[ANNAPOLIS NATIONAL BANCORP, INC. LOGO]



                               Annual Report 1997


<PAGE>



OUR MISSION IS TO BE THE BANK OF CHOICE IN THE MARKETS WE SERVE. WE WILL
ACCOMPLISH THIS BY FOCUSING ON OUR CORE VALUES AND COMMITMENTS OF:

        o BEING OUR COMMUNITY'S LOCALLY OWNED & MANAGED, INDEPENDENT ALTERNATIVE
          TO LARGE, IMPERSONAL, OUT-OF-TOWN BANKS

        o EXCEEDING OUR CUSTOMERS' EXPECTATIONS BY PROVIDING THE HIGHEST LEVELS
          OF FAST, RESPONSIVE CUSTOMER SERVICE, LISTENING, AND OFFERING THEM
          ACCESS TO LOCAL DECISION MAKERS

        o TREATING OUR CUSTOMERS AND EMPLOYEES FAIRLY AND WITH RESPECT, KNOWING
          THEM, AND CARING ABOUT THEIR WELL-BEING

        o DELIVERING FIRST RATE, COMPETITIVELY PRICED, EASY TO USE PRODUCTS AND
          SERVICES THAT OUR CUSTOMERS WANT

        o AGGRESSIVE BUT SAFE GROWTH OF OUR MARKET SHARE OF LOANS AND DEPOSITS

        o BEING A GOOD CORPORATE CITIZEN BY PARTICIPATING IN LOCAL COMMUNITY
          ORGANIZATIONS AND PROGRAMS

        o BUILDING SHAREHOLDER VALUE BY OPERATING PROFITABLY AND INCREASING
          MARKET PRICE & LIQUIDITY FOR OUR STOCKHOLDERS

OUR EVERY ACTION WILL CONVEY PRIDE IN WHO WE ARE AND WHERE WE ARE GOING.


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


A YEAR OF INVESTING IN OUR FUTURE

      The year 1997 will be remembered as a time of great change during which we
re-engineered nearly every area of Annapolis National Bancorp, Inc. (the
"Company") and Annapolis National Bank (the "Bank") to position them for a much
brighter future. The year of change was highlighted by the implementation of a
revised business strategy designed to improve the financial performance and
enhance shareholder value. The revised business strategy has impacted virtually
all aspects of the Company and the Bank, including management, capitalization,
shareholder value, growth, profitability, asset quality, new initiatives, and
our commitment to the future.

MANAGEMENT

      The management team of Annapolis National has been reconstructed at every
level with a mixture of new talent and company veterans. In February 1997, the
Board of Directors engaged John W. Marhefka, Jr. as Chief Executive Officer of
the Company and the Bank. In March, 1997, Russell J. Grimes, Jr., was named
Chief Financial Officer of the Company and the Bank. Later in the year, two
long-standing Bank officers were promoted to positions of increased authority as
Lori J. Mueller became Senior Vice President for Administration & Marketing
while Jeffrey S. Armiger was made Senior Vice President of the Bank's Business
Banking Unit. In October, 1997, Michael R. Irwin was appointed as Senior Vice
President of Credit Administration and, in December, Kevin J. Barron was engaged
as Senior Vice President of Real Estate Lending to round out the new senior
management team. This team is comprised of seasoned bankers who will provide
experienced leadership to our staff while implementing the Bank's revised
business strategy.

[PHOTO APPEARS HEARE -- John W. Marhefka, Jr.]

      The composition of the Board of Directors also changed following the
adoption of a policy that, in order to assure a high level of commitment to the
Company, all Directors must own at least $100,000 of the Company's common stock.
Following the implementation of this policy in April, 1997, several former
Directors chose not to continue, while four new Directors were added who have
long-standing ties to Anne Arundel County. The new Directors were Stanley H.
Katsef, Vice Chairman of the Board, Ronald E. Gardner, Stanley J. Klos, Jr., and
John W. Marhefka, Jr. Our four new Directors offer a new perspective and a
healthy compliment to a Board which also benefits from the experience of its
five founding members.

      In addition to changes in the Board and Senior Management, 1997 also saw
the Bank's middle management officer level restructured with the addition of
relationship managers in all of our branch offices to spearhead a sales culture,
commercial lenders in our business banking unit to build upon our small business
lending expertise, additional real estate lenders to expand our construction
lending niche, mortgage bankers to develop our home lending products and
administrative support for our growing loan servicing, operations, and
accounting/finance functions.  This was truly a year that has changed the face
of the Company and the Bank at every level, including our stockholders. . . . .

1

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ANNAPOLIS NATIONAL BANCORP, INC.


SHAREHOLDER VALUE

      Our year began with 85 stockholders and ended with more than 700, so most
of our owners are new as well. Even the name of the Company was changed from
"Maryland Publick Banks, Inc." to "Annapolis National Bancorp, Inc." to be more
representative of the single-bank holding company that we are. The Company
conducted a successful initial public stock offering which helped it to achieve
a number of strategic goals during the year. By raising over $5 million, our
Stockholders' Equity more than doubled during the year to $11.1 Million. The
additional capital has positioned us for future growth by increasing both our
legal lending limit and our regulatory capital ratios. We strengthened the bond
with our local community by bringing many new local owners into the family who
are becoming customers, business referral sources, and general supporters of the
Bank. By selling the new shares at $6.00 each, a premium to book value, the
offering was accretive to our book value per share, which increased by $1.09 per
share, or 29.46%, during the year from $3.70 as of December 31, 1996 to $4.79 on
December 31, 1997. Future period Interest Expense was reduced by retiring $1.1
Million of holding company debt upon completion of the offering on September 30,
1997. The offering of 833,334 shares of common stock was oversubscribed in a
brief initial offering period, creating demand to support an aftermarket in the
shares. On October 1, 1997, our common stock debuted on The NASDAQ Stock
MarketSM under the ticker symbol "ANNB". The opening bid for the shares that
first day as a publicly traded company was $7.75. By year end, the bid price had
risen to $10.50 amid brisk trading volume. With several brokerage firms now
acting as market makers by posting daily "bid" and "ask" prices for our shares,
we have made great strides in increasing liquidity for those investors who
choose to sell our shares and in advancing the market price for those investors
who choose to share in our future. 1997 was a banner year for accomplishing our
number one priority, enhancing shareholder value.

GROWTH

      Annapolis National experienced growth throughout its balance sheet during
1997. Total Assets grew to $120.8 Million as of December 31, 1997, a 20.6%
increase over December 31, 1996 Total Assets of $100.2 Million. Asset growth was
primarily funded by a 17.0% increase in Total Deposits and Repurchase Agreements
during the year, increasing to $109.4 Million as of December 31, 1997 from $93.5
Million a year earlier. Net Loans Receivable grew by 3.2% during the year to
$71.0 Million as of December 31, 1997. Total Stockholders' Equity more than
doubled to $11.1 Million during the year due to our successful initial public
stock offering and record earnings performance.....

PROFITABILITY

      1997 Net Income of $1,084,000, or $0.64 per share, represented a 156.3%
increase over 1996 Net Income of $423,000, or $0.29 per share. It was the finest
earnings year in Annapolis National's eight year history and our first million
dollar year. The improved earnings performance was driven


2


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ANNAPOLIS NATIONAL BANCORP, INC.


by a 17.0% increase in Net Interest Income, which rose to $5.5 Million in 1997
from $4.7 Million in 1996, and was further supplemented by a 29.8% increase in
Noninterest Income, which rose to $762,000 in 1997 from $587,000 in 1996. We are
pleased that Annapolis National was able to achieve record growth and earnings
performance during 1997 while engineering substantial restructuring of the
Company. 1997 earnings were impacted by two large nonrecurring items, $796,000
of restructuring expenses associated with the implementation of the revised
business plan, and $769,000 of Federal income tax benefits from prior years' net
operating loss carryforwards.

ASSET QUALITY

      A major aspect of the revised business strategy has been to reduce
nonperforming assets by implementing more stringent underwriting criteria and
more aggressive collection procedures. Total nonperforming assets (loans over
ninety days past due and other real estate owned) totaled $2,135,000, or 2.13%
of Total Assets as of December 31, 1996. By December 31, 1997, nonperforming
assets had been reduced to $1.2 million, or 1.18% of Total Assets. We continue
to make asset quality a top management priority.

OTHER NEW INITIATIVES

      New management has taken a fresh look at everything we do and has
undertaken many other new initiatives. In April, 1997, the Company implemented
an incentive stock option plan which has been instrumental in helping us to
recruit, retain, and motivate the best management talent available by
encouraging them to act like owners. Additional incentive compensation plans
were implemented to assist us in accomplishing another strategic goal of
encouraging a strong sales culture throughout the organization. In October,
1997, we completed the consolidation of our two Annapolis offices into one new
Annapolis facility located near the Annapolis Mall on Bestgate Road. The new
Bestgate branch is a state of the art office offering many amenities which the
prior offices did not and allowing us to better serve both new and existing
customers from a superior location while reducing our overhead expenses. We
conducted a customer satisfaction survey during 1997 designed to help us
understand what we are doing well and where we have room to improve. In response
to the survey, we have restructured many of our product lines so that we now
offer the most competitive checking account, consumer loan, and home loan
products available in our market. We continue to re-evaluate every aspect of our
business on an ongoing basis and will continue to evolve and improve throughout
1998 and beyond....

COMMITMENT TO THE FUTURE

      As the only independent bank holding company and commercial bank
headquartered in Annapolis, we are very excited about our future and the
opportunity to make a difference in our community. In November, 1997, our
commitment to our community was recognized and rewarded when the Bank earned an
"Outstanding" rating for Community Reinvestment Act performance as a result of
an evaluation by the Comptroller of the Currency. As we move into 1998, we are
proud of

3

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ANNAPOLIS NATIONAL BANCORP, INC.


our recent accomplishments and well positioned for even greater future success.
We have carved a niche in the highly competitive local banking market by
adhering to a philosophy of providing quality financial products and first rate
personal service to our increasing customer base. Consolidation within the
banking industry has created a wealth of opportunity for us to continue to grow
and prosper as a locally owned and managed community bank. We are succeeding in
attracting many new customers who prefer to bank with one of the few remaining
local banks, giving added meaning to our slogan, "Your Hometown Bank".

      Our goal is to continue building financial strength through controlled
growth. We have been fortunate to attract many capable, experienced, and
motivated new Directors and employees to compliment a solid nucleus which was in
place. This dedicated and enthusiastic team serves the Company with pride and
efficiency. We have set very high goals for ourselves and for this Company. We
are committed to building Annapolis National into a market force which is a
valuable asset to its stockholders, its customers, and its local community. We
appreciate your confidence and support.

/s/ John W. Marhefka, Jr.
-------------------------
John W. Marhefka, Jr.

Chief Executive Officer

March 12, 1998


4


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ANNAPOLIS NATIONAL BANCORP, INC.


