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                                   FORM 10-KSB
                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

(Mark One)

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

         For the year ended December 31, 2002

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

         For the transition period from                                     to

                        Commission File Number 333-87781


                            Bay National Corporation
                            ------------------------
                 (Name of small business issuer in its charter)

         Maryland                                           52-2176710
         --------                                           ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

                2328 West Joppa Road, Lutherville, Maryland 21093
                ------------------------------------------- -----
               (Address of principal executive offices) (Zip Code)

                     Issuer's telephone number: 410-494-2580
                     ---------------------------------------

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:  Common stock,
                                                                par value $1.00
                                                                per share

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
                                                                      ---
         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]

<PAGE>




         The issuer's revenues for its most recent fiscal year were $4,204,032.

         The aggregate market value of the common equity held by non-affiliates
was $8,407,980 as of March 24, 2003, based on a sales price of $9.00 per share
of Common Stock, which is the sales price at which shares of Common Stock were
last sold in over the counter trading on March 24, 2003.

         The number of shares outstanding of the issuer's Common Stock was
1,242,020 as of March 24, 2003.

         Transitional Small Business Disclosure Format (check one):

                                     Yes __ No X

                                     PART I

Item 1.  Description of Business

General

         Bay National Corporation was incorporated under the laws of the State
of Maryland on June 3, 1999, primarily to serve as a bank holding company for a
proposed federally chartered commercial bank to be named Bay National Bank.

         Bay National Bank commenced operations on May 12, 2000 with its main
office in North Baltimore, Maryland and a branch office in Salisbury, Maryland.
Bay National Bank accepts checking and savings deposits and offers a wide range
of commercial and industrial, real estate, consumer and residential mortgage
loans.

Marketing Focus

         Bay National Bank was formed by a group of individuals active in
business, professional, banking, financial and charitable activities in the
Baltimore, Maryland metropolitan area and the Eastern Shore of Maryland. These
individuals believed that the banking needs of certain segments of these
communities were not being served adequately by existing banks. Specifically, as
a result of bank mergers in the 1990's, many banks in the Baltimore metropolitan
area and the Eastern Shore of Maryland became local branches of large regional
and national banks. Although size gave the larger banks some advantages in
competing for business from large corporations, including economies of scale and
higher lending limits, the organizers believed that these "megabanks" were
focused on a mass market approach which de-emphasized personal contact and
service. The organizers also believed that the centralization of decision-making
power at these large institutions had resulted in a lack of customer service. At
many of these institutions, determinations were made at the "home office" by
individuals who lacked personal contact with customers as well as an
understanding of the customers' needs and scope of the relationship with the
institution.

         Bay National Bank's management believes that this trend is ongoing, and
has been particularly frustrating to owners of small and mid-sized businesses,
business professionals and high net worth individuals who traditionally were
accustomed to dealing directly with a bank executive who had an understanding of
their banking needs with the ability to deliver a prompt response.

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<PAGE>

         Bay National Bank targets its commercial banking services to small and
mid-sized businesses and targets its retail banking services to the owners of
these businesses and their employees, to business professionals and high net
worth individuals.

         Bay National Bank seeks to distinguish itself by

          o    Developing personal relationships with its customers.

          o    Customizing  its  products  to fit  the  needs  of its  customers
               instead of adopting a "one size fits all" mentality.

          o    Streamlining the decision making process.

          o    Offering its customers additional complementary services, such as
               insurance  and  investment  advice,  through  relationships  with
               strategic partners.

         Bay National Bank's offices are not organized in the traditional retail
branch structure, which is transaction and "bank teller" oriented. Instead, Bay
National Bank has adopted a "sit-down" model where customers are greeted by a
personal banker and taken to a private desk. We believe that this approach makes
service more individualized and enhances the banker's understanding of the
customer's needs. Furthermore, Bay National Bank's branch locations do not focus
on capturing every customer within the surrounding area. Instead, they are
strategically located in areas convenient to Bay National Bank's target customer
base.

Market Area and Facilities

        Bay National Bank's headquarters and Baltimore branch office are located
at 2328 West Joppa Road, Lutherville, Maryland 21093. Bay National Bank serves
the Baltimore metropolitan area from that location, with its primary service
area being Towson, Lutherville-Timonium, Cockeysville, Hunt Valley, Ruxton and
Roland Park. Bay National Bank's Salisbury, Maryland branch office is located at
109 Poplar Hill Avenue, Salisbury, Maryland 21801, from which it serves
Maryland's Eastern Shore.

Products and Services

         Loan Portfolio.
         ---------------

         Bay National Bank offers a full range of loans, including commercial
and industrial loans, real estate loans, consumer loans and residential mortgage
and home equity loans. Commercial business and commercial real estate loans for
owner-occupied properties are Bay National Bank's primary loan products,
accounting for approximately 75% of the loan portfolio as of December 31, 2002.

         Generally, Bay National Bank is subject to a lending limit to any one
borrower of 15% of Bay National Bank's unimpaired capital and surplus. However,
management is able to originate loans and to participate with other lenders in
loans that exceed Bay National Bank's lending limits.

         The following is a description of the types of loans Bay National Bank
has targeted in building its loan portfolio:

          o    Commercial and industrial loans for business  purposes  including
               working  capital,   equipment  purchases,  lines  of  credit  and
               government  contract  financing.  Asset-based  lending,  accounts
               receivable  financing and lease financing are also available.  As
               of December 31, 2002, these loans  represented  approximately 62%
               of Bay  National  Bank's loan  portfolio.  Bay  National  Bank


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               is targeting small and mid-sized businesses in its market area
               with credit needs in the range of up to $5,000,000.

          o    Non-mortgage real estate loans, including land development and
               construction loan financing, primarily for owner-occupied
               premises. As of December 31, 2002, these loans represented
               approximately 11% of Bay National Bank's loan portfolio.

          o    Consumer loans including automobile and personal loans. In
               addition, Bay National Bank offers personal lines of credit. As
               of December 31, 2002, these loans represented approximately 6% of
               Bay National Bank's loan portfolio. Bay National Bank's consumer
               loans are targeted to business owners and their employees,
               business professionals and high net worth individuals.

          o    Residential mortgage loans, including first and second mortgage
               loans on owner occupied and investment properties, and home
               equity loans secured by single-family owner-occupied residences.
               As of December 31, 2002, these loans represented approximately
               21% of Bay National Bank's loan portfolio. Like its consumer
               loans, Bay National Bank's residential mortgage loans are
               targeted to business owners and their employees, business
               professionals and high net worth individuals.

