           500                                             500
  Federal Reserve Bank stock             358              -              -               358
                                     $19,966           $241             $-           $20,207

December 31, 2001
Available for sale
  U.S. Government agency             $23,063           $286             $3           $23,346
  Mortgage-backed securities           4,910             21              -             4,931
  Federal Home Loan Bank stock           360              -              -               360
  Federal Reserve Bank stock             358              -              -               358
                                     $28,691           $307             $3           $28,995

December 31, 2000
Available for sale
  U.S. Government agency             $33,512            $61             $8           $33,565
  Federal Home Loan Bank stock           360                                             360
  Federal Reserve Bank stock             358              -              -               358
                                     $34,230            $61             $8           $34,283
</TABLE>

     There were no proceeds from the sale of securities during 2002, 2001 and
2000. Gains and losses are determined using the specific identification method.

                                       32

<PAGE>

     The amortized cost and estimated fair value of securities by contractual
maturities are shown below. Actual maturities of these securities may differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                       Available for sale
                                                   Amortized     Estimated Fair
                                                        cost             value
<S>                                                <C>               <C>
December 31, 2002
Due within one year                                      $--               $--
Due after one through five years                      14,503            14,657
Due after five years                                   4,605             4,692
Equity securities                                        858               858
                                                     $19,966           $20,207

December 31, 2001
Due within one year                                      $--               $--
Due after one through five years                      19,941            20,185
Due after five years                                   8,032             8,092
Equity securities                                        718               718
                                                     $28,691           $28,995

December 31, 2000
Due within one year                                  $22,592           $22,614
Due after one through five years                      10,920            10,951
Equity securities                                        718               718
                                                     $34,230           $34,283
</TABLE>

     At December 31, 2002, 2001 and 2000, investments available for sale with a
carrying value of $16.8 million, $10.9 million and $14.2 million, respectively,
were pledged as collateral for certain government deposits and for other
purposes as required by law.

4.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

     Major classifications of loans are as follows:

<TABLE>
<CAPTION>
                                                         2002                   2001                    2000
<S>                                                  <C>                   <C>                       <C>
Real estate
  Commercial                                          $53,224                $50,232                 $46,059
  Residential                                          47,607                 29,629                  19,728
Commercial                                             32,445                 24,368                  19,323
Consumer                                               14,140                  8,887                   4,107
                                                      147,416                113,116                  89,217

Less
  Deferred loan origination fees                          103                    193                     250
  Allowance for credit losses                           1,578                  1,576                   1,556
                                                        1,681                  1,769                   1,806
Loans, net                                           $145,735               $111,347                 $87,411

     The maturity and rate repricing distribution of the loan portfolio is as follows:

Repricing or maturing within one year                 $73,995                $61,395                 $51,308
Maturing over one to five years                        46,786                 41,270                  26,685
Maturing over five years                               26,635                 10,451                  11,224
                                                     $147,416               $113,116                 $89,217

     Transactions in the allowance for credit losses are as follows:

Balance, beginning of year                             $1,576                 $1,556                  $1,483
Provisions charged to operations                           25                      0                      36
Recoveries                                                 49                     24                      38
Charge-offs                                                72                      4                       1
Balance, end of year                                   $1,578                 $1,576                  $1,556

     The balance of nonaccrual and impaired loans is as follows:

Other nonaccrual loans                                    $18                    $75                    $263
Total nonaccrual and impaired loans                        55                    100                     299
Average impaired loans                                    112                    302                   1,257
Related allowance for credit losses                        17                     33                     171
Interest collected                                         50                     45                     145
Balance of accrued interest not recorded                   55                     68                      98
</TABLE>

     The Bank lends to customers located primarily in Anne Arundel County and
surrounding areas of central Maryland. Although the loan portfolio is
diversified, its performance will be influenced by the economy of the region.

     Loans that were 90 days or more past due, including nonaccrual loans
amounted to $1.3 million at December 31, 2002, $24 thousand at December 31, 2001
and zero at December 31, 2000.