CORPORATE PROFILE

       ANNAPOLIS NATIONAL BANCORP, INC., formerly 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 Annapolis National Bank, a federally
insured community oriented bank and the only independent commercial bank
headquartered in Annapolis, Maryland. The Bank currently operates as a full
service commercial bank from its headquarters in Annapolis, and its four
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 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'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 50 full time and 13 part time individuals at December
31, 1997.

       The Bank continually evaluates new products, and implements such new
products as deemed appropriate by management.


5


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ANNAPOLIS NATIONAL BANCORP, INC.


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 National Bancorp,
Inc. on a consolidated basis with its wholly owned subsidiary, Annapolis
National Bank, 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.

       The Company reported net income for 1997 of $1,084,197, a 156.59%
increase over 1996 earnings of $422,540. Basic earnings per share increased to
$0.64 per share compared to $0.29 per share in 1996. 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 $5.5 million for 1997, an increase of
$871,000 or 18.53% compared to $4.7 million in 1996.

       Total assets grew to $120.8 million as of December 31, 1997, a 20.56%
increase over the December 31, 1996 total assets of $100.2 million. The
Company's return on average assets was 0.99% and 0.44% at December 31, 1997, and
1996 respectively. The Company's return on average equity was 14.83% and 7.98%
at December 31, 1997, and 1996 respectively.

      At December 31, 1997, the Bank's loan portfolio totaled $72.2 million. Of
this amount, $30.7 million or 42.61% were commercial loans, $20.5 million or
28.34% were commercial real estate loans, $10.0 million or 13.91% were
construction loans, $5.2 million or 7.25% were one- to four-family residential
mortgage loans, and $3.4 million or 4.70% were home equity loans, and $2.3
million or 3.19% were consumer and other loans.


6


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ANNAPOLIS NATIONAL BANCORP, INC.


The following table shows selected consolidated financial highlights for the
Company at and for the four years ended December 31, 1994, through December 31,
1997.

SELECTED CONSOLIDATED FINANCIAL DATA
AT AND FOR YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
===========================================================================================================================
SELECTED FINANCIAL DATA                                            1997             1996              1995             1994
---------------------------------------------------------------------------------------------------------------------------
<S><C>
Total assets                                                 $  120,827       $  100,227        $   95,296        $  75,859
Total loans, net of deferred fees and costs                      72,162           69,565            56,653           57,337
Total deposits                                                   96,062           87,106            82,096           66,118
Securities sold under agreement to repurchase                    13,306            6,345             6,970            4,741
Note payable                                                         --            1,004               925            4,004
Stockholders' equity                                             11,087            5,471             5,046              760

SELECTED OPERATING DATA
Interest income                                               $   9,161         $  8,021         $   7,651         $  5,552
Interest expense                                                  3,630            3,362             3,099            2,260
---------------------------------------------------------------------------------------------------------------------------
Net interest income                                               5,531            4,659             4,552            3,292
Provision for credit losses                                         748              452               318              300
---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses             4,783            4,207             4,234            2,992
Restructuring expense                                               796               --                --               --
Other income                                                        762              587               521              394
Operating expense                                                 4,434            4,371             3,957            3,313
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                   315              423               798               73
Income tax benefit (expense)                                        769               --                (6)              --
Net income before minority interest in
   earnings of consolidated subsidiary                            1,084              423               792               73
Minority interest in earnings of
   consolidated subsidiary                                           --               --                --               55
---------------------------------------------------------------------------------------------------------------------------
Net income                                                    $   1,084         $    423          $    792          $    18
===========================================================================================================================

KEY FINANCIAL RATIOS AND OTHER DATA
Return on average assets                                          0.99%            0.44%             0.94%            0.03%
   Net income divided by average assets
Return on average equity                                         14.83%            7.98%            19.26%            1.97%
   Net income divided by average equity
Equity to asset ratio (1)                                         6.70%            5.46%             4.88%            1.30%
   Average equity divided by average assets
Basic earnings per share                                          $0.64            $0.29             $0.57            $0.03
Book value per share                                              $4.79            $3.70             $3.41            $1.40
Tangible book value per share                                     $4.70            $3.17             $2.78           $(0.58)

Number of shares outstanding                                  2,312,306        1,478,972         1,478,972          541,300

Efficiency ratio (2)                                             83.11%           83.34%            78.00%           89.88%

Interest rate spread                                              4.88%            4.68%             5.29%            4.74%
Net interest margin                                               5.37%            5.10%             5.73%            4.98%

Risk based capital ratio--Tier 1                                 15.16%            7.46%             7.68%           (0.12%)
Risk based capital ratio--Total                                  16.42%            8.68%             8.83%            1.13%
===========================================================================================================================
</TABLE>

(1) The Company's initial public stock offering closed on September 30, 1997
    with net proceeds of $3.5 million. The average capital used to calculate
    this ratio reflects the increase in capital for the last quarter of 1997.

(2) Includes restructuring expense of $796,000 for the year ended December 31,
    1997.


7


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ANNAPOLIS NATIONAL BANCORP, INC.


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

       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, 1997, 1996 and 1995. 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 which 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 4.88% from the
year ended December 31, 1997, compared to 4.68% at December 31, 1996.

CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES

<TABLE>
<CAPTION>
==============================================================================================================================
                                                                               YEARS ENDED

                                            DECEMBER 31, 1997               DECEMBER 31, 1996             DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------------------------------
                                     AVERAGE              YIELD/     AVERAGE             YIELD/    AVERAGE              YIELD/
                                     BALANCE    INTEREST   RATE      BALANCE  INTEREST    RATE     BALANCE   INTEREST    RATE
------------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Interest Earning Assets:
   Federal Funds Sold and
      other overnight
      investments                   $ 14,447     $  776     5.37%     $10,935   $  565    5.17%    $ 9,859    $  557    5.65%
   Investment Securities              16,253        937     5.77       18,339      975    5.32      12,727       714    5.61
   Loans                              72,385      7,448    10.29       62,144    6,481   10.43      56,905     6,380   11.21
------------------------------------------------------------------------------------------------------------------------------
      Total interest-earning assets  103,085      9,161     8.89       91,418    8,021    8.77      79,491     7,651    9.62
==============================================================================================================================
Noninterest Earning Assets
   Cash and Due From Banks             3,830                            3,210                        2,851
   Other Asets                         2,176                            2,424                        1,882
------------------------------------------------------------------------------------------------------------------------------
      Total Assets                  $109,091                          $97,052                      $84,224
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits
   Now Accounts                      $15,475     $  324     2.09%     $14,583   $  363    2.49%    $11,532    $  284    2.46%
   Money Market Accounts              14,088        484     3.44       15,819      558    3.53      13,688       528    3.86
   Savings Accounts                   12,005        367     3.06       10,995      354    3.22       9,537       339    3.55
   Certificates of Deposit            37,829      2,084     5.50       32,207    1,776    5.51      29,095     1,638    5.63
   Repurchase Agreements              10,570        315     2.98        7,762      232    2.99       6,715       214    3.19
   Note Payable                          632         60     9.49          848       79    9.32       1,014        96    9.47
------------------------------------------------------------------------------------------------------------------------------
      Total Interest Bearing
         Liabilities                  90,599      3,634     4.01       82,214    3,362    4.09      71,581     3,099    4.33
==============================================================================================================================
Noninterest Bearing Liabilities
   Demand deposit accounts            10,510                            9,158                        7,908
   Other Liabilities                     668                              383                          623
   Stockholders' Equity                7,314                            5,297                        4,112
------------------------------------------------------------------------------------------------------------------------------
         Total Liabilities and
         Stockholders' Equity       $109,091                          $97,052                      $84,224
==============================================================================================================================
Interest rate spread                                        4.88%                         4.68%                         5.29%
==============================================================================================================================
Ratio of interest earning assets
   to interest bearing liabilities                        113.78%                       111.20%                       111.05%

Net interest income and net
   interest margin                               $5,531     5.37%               $4,659    5.10%               $4,552    5.73%
==============================================================================================================================
</TABLE>

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ANNAPOLIS NATIONAL BANCORP, INC.


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 20.56% during 1997 to $120.8 million from $100.2
million at December 31, 1996. Total deposits and securities sold under
agreements to repurchase, the Company's primary source of funds, increased $15.9
million or 17.01% to $109.4 million at December 31, 1997, from $93.5 million at
December 31, 1996. Time deposits comprise the largest portion of the Bank's
total deposits, totaling $41.7 million or 43.44% of the Bank's total deposits at
December 31, 1997. Savings and Money Market accounts totaled $24.7 million or
25.73% of the Bank's total deposits at December 31, 1997. NOW accounts total
$19.3 million or 20.10% of total deposits at December 31, 1997. Demand, non
interest bearing accounts total $10.3 million or 10.76% of total deposits at
December 31, 1997. Securities sold under agreements to repurchase increased $7.0
million to $13.3 million from $6.3 million at December 31, 1996, respectively.

      The Company's primary use of funds are for loans and investments. Loans,
less deferred fees and discounts and the allowance for loan losses, increased by
$2.2 million or 3.20% to $71.0 million at December 31, 1997, from $68.8 million
a year earlier.

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 impacted by increases or decreases in the
amount of outstanding interest earning assets and interest bearing liabilities
(volume variance). This 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 found on page 10 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, 1997, was $5.5
million, representing an increase of $871,000 or 18.53% from net interest income
of $4.7 million for the year ended December 31, 1996. The increase in net
interest income is due primarily to an increase in the balance of interest
earning assets, offset in part by an increase in interest bearing liabilities,
and is largely responsible for the Company's profitability. The net yield on
interest earning assets was 5.37% and 5.10% for the years ended December 31,
1997, and 1996 respectively.


9


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ANNAPOLIS NATIONAL BANCORP, INC.


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

RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
===========================================================================================================================
                                                        1997 VS 1996                                1996 VS 1995
---------------------------------------------------------------------------------------------------------------------------
                                             TOTAL           DUE TO CHANGE IN             TOTAL          DUE TO CHANGE IN
                                                           --------------------                        --------------------
                                            CHANGE         VOLUME          RATE          CHANGE        VOLUME         RATE
---------------------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME ON:
   Loans                                    $  967         $1,068          $(101)         $101           $587         $(486)
   Investment Securities                       (38)          (111)            73           261            315           (54)
   Federal Funds Sold and other
      overnight investments                    211            181             30             8             61           (53)
---------------------------------------------------------------------------------------------------------------------------
Total interest income                        1,140          1,138              2           370            963          (593)

INTEREST EXPENSE ON:
   Now Accounts                                (39)            22            (61)           79             75             4
   Money Market Accounts                       (74)           (61)           (13)           30             82           (52)
   Savings Accounts                             13             33            (20)           15             52           (37)
   Certificates of Deposit                     304            310             (6)          138            175           (37)
   Repurchase Agreements                        83             84             (1)           18             33           (15)
   Note Payable                                (19)           (20)             1           (17)           (16)           (1)
---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense                         268            368           (100)          263            401          (138)
---------------------------------------------------------------------------------------------------------------------------
Net Interest Income                         $  872         $  770          $ 102          $107           $562         $(455)
===========================================================================================================================



INTEREST INCOME

       The Company's interest income increased $1.2 million or 15.0% to $9.2
million at December 31, 1997, compared to $8.0 million at December 31, 1996. The
increase in interest income can be attributed to an increase of $11.7 million in
average earning assets, and an increase in the average yield on earning assets
to 8.89% in 1997 compared to 8.77% in 1996. Average loans increased $10.2
million or 16.48% which contributed substantially to the increase in interest
income.