               Bay National Bank's conventional first and second residential
               mortgage loans adhere to standards developed by FNMA/FHLMC.
               Management requires private mortgage insurance for loans in
               excess of 80% of a property's value. Bay National Bank sells most
               of its first and second residential mortgage loans in the
               secondary market. Therefore, management sells those loans that
               have a lower degree of risk, and a lower yield, relative to the
               other types of loans that Bay National Bank is expected to make.
               As of December 31, 2002, mortgage loans held for sale, totaled
               $2,818,500.

        Deposits.
        ---------

        Bay National Bank offers a wide range of interest-bearing and
non-interest-bearing accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts,
interest-bearing statement savings accounts and certificates of deposit with
fixed and variable rates and a range of maturity date options.

        Other Banking and Financial Services.
        -------------------------------------

        Bay National Bank offers commercial customers cash management services
such as sweep accounts, account reconciliation, lockbox services and wire
transfers of funds. Additionally, Bay National Bank makes available telephone
banking, ATM/debit cards, safe keeping boxes, after-hours deposit services,
travelers checks, direct deposit of payroll and automatic drafts for various
accounts. These services are provided either directly by Bay National Bank or
through correspondent banking relationships. Bay National Bank does not have
it's own network of ATM machines. In general, Bay National Bank waives fees on a
predetermined number of ATM transactions per month, thereby allowing its
customers to use any ATM machine.

        In addition, Bay National Bank's customers are able to access
information about their accounts and view information about Bay National Bank's
services and products on Bay National Bank's website, which is located at
http://www.baynational.com. Bay National Bank's website also permits customers
to make transfers of funds among accounts, pay bills, and send e-mail to Bay
National Bank personnel.

        Bay National Bank offers, through strategic partners, investment
advisory, risk management and employee benefit services. Through these
affiliations, banking clients can receive a full range of financial


                                       4
<PAGE>

services, including investment advice, personal and business insurance products
and employee benefit products such as pension and 401(k) plan administration. To
the extent permitted by applicable regulations, the strategic partners may share
fees and commissions with Bay National Bank. As of December 31, 2002, Bay
National Bank had not entered in to any such fee arrangements. When sufficient
volume is developed in any of these lines of business, Bay National Bank may
provide these services if permitted by applicable regulations.

Competition

        Deregulation of financial institutions and acquisitions of banks across
state lines has resulted in widespread changes in the financial services
industry. In both the Baltimore metropolitan area and on Maryland's Eastern
Shore, Bay National Bank faces strong competition from large banks headquartered
within and outside of Maryland. Bay National Bank also competes with other
community banks, savings and loan associations, credit unions, mortgage
companies, finance companies and others providing financial services. In
addition, insurance companies, securities brokers and other non-bank entities or
their affiliates may provide services, which historically have been considered
banking in nature.

        Many of Bay National Bank's competitors can finance extensive
advertising campaigns, maintain extensive branch networks and technology
investments, and offer services, which Bay National Bank cannot offer or will
not offer initially. Also, larger institutions have substantially higher lending
limits than Bay National Bank. Some of Bay National Bank's competitors have
other advantages, such as tax exemption in the case of credit unions, and lesser
regulation in the case of mortgage companies and finance companies.

Employees

        As of March 25, 2003, Bay National Bank employed twenty-eight
individuals. Nineteen people operate from Bay National Bank's headquarters and
banking office in North Baltimore and nine people from the Salisbury, Maryland
banking office. Bay National Corporation has no employees.

Supervision and Regulation

        Bay National Corporation and Bay National Bank are subject to extensive
regulation under state and federal banking laws and regulations. These laws
impose specific requirements and restrictions on virtually all aspects of
operations and generally are intended to protect depositors, not stockholders.
The following discussion is only a summary and readers should refer to
particular statutory and regulatory provisions for more detailed information. In
addition, management cannot predict the nature or the extent of the effect on
business and earnings that new federal or state legislation may have in the
future.

        Bay National Corporation.
        -------------------------

        Federal Bank Holding Company Regulation. Bay National Corporation is a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, and is subject to supervision by the Federal Reserve Board. As a bank
holding company, Bay National Corporation is required to file with the Federal
Reserve Board an annual report and such other additional information as the
Federal Reserve Board may require by statute. The Federal Reserve Board may also
examine Bay National Corporation and each of its subsidiaries.

        The Federal Reserve Board must approve, among other things, the
acquisition by a bank holding company of control of more than five percent (5%)
of the voting shares, or substantially all the assets, of any bank or bank
holding company or the merger or consolidation by a bank holding company with
another bank holding company. Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, the


                                       5
<PAGE>

restrictions on interstate acquisitions of banks by bank holding companies were
repealed as of September 29, 1995. The effect of the repeal of these
restrictions is that, subject to certain time and deposit base requirements, Bay
National Corporation may acquire a bank located in Maryland or any other state,
and a bank holding company located outside of Maryland can acquire any
Maryland-based bank holding company or bank.

        Unless it chooses to become a financial holding company, as further
described below, a bank holding company is prohibited from acquiring control of
any voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking, or
managing or controlling banks or furnishing services for its authorized
subsidiaries. There are limited exceptions. A bank holding company may, for
example, engage in activities which the Federal Reserve Board has determined by
order or regulation to be so closely related to banking or managing or
controlling banks as to be "properly incident thereto." In making such a
determination, the Federal Reserve Board is required to consider whether the
performance of such activities can reasonably be expected to produce benefits to
the public, such as convenience, increased competition or gains in efficiency,
which outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced by the
acquisition, in whole or in part, of a going concern. Some of the activities
that the Federal Reserve Board has determined by regulation to be closely
related to banking include servicing loans, performing certain data processing
services, acting as a fiduciary, investment or financial advisor, and making
investments in corporations or projects designed primarily to promote community
welfare.

        Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by statute on any extensions of credit to the bank holding
company or any of its subsidiaries, or investments in their stock or other
securities, and on taking such stock or securities as collateral for loans to
any borrower. Further, a bank holding company and any subsidiary bank are
prohibited from engaging in certain tie-in arrangements in connection with the
extension of credit. In 1997, the Federal Reserve Board adopted amendments to
its Regulation Y, creating exceptions to the Bank Holding Company Act's
anti-tying prohibitions that give bank subsidiaries of holding companies greater
flexibility in packaging products and services with their affiliates.

        In accordance with Federal Reserve Board policy, Bay National
Corporation is expected to act as a source of financial strength to Bay National
Bank and to commit resources to support Bay National Bank in circumstances in
which Bay National Corporation might not otherwise do so. The Federal Reserve
Board may require a bank holding company to terminate any activity or relinquish
control of a non-bank subsidiary (other than a non-bank subsidiary of a bank)
upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or non-bank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.

        On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act ("GLBA"). Effective March 11, 2000, pursuant to authority
granted under the GLBA, a bank holding company may elect to become a financial
holding company and thereby engage in a broader range of financial and other
activities than are permissible for traditional bank holding companies. In order
to qualify for the election, all of the depository institution subsidiaries of
the bank holding company must be well capitalized and well managed, as defined
by regulation, and all of its depository institution subsidiaries must have
achieved a rating of satisfactory or better with respect to meeting community
credit needs.

         Pursuant to the GLBA, financial holding companies will be permitted to
engage in activities that are "financial in nature" or incidental or
complementary thereto, as determined by the Federal Reserve Board.


                                       6
<PAGE>

The GLBA identifies several activities as "financial in nature," including,
among others, insurance underwriting and agency, investment advisory services,
merchant banking and underwriting, and dealing or making a market in securities.
Being designated a financial holding company will allow insurance companies,
securities brokers and other types of financial companies to affiliate with
and/or acquire depository institutions.

        The Federal Reserve Board imposes risk-based capital measures on bank
holding companies in order to insure their capital adequacy. As a bank holding
company with less than $150,000,000 in assets, Bay National Corporation
initially is exempt from most of these risk-based capital measures. However, the
Federal Reserve Board still requires that Bay National Corporation remain
adequately capitalized and have the ability to retire any debt within 25 years
from the date it is incurred.

        The status of Bay National Corporation as a registered bank holding
company under the Bank Holding Company Act does not exempt it from certain
federal and state laws and regulations applicable to corporations generally,
including, without limitation, certain provisions of the federal securities
laws.

        State Bank Holding Company Regulation. Bay National Corporation is a
Maryland-chartered bank holding company and is subject to various restrictions
on its activities as set forth in Maryland law, in addition to those
restrictions set forth in federal law.

        Under Maryland law, a bank holding company that desires to acquire a
Maryland state-chartered bank or trust company, a federally chartered bank with
its main office in Maryland, or a bank holding company that has its principal
place of business in Maryland, must file an application with the Maryland
Commissioner of Financial Regulation (the "Commissioner"). In approving the
application, the Commissioner must consider whether the acquisition may be
detrimental to the safety and soundness of the entity being acquired or whether
the acquisition may result in an undue concentration of resources or a
substantial reduction in competition in Maryland. The Commissioner may not
approve an acquisition if, on consummation of the transaction, the acquiring
company, together with all its insured depository institution affiliates, would
control 30% or more of the total amount of deposits of insured depository
institutions in Maryland. The Commissioner has authority to adopt by regulation
a procedure to waive this requirement for good cause. In a transaction for which
the Commissioner's approval is not required due to an exemption under Maryland
law, or for which federal law authorizes the transaction without application to
the Commissioner, the parties to the acquisition must provide written notice to
the Commissioner at least 15 days before the effective date of the acquisition.

        Bay National Bank.
        ------------------

        General. Bay National Bank, as a national banking association whose
accounts are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC") up to the maximum legal limits, is subject to
regulation, supervision and regular examinations by the Office of the
Comptroller of the Currency ("OCC"). Bay National Bank is a member of the
Federal Reserve System and, as such, is subject to certain regulations issued by
the Federal Reserve Board. Bay National Bank also is subject to applicable
banking provisions of Maryland law insofar as they do not conflict with or are
not preempted by federal law. The regulations of these various agencies govern
most aspects of Bay National Bank's business, including setting required
reserves against deposits, loans, investments, mergers and acquisitions,
borrowing, dividends and location and number of branch offices.

        The GLBA authorizes expanded activities for national banks, but requires
(with the exception of underwriting municipal revenue bonds and other state and
local obligations) that any expanded activities be conducted in a new entity
called a "financial subsidiary" that is a subsidiary of the bank rather than the
bank itself. A financial subsidiary may engage in any activities in which a
financial holding company or a


                                       7
<PAGE>

financial holding company's non-bank subsidiaries can engage, except that a
financial subsidiary may not underwrite most insurance, engage in real estate
development or conduct merchant banking activities. A financial subsidiary may
be established through acquisition or de novo.

        In order for a national bank to operate a financial subsidiary, it must
be well capitalized and well managed, have a satisfactory or better rating with
respect to meeting community credit needs and the aggregate assets of all of the
bank's financial subsidiaries may not exceed 45% of the total assets of the
bank, subject to certain exceptions. Existing authority of the OCC and the FDIC
to review subsidiary activities are preserved.

        Banking is a business which depends on interest rate differentials. In
general, the differences between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on loans extended to
its customers and securities held in its investment portfolio constitute the
major portion of a bank's earnings. Thus, the earnings and growth of Bay
National Bank will be subject to the influence of economic conditions generally,
both domestic and foreign, and also on the monetary and fiscal policies of the
United States and its agencies, particularly the Federal Reserve Board, which
regulates the supply of money.