     Certain officers and directors (and companies which have a 10% or more
beneficial ownership) have loans with the Bank. Such loans were made in the
ordinary course of business on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated parties and are being
repaid as agreed.

                                       33

<PAGE>

     A summary of the activity of these loans follows:

($000)                                        2002      2001      2000
Beginning balance                           $1,774    $1,901    $2,824
Advances                                       300       352       125
Repayments                                    (346)     (497)   (1,242)
Change in officers and directors               601        18       194
Ending balance                              $2,329    $1,774    $1,901

5.  CREDIT COMMITMENTS

     Outstanding loan commitments, unused lines of credit, and letters of credit
are as follows:

         ($000)                               2002      2001      2000
Loan commitments and lines of credit
  Construction                             $18,345   $18,722   $18,722
  Other                                     24,407    14,271    14,271
                                           $42,752   $32,993   $32,993
Letters of credit
  Deposit secured                             $368      $240      $240
  Other                                        967       848     1,156
                                            $1,335    $1,197    $1,396

     Loan commitments including lines of credit are agreements to lend to a
customer as long as there is no violation of any condition to the contract. Loan
commitments generally have variable interest rates, fixed expiration dates, and
may require payment of a fee. Lines of credit generally have variable interest
rates. Such lines do not represent future cash requirements because it is
unlikely that all customers will draw upon their lines in full at any time.

     Letters of credit are commitments issued to guarantee the performance of a
customer to a third party.

     Loan commitments and lines and letters of credit are made on the same
terms, including collateral, as outstanding loans. Management is not aware of
any accounting loss the Company will incur by the funding of these commitments.

6.  INTANGIBLE ASSETS

     The core deposit premium was amortized over a period expiring in the year
2000. Amortization expense relating to the core deposit premium was zero in 2002
and 2001and $43 thousand in 2000. As of December 31, 2000 the core deposit
premium was fully amortized.

7.  INVESTMENT IN BANK OWNED LIFE INSURANCE

     The Company includes the cash surrender value of Bank Owned Life Insurance
(BOLI) in Other Assets on the accompanying consolidated financial statements of
condition. In 2002, the Bank purchased single premium policies amounting to
$3,110,000. The increase in cash surrender value is recorded as other
noninterest income. The Bank recorded $113,000 in BOLI income for 2002 and zero
for 2001 and 2000.

8.   PREMISES AND EQUIPMENT

     A summary of premises and equipment and the related depreciation is as
follows:

($000)                                        2002      2001      2000

 Land, Land Improvements and Building       $6,063    $6,075    $4,316
 Leasehold improvements                        634       596       602
 Furniture, fixtures, and equipment          2,364     2,219     1,564
                                             9,061     8,890     6,482
 Accumulated depreciation                    1,947     1,515     1,180
 Net premises and equipment                 $7,114    $7,375    $5,302
 Depreciation and amortization expense        $448      $424      $314

     The Company constructed a new branch and administrative facility on a tract
of land owned by the Company. The company moved into the new facility in March
2001. The total cost of the project was approximately $6 million. Interest
capitalized in association with the branch and administrative facility was zero
for the year ended December 31, 2002 and $56 thousand and $139 thousand
respectively for the years ended December 31, 2001 and 2000.

                                       34

<PAGE>

9.  LEASE COMMITMENTS

     Lease obligations will require rent payments as follows:

                                  Minimum
                                  rentals
                   Period         $(000)

                    2002           $135
                    2003            115
                    2004            115
                    2005            100
                    2006             37
     Remaining years                --
                                    --
                                   $502

     The leases generally provide for payment of property taxes, insurance, and
maintenance costs by the Company. The total rental expense for all real property
leases was $149 thousand, $205 thousand and $480 thousand for 2002, 2001, and
2000, respectively.