INTEREST EXPENSE

       The Company's interest expense increased $269,000 or 7.9% to $3.6 million
at December 31, 1997, compared to $3.4 million at December 31, 1996. The
increase in interest expense can be attributed to an increase of $8.4 million in
average interest bearing liabilities offset by a decrease in the cost of
interest bearing liabilities to 4.01% at December 31, 1997, compared to 4.09% in
1996. The increased growth in deposits and repurchase agreements were used to
fund loan growth and for general liquidity purposes.

NONINTEREST INCOME

       The Company's primary source of noninterest income are fees charged for
services and gains and fees recognized on the sale of residential mortgage
loans. Noninterest income increased $175,000 or 29.81% to $762,000 at December
31, 1997, as compared to $587,000 in 1996. The growth in noninterest income was
primarily the result of an increase of $127,000 or 21.60% in service fees and
other charges, reflecting growth in the Bank's deposit accounts.


10


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ANNAPOLIS NATIONAL BANCORP, INC.


NONINTEREST EXPENSE

      Noninterest expense increased $858,000 or 19.62% to $5.2 million at
December 31, 1997, compared to $4.4 million at December 31, 1996. The increase
in noninterest expense was primarily due to a one time restructuring expense of
$796,000 during 1997, resulting from implementation of a revised business
strategy by the Board of Directors and senior management in February 1997. The
increase in expense includes a reduction of approximately $471,000 relating to
intangible assets acquired in the June 1990 acquisition of a failed savings and
loan association, severance payments and benefits of $102,000, branch
consolidation expense of $119,000, and $50,000 of other expense.

       Personnel expense decreased $108,000 or 4.88% due to general staff
reductions. This reduction includes an increase in health and related benefits
of $43,000 or 24.4% in 1997 relating to the Company's self insured health plan.

       Occupancy expense increased $104,000 or 14.23% due to scheduled rate
increases, the opening of the Bank's Severna Park branch office in September
1996 and additional maintenance expenses.

       Other expense increased $127,000 or 10.83% due mainly to additional data
processing expense of approximately $111,000 or 26.6%. This was the result of
contractual price escalations by our third party data processor and rising
transaction volume due to additional deposit growth during 1997.

       Amortization of intangible assets decreased $43,000 or 29.86% due to the
accelerated write off of the intangible assets related to the restructuring
expenses incurred in 1997. The amortization recorded for the year ended December
31, 1997, reflects a lower intangible asset balance amortized in 1997 and
subsequent years. The remaining intangible asset balance of $216,000 relates to
the core deposit premium paid for deposits and still retained by the Bank at
December 31, 1997.

PROVISION FOR INCOME TAXES

       The Company and the Bank file consolidated federal income tax returns and
separate Maryland income tax returns. The Company has approximately $1.4 million
of net operating loss carryforwards, and net deferred tax assets of $766,000 at
December 31, 1997. The Company recognized a tax benefit during 1997 of $769,000.

FINANCIAL ANALYSIS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

      Net income for the year ended December 31, 1996, totaled $423,000 or $0.29
per share compared to $792,000 or $0.57 per for the year ended December 31,
1995. This decrease in net income was attributable to a $134,000 increase in the
provision for loan losses and a $415,000 increase in operating expenses.

       Net interest income increased $107,000 or 2.35% at December 31, 1996, to
$4.7 million from $4.6 million at December 31, 1995. This increase was the
result of an increase in interest income of $370,000, which was partially offset
by an increase in interest expense of $263,000.

       Interest income increased $370,000 or 4.84% in 1996 compared to 1995,
primarily as a result of an increase in the average balance of loans
outstanding. Average loans outstanding, net of unearned income, increased $5.2
million or 9.21% during 1996. In addition, the average yield on loans decreased
to 10.43% in 1996 from 11.21% in 1995.

       Interest expense increased $263,000 in 1996 as compared to 1995. The
increase generally reflected an increase in the balance of interest bearing
liabilities to $82.2 million from $71.6 million at December 31, 1995. During
this period the average cost of interest bearing liabilities decreased to 4.09%
at December 31, 1996, from 4.33% at December 31, 1995.

       Noninterest income increased $66,000 or 12.67% during 1996 as compared to
1995. The increase was attributable to an increase in service fees and other
charges of $202,000 or 48.56% due to growth in the Bank's deposit base and was
partially offset by a decrease of $136,000 or 130.77%, due to a one time gain of
approximately $113,000 on the sale of loans guaranteed by the Small Business
Administration in 1995.

11


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


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

       Noninterest expense increased $415,000 or 10.49% to $4.4 million at
December 31, 1996, from 4.0 million at December 31, 1995. The primary reason for
the increase was a $280,000 or 14.44% increase in personnel expense to $2.2
million at December 31, 1996, from $1.9 million at December 31, 1995, and a
$122,000 or 10.55% increase in operating expense to $1.2 million at December 31,
1996, from $1.1 million at December 31, 1995. The increase in personnel expense
was due to the opening of the new Severna Park branch office in September 1996,
and the hiring of additional personnel for the loan origination department.
Operating expenses increased due to additional expenses related to the Bank's
implementation of a check image product for its checking account customers, and
increased volumes of transaction and other savings accounts during the year.

YEAR 2000 ISSUES

       Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The Company
primarily utilizes a third party vendor and such vendor's propriety software to
process its electronic data. The third party vendor is in the process of
modifying, upgrading, or replacing its computer software applications and
systems as necessary to accommodate the "year 2000" dating changes necessary to
permit correct recording of year dates for 2000 and later years. The vendor has
also engaged a consultant to review its year 2000 issues and has begun to
implement a year 2000 compliance program. The Company does not expect that the
cost of its year 2000 compliance program will be material to its financial
condition or results of operations and believes that it will be able to satisfy
such compliance program by the end of 1998 without any material disruption in
its operations. The Company does not currently have any information concerning
the compliance status of its suppliers and customers, other than the Bank's
third party data processing vendor. In the event that any of the Company's
significant suppliers do not successfully and timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

      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 43.44% of the deposit portfolio at December
31, 1997. Core deposits considered to be noninterest bearing and interest
bearing demand deposit accounts, savings deposits, and money market accounts
accounted for 56.56% of the deposit portfolio at December 31, 1997.

      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 accept brokered deposits and held no such deposits at December 31,
1997. 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 weekly by management who consider 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.


12


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


      Jumbo Certificates of Deposits. Jumbo certificates of deposit are accounts
of $100,000 or more. These accounts totaled $5.9 million at December 31, 1997
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, 1997.


</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
                           GREATER THAN          ONE YEAR
    THREE MONTHS           THREE MONTHS             TO            GREATER THAN
      OR LESS              TO ONE YEAR          FIVE YEARS         FIVE YEARS          TOTAL
---------------------------------------------------------------------------------------------
                                          (Dollars in thousands)

<S><C>
       $1,722                 $3,838               $337               $-0-             $5,897
=============================================================================================
</TABLE>

      Commercial reverse repurchase agreements 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, 1997, and 1996, the average
cost of these borrowings were 2.98% and 2.99% respectively.

       The Bank maintains a borrowing line with the Federal Home Loan Bank
(FHLB), and may borrow up to $5.0 million under a reverse repurchase line
established with a local correspondent commercial bank. In addition, the Bank
has the ability to borrow directly from the Federal Reserve Bank discount
window. At December 31, 1997, there were no outstanding advances under these
lines of credit.

      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. Additionally, all of the loans in the Bank's portfolio are either
adjustable or short term fixed rate loans with terms to maturity of 30 days to
30 years. The Bank does not engage in long term fixed rate portfolio lending.
Any long term fixed rate loans made by the Bank are sold in the secondary
market.


13


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


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

       The following table summarizes the anticipated maturities or repricing of
the Company's interest earning assets and interest bearing liabilities as of
December 31, 1997, 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 generally
to maintain a balanced cumulative gap position for the period of one year or
less 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, 1997, and does not
give effect to prepayment or extension of loans as a result of changes in
general market rates.

INTEREST SENSITIVITY GAP ANALYSIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997

<TABLE>
<CAPTION>
===========================================================================================================================
                                                                     AFTER THREE
                                                       WITHIN        BUT WITHIN       AFTER ONE
                                                        THREE          TWELVE        BUT WITHIN        AFTER
                                                       MONTHS          MONTHS        FIVE YEARS     FIVE YEARS       TOTAL
---------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Federal funds sold and other
   overnight investments                               $20,744       $      0         $     0         $     0      $ 20,744
Investment securities (1)                                6,944          6,974           5,022             980        19,920
Loans (2), (3)                                          47,810          7,325          14,618           1,898        71,651
---------------------------------------------------------------------------------------------------------------------------
                                                       $75,498       $ 14,299         $19,640         $ 2,878      $112,315
===========================================================================================================================
LIABILITIES
Interest-bearing deposits
   NOW Accounts                                        $19,273       $      0         $     0         $     0      $ 19,273
   Savings Accounts                                     12,448              0               0               0        12,448
   Money Market Accounts                                12,282              0               0               0        12,282
   Certificate of deposits (4)                          10,308         28,128           3,204              89        41,729
Repurchase Agreements                                   13,306              0               0               0        13,306
---------------------------------------------------------------------------------------------------------------------------
                                                       $67,617       $ 28,128         $ 3,204         $    89      $ 99,038
===========================================================================================================================
Interest sensitivity gap                               $ 7,881       $(13,829)        $16,436         $ 2,789      $ 13,277
Cumulative interest sensitivity gap                    $ 7,881       $ (5,948)        $10,488         $13,277
Cumulative interest sensitivity gap as a
   percentage of total assets                            6.52%        (4.92)%           8.68%          10.99%
===========================================================================================================================
</TABLE>

(1) Net of Federal Reserve Bank and Federal Home Loan Bank stock.
(2) Loans scheduled by contractual maturities.
(3) Net of non-accrual loans of $778,000.
(4) Certificates of deposits scheduled by contractual maturities.