        Branching and Interstate Banking. Beginning on June 1, 1997, the federal
banking agencies were authorized to approve interstate bank merger transactions
without regard to whether such a transaction is prohibited by the law of any
state, unless the home state of one of the banks has opted out of the interstate
bank merger provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994. Furthermore, under the Riegle-Neal Act, interstate
acquisitions of branches are permitted if the law of the state in which the
branch is located permits such acquisitions. The Riegle-Neal Act also authorizes
the OCC and FDIC to approve interstate branching de novo by national and
non-member banks, respectively, but only in states which specifically allow for
such branching.

        The District of Columbia, Maryland, Delaware and Pennsylvania have all
enacted laws which permit interstate acquisitions of banks and bank branches and
permit out-of-state banks to establish de novo branches.

        Capital Adequacy Guidelines. The Federal Reserve Board, the OCC and the
FDIC have all adopted risk-based capital adequacy guidelines by which they
assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk-based
capital requirements determine the adequacy of capital based on the risk
inherent in various classes of assets and off-balance sheet items.

        Since December 31, 1992, national banks have been expected to meet a
minimum ratio of total qualifying capital (the sum of core capital (Tier 1) and
supplementary capital (Tier 2)) to risk-weighted assets (a "Total Risk-Based
Capital Ratio") of 8%. At least half of this amount (4%) should be in the form
of core capital. These requirements apply to Bay National Bank.

        Tier 1 capital for national banks generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such stock which may be
included as Tier 1 capital), less goodwill, without adjustment in accordance
with Statement of Financial Accounting Standards No. 115. Tier 2 capital
consists of the following: hybrid capital instruments, perpetual preferred stock
which is not otherwise eligible to be included as Tier 1 capital, term
subordinated debt and intermediate-term preferred stock, and, subject to
limitations, general allowances for loan losses. Assets are adjusted under the
risk-based guidelines to take into account different risk characteristics, with
the categories ranging from 0% (requiring no risk-based capital) for assets such
as cash, to 100% for the bulk of assets which are typically held by a bank
holding company, including certain multi-family residential and commercial real
estate loans, commercial business loans and consumer loans. Residential first
mortgage loans


                                       8
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on one-to-four-family residential real estate and certain seasoned multi-family
residential real estate loans, which are not 90 days or more past-due or
non-performing and which have been made in accordance with prudent underwriting
standards, are assigned a 50% level in the risk-weighing system, as are certain
privately issued mortgage-backed securities representing indirect ownership of
such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics.

        In addition to the risk-based capital requirements, the OCC has
established a minimum 3% Leverage Capital Ratio (Tier 1 capital to total
adjusted assets) requirement for the most highly-rated national banks, with an
additional cushion of at least 100 to 200 basis points for all other national
banks, which effectively increases the minimum Leverage Capital Ratio for such
other banks to 4%-5% or more. Under the OCC's regulations, highest-rated banks
are those that the OCC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, those which are considered a strong banking organization. A national
bank that has less than the minimum Leverage Capital Ratio requirement must
submit to the applicable district office for review and approval a reasonable
plan describing the means and timing by which the bank will achieve its minimum
Leverage Capital Ratio requirement. A national bank which fails to file such a
plan is deemed to be operating in an unsafe and unsound manner and could be
subject to a cease-and-desist order.

        The OCC's regulations also provide that any insured depository
institution with a Leverage Capital Ratio less than 2% is deemed to be operating
in an unsafe or unsound condition. Operating in an unsafe or unsound manner
could lead the FDIC to terminate deposit insurance. However, such an institution
will not be subject to an enforcement proceeding solely on account of its
capital ratios if it has entered into and is in compliance with a written
agreement with the OCC to increase its Leverage Capital Ratio to such level as
the OCC deems appropriate and to take such other action as may be necessary for
the institution to be operated in a safe and sound manner. The capital
regulations also provide, among other things, for the issuance by the OCC or its
designee(s) of a capital directive, which is a final order issued to a bank that
fails to maintain minimum capital or to restore its capital to the minimum
capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.

        Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. Under applicable regulations, a bank will be deemed to be: (i) "well
capitalized" if it has a Total Risk-Based Capital Ratio of 10% or more, a Tier 1
Risk-Based Capital Ratio of 6% or more, a Leverage Capital Ratio of 5% or more
and is not subject to any written capital order or directive; (ii) "adequately
capitalized" if it has a Total Risk-Based Capital Ratio of 8% or more, a Tier 1
Risk-Based Capital Ratio of 4% or more and a Leverage Capital Ratio of 4% or
more (3% under certain circumstances); (iii) "undercapitalized" if it has a
Total Risk-Based Capital Ratio that is less than 8%, a Tier 1 Risk-Based Capital
Ratio that is less than 4% or a Leverage Capital Ratio that is less than 4%
(3.3% under certain circumstances); (iv) "significantly undercapitalized" if it
has a Total Risk-Based Capital Ratio that is less than 6%, a Tier 1 Risk-Based
Capital Ratio that is less than 3% or a Leverage Capital Ratio that is less than
3%; and (v) "critically undercapitalized" if it has a ratio of tangible equity
to total assets that is equal to or less than 2%. Bay National Bank is "well
capitalized" as of December 31, 2002.

        An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. The federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving the
capital restoration plan, subject to extensions by the applicable agency.

        An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty is limited to the lesser of


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<PAGE>

(i) an amount equal to 5% of the institution's total assets at the time the
institution was notified or deemed to have notice that it was undercapitalized
or (ii) the amount necessary at such time to restore the relevant capital
measures of the institution to the levels required for the institution to be
classified as adequately capitalized. Such a guaranty expires after the federal
banking agency notifies the institution that it has remained adequately
capitalized for each of four consecutive calendar quarters. An institution which
fails to submit a written capital restoration plan within the requisite period,
including any required performance guaranty, or fails in any material respect to
implement a capital restoration plan, is subject to the restrictions in Section
38 of the Federal Deposit Insurance Act which are applicable to significantly
undercapitalized institutions.