10.  DEPOSITS

     Major classifications of deposits are as follows:


    ($000)                                2002          2001         2000

    Demand, noninterest bearing          $29,534      $23,721       $13,752
    NOW accounts                          24,879       19,142        21,892
    Savings and money market accounts     44,419       40,042        31,155
    Time deposits, $100,000 and over      17,757       14,003         9,923
    Other time                            47,400       47,975        41,298
                                        $163,989     $144,883      $118,020

     Time deposits mature as follows:

    Three months or less                 $10,690       $9,975        $7,567
    Over three months to one year         28,512       29,991        32,998
    Over one year                         25,955       22,013        10,656
                                         $65,157      $61,979       $51,221

     At December 31, 2002, 2001, and 2000, time deposits with maturities in
excess of five years totaled $zero, $113 thousand and $107 thousand,
respectively.

11.   SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Securities sold under agreements to repurchase are securities sold to the
Bank's customers, at the customer's request, under a continuing "roll-over"
contract that matures in one business day. The underlying securities sold are
U.S. Treasury notes or Federal agencies that are segregated in the Bank's
correspondent safekeeping account from the Bank's other investment securities.

     The following table presents certain information for repurchase agreements:

($000)                                      2002         2001          2000
Balance outstanding, at year end         $10,500       $7,674        $5,369
Average balance during the year            8,752        7,384         9,851
Average interest rate during the year       2.65%        3.22%         3.40%
Maximum month-end balance                $10,609       $9,581       $11,750


12.  LONG TERM BORROWINGS

     The Company had other long term borrowings at December 31, 2002 as follows:

          FHLB 4.25% Advance due May 2007                      $5,000
          FHLB 4.75% Advance due May 2012                       5,000
                                               Total          $10,000

     Interest on these instruments is paid quarterly. FHLB advances are fully
collateralized by pledges of loans. The Company has pledged under a blanket
lien, all qualifying residential and commercial mortgage loans under the
borrowing agreement with the FHLB.

                                       35

<PAGE>

13.  PROFIT SHARING AND OTHER EMPLOYEE BENEFIT PLANS

     The Company has a profit sharing plan, qualifying under Section 401(k) of
the Internal Revenue Code, for those employees who meet the eligibility
requirements set forth in the plan. The plan does not require the Company to
match the participants' contributions. The Company's contributions to the plan
were $95 thousand in 2002, $78 thousand in 2001 and $24 thousand in 2000.

     The Company has entered into individual Supplemental Executive Retirement
Agreements (SERA's) with certain of its executives. The SERA's are designed to
provide certain post-retirement benefits to enable a targeted level of covered
retirement income to be met and to provide certain death benefits. The Company
is accruing the present value of these benefits over the remaining number of
years to the executives' retirement dates. Benefit accruals included in
noninterest expense for 2002, 2001, and 2000 were $17.6 thousand, zero and zero,
respectively.

14. STOCK OPTIONS AND RESTRICTED SHARES

     In April, 1997, the Company adopted a stock option plan, authorizing the
issuance of 133,333 shares of common stock, intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code. The plan provided
for granting options to purchase shares of the common stock to the officers and
other key employees of the Company and the Bank. Options granted under this plan
have ten-year expiration dates with vesting periods from immediate to five
years. After April 2000 no additional options may be granted under this plan.

     During April 2000, a new incentive stock option plan was approved by the
shareholders at the annual meeting. Under this plan, the Company's compensation
committee has discretionary authority to grant stock options, restricted stock
awards, and deferred share awards to employees and directors, including members
of the committee. Under this plan, up to 266,666 shares, as adjusted for the
August 24, 2001 four for three stock split in the form of a stock dividend, of
Company stock may be awarded under the direction of the committee. The plan
provides for the awards to vest over a five-year period of time. Options have a
ten-year expiration period.