14


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


INVESTMENT PORTFOLIO

      At December 31, 1997, the Bank's investment portfolio, which totaled $20.5
million, consisted primarily of U.S. treasury and government agency securities
and one mortgage-backed security. Of this amount, $18.9 million, or 92.2%, were
U.S. treasury securities and U.S. government agency obligations. The
mortgage-backed security totaled $980,000 which was issued by Freddie Mac.
Additionally, the Company owns $327,250 in stock of the Federal Reserve Bank of
Richmond and $292,900 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, 1997,
approximately 67.8% of the investment securities portfolio had maturities of one
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, nongovernment 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, 1997, approximately $16.6 million, or
80.7% of the investment portfolio was classified available-for-sale.

      The Composition of Securities at December 31, for each of the past three
fiscal years was:

==============================================================================
                                    1997               1996               1995
------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury                    $ 1,974            $ 9,157            $16,186
U.S. Agency                       12,991                996                978
Mortgage-backed                      980                987                984
Equity securities                    620                194                175
------------------------------------------------------------------------------
   Total                          16,565             11,334             18,323

HELD-TO-MATURITY
U.S. Treasury                      3,975              1,993                 --
------------------------------------------------------------------------------
   Total                           3,975              1,993                 --
------------------------------------------------------------------------------
Total Securities                 $20,540            $13,327            $18,323
==============================================================================



15



<PAGE>



ANNAPOLIS NATIONAL BANCORP, INC.


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

      The following table presents maturties and weighted average yields for
investments in available for sale and held to maturity securities.

DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
===========================================================================================================================
                                                                  YEARS TO MATURITY
---------------------------------------------------------------------------------------------------------------------------
                                      WITHIN             OVER 1            OVER 5               OVER
                                         1              THROUGH 5        THROUGH 10              10
---------------------------------------------------------------------------------------------------------------------------
                                 AMOUNT     YIELD    AMOUNT    YIELD   AMOUNT    YIELD    AMOUNT    YIELD   TOTAL     YIELD
---------------------------------------------------------------------------------------------------------------------------
<S><C>
Investments
   Available-For-Sale
   U.S. Treasury                  $1,974     5.88%   $   --     --%     $ --       --%     $--       --%   $ 1,974     5.88%
   U.S. Agency                     7,969     5.65     5,022   6.28        --       --       --       --     12,991     5.90
   Mortgage-backed                    --       --        --     --       980     5.79%      --       --        980     5.79
      Total Debit Securities      $9,943     5.70%   $5,022   6.28%     $980     5.79%     $--       --%    15,945     5.89%
===========================================================================================================================
   Equity Securities                                                                                           620
---------------------------------------------------------------------------------------------------------------------------
      Total Investments
      Available-For-Sale                                                                                   $16,565
===========================================================================================================================
Investments Held-To-Maturity
   U.S. Treasury                  $3,975     5.64%   $   --     --%     $ --       --%     $--       --%   $ 3,975     5.64%
      Total Investments
      Held-To-Maturity            $3,975     5.64%   $   --     --%     $ --       --%     $--       --%   $ 3,975     5.64%
===========================================================================================================================
</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.

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>
===========================================================================================================================
                                      1997              1996                1995               1994              1993
---------------------------------------------------------------------------------------------------------------------------
                                AMOUNT    PERCENT  AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT    PERCENT  AMOUNT  PERCENT
---------------------------------------------------------------------------------------------------------------------------
<S><C>
Commercial loans               $30,749     42.61%  $30,469   43.80%  $27,727    48.94%  $27,025     47.14% $19,724   48.33%
Real estate:
   Commercial                   20,448     28.34    17,845   25.65%   13,553    23.92     5,601      9.77   12,806   31.38
   Construction                 10,035     13.91    10,173   14.62     7,937    14.01     8,672     15.12      345    0.85
   One-to four-family            5,232      7.25     7,002   10.07     4,391     7.75    12,798     22.32    5,637   13.82
   Home equity                   3,393      4.70     1,744    2.51     1,197     2.11     1,016      1.77      615    1.51
Consumer loans                   2,306      3.19     2,332    3.35%    1,848     3.27     2,226      3.88    1,676    4.11
---------------------------------------------------------------------------------------------------------------------------
      Total loans               72,162    100.00%   69,565  100.00%   56,653   100.00%   57,338    100.00%  40,803  100.00%
Less:
   Allowance for loan losses    (1,177)               (765)             (617)              (687)              (574)
---------------------------------------------------------------------------------------------------------------------------
Net loans receivable           $70,985             $68,800           $56,036            $56,651            $40,229
===========================================================================================================================
</TABLE>


16


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


      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, 1997, the Bank's loan portfolio totaled
$72.2 million, of which $30.7 million, or 42.61%, were commercial loans; $20.4
million, or 28.34%, were commercial real estate loans; $10.0 million, or 13.91%,
were construction loans; $5.2 million, or 7.25%, were one- to four-family
residential mortgage loans; $3.4 million, or 4.70% were home equity loans and
$2.3 million, or 3.19%, 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 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 three years. Such loans are offered in amounts up to $750,000 and are
generally secured by receivable, 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, up to $500,000. 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.

      Commercial business loans are generally of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. In order to reduce the overall risk and
cost of its loan portfolio, the Bank intends to reduce the ratio of commercial
loans to total loans and may reduce the level of its SBA loans.

      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% 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, 1997, was $1.7 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 three year period in accordance with the prime rate
as reported in the Wall Street Journal. In reaching a decision as to whether or
not 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 times.

      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.

      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 con-


17


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


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

struction 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. Although the
Bank attempts to procure permanent end financing, many of the Bank's
construction loans, at the time entered into with the Bank, have permanent end
financing committed by other financial institutions.

       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 six months for consumer loans, up to
twelve months for builder loans, and up to eighteen months for land development
loans.

      Construction loans are generally made in amounts up to 80% of the 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, 1997, the Bank had construction loans, including land
acquisition and development loans totaling $10.0 million, or 13.91% of the
Bank's total loan portfolio, of which $7.2 million consisted of one- to
four-family residential construction loans, $851,000 consisted of commercial
real estate construction loans and $2.0 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 timely and in a 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 which 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 lots for one- to
four-family residences located throughout Central Maryland. 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 a recourse
in the event of breaches for 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, 1997, one- to four-family residential mortgage loans
totaled $5.2 million, or 7.25%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, $1.6 million were fixed-rate loans with
terms of up to three years with a balloon payment at the end of the term and
$3.6 million were adjustable-rate mortgage loans. The Bank currently offers a
number of adjustable-rate mortgage loans 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


18


<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.


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% 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, 1997, home equity loans totaled
$3.4 million, or 4.70% of the Bank's total loan portfolio. Fixed-rate,
fixed-term home equity loans and adjustable rate home equity lines of credit are
offered in amounts up to 100% of the appraised value with a maximum loan amount
of $100,000. Fixed-rate, fixed-term home equity loans are offered with terms up
to five 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 WSJ 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, 1997, consumer loans totaled $2.3 million or 3.19% to total loans
outstanding. Consumer loans are generally originated in the Bank's primary
market area.

CREDIT RISK MANAGEMENT

      The Bank's allowance for loan 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 loan 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 allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan 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, 1997, the Bank's allowance for loan losses was $1.2 million or 1.6%
of total loans and 102.44% of non-performing loans as compared to $765,000, or
1.1% of total loans and 38.35% of non-performing loans as of December 31, 1996.
The Bank had total non-performing loans of $1.1 million and $2.0 million at
December 31, 1997 and December 31, 1996, respectively, and non-performing loans
to total loans of 1.59% and 2.87%, at December 31, 1997, and December 31, 1996,
respectively.


19


<PAGE>



ANNAPOLIS NATIONAL BANCORP, INC.


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

      The Bank continues to monitor and modify its allowances for loan losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for loan 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 loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan 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 loan losses.
Management may in the future increase its level of loan loss allowances as a
percentage of total loans and non-performing loans as its loan portfolio
increases.

ANALYSIS OF CREDIT RISK

      Activity in the allowance for loan losses for the preceding two years
ended December 31 is shown below:

AT DECEMBER 31,
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                           1997           1996
----------------------------------------------------------------------------------------------
<S><C>
Total loans outstanding                                                 $72,162        $69,565
Average loans outstanding                                                72,385         62,144
Allowance for loan losses at beginning of period                            765            617
Provision charged to expense                                                748            452
----------------------------------------------------------------------------------------------
Chargeoffs:
   Residential/commercial real estate                                         0             15
   Commercial loans                                                         362            279
   Consumer and other loans                                                   6             28
----------------------------------------------------------------------------------------------
      Total                                                                 368            322
----------------------------------------------------------------------------------------------
Recoveries:
   Residential/commercial real estate                                         9              8
   Commercial loans                                                          21             10
   Consumer and other loans                                                   2             --
----------------------------------------------------------------------------------------------
      Total                                                                  32             18
----------------------------------------------------------------------------------------------
Net chargeoffs                                                              336            304
----------------------------------------------------------------------------------------------
Allowance for loan losses at end of period                              $ 1,177        $   765
==============================================================================================
Allowance for loan losses as a percent of total loans                     1.63%          1.10%
Net chargeoffs as a percent of average loans                               .46%           .49%
==============================================================================================
</TABLE>

CAPITAL MANAGEMENT

      During 1997 Stockholders' Equity increased $5.6 million or 101.82% to
$11.1 million from $5.5 million at December 31, 1996. The increase was due
primarily to the successful completion on September 30, 1997, of the Company's
initial public stock offering which sold an additional 833,334 shares of common
stock at $6.00 per share. As a result, the Company's common shares outstanding
increased 56.35% to 2,312,306 at December 31, 1997, from 1,478,972 at December
31, 1996.

      In April, 1997, the Company's employee incentive stock option plan was
approved by shareholders at the annual meeting. Under the plan, up to 100,000
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. At December 31, 1997, 64,000 shares of common stock were granted under
the plan and 6,500 shares were forfeited.

      See Note 13 to the Consolidated Financial Statements for more information
on the Company's stock option plan.


20


<PAGE>



ANNAPOLIS NATIONAL BANCORP, INC.


REGULATORY CAPITAL REQUIREMENTS

      The OCC's capital regulations require national banks to meet two minimum
capital standards: a 3% Tier 1 capital to total adjusted assets ratio for the
most highly rated banks (at least 100 to 200 basis points more for other
national banks) (the "leverage" ratio) and an 8% risk-based capital ratio. Tier
1 capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
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
OCC capital regulation 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, 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 and intermediate
preferred stock and the allowance for loan and lease 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, 1997, the Bank's tier 1 and total risk based capital ratio
were 14.50% and 15.80% respectively. The Bank was considered well capitalized
for regulatory purposes. See Note 14 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 BHCA.

      The activities of national banks, such as the Bank, are generally governed
by the National Bank Act and the Federal Deposit Insurance Act. The Bank is
subject to extensive regulation, examination and supervision by the Office of
the Comptroller of the Currency (the "OCC"), as its primary federal 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 OCC 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 OCC and/or the FDIC 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 OCC, the
FDIC or the Congress, could have a material adverse impact on the Company or the
Bank and their operations.