        A critically undercapitalized institution will be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or another appropriate federal banking
regulatory agency makes specific further findings and certifies that the
institution is viable and is not expected to fail, an institution that remains
critically undercapitalized on average during the four calendar quarters after
the date it becomes critically undercapitalized must be placed in receivership.

        Immediately upon becoming undercapitalized, an institution becomes
subject to statutory provisions which (i) restrict payment of capital
distributions and management fees; (ii) require that the appropriate federal
banking agency monitor the condition of the institution and its efforts to
restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include requiring
the institution to raise additional capital, restricting transactions with
affiliates, requiring divestiture of the institution or the sale of the
institution to a willing purchaser, and any other supervisory action that the
agency deems appropriate. Significantly undercapitalized and critically
undercapitalized institutions are subject to these and additional mandatory and
permissive supervisory actions.

        Regulatory Enforcement Authority. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority included, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined in FIRREA. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with
regulatory authorities. FIRREA significantly increased the amount of and grounds
for civil money penalties and requires, except under certain circumstances,
public disclosure of final enforcement actions by the federal banking agencies.

        Deposit insurance. The FDIC has adopted a risk-based deposit insurance
assessment system. The FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending seven months before the assessment period, consisting of (i) well
capitalized, (ii) adequately capitalized or (iii) undercapitalized, and one of
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
subcategory to which it is assigned. Assessment rates for BIF deposits currently
range from 0 basis points to


                                       10
<PAGE>

27 basis points. As a new bank, Bay National Bank was initially assigned to a
capital and supervisory subcategory that has an assessment rate of 0. The FDIC
is authorized to raise the assessment rates in certain circumstances, including
to maintain or achieve the designated reserve ratio of 1.25%, which requirement
the BIF currently meets. The FDIC has exercised its authority to raise rates in
the past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of Bay National
Bank.

        Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC.

        Transactions with Affiliates and Insiders. Bay National Bank is subject
to the provisions of Section 23A of the Federal Reserve Act, which place limits
on the amount of loans or extensions of credit to affiliates, investments in or
certain other transactions with affiliates and on the amount of advances to
third parties collateralized by the securities or obligations of affiliates.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to ten percent (10%) of the capital and surplus of Bay National Bank
and also limits the aggregate amount of transactions with all affiliates to
twenty percent (20%) of capital and surplus. Loans and certain other extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited.

        Bay National Bank also is subject to the provisions of Section 23B of
the Federal Reserve Act which, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution and/or its subsidiaries, as those prevailing at the time for
comparable transactions with non-affiliated entities. In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards that in good faith would be offered to
or would apply to non-affiliated companies.

        Bay National Bank also is subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer or
a greater-than-10% stockholder of a bank as well as certain affiliated interests
of any of the foregoing may not exceed, together with all other outstanding
loans to such person and affiliated interests, the loans-to-one-borrower limit
applicable to national banks (generally 15% of the institution's unimpaired
capital and surplus), and all loans to all such persons in the aggregate may not
exceed the institution's unimpaired capital and unimpaired surplus. Regulation O
also prohibits the making of loans in an amount greater than $25,000 or 5% of
capital and surplus but in any event not over $500,000, to directors, executive
officers and greater-than-10% stockholders of a bank, and their respective
affiliates, unless such loans are approved in advance by a majority of the Board
of Directors of the bank with any "interested" director not participating in the
voting. Further, Regulation O requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
those that are offered in comparable transactions to other persons. Regulation O
also prohibits a depository institution from paying overdrafts over $1,000 of
any of its executive officers or directors unless they are paid pursuant to
written pre-authorized extension of credit or transfer of funds plans.

        Loans to One Borrower. As a national bank, Bay National Bank is subject
to the statutory and regulatory limits on the extension of credit to one
borrower. Generally, the maximum amount of total outstanding loans that a
national bank may have to any one borrower at any one time is 15% of the bank's
unimpaired capital and surplus. A national bank may lend an additional 10% on
top of the 15% if the amount

                                       11
<PAGE>

that exceeds 15% of the bank's unimpaired capital and surplus is fully secured
by readily marketable collateral.

        Liquidity. Bay National Bank is subject to the reserve requirements of
Federal Reserve Board Regulation D, which applies to all depository
institutions. Specifically, amounts in Bay National Bank's transaction accounts
above $5,000,000 and under $44,300,000 must have reserves held against them in
the ratio of three percent (3%) of the amount.

        Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires that, in connection with examinations of financial institutions within
their respective jurisdictions, the Federal Reserve Board, the FDIC, the OCC or
the Office of Thrift Supervision shall evaluate the record of the financial
institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
An institution's CRA activities are considered in, among other things,
evaluating mergers, acquisitions and applications to open a branch or facility
as well as determining whether the institution will be permitted to exercise
certain of the powers allowed by the GLBA. The CRA also requires all
institutions to make public disclosure of their CRA ratings.

         USA PATRIOT Act. On October 26, 2001, the President signed into law
comprehensive anti-terrorism legislation known as the USA PATRIOT Act of 2001
(the "USA Patriot Act"). Title III of the USA Patriot Act substantially
broadened the scope of U.S. anti-money laundering laws and regulations by
imposing significant new compliance and due diligence obligations, creating new
crimes and penalties and expanding the extra-territorial jurisdiction of the
United States. The U.S. Treasury Department ("Treasury") has issued a number of
implementing regulations which apply to various requirements of the USA Patriot
Act to financial institutions such as Bay National Bank. Those regulations
impose new obligations on financial institutions to maintain appropriate
policies, procedures and controls to detect, prevent and report money laundering
and terrorist financing. Treasury is expected to issue a number of additional
regulations which will further clarify the USA Patriot Act's requirements.

         Failure of a financial institution to comply with the USA Patriot Act's
requirements could have serious legal and reputational consequences for the
institution. The Company has adopted appropriate policies, procedures and
controls to address compliance with the requirements of the USA Patriot Act
under the existing regulations and will continue to revise and update its
policies, procedures and controls to reflect changes required by the USA Patriot
Act and Treasury's regulations.