A summary of the status of the Company's performance-based stock option plans
follows:

<TABLE>
<CAPTION>
                                                2002                     2001                     2000
                                                    Weighted                 Weighted                 Weighted
                                                     Average                  Average                  Average
                                       Number of    Exercise    Number of    Exercise    Number of    Exercise
                                         Shares       Price       Shares       Price       Shares       Price
<S>                                    <C>          <C>         <C>          <C>         <C>          <C>
Options Outstanding
 Outstanding, beginning of year          249,315       $3.79       99,500       $3.98       86,500       $4.58
   Granted                                32,500        5.50      107,331        3.67       40,000        3.23
   Exercised                              (8,899)       3.28       (6,666)       3.23            -           -
   Forfeited                             (65,998)       3.70      (11,000)       5.13      (27,000)       5.53
   Effect of Stock Split                       -           -       60,150        3.74            -           -
     Outstanding, end of year            206,918       $4.10      249,315       $3.79       99,500       $3.98
</TABLE>

     These options expire as follows:

                           Weighted
                            Average
                           Exercise        Options
       Expiration Date       Price          Vested   Nonvested

                  2007        $4.96         12,565           -
                  2008        $7.30          7,466       1,866
                  2009        $3.46         18,399      13,333
                  2010        $3.23         15,998      23,998
                  2011        $3.73         15,732      65,061
                  2012        $5.50              -      32,500
         Total                               70,160    136,758



                                       36

<PAGE>

    A summary of the status of the Company's restricted share awards follows:

<TABLE>
<CAPTION>
                                                2002                     2001                     2000
                                                    Weighted                 Weighted                 Weighted
                                                     Average                  Average                  Average
                                       Number of    Exercise    Number of    Exercise    Number of    Exercise
                                         Shares       Price       Shares       Price       Shares       Price
<S>                                    <C>          <C>         <C>          <C>         <C>          <C>
Restricted Shares
  Outstanding, beginning of year          11,468       $3.23       13,250       $3.23            -          $-
  Granted                                      -           -            -           -       13,250        3.23
  Exercised                              (4,865)        3.23      (6,197)        3.23            -           -
  Forfeited                                    -           -            -           -            -           -
  Effect of Stock Split                        -           -        4,415        3.23            -           -
  Outstanding, end of year                 6,603       $3.23       11,468       $3.23       13,250       $3.23

    Weighted fair value of options,
        granted during the year                        $2.22                    $1.63                    $1.85
</TABLE>

     The Company applies APB Opinion No. 25 in accounting for the stock option
plan. Accordingly, the Company does not recognize compensation expense for stock
options granted. SFAS No. 123, Accounting for Stock-Based Compensation,
established new accounting and reporting standards for stock-based employee
compensation plans.

     This standard defines a fair value based method for measuring compensation
expense for stock-based plans to be recognized in the statement of income or
disclosed in the notes to the financial statements.

     The weighted average fair value of options granted during 2002, 2001, and
2000 has been estimated using the Black-Scholes option-pricing model with the
following assumptions:

                                      2002        2001        2000
  Dividend yield                     0.00%       0.80%       0.00%
  Risk-free interest rate            4.66%       5.32%       6.46%
  Expected volatility                15.0%       15.0%       30.0%
  Expected life in years               10          10          10

     Had compensation been determined in accordance with the provisions of SFAS
No. 123 and SFAS No, 148, the Company's net income and earning per share would
have been reduced to the following pro forma amounts:

                                                2002        2001         2000

  Net income as reported                      $1,227        $506         $972

    Less proforma effect of stock-based
      compensation expense determined
      using the fair value method                (64)        (47)         (31)
  Proforma income                             $1,163        $459         $941

  Basic earnings per share
     As reported                               $0.41       $0.17        $0.32
     Pro forma                                  0.39        0.15         0.31
  Diluted earnings per share
     As reported                               $0.41       $0.17        $0.32
     Pro forma                                  0.38        0.15         0.31

15.  LINES OF CREDIT

     The Bank is a member of the Federal Home Loan Bank system and may borrow up
to $70,041,000. If funded, this line is secured by one- to four-family
residential mortgage loans held in the Bank's portfolio. In addition, the Bank
has available secured and unsecured lines of credit of $8,250,000.