21


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


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

MARKET VALUE AND DIVIDEND INFORMATION

      The Company's Common stock is listed on The NASDAQ Stock MarketSM and
trades under the symbol "ANNB". The Company's stock began trading on October 1,
1997, with an opening bid of $7.75 per share. The Company has traded an average
daily volume of 9,175 shares from October 1, 1997 through December 31, 1997. At
December 31, 1997 the closing bid price was $10.50 per share.

      The Company's high and low stock price during the last quarter of 1997 was
$11.625 and $7.75 respectively. As of March 12, 1998 the Company has outstanding
2,312,306 shares of common stock and no preferred stock issued or outstanding.
The Company has not paid a dividend to stockholders in the past and does not
anticipate paying dividends in the near future. The Company intends to retain
its capital to allow for balance sheet growth while maintaining adequate capital
reserves.


22


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.

                                                     ROWLES
                                                    & Company, LLP

                                                    Certified Public Accountants


Report of Independent Auditors

The Board of Directors and Stockholders
Annapolis National Bancorp, Inc. and Subsidiary
Annapolis,  Maryland

      We have audited the accompanying consolidated balance sheet of Annapolis
National Bancorp, Inc. and Subsidiary as of December 31, 1997, and the related
statements of income, changes in stockholders' equity, and cash flows for the
year 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. The consolidated financial
statements of Annapolis National Bancorp, Inc. and Subsidiary for the years
ended December 31, 1996 and 1995 were audited by other auditors whose report
dated January 23, 1997, expressed an unqualified opinion on those statements.

      We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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
National Bancorp, Inc. and Subsidiary as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.

      As discussed in Note 1 to the financial statements, the Company changed
its method of reporting earnings per share in 1997.


                                                 /s/ Rowles & Company LLP
                                                 ------------------------

Baltimore, Maryland
January 29, 1998


23


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


CONSOLIDATED BALANCE SHEETS

DECEMBER 31,

<TABLE>
<CAPTION>
===========================================================================================================================
                                                                                                   1997                1996
---------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks                                                                    $  5,611,407        $  6,083,554
Federal funds sold and other overnight investments                                           20,743,973           4,378,730
Securities purchased under agreement to resell                                                       --           4,750,000
Investment securities available for sale                                                     16,565,290          11,334,273
Investment securities held to maturity (market value of
   $3,891,830 and $1,985,625)                                                                 3,975,296           1,992,835
Loans, less allowance for credit losses of $1,177,437 and $765,000                           70,985,232          68,800,397
Premises and equipment                                                                        1,238,887           1,334,825
Core deposit premium and other intangibles                                                      216,315             788,301
Accrued interest receivable                                                                     515,549             436,722
Other real estate owned                                                                          42,637             140,000
Deferred income taxes                                                                           765,868                  --
Other assets                                                                                    166,848             187,544
---------------------------------------------------------------------------------------------------------------------------
      Total assets                                                                         $120,827,302        $100,227,181
---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits                                                                                   $ 96,061,762        $ 87,105,995
Securities sold under agreements to repurchase                                               13,305,780           6,344,959
Accrued interest payable and other liabilities                                                  372,446             301,797
Note and accrued interest payable to stockholder                                                     --           1,003,661
---------------------------------------------------------------------------------------------------------------------------
      Total liabilities                                                                     109,739,988          94,756,412
---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
   Common stock, par value $.01 per share; authorized 10,000,000 shares;
      issued and outstanding 2,312,306 shares in 1997 and 1,478,972 shares in 1996               23,123              14,789
   Capital surplus                                                                           13,135,320           8,633,560
   Retained earnings (deficit)                                                               (2,077,844)         (3,162,041)
---------------------------------------------------------------------------------------------------------------------------
                                                                                             11,080,599           5,486,308
   Unrealized gain (loss) on investment securities available for sale                             6,715             (15,539)
---------------------------------------------------------------------------------------------------------------------------
      Total stockholders' equity                                                             11,087,314           5,470,769
---------------------------------------------------------------------------------------------------------------------------
      Total liabilities and stockholders' equity                                           $120,827,302        $100,227,181
===========================================================================================================================
</TABLE>

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


24


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
===========================================================================================================================
                                                                              1997                 1996                1995
---------------------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME
   Loans, including fees                                                $7,447,970           $6,481,532          $6,379,798
   Federal funds sold and securities purchased under
   agreements to sell                                                      776,452              564,873             556,901
   U.S. Treasury securities and obligations of other
   U.S. Government agencies                                                937,019              974,939             714,472
---------------------------------------------------------------------------------------------------------------------------
      Total interest income                                              9,161,441            8,021,344           7,651,171
---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
   Certificates of deposit, $100,000 or more                               283,053              237,863             206,630
   Other deposits                                                        2,973,123            2,813,535           2,582,008
   Securities sold under agreements to repurchase                          314,943              231,514             214,431
   Interest on borrowed funds                                               59,574               78,759              95,546
---------------------------------------------------------------------------------------------------------------------------
      Total interest expense                                             3,630,693            3,361,671           3,098,615
---------------------------------------------------------------------------------------------------------------------------
      NET INTEREST INCOME                                                5,530,748            4,659,673           4,552,556

PROVISION FOR CREDIT LOSSES                                                747,908              452,190             318,370
---------------------------------------------------------------------------------------------------------------------------
   Net interest income after provision for credit losses                 4,782,840            4,207,483           4,234,186
---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
   Gain (loss) on sale of loans, securities, equipment,
      and other real estate                                                 17,000              (31,696)            104,182
   Service charges and other                                               745,064              618,501             416,363
---------------------------------------------------------------------------------------------------------------------------
      Total noninterest income                                             762,064              586,805             520,545
---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
   Personnel                                                             2,111,176            2,219,380           1,938,920
   Occupancy and equipment                                                 834,943              730,927             718,655
   Marketing and advertising                                                88,142              104,947              68,817
   Other operating                                                       1,299,398            1,172,854           1,086,997
   Restructuring                                                           795,570                   --                  --
   Amortization of intangible assets acquired                              100,805              143,640             143,639
---------------------------------------------------------------------------------------------------------------------------
      Total noninterest expenses                                         5,230,034            4,371,748           3,957,028
---------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                                 314,870              422,540             797,703
Income tax expense (benefit)                                              (769,327)                  --               6,000
---------------------------------------------------------------------------------------------------------------------------
Net income                                                              $1,084,197           $  422,540          $  791,703
===========================================================================================================================
Basic earnings per share                                                $     0.64           $     0.29          $     0.57
===========================================================================================================================
Diluted earnings per share                                              $     0.63           $     0.29          $     0.57
===========================================================================================================================
</TABLE>

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


25


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
=============================================================================================================================
                                                COMMON STOCK                                        UNREALIZED          TOTAL
                                          ------------------------       CAPITAL      RETAINED     GAIN (LOSS)  STOCKHOLDERS'
                                            SHARES      PAR VALUE        SURPLUS      EARNINGS   ON SECURITIES         EQUITY
-----------------------------------------------------------------------------------------------------------------------------
<S><C>
Balance, December 31, 1994                 541,300       $  5,413   $  5,379,686  $ (4,376,284)    $ (249,189)    $   759,626
Sale of common stock                       937,672          9,376      3,253,874            --             --       3,263,250
Net income                                      --             --             --       791,703             --         791,703
Change in unrealized loss                       --             --             --            --        231,243         231,243
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995               1,478,972         14,789      8,633,560    (3,584,581)       (17,946)      5,045,822
Net income                                      --             --             --       422,540             --         422,540
Change in unrealized loss                       --             --             --            --          2,407           2,407
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996               1,478,972         14,789      8,633,560    (3,162,041)       (15,539)      5,470,769
Sale of stock, net of costs                833,334          8,334      4,501,760            --             --       4,510,094
Net income                                      --             --             --     1,084,197             --       1,084,197
Change in unrealized loss                       --             --             --            --         22,254          22,254
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997               2,312,306        $23,123    $13,135,320   $(2,077,844)      $  6,715     $11,087,314
=============================================================================================================================
</TABLE>

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


26


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
===========================================================================================================================
                                                                              1997                 1996                1995
---------------------------------------------------------------------------------------------------------------------------
<S><C>
RECONCILIATION OF NET INCOME TO NET CASH
   PROVIDED BY OPERATING ACTIVITIES
      Net income                                                      $  1,084,197         $    422,540        $    791,703
      Adjustments to reconcile net income to net cash
         provided by operating activities
         Depreciation and amortization                                     197,955              187,311             148,344
         Provision for loan losses                                         747,908              452,190             318,370
         Deferred income taxes                                            (769,327)                  --                  --
         Amortization of premiums and accretion of discounts, net         (453,932)              10,152            (136,627)
         Amortization of intangible assets                                 571,986              143,640             143,639
         Loss (gain) on sales of loans, securities,
            equipment, and other real estate owned                          43,826               31,696            (104,182)
         Decrease (increase) in
            Accrued interest receivable                                    (78,827)             (16,544)            (29,249)
            Other assets                                                    71,461             (203,523)             52,504
         Increase (decrease) in
            Accrued interest payable                                      (155,441)             (16,787)             95,546
            Accrued income taxes                                            (7,487)                  --                  --
            Deferred origination fees                                      (65,463)             141,367             (39,698)
            Other liabilities                                               70,829              138,992              23,225
---------------------------------------------------------------------------------------------------------------------------
            Net cash provided from operations                            1,257,685            1,291,034           1,263,575
===========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturities of securities held to maturity                      --           22,642,605           9,080,902
   Purchase of securities held to maturity                              (1,890,901)          (1,946,528)                 --
   Proceeds from maturities of securities available for sale            52,960,000            1,979,884           4,252,645
   Purchase of securities available for sale                           (57,802,932)         (17,687,193)        (24,776,098)
   Net decrease (increase) in federal funds                            (16,365,243)             844,428            (897,622)
   Loans made, net of principal collected                               (2,867,280)         (13,216,953)         (2,210,753)
   Proceeds from sales of loans                                                 --                   --           2,619,770
   Purchases of and deposits on premises, equipment,
      and software                                                        (206,121)            (524,964)           (720,071)
   Proceeds from sale of equipment                                          17,000                   --                  --
   Acquisition of other real estate owned                                  (11,325)            (140,000)            (16,412)
   Proceeds from sale of other real estate owned                           108,688              463,523                  --
   Net (increase) decrease in securities purchased under
      agreement to resell                                                4,750,000            3,000,000          (5,250,000)
---------------------------------------------------------------------------------------------------------------------------
         Net cash used by investing activities                        $(21,308,114)        $ (4,585,198)       $(17,917,639)
===========================================================================================================================
</TABLE>

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


27


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
===========================================================================================================================
                                                                              1997                 1996                1995
---------------------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase (decrease) in
      Time deposits                                                    $13,052,660          $(4,235,342)         $7,574,901
      Other deposits                                                    (4,096,893)           9,245,080           8,403,074
      Securities sold under repurchase agreements                        6,960,821             (625,264)          2,228,820
   Repayment long-term debt principal                                     (848,400)                  --                  --
   Proceeds from sale of stock                                           4,510,094                   --              88,250
---------------------------------------------------------------------------------------------------------------------------
         Net cash provided by financing activities                      19,578,282            4,384,474          18,295,045
===========================================================================================================================
Net increase (decrease) in cash and cash equivalents                      (472,147)           1,090,310           1,640,981

Cash and cash equivalents at beginning of year                           6,083,554            4,993,244           3,352,263
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                               $ 5,611,407          $ 6,083,554          $4,993,244
===========================================================================================================================
Supplemental Cash Flow Information
   Interest paid, including interest credited to accounts              $ 3,786,134          $ 3,282,912          $3,003,069
   Income taxes paid                                                         7,487                   --               6,000
Non-Cash Activities
   Conversion of stockholder note to common stock                               --                   --           3,175,000
</TABLE>

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


28


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accounting and reporting policies in the financial statements conform
to generally accepted accounting principles 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.