Factors Affecting Future Results

         Some of the information in this annual report includes "forward-looking
statements." These statements use words such as "may," "will," "expect,"
"anticipate," "plan," "estimate" or similar words, and they discuss future
expectations, projections of financial results or strategies that are subject to
risks and uncertainties. When you read a forward-looking statement, you should
keep in mind the risk factors described below and any other information
contained in this annual report which identifies a risk or uncertainty. Bay
National Corporation's actual results and the actual outcome of Bay National
Corporation's expectations and strategies could be different from that described
in this annual report because of these risks and uncertainties and you should
not put undue reliance on any forward-looking statements. All forward-looking
statements speak only as of the date of this filing, and Bay National
Corporation undertakes no obligation to make any revisions to the
forward-looking statements to reflect events or circumstances after the date of
this filing or to reflect the occurrence of unanticipated events.


                                       12
<PAGE>



         Bay National Corporation has limited operating history upon which to
evaluate future success, and Bay National Corporation does not expect to be
profitable initially. Bay National Corporation and Bay National Bank commenced
operations in May 2000, and their operating history is limited. Bay National
Corporation's profitability depends on the results of operations of its
principal asset, Bay National Bank. Bay National Corporation incurred operating
losses during each of the years ended December 31, 2002, 2001 and 2000, and
management expects that Bay National Corporation will continue to incur
operating losses and may not achieve profitability, if at all, until the second
or third quarter of 2003. In addition, management expects that additional
capital may be required in the future to support growth of Bay National Bank.

         If Bay National Bank decides to open additional offices, that decision
may further delay profitability because of the increased expenses of expansion
and because the new branch offices may not enhance the results of operations as
anticipated. Bay National Bank has no current plans to open additional branch
offices.

         Bay National Corporation and Bay National Bank depend heavily on one
key employee, Mr. Hugh W. Mohler, and business would suffer if something were to
happen to Mr. Mohler. Mr. Mohler is the Chairman, President and Chief Executive
Officer of Bay National Bank. If he were to leave for any reason, Bay National
Corporation's and Bay National Bank's business would suffer because he has
banking experience and relationships with clients and potential clients that
would not be easy to replace. In addition, because Bay National Bank's business
is relationship driven, the loss of an employee who has primary contact with one
or more of Bay National Bank's clients could cause Bay National Bank to lose
those clients' business, possibly resulting in a decline in revenues.

         Bay National Bank's lending strategy involves risks resulting from the
choice of loan portfolio. Bay National Bank's loan strategy emphasizes
commercial business loans and commercial real estate loans. At December 31,
2002, such loans accounted for approximately 75% of the loan portfolio. Bay
National Bank also offers construction loans, consumer loans and mortgage loans
for owner-occupied residential properties, although most of the residential
mortgage loans are sold in the secondary market. Commercial business and
commercial real estate loans generally carry a higher degree of credit risk than
do residential mortgage loans because of several factors including larger loan
balances, dependence on the successful operation of a business or a project for
repayment, or loan terms with a balloon payment rather than full amortization
over the loan term.

         Bay National Bank's lending limit may limit its growth and the growth
of Bay National Corporation. Bay National Bank is limited in the amount it can
loan to a single borrower by the amount of its capital. Specifically, under
current law, Bay National Bank may lend up to 15% of its unimpaired capital and
surplus to any one borrower. Furthermore, until Bay National Bank is profitable,
Bay National Bank's capital will decrease which will result in a decrease to the
lending limit. Bay National Bank's lending limit is significantly less than that
of many of its competitors and may discourage potential borrowers who have
credit needs in excess of Bay National Bank's lending limit from conducting
business with Bay National Bank. Management is often able to accommodate larger
loans by selling participations in those loans to other financial institutions.

         Bay National Bank faces substantial competition which could adversely
affect its ability to attract depositors and borrowers. Bay National Bank
operates in a competitive market for financial services and faces intense
competition from other institutions both in making loans and in attracting
deposits. Many of these institutions have been in business for many years, are
significantly larger, have established customer bases, have greater financial
resources and lending limits than Bay National Bank, and are able to offer
certain services that Bay National Bank is not able to offer. If Bay National
Bank cannot attract deposits and make loans at a sufficient level, its operating
results will suffer, as will its opportunities for growth.

                                       13
<PAGE>

         Government regulation could restrict Bay National Corporation's or Bay
National Bank's growth or cause Bay National Corporation or Bay National Bank to
incur higher costs. Bay National Corporation and Bay National Bank operate in a
highly regulated environment and are subject to examination, supervision and
comprehensive regulation by several federal and state regulatory agencies.
Banking regulations, designed primarily for the safety of depositors, may limit
the growth of Bay National Bank and the return to investors by restricting
activities such as the payment of dividends; mergers with, or acquisitions by,
other institutions; investments; loans and interest rates; interest rates paid
on deposits; and the creation of branch offices. Laws and regulations could
change at any time, and changes could adversely affect Bay National
Corporation's and Bay National Bank's business. In addition, the cost of
compliance with regulatory requirements could adversely affect Bay National
Corporation's and Bay National Bank's ability to operate profitably.

         Bay National Bank's ability to compete may suffer if it cannot take
advantage of technology to provide banking services or if its customers fail to
embrace that technology. Bay National Bank's business strategy relies less on
customers' access to a large branch network and more on access to technology and
personal relationships. Further, the market for financial services is
increasingly affected by advances in technology, including developments in
telecommunications, data processing, computers, automation, Internet-based
banking, telephone banking, debit cards and so-called "smart" cards. Bay
National Bank's ability to compete successfully may depend on the extent to
which Bay National Bank can take advantage of technological changes and the
extent to which Bay National Bank's customers embrace technology to complete
their banking transactions.

Item 2.  Description of Property

        On July 16, 1999, Bay National Corporation entered into two lease
agreements for its main office, which is located at 2328 West Joppa Road,
Lutherville, Maryland 21093.