16.  PREFERRED STOCK

     The Company is authorized to issue up to 2,000,000 shares of preferred
stock with a par value of $.01 per share. There were no preferred shares
outstanding as December 31, 2002, 2001 or 2000.


                                       37

<PAGE>

17.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED

<TABLE>
<CAPTION>
          (in thousands except per share amounts)
                                                  December 31,     September 30,       June 30,      March 31,
          <S>                                     <C>              <C>                 <C>           <C>
          2002

          Interest income                               $2,800            $2,853         $2,668         $2,537
          Interest expense                                 868               914            885            847
          Net interest income                            1,932             1,939          1,783          1,690
          Provision for credit losses                       25                 -              -              -
          Net income                                       429               423            230            145
          Comprehensive income                              (5)               59            (95)            (1)
          Earnings per share-basic                        0.15              0.14           0.07           0.05
          Earnings per share-diluted                      0.15              0.14           0.07           0.05

          2001

          Interest income                               $2,626            $2,711         $2,789         $2,775
          Interest expense                               1,032             1,215          1,219          1,127
          Net interest income                            1,594             1,496          1,570          1,648
          Provision for credit losses                        -                 -              -             --
          Net income                                       185               121             48            152
          Comprehensive income                              46               418             81            129
          Earnings per share-basic                        0.06              0.04           0.02           0.05
          Earnings per share-diluted                      0.06              0.04           0.02           0.05

          2000

          Interest income                               $2,731            $2,718         $2,575         $2,431
          Interest expense                                 938               934            908            900
          Net interest income                            1,793             1,784          1,667          1,531
          Provision for credit losses                        -                 -              -             36
          Net income                                       303               311            216            142
          Comprehensive income                             345               353            215            126
          Earnings per share-basic                        0.10              0.10           0.07           0.05
          Earnings per share-diluted                      0.10              0.10           0.07           0.05
</TABLE>

18.  INCOME TAXES

<TABLE>
<CAPTION>
     The components of income tax expense are as follows:

          ($000)                                                            2002             2001            2000
     <S>                                                                   <C>             <C>               <C>
          Current
            Federal                                                         $578             $223             $510
            State                                                             65                -                -
                                                                             643              223              510
          Deferred                                                             1               43               (6)
                                                                            $644             $266             $504

     The components of the deferred taxes are as follows:

          Recognition of the benefit of the net operating loss carryover      $-               $-              $20
          Provision for credit losses                                         (1)               -              (12)
          Revenues taxed not earned                                           28               36                1
          Accrued expenses                                                  (29)                -                -
          Depreciation expense                                                 3                7                -
          Amortization and write down of intangible assets                     -                -              (15)
          Deferred tax benefit                                                $1              $43              $(6)

     The components of the net deferred tax assets are as follows:

          Deferred tax assets

             Allowance for credit losses                                    $407             $406             $406
             Revenue taxed not earned                                         54               82              118
             Accrued expenses                                                 29                -                -
                Total deferred tax assets                                    490              488              524

          Deferred tax liabilities
             Depreciation                                                     45               42               45
             Unrealized gain on securities available for sale                 82              111               18
                Total deferred tax liabilities                               127              153               63

           Net deferred tax asset                                           $363             $335             $461
</TABLE>

                                       38

<PAGE>

     The differences between federal income taxes and the amount reported by the
Company follow:

<TABLE>
<CAPTION>
($000)                                           2002         %        2001        %       2000      %
<S>                                            <C>       <C>    <C>    <C>    <C>    <C>
Income before income taxes                     $1,871                  $722              $1,476
Taxes computed at the federal income
  tax rate                                        636      34.0%       $262     34.0%      $502   34.0%
Increases (decreases) resulting from
  State income taxes, net of federal benefit       43       2.3%          -        -          -      -
  Nondeductible expenses                            4       0.2%          4      0.5%         2    0.1%
  Nontaxable income                               (39)     (2.1%)         -        -          -      -
Income tax expense                               $644      34.4%       $266     34.5%      $504   34.1%
</TABLE>