BUSINESS

      The Company was incorporated on May 26, 1988, under the laws of the State
of Maryland to serve as a bank holding company and formed Annapolis National
Bank (the Bank) as a wholly owned subsidiary. The Company is registered as a
bank holding company and the Bank is chartered as a national bank. The Company
(as a bank holding company) and the Bank (as a nationally chartered bank) are
subject to governmental supervision, regulation, and control.

      In late 1993, the Bank formed a new company, ANB Mortgage Services, LLC
(ANB Mortgage) for the purpose of originating and servicing residential
construction loans. ANB Mortgage assets and liabilities and its results of
operations are consolidated on the accompanying financial statements. This
company was liquidated in 1997.

      The principal business of Annapolis National Bank 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, travelers checks, certified checks, U.S. Savings Bond application and
redemption, Mastercard/VISA/American Express credit card and merchant deposit
services, federal tax depository services, individual retirement accounts, money
orders, money wire transfers, the MOST automated teller product, 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, Annapolis National Bank. All significant
intercompany balances and transactions have been eliminated in consolidation.

CASH EQUIVALENTS

      For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.

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 which is cost adjusted for amortization of premiums and accretion
of discounts to maturity, or over the expected life of mortgage-backed
securities. 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 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.

29


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

LOANS AND ALLOWANCE FOR CREDIT LOSSES

      Loans are stated at face value, 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.

      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.

      The allowance for loan losses represents an amount which, in management's
judgment, will be adequate to absorb possible losses on existing loans that may
become uncollectible. Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowers'
ability to pay. If the current economy or real estate market were to suffer a
severe downturn, the estimate for uncollectible accounts would need to be
increased. Loans which are deemed uncollectible are charged off and deducted
from the allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.

PREMISES AND EQUIPMENT

      Premises and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed over the estimated
useful lives using the straight-line method. Leasehold improvements are
amortized over the terms of the leases or the estimated useful lives of the
improvements, whichever is shorter.

INTANGIBLE ASSETS

      Net assets acquired in purchase transactions are recorded at fair value at
the date of acquisition. Core deposit premiums are amortized on a straight line
basis over the estimated period benefited.

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 operating expenses.

INCOME TAXES

      The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Prior to
1997, no deferred taxes were recognized since the Company did not have a
sustained history of profits.

STOCK OPTIONS

      The Company accounts for stock options under Accounting Principles Board
Option No. 25, Accounting for Stock Issued to Employees.

EARNINGS PER SHARE

      In 1997, the Company adopted Statement of Financial Accounts Standards
(SFAS) No. 128, Earnings per Share which changes the earnings per share
disclosures from primary and fully diluted per share amounts to basic and
diluted earnings per share. Under SFAS No. 128, basic earnings per


30


<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.


common share are determined by dividing net income by the weighted average
number of shares of common stock outstanding. Diluted earnings per share is
calculated including the average dilutive common stock equivalents outstanding
during the period. Earnings per share disclosures for prior periods have been
restated to conform to these new calculation methods.

      Dilutive common equivalent shares consist of stock options, calculated
using the treasury stock method. In loss periods, dilutive common equivalent
shares are excluded since the effect would be antidilutive.

      Net income per common share is based on weighted average number of shares
outstanding of 1,691,301, 1,478,972 and 1,401,903 for the years ended 1997,
1996, and 1995 respectively.

RECLASSIFICATION

      Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.

NOTE 2. INVESTMENT SECURITIES

      Investment securities are summarized as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                         AMORTIZED     UNREALIZED     UNREALIZED        MARKET
DECEMBER 31, 1997                             COST          GAINS         LOSSES         VALUE
----------------------------------------------------------------------------------------------
<S><C>
Held to maturity
   U.S. Treasury securities            $ 3,975,296        $    --        $83,466   $ 3,891,830
----------------------------------------------------------------------------------------------
Available for sale
   U.S. Treasury securities            $ 1,970,565        $ 3,435        $    --   $ 1,974,000
   U.S. Government agency               12,964,401         27,088            349    12,991,140
   Mortgage-backed securities            1,000,000             --         20,000       980,000
   Federal Home Loan Bank stock            292,900             --             --       292,900
   Federal Reserve stock                   327,250             --             --       327,250
----------------------------------------------------------------------------------------------
                                       $16,555,116        $30,523        $20,349   $16,565,290
==============================================================================================

DECEMBER 31, 1996
----------------------------------------------------------------------------------------------
Held to maturity
   U.S. Treasury securities            $ 1,992,835        $    --        $ 7,210   $ 1,985,625
----------------------------------------------------------------------------------------------
Available for sale
   U.S. Treasury securities            $ 9,155,662        $ 2,211        $   875   $ 9,156,998
   U.S. Government agency                1,000,000             --          3,750       996,250
   Mortgage-backed securities            1,000,000             --         13,125       986,875
   Federal Reserve stock                   194,150             --             --       194,150
----------------------------------------------------------------------------------------------
                                       $11,349,812        $ 2,211        $17,750   $11,334,273
==============================================================================================
</TABLE>

      The amortized cost and market value of debt 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 repayment penalties.

31


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

<TABLE>
<CAPTION>
==============================================================================================
                                             HELD TO MATURITY            AVAILABLE FOR SALE
----------------------------------------------------------------------------------------------
                                         AMORTIZED         MARKET      AMORTIZED        MARKET
DECEMBER 31, 1997                             COST          VALUE           COST         VALUE
----------------------------------------------------------------------------------------------
<S><C>
Due within one year                     $3,975,296     $3,891,830    $ 9,936,710   $ 9,942,937
Due after one through five years                --             --      4,998,256     5,022,203
Mortgage-backed securities                      --             --      1,000,000       980,000
Equity securities                               --             --        620,150       620,150
----------------------------------------------------------------------------------------------
                                        $3,975,296     $3,891,830    $16,555,116   $16,565,290
==============================================================================================

DECEMBER 31, 1996
----------------------------------------------------------------------------------------------
Due within one year                     $       --     $       --    $10,155,662   $10,153,248
Due after one through five years         1,992,835      1,985,625             --            --
Mortgage-backed securities                      --             --      1,000,000       986,875
Federal Reserve stock                           --             --        194,150       194,150
----------------------------------------------------------------------------------------------
                                        $1,992,835     $1,985,625    $11,349,812   $11,334,273
==============================================================================================
</TABLE>

      Proceeds from available for sale securities during 1996 were $1,979,884
with realized gains of $304 on those sales.

      Securities were sold to commercial customers of the Bank under agreements
for the Bank to repurchase the securities as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Cost at December 31                                                  $13,459,429    $6,367,028
Fair value at December 31                                             13,508,000     6,352,152
Repurchase price                                                      13,305,780     6,344,959
Average balance during the year                                       10,570,086     7,761,702
Average interest rate during the year                                      2.98%         2.97%
Maximum month-end balance                                            $14,666,790    $9,591,298
==============================================================================================
</TABLE>

NOTE 3. CASH AND EQUIVALENTS

      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.


32


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

      Major classifications of loans are as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Real estate
   Commercial                                                        $20,447,677   $17,844,638
   Residential                                                        18,816,566    18,919,242
Commercial                                                            30,860,360    30,801,220
Consumer                                                               2,304,614     2,332,308
----------------------------------------------------------------------------------------------
                                                                      72,429,217    69,897,408
==============================================================================================
Less
   Unearned income                                                       266,548       332,011
   Allowance for loan losses                                           1,177,437       765,000
----------------------------------------------------------------------------------------------
                                                                       1,443,985     1,097,011
----------------------------------------------------------------------------------------------
Loans, net                                                           $70,985,232   $68,800,397
==============================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Repricing or maturing within one year                                $55,913,146   $61,862,644
Maturing over one to five years                                       14,618,447     6,927,761
Maturing over five years                                               1,897,624     1,107,003
----------------------------------------------------------------------------------------------
                                                                     $72,429,217   $69,897,408
==============================================================================================
</TABLE>

      Transactions in the allowance for credit losses were as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Balance, beginning of year                                            $  765,000    $  617,000
Provisions charged to operations                                         747,908       452,190
Recoveries                                                                32,943        18,126
----------------------------------------------------------------------------------------------
                                                                       1,545,851     1,087,316
Charge-offs                                                              368,414       322,316
----------------------------------------------------------------------------------------------
Balance, end of year                                                  $1,177,437    $  765,000
==============================================================================================
</TABLE>

      The balance of nonaccrual and impaired loans is as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Total guaranteed by the Small Business Administration                 $  531,722    $1,076,000
Other nonaccrual loans                                                   245,954       817,677
----------------------------------------------------------------------------------------------
Total nonaccrual loans                                                   777,676     1,893,677
Average impaired loans                                                 1,271,093     1,276,500
Related allowance for credit losses                                      171,923       183,000
Interest collected                                                        98,000        56,000
Balance of accrued interest not recorded                                  73,864        78,000
==============================================================================================
</TABLE>

Loans which were 90 days or more past due amounted to $371,000 and $101,000 at
December 31, 1997, and 1996.


33


<PAGE>

ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

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

      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. A summary of the activity of these loans follows:

======================================================================
                                                    1997         1996
----------------------------------------------------------------------
Beginning balance                            $ 3,071,471   $2,153,082
Advances                                       1,058,813    1,764,445
Repayments                                      (240,899)    (846,056)
Change in officers and directors              (1,659,796)          --
----------------------------------------------------------------------
Ending balance                               $ 2,229,589   $3,071,471
======================================================================

NOTE 5. CREDIT COMMITMENTS

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

======================================================================
(in thousands)                                     1997          1996
----------------------------------------------------------------------
Loan commitments
   Construction                                 $ 4,319       $ 6,106
   Other                                         10,800         8,656
----------------------------------------------------------------------
                                                $15,119       $14,762
======================================================================
Letters of credit
   Deposit secured                              $   592       $   746
   Other                                            473           504
----------------------------------------------------------------------
                                                $ 1,065       $ 1,250
======================================================================

      Loan commitments and 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. No amount
has been recognized by the Bank as an allowance for losses related to these
financial instruments with off-balance sheet risk.