        The first lease, which commenced on July 26, 1999, is for 947 square
feet of space. This space, which is on the first floor of a three-story
building, was initially used for administrative office space. Upon the opening
of Bay National Bank, this space became Bay National Bank's Baltimore branch
office. The lease term runs for five years and five months. Bay National
Corporation has the option to extend the term of this lease for one five-year
renewal term. During the first year of the lease term, Bay National Corporation
paid monthly rent of approximately $1,900, which amount increases at the rate of
four percent per year. The monthly rent as of December 31, 2002 was $2,138. The
monthly rent includes Bay National Corporation's share of taxes and building
operating costs.

        The second lease, which commenced on March 1, 2000, is for 5,130 square
feet of space and runs for five years. Approximately 3,400 square feet of this
space, which is on the third floor of the same building, is used for Bay
National Corporation and Bay National Bank's administrative offices. Bay
National Corporation also has the option to extend the term of this lease for
one five-year renewal term. During the first year of the lease term, Bay
National Corporation paid monthly rent of approximately $10,773, which amount
increases at the rate of four percent per year. The monthly rent as of December
31, 2002 was $11,652. The monthly rent includes Bay National Corporation's share
of taxes and building operating costs. Beginning April 1, 2000, Bay National
Corporation sublet approximately 1,800 square feet of this space for a
three-year term at a monthly rent for the first year of $3,173, which amount
increases at the rate of four percent per year. The monthly rent as of December
31, 2002 was $3,432. Upon the termination of the sublease in March 2003,
management will convert a portion of this space for use by Bay National
Corporation and Bay National Bank and will attempt to enter into a new sublease
agreement for the remaining space. The additional space will be used to
accommodate current and future growth.

        On September 16, 1999, Bay National Corporation entered into a lease
agreement for Bay National Bank's Salisbury, Maryland branch office, which is
located at 109 Poplar Hill Avenue, Salisbury Maryland


                                       14
<PAGE>

21801 in a two-story building containing approximately 2,500 square feet of
office space. This lease, which became effective as of September 1, 1999, is for
a term of five years with Bay National Corporation having the option to extend
the term for three five-year renewal terms. During the initial lease term, Bay
National Corporation is paying monthly rent of approximately $1,980, plus all
real estate taxes and utilities. Pursuant to this lease, Bay National
Corporation has a right of first refusal to purchase the building in the event
the landlord receives a bona fide offer to sell.

Item 3.  Legal Proceedings

         There are no pending legal proceedings to which Bay National
Corporation or Bay National Bank is a party or to which any of their properties
are subject, nor are there proceedings known to Bay National Corporation to be
contemplated by any governmental authority. There are no material proceedings
known to Bay National Corporation, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of Bay National
Corporation is a party adverse to Bay National Corporation or Bay National Bank
or has a material interest adverse to Bay National Corporation or Bay National
Bank.

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

         No matter was submitted during the fourth quarter of the year ended
December 31, 2002 to a vote of security holders of Bay National Corporation.



                                       15
<PAGE>

        PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         As of March 24, 2003, the number of holders of record of Bay National
Corporation's common stock was approximately 350. Bay National Corporation's
common stock is traded on the Over the Counter Bulletin Board ("OTCBB") under
the symbol "BANI.OB."

         Bay National Corporation completed an initial public offering ("IPO")
of its common stock on April 30, 2000. Stock prices subsequent to the IPO are
based upon limited trading on the OTCBB. Quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>

                                                             2002                          2001
                                                        Bid Price Range              Bid Price Range
          Quarter                                      Low           High           Low            High
                                                   --------------------------   ---------------------------
<S>       <C>                                     <C>            <C>           <C>             <C>
          1st                                     $       7.00   $      7.30   $       7.50    $      9.00
          2nd                                             6.71          7.25           6.05           7.70
          3rd                                             6.70          7.50           6.18           8.60
          4th                                             7.00          8.60           7.00           7.33
</TABLE>

        To date, Bay National Corporation has not declared or paid any dividends
on its common stock. Management anticipates that Bay National Corporation will
retain all earnings, if any, in order to provide more funds to operate and
expand Bay National Corporation's business and, therefore, Bay National
Corporation has no plans to pay any cash dividends at least until it has
achieved profitability that supports capital growth in excess of regulatory
capital needs. If Bay National Corporation decides to pay dividends in the
future, its ability to do so will depend on the ability of Bay National Bank to
pay dividends to Bay National Corporation. In addition, management would
consider a number of other factors before deciding to pay dividends, including
Bay National Corporation's earnings prospects, financial condition and cash
needs.

        The amount of dividends that may be paid by Bay National Bank to Bay
National Corporation depends on Bay National Bank's earnings and capital
position and is limited by statute, regulations and regulatory policies. As a
national bank, Bay National Bank may not pay dividends from its paid-in surplus.
All dividends must be paid out of undivided profits then on hand, after
deducting expenses, including provisions for loan losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its shares
of common stock until its surplus equals its stated capital, unless there has
been transferred to surplus no less than one-tenth of the bank's net profits for
the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year exceeds the total of its net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. In addition, Bay National
Bank may not pay a dividend if, after paying the dividend, it would be
"undercapitalized" as defined in the applicable regulations.

Recent Sales of Unregistered Securities
---------------------------------------

         On October 31, 2002, Bay National Corporation commenced a private
offering to accredited investors only of an aggregate of 550,000 shares of its
common stock, which was subsequently increased to 620,690 shares of its common
stock. The purchase price per share is $7.25 for an aggregate purchase price of
$4,500,002. The private offering will terminate no later than April 30, 2003. As
of December 31, 2002, Bay National Corporation had received and accepted
subscriptions from accredited investors to purchase 41,500


                                       16
<PAGE>

shares in the private offering. As of March 24, 2003, Bay National Corporation
had received and accepted subscriptions from accredited investors to purchase
364,484 shares in the private offering.

         There were and will be no underwriting discounts or commissions paid
with respect to the private offering. Bay National Corporation believes that the
private offering is exempt from the registration requirements of the Securities
Act of 1933 by virtue of Section 4(2) of the Securities Act of 1933 and Rule 506
promulgated thereunder. The transaction is not being conducted by any form of
general solicitation or general advertising and, in connection with the
transaction, Bay National Corporation is taking reasonable care to assure that
the investors are not underwriters within the meaning of Section 2(11) of the
Securities Act by, among other things, making reasonable inquiry of each
investor to confirm that the investor is taking his or her securities for
investment only and not with a view to or for sale in connection with any
distribution of the securities and will place appropriate legends on the share
certificates.