19.  CAPITAL STANDARDS

     The Federal Reserve Board and the Federal Deposit Insurance Corporation
have adopted risk-based capital standards for banking organizations. These
standards require ratios of capital to assets for minimum capital adequacy and
to be classified as well capitalized under prompt corrective action provisions.
The capital ratios, and minimum capital requirements of the Company and the
Bank, as of December 31, 2002, 2001, and for the Bank as of December 31, 2000,
are as follows:

<TABLE>
<CAPTION>
                                                                            Minimum
                                                                            capital            To be well
                                                       Actual              adequacy           capitalized
     ($000)                                            Amount  Ratio        Amount    Ratio      Amount     Ratio
     <S>                                              <C>     <C>          <C>        <C>        <C>       <C>
     December 31, 2002
     Total capital (to risk-weighted assets)
         Company                                      $16,497   10.7%       $12,295     8.0%
         Bank                                         $16,471   10.7%       $12,295     8.0%      $15,369    10.0%
     Tier 1 capital (to risk-weighted assets)
         Company                                      $14,919    9.7%        $6,148     4.0%
         Bank                                         $14,893    9.7%        $6,148     4.0%       $9,221     6.0%
     Tier 1 capital (to average assets)
         Company                                      $14,919    7.5%        $7,962     4.0%
         Bank                                         $14,893    7.5%        $7,962     4.0%       $9,952     5.0%

     December 31, 2001
     Total capital(to risk-weighted assets)
         Company                                      $15,496   12.6%        $9,809     8.0%
         Bank                                         $15,496   12.6%        $9,809     8.0%      $12,261    10.0%
     Tier 1 capital(to risk-weighted assets)
         Company                                      $13,659   11.1%        $4,904     4.0%
         Bank                                         $13,659   11.1%        $4,904     4.0%       $7,356     6.0%
     Tier 1 capital (to average assets)
         Company                                      $13,659    8.4%        $6,528     4.0%
         Bank                                         $13,659    8.3%        $6,528     4.0%       $8,160     5.0%

     December 31, 2000
     Total capital(to risk-weighted assets)           $14,501   14.9%        $7,789     8.0%       $9,736    10.0%
     Tier 1 capital (to risk-weighted assets)         $13,280   13.6%        $3,894     4.0%       $5,842     6.0%
     Tier 1 capital (to average assets)               $13,280    9.7%        $5,471     4.0%       $6,838     5.0%
</TABLE>



     Tier 1 capital consists of capital stock, paid in capital, and retained
earnings. Total capital includes a limited amount of the allowance for credit
losses. In calculating risk-weighted assets, specified risk percentages are
applied to each category of asset and off-balance sheet items.

     Failure to meet the capital requirements could affect the Bank's ability to
pay dividends and accept deposits and may significantly affect the operations of
the Bank.


                                       39

<PAGE>

20.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques and may not be
indicative of the net realizable or liquidation values. Also, the calculation of
estimated fair values is based on market conditions at a specific point in time
and may not reflect current or future fair values.

<TABLE>
<CAPTION>
($000)                                            2002                      2001                     2000
                                         Carrying         Fair     Carrying        Fair     Carrying         Fair
December 31,                               Amount        Value       Amount       Value       Amount        Value
------------------------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>         <C>          <C>         <C>           <C>
Financial assets

  Cash and due from banks                  $7,725       $7,725       $3,632      $3,632       $3,177       $3,177
  Federal funds sold                       14,529       14,529       13,710      13,710        4,723        4,723
  Investment securities (total)            20,207       20,207       28,995      28,995       34,283       34,283
  Loans, net                              145,735      145,747      112,923     113,151       87,411       87,360
  Accrued interest receivable                 732          732          885         885        1,152        1,152

<CAPTION>
($000)                                            2002                      2001                     2000
                                         Carrying         Fair     Carrying        Fair     Carrying         Fair
December 31,                               Amount        Value       Amount       Value       Amount        Value
------------------------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>         <C>          <C>         <C>           <C>
Financial liabilities

  Noninterest-bearing deposits            $29,534      $29,534      $23,721     $23,721      $13,752      $13,752
  Interest-bearing deposits               134,455      134,962      121,163     121,495      104,268      104,266
  Securities sold under agreements
    to repurchase                          10,500       10,500        7,674       7,674        5,369        5,369
  Long term borrowings                     10,000       10,274            -           -            -            -
  Accrued interest payable                     94           94           30          30           48           48
</TABLE>

     The fair values of U.S. Treasury and Government agency securities and
mortgage backed securities are determined using market quotations.