NOTE 6. INTANGIBLE ASSETS

      In 1997 the intangible assets acquired in 1990 were evaluated for
impairment. Except for the core deposit premium, the various other intangible
assets were written off as part of the restructuring expense. The core deposit
premium is being amortized over a period expiring in the year 2000. Amortization
expense relating to the core deposit premium was $87,527 in each of the three
years ended December 31, 1997.


34


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTE 7. PREMISES AND EQUIPMENT

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

=====================================================================
                                                   1997          1996
---------------------------------------------------------------------
 Leasehold improvements                      $  658,175    $  805,067
 Furniture, fixtures, and equipment           1,077,546     1,046,101
---------------------------------------------------------------------
                                              1,735,721     1,851,168
 Accumulated depreciation                       496,834       516,343
---------------------------------------------------------------------
 Net premises and equipment                  $1,238,887    $1,334,825
=====================================================================
 Depreciation and amortization expense       $  197,955    $  187,311
=====================================================================

NOTE 8. LEASE COMMITMENTS

      The Company leases facilities under the following terms:

<TABLE>
<CAPTION>
==============================================================================================
                                    CURRENT
                                     ANNUAL
                                     RENTAL      EXPIRATION DATE               RENEWAL OPTIONS
----------------------------------------------------------------------------------------------
<S><C>
Bestgate Branch                    $ 96,286      January, 1999                            None
Cape St. Claire Branch               13,200      February, 1999             3 terms of 5 years
Edgewater Branch                     40,000      April, 2005               2 terms of 10 years
Kent Island Branch                   18,000      August, 1998             1 year, 2 year terms
Severna Park Branch                  40,354      August, 2006               1 term of 10 years
Administrative offices, Annapolis   131,800      September, 2005       None, early buyout 2000
==============================================================================================
</TABLE>

      Some of the leases provide for increases in the rental rates at specified
times during the lease terms, prior to the expiration dates. All renewal options
are exercisable at increased rates.

      Lease obligations will require rent payments as follows:

================================================================================
                                 PERIOD            MINIMUM RENTALS
--------------------------------------------------------------------------------
                                   1998                 $  336,282
                                   1999                    223,968
                                   2000                    205,502
                                   2001                     85,354
                                   2002                     85,354
                        Remaining years                  1,186,472
--------------------------------------------------------------------------------
                                                        $2,122,932
================================================================================

      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 $463,900, $402,105, and $429,927 for 1997, 1996, and 1995,
respectively.


35


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

NOTE 9. DEPOSITS

      Major classifications of deposits are as follows:

===============================================================================
                                                             1997          1996
-------------------------------------------------------------------------------
Demand, non-interest bearing                          $10,330,153   $10,051,957
NOW accounts                                           19,272,587    20,759,310
Savings and money market                               24,730,257    27,618,623
Time deposits, $100,000 and over                        5,897,484     3,617,185
Other time                                             35,831,281    25,058,920
-------------------------------------------------------------------------------
                                                      $96,061,762   $87,105,995
===============================================================================

      Time deposits, shown in thousands, mature as follows:

-------------------------------------------------------------------------------
Three months or less                                      $10,307   $    12,687
Four months to one year                                    28,128        13,884
Over one year                                               3,294         2,105
-------------------------------------------------------------------------------
                                                      $    41,729   $    28,676
===============================================================================

      At December 31, 1997, time deposits with maturities in excess of five
years totaled $127,064.

NOTE 10. DUE TO STOCKHOLDER

      In June 1990, the Company borrowed $3,000,000 under an unsecured
promissory note to a stockholder of the Company to provide sufficient regulatory
capital to allow the Company to purchase and assume Gibraltar's assets and
liabilities. Interest accrued, but not paid, on the note was at an annual rate
equal to the Bank's prime rate less 2%. In December 1989, this same stockholder
advanced funds to the Company to provide sufficient funds to start banking
operations in January 1990.

      The stockholder acquired 907,143 shares of stock for $3,175,000 due him in
a stock offering which terminated in January 1995. The Company issued a new note
for $848,400 for the remaining amount owed the stockholder. Interest accrued on
the note at an annual rate of the prime rate published in the Wall Street
Journal plus 1%. The principal and interest, totaling $1,062,836, on the note
were paid off in 1997. Interest expensed under this note was $59,574, $78,759,
and $95,546 for 1997, 1996, and 1995, respectively.

NOTE 11. PROFIT SHARING PLAN

      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 contributions to the plan
were $25,874 in 1997, $19,596 in 1996, and $15,000 in 1995.

NOTE 12. LINES OF CREDIT

      The Bank is a member of Federal Home Loan Bank system and may borrow up to
$5,000,000.  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 lines of credit of $5,000,000 from other banks.


36


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTE 13. STOCK OPTIONS

      The Corporation has adopted a stock option plan, covering 100,000 shares
of common stock, intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code. The plan provides for granting options to
purchase shares of the common stock to the officers and other key employees of
the Corporation and the Bank. Options granted have ten year expiration dates
with vesting periods from immediate to five years. No options shall be granted
under the plan after March 28, 2007.

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

==============================================================================
                                                                         1997
------------------------------------------------------------------------------
Outstanding, beginning of year                                             --
Granted                                                                64,000
Exercised                                                                  --
Forfeited                                                              (6,500)
------------------------------------------------------------------------------
Outstanding, end of year                                               57,500
==============================================================================

      These options expire as follows:

==============================================================================
                                                        EXERCISE
                                                           PRICE       OPTIONS
------------------------------------------------------------------------------
July, 2007                                                 $6.00       30,000
September, 2007                                            $6.00        1,000
November, 2007                                             $9.88        6,500
December, 2007                                             $9.75       10,000
------------------------------------------------------------------------------
   Total nonvested                                                     47,500
------------------------------------------------------------------------------
April, 2007 (100% vested)                                  $5.00       10,000
------------------------------------------------------------------------------
                                                                       57,500
==============================================================================

      The Company applies APB No. 25 in accounting for the stock option plan.
Accordingly, no compensation expense has been recognized for the stock options
granted.  Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) was issued in October, 1995 to establish
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 defines a fair value based method of accounting 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 1997 has been
estimated using the Black-Scholes option-pricing model with the following
assumptions:

Dividend yield                                                           0.00%
Risk-free interest rate                                                  5.75%
Expected volatility                                                     10.00%
Expected life in years                                                  10


37


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

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

===================================================================
                                                              1997
-------------------------------------------------------------------
Net income
   As reported                                           $1,084,197
   Pro forma                                             $  943,715
Basic earnings per share
   As reported                                           $     0.64
   Pro forma                                             $     0.58
Diluted earnings per share
   As reported                                           $     0.63
   Pro forma                                             $     0.57
===================================================================

NOTE 14. 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 Bank, as of December
31, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
=============================================================================================
                                                                                TO BE WELL
                                       ACTUAL           CAPITAL ADEQUACY        CAPITALIZED
---------------------------------------------------------------------------------------------
                                    AMOUNT   RATIO        AMOUNT   RATIO      AMOUNT   RATIO
---------------------------------------------------------------------------------------------
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------
<S><C>
   Total capital
      (to risk-weighted assets)  $11,393,091  15.8% > $5,772,738 > 8.0% > $7,215,923 > 10.0%
                                                    -            -      -            -
   Tier 1 capital
      (to risk-weighted assets)  $10,490,371  14.5% > $2,886,369 > 4.0% > $4,329,554 >  6.0%
                                                    -            -      -            -
   Tier 1 capital
   (to average assets)           $10,490,371   8.8% > $4,767,360 > 4.0% > $5,959,200 >  5.0%

                                                    -            -      -            -
<CAPTION>

DECEMBER 31, 1996
---------------------------------------------------------------------------------------------
<S><C>
   Total capital
      (to risk-weighted assets)  $ 6,445,903  10.2% > $5,035,177 > 8.0% > $6,293,972 > 10.0%
                                                    -            -      -            -
   Tier 1 capital
      (to risk-weighted assets)  $ 5,680,903   9.0% > $2,517,589 > 4.0% > $3,776,383 >  6.0%
                                                    -            -      -            -
   Tier 1 capital
   (to average assets)           $ 5,680,903   5.8% > $3,898,339 > 4.0% > $4,879,324 >  5.0%
                                                    -            -      -            -
=============================================================================================
</TABLE>

      Tier 1 capital consists of capital stock, surplus, and undivided profits
and 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.


38



<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTE 15. INCOME TAXES

      The components of the deferred tax benefit are as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                                                                         1997
----------------------------------------------------------------------------------------------
<S><C>
Recognition of the benefit of the net operating loss carryover                    $   449,614
Provision for credit losses                                                          (101,996)
Revenues taxed not earned                                                              (9,770)
Expenses incurred not deducted                                                         65,000
Depreciation expense                                                                   34,878
Amortization and write down of intangible assets                                      (84,053)
Elimination of the valuation allowance                                             (1,123,000)
Deferred tax benefit                                                              $  (769,327)
==============================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997         1996
----------------------------------------------------------------------------------------------
<S><C>
Deferred tax assets
   Allowance for credit losses                                          $286,996  $   185,000
   Revenue taxed not earned                                              100,770       91,000
   Expenses incurred not deducted                                             --       65,000
   Net operating loss carryforward                                       492,386      942,000
----------------------------------------------------------------------------------------------
      Total deferred tax assets                                          880,152    1,283,000
----------------------------------------------------------------------------------------------
Deferred tax liabilities
   Depreciation                                                           37,278        2,400
   Intangible assets                                                      73,547      157,600
   Unrealized gain on securities available for sale                        3,459           --
----------------------------------------------------------------------------------------------
      Total deferred tax liabilities                                     114,284      160,000
----------------------------------------------------------------------------------------------
   Valuation allowance                                                        --   (1,123,000)
----------------------------------------------------------------------------------------------
Net deferred tax asset                                                  $765,868  $        --
==============================================================================================
</TABLE>

      The differences between the amount of federal income taxes at 34% and the
amount reported by the Company follow:

<TABLE>
<CAPTION>
==============================================================================================
                                                                            1997         1996
----------------------------------------------------------------------------------------------
<S><C>
Income before income taxes                                             $ 314,870    $ 422,540
Taxes computed at the federal income tax rate                            107,056      143,664
Increases (decreases) resulting from
   State income taxes, net of federal benefit                             14,547       19,521
   Nondeductible expenses                                                  1,720       14,856
   Net operating loss carryforward                                      (892,650)    (178,041)
----------------------------------------------------------------------------------------------
Income tax expense                                                     $(769,327)   $      --
==============================================================================================
</TABLE>

      The Company has approximately $1.4 million of net operating loss
carryforwards at December 31, 1997.


39


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

NOTE 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.

NOTE 17. 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>
==============================================================================================
DECEMBER 31, 1997                                                CARRYING AMOUNT    FAIR VALUE
----------------------------------------------------------------------------------------------
<S><C>
Financial assets
   Cash and due from banks                                           $ 5,611,407   $ 5,611,407
   Federal funds sold                                                 20,743,973    20,743,973
   Investment securities (total)                                      20,540,586    20,457,120
   Loans, net                                                         70,985,232    70,793,572
   Accrued interest receivable                                           515,549       515,549

Financial liabilities
   Noninterest-bearing deposits                                      $10,330,153   $10,330,153
   Interest-bearing deposits                                          85,731,609    85,869,314
   Securities sold under agreements to repurchase                     13,305,780    13,305,780
   Accrued interest payable                                               36,113        36,113
==============================================================================================
</TABLE>

      The fair values of U.S. Treasury and Government agency 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 for loans
of the same class and term. 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.

      The fair value of long-term debt is estimated based on interest rates
currently offered for long-term debt of similar terms.

      It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.

      In 1996, the Company considered disclosure of the fair value of its
financial instruments, including off-balance sheet items and determined that the
difference between its assets and liabilities and their carrying values was
insignificant. The Company reached this conclusion after evaluating the
repricing and terms of its financial instruments. A substantial portion of such
instruments repriced annually and were short term in nature. As a result, the
fair values approximated the value reported in the financial statements at
December 31, 1996.

40


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
==============================================================================================
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------------------------------------
                                                        THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
                                 DECEMBER 31,       SEPTEMBER 30,       JUNE 30,     MARCH 31,
----------------------------------------------------------------------------------------------
<S><C>
1997
Interest revenue                       $2,492              $2,422         $2,260        $1,987
Interest expense                          976               1,008            893           754
Net interest income                     1,516               1,414          1,367         1,233
Provision for loan losses                 354                  75             82           237
Net income                                 92                 335            274           383
Earnings per share-basic                 0.04                0.23           0.19          0.26
Earnings per share-diluted               0.04                0.23           0.19          0.26
==============================================================================================
</TABLE>

NOTE 19. PARENT COMPANY FINANCIAL INFORMATION

      The balance sheet and statements of income and cash flows for Annapolis
National Bancorp, Inc. (Parent Company only) follow:

BALANCE SHEETS

<TABLE>
<CAPTION>
==============================================================================================
DECEMBER 31,                                                                1997          1996
----------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks                                              $       191  $    20,765
Investment in Annapolis National Bank                                 10,713,401    6,453,665
Deferred income taxes                                                    373,722           --
----------------------------------------------------------------------------------------------
   Total assets                                                      $11,087,314  $ 6,474,430
==============================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Due to stockholder                                                   $        --  $ 1,003,661
----------------------------------------------------------------------------------------------
Stockholders' equity
   Common stock, par value $.01 per share; authorized
      10,000,000 shares; issued and outstanding 2,312,306
      shares in 1997 and 1,478,972 shares in 1996                         23,123       14,789
   Capital surplus                                                    13,135,320    8,633,560
   Retained earnings (deficit)                                        (2,077,844)  (3,162,041)
   Unrealized gain (loss) on investment securities available for sale      6,715      (15,539)
----------------------------------------------------------------------------------------------
      Total stockholders' equity                                      11,087,314    5,470,769
----------------------------------------------------------------------------------------------
      Total liabilities and stockholders' equity                     $11,087,314  $ 6,474,430
==============================================================================================
</TABLE>


41


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

DECEMBER 31, 1997

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
==============================================================================================
YEARS ENDED DECEMBER 31,                                                    1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Interest revenue                                                      $    8,257   $       --
Interest expense                                                          59,575       78,759
----------------------------------------------------------------------------------------------
Net interest income (expense)                                            (51,318)     (78,759)
Equity in undistributed income of subsidiary                             761,893      501,399
Expenses
   Other operating                                                           100          100
----------------------------------------------------------------------------------------------
Income before income taxes                                               710,475      422,540
Income taxes                                                            (373,722)          --
----------------------------------------------------------------------------------------------
Net income                                                            $1,084,197   $  422,540
==============================================================================================
</TABLE>

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
==============================================================================================
YEARS ENDED DECEMBER 31,                                                    1997          1996
----------------------------------------------------------------------------------------------
<S><C>
Cash flows from operating activities
   Interest received                                                 $     8,257     $     --
   Interest paid                                                        (214,836)     (19,044)
   Cash paid for operating expenses                                         (100)        (100)
----------------------------------------------------------------------------------------------
                                                                        (206,679)     (19,144)
----------------------------------------------------------------------------------------------

Cash flows from investing activities
   Capital contributed to Annapolis National Bank                     (3,475,589)          --
----------------------------------------------------------------------------------------------

Cash flows from financing activities
   Proceeds from stock offering                                        4,510,094           --
   Repayment of stockholder loan                                        (848,400)          --
----------------------------------------------------------------------------------------------
                                                                       3,661,694           --
----------------------------------------------------------------------------------------------
   Net (decrease) in cash                                                (20,574)     (19,144)

Cash and equivalents at beginning of year                                 20,765       39,909
----------------------------------------------------------------------------------------------
Cash and equivalents at end of year                                         $191     $ 20,765
----------------------------------------------------------------------------------------------

Reconciliation of net income to net cash
   provided by operating activities
   Net income                                                        $ 1,084,197     $422,540
   Adjustments to reconcile net income to net
      cash used in operating activities
      Undistributed net income of subsidiary                            (761,893)    (501,399)
      Increase in deferred tax assets                                   (373,722)          --
      Increase (decrease) in accrued interest expense                   (155,261)      59,715
----------------------------------------------------------------------------------------------
                                                                        (206,679)    $(19,144)
==============================================================================================
</TABLE>


42


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


OFFICERS AND DIRECTORS



[PHOTO APPEARS HERE]


Seated Ronald E. Gardner, John W. Marhefka Jr., Standing (left to right)
Lawrence W. Schwartz, Stanley H. Katsef, Richard M. Lerner, Stanley J. Klos Jr.,
Dimitri P. Mallios, Albert Phillips and Lawrence E. Lerner.


BOARD OF DIRECTORS                    EXECUTIVE OFFICERS
OF ANNAPOLIS NATIONAL                 OF ANNAPOLIS NATIONAL
BANCORP, INC. AND                     BANCORP, INC.
ANNAPOLIS NATIONAL
BANK                                  Russell J. Grimes Jr.
                                         Chief Financial Officer &
Ronald E. Gardner                        Treasurer
Stanley H. Katsef                     John W. Marhefka Jr.
   Vice Chairman of the Board            Chief Executive Officer &
Stanley J. Klos Jr.                      Vice President
Lawrence E. Lerner                    Lori J. Mueller
Richard M. Lerner                        Secretary
Dimitri P. Mallios                    Albert Phillips
John W. Marhefka Jr.                     President
   Chief Executive Officer
Albert Phillips
   Chairman of the Board
Lawrence W. Schwartz

OFFICERS OF ANNAPOLIS
NATIONAL BANK

EXECUTIVE OFFICERS

Jeffrey S. Armiger
   Senior Vice President,
   Business Banking
Kevin J. Barron
   Senior Vice President,
   Real Estate Lending
Russell J. Grimes Jr.
   Senior Vice President,
   Chief Financial Officer & Treasurer
Michael L. Irwin, CPA
   Senior Vice President,
   Credit Administration
John W. Marhefka Jr.
   President &
   Chief Executive Officer
Lori J. Mueller
   Senior Vice President,
   Administration & Marketing

VICE PRESIDENTS

Tianne Baker
   Real Estate Lending
Tamara S. Cleaver
   Loan Servicing
Stephanie L. Gates
   Real Estate Lending
Becky L. Hoffman
   Operations
Robert E. Mann
   Commercial Lending
Jo Ann Pyles
   Mortgage Bandking
Jan L. Rupp
   Real Estate Lending

ASSISTANT VICE PRESIDENTS

Judith A. Atkins
   Construction Loan Adninistration
Deborah L. Cobb
   Relationship Manager
Linda W. Friday
   Relationship Manager
Alison M. Hamlett
   Commercial Lending
Janice A. Korvin
   Accounting Manager
Susan F. Smith
   Relationship Manager
Heather R. Tinelli
   Credit Analyst
L. C. "Sam" Walters
   Relationship Manager
Gregory E. Williams
   Commercial Lending



43


<PAGE>


ANNAPOLIS NATIONAL BANCORP, INC.


CORPORATE INFORMATION

EXECUTIVE OFFICES

180 Admiral Cochrane Drive
Suite 300
Annapolis, Maryland 21401
410-224-4455

COMMUNITY OFFICES

ANNAPOLIS
900 Bestgate Road
Suite 100
Annapolis, Maryland 21401
410-224-4483

CAPE ST. CLAIRE
1372-B Cape St. Claire Road
Annapolis, Maryland 21401
410-974-1515

EDGEWATER
120 Central Avenue
Edgewater, Maryland 21037
410-956-2900

KENT ISLAND
Route 50 and 18
Kent Island Shopping Center
Stevensville, Maryland 21666
410-643-4191

SEVERNA PARK
50 West McKinsey Road
Severna Park, Maryland 21146
410-518-6885

ADDRESS OF PRINCIPAL OFFICE

Annapolis National Bancorp, Inc.
180 Admiral Cochrane Dr.,
Suite 300
Annapolis, Maryland 21401

TRANSFER AGENT

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016

INDEPENDENT AUDIT
FIRM

Rowles & Company, LLP
101 East Chesapeake Avenue
Baltimore, MD 21286

SECURITIES COUNSEL

Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016

ANNUAL MEETING

The Annual Meeting of the
stockholders of Annapolis
National Bancorp, Inc. will be
held at the Annapolis Holiday
Inn, 210 Holiday Ct., Annapolis,
MD 21401 at 6:00 PM on
Thursday, April 23, 1998.

INVESTOR INFORMATION

Analysts, stockholders and others
seeking information about
Annapolis National Bancorp, Inc.
are invited to contact:

John W. Marhefka Jr.
Chief Executive Officer

           or

Russell J. Grimes Jr.
Chief Financial Officer & Treasurer
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive
Suite 300
Annapolis, Md. 21401
(410) 224-4455

SECURITIES LISTING

The Company's shares are
listed on The NASDAQ Stock
Market(SM). Ticker Symbol:
ANNB

Member Federal Deposit Insurance Corporation
Member Federal Reserve System


44