     The fair value of fixed-rate loans is estimated to be the present value of
scheduled payments discounted using interest rates currently in effect. The fair
value of variable-rate loans, including loans with a demand feature, is
estimated to equal the carrying amount. The valuation of loans is adjusted for
possible credit losses.

     The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.

21.  EARNINGS PER SHARE

     A summary of shares outstanding for basic and fully diluted earnings per
share is as follows:

 (000)                                                    2002     2001     2000

 Weighted average shares outstanding, basic              3,007    2,990    3,049
 Common stock equivalents                                   20        -        -

 Average common shares and equivalents, fully diluted    3,027    2,990    3,049

 Stock options outstanding that were antidilutive
    at December 31,                                         17        6      177


                                       40

<PAGE>

22.  PARENT COMPANY FINANCIAL INFORMATION

     The balance sheet and statements of income and cash flows for ANNAPOLIS
BANCORP, INC. (Parent Company only) follow:

<TABLE>
<CAPTION>
       Balance Sheets

       ($000)
       December 31,                                                                     2002           2001           2000
       <S>                                                                      <C>             <C>             <C>
       Assets
       Cash and due from banks                                                           $13             $1            $19
       Due from subsidiary                                                                13              -             29
       Investment in subsidiary                                                       15,052         13,789         13,314
       Deferred income taxes and other assets                                              -             70              -
                 Total assets                                                        $15,078        $13,860        $13,362

       Liabilities and Stockholders' Equity
       Liabilities                                                                        $-             $-             $-
       Stockholders' equity
         Common stock                                                                     30             30             23
         Paid in capital                                                              12,859         12,796         12,881
         Retained earnings                                                             2,030            833            425
         Accumulated other comprehensive income                                          159            201             33
                 Total liabilities and stockholders' equity                          $15,078        $13,860        $13,362
<CAPTION>
       Statements of Income

       ($000)
       Years Ended December 31,                                                         2002           2001           2000
       <S>                                                                      <C>             <C>             <C>
       Equity in undistributed income of subsidiary                                   $1,305           $308           $880
       Dividends from subsidiary                                                          25            330            160
       Expenses
         Compensation                                                                     44             56             55
         Other operating                                                                 112            144             49
       Income before income tax benefit                                                1,174            438            936
       Income tax benefit                                                                (53)           (68)           (36)
       Net income                                                                     $1,227           $506           $972
<CAPTION>
       Statements of Cash Flows

       ($000)
       Years Ended December 31,                                                         2002           2001           2000
       <S>                                                                      <C>             <C>             <C>
       Cash flows from operating activities
          Net income                                                                  $1,227           $506           $972
          Due from subsidiary                                                            (13)            30            (30)
          Tax benefit received                                                            70            (70)             -
          Undistributed net income of subsidiary                                      (1,330)          (638)        (1,040)
             Net cash used for operations                                                (46)          (172)           (98)

       Cash flows from financing activities
         Dividends paid                                                                  (30)           (98)           (92)
         Dividends received from Bank                                                     25            330            160
         Proceeds from stock options exercised and restricted stock issued                63             50              -
         Repurchase of common stock                                                        -           (128)          (312)
             Net cash provided (used) by financing activities                             58            154           (244)

          Net increase (decrease) in cash                                                 12            (18)          (342)
       Cash and equivalents at beginning of year                                           1             19            361
       Cash and equivalents at end of year                                               $13             $1            $19
</TABLE>

                                       41