                                       17
<PAGE>
<TABLE>
<CAPTION>



                                                        SELECTED FINANCIAL DATA
                                                AS OF DECEMBER 31, 2002, 2001 and 2000
                                             (dollars in thousands, except per share data)

                                                                        2002            2001             2000
                                                                        ----            ----             ----
<S>                                                                 <C>            <C>               <C>
Total assets                                                        $     84,609   $      47,026     $     24,026
Cash and due from banks                                                      363           3,065              561
Federal funds sold and other overnight investments                        11,753           6,488           16,587
Loans held for sale                                                        2,819             682              -
Investment securities available for sale                                     948               -              -
Federal Reserve Bank stock                                                   276             276              276
Federal Home Loan Bank stock                                                  80               -              -
Loans, net                                                                67,227          35,415            5,578
Deposits                                                                  76,079          38,139           13,657
Short-term borrowings                                                        507               -              -
Stockholders' equity                                                       7,610           8,602           10,218

Common shares outstanding                                              1,242,020       1,242,020        1,242,020
Book value per share                                                $       6.13   $        6.93     $       8.23
Ratio of interest earning assets to interest
     bearing liabilities                                                  127.68%         134.86%          202.05%
Stockholders' equity as a percentage of assets                              8.99%          18.29%           42.53%

                                                       SELECTED FINANCIAL RATIOS
                                         FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000

Weighted average yield/rate on:                                         2002            2001             2000
                                                                        ----            ----             ----
Loans                                                                       6.52%          7.38%          7.19%
Investments and interest bearing cash balances                              1.43%          3.85%          6.35%
Deposits and short-term borrowings                                          2.84%          3.70%          5.25%
Net interest spread                                                         2.80%          2.31%          1.17%
Net interest margin                                                         3.43%          3.58%          4.75%

                                                       SELECTED OPERATIONAL DATA
                                         FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                                             (dollars in thousands, except per share data)

                                                                        2002           2001              2000
                                                                        ----           ----              ----
Interest income                                                     $      3,486  $        1,882     $        782
Interest expense                                                           1,367             760              203
Net interest income                                                        2,119           1,122              579
Provision for credit losses                                                  405             377               70
Net interest income after provision for credit losses                      1,714             745              509
Non-interest income                                                          718             271               15
Non-interest expenses                                                      3,424           2,632            2,177
Loss before income taxes                                                    (992)         (1,616)          (1,653)
Income taxes
                                                                          -              -                 -
Net loss                                                            $       (992) $       (1,616)    $     (1,653)

PER COMMON SHARE
Basic and diluted net loss per share                                $       (.80) $        (1.30)    $      (1.98)
Average shares outstanding (Basic and Diluted)                         1,242,020       1,242,020          834,652

</TABLE>


                                       18
<PAGE>




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

         The following discussion of Bay National Corporation's financial
condition and results of operations should be read in conjunction with Bay
National Corporation's consolidated financial statements, the notes thereto and
the other information included in this annual report.

         This discussion and analysis provides an overview of the financial
condition and results of operations of Bay National Corporation ("Parent") and
its national bank subsidiary, Bay National Bank ("Bank"), (collectively the
"Company"), as of December 31, 2002 and 2001 and for the years ended December
31, 2002, 2001, and 2000. Comparative discussion of the results of operations
for the year ended December 31, 2000 is limited by the fact that the Company had
no operations other than organizational activity until May 2000. As such,
comparisons may not provide accurate or meaningful information regarding the
Company's results of operations during the period.

General

        The Parent was organized on June 3, 1999. From inception through May 12,
2000, the Parent's activities were limited to those related to its organization
and capitalization of the Bank. These limited activities were financed solely by
the Parent's sale of an aggregate of 112,500 shares of common stock at a
purchase price of $10.00 per share in its organizational offering.

         The Parent completed its initial public offering of 1,129,520 shares of
its common stock, at an offering price of $10.00 per share, on April 30, 2000.
The primary purpose of the offering was to raise the necessary capital to form
and capitalize the Bank.

         On May 12, 2000, the Parent became a bank holding company by purchasing
all of the common stock issued by the Bank. The Bank opened its first office on
May 12, 2000, and a second office on May 26, 2000. The Bank was formed to serve
the business communities of North Baltimore and Salisbury, Maryland.

Application Of Critical Accounting Policies

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

        The most significant accounting policies followed by the Company are
presented in Note 1 to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes and
in this financial review, provide information on how significant assets and
liabilities are


                                       19
<PAGE>

valued in the financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts, management
has identified the determination of the allowance for credit losses as the
accounting area that requires the most subjective or complex judgments, and as
such could be most subject to revision as new information becomes available.

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

Recent Accounting Pronouncements And Developments

        Note 1 to the consolidated financial statements discusses new accounting
policies adopted by the Corporation during 2002 and the expected impact of
accounting policies recently issued or proposed but not yet required to be
adopted. To the extent the adoption of new accounting standards materially
affects the Corporation's financial condition, results of operations, or
liquidity, the impacts are discussed in the applicable section(s) of this
financial review and notes to the consolidated financial statements.

Risk Management

        The Board of Directors is the foundation for effective corporate
governance and risk management. The Board demands accountability of management,
keeps stockholders' and other constituencies' interests in focus, and fosters a
strong internal control environment. Through its Executive, Loan, Investment and
Audit Committees, the Board actively reviews critical risk positions, including
market, credit, liquidity, and operational risk. The Company's goal in managing
risk is to reduce earnings volatility, control exposure to unnecessary risk, and
ensure appropriate returns for risk assumed. Senior management actively manages
risk at the line of business level, supplemented with corporate-level oversight
through the Asset Liability Committee, the internal audit process and quality
control functions, and other risk management groups within the Company. This
risk management structure is designed to surface risk issues through a
systematic process, enabling timely and appropriate action to avoid and mitigate
risk. The risk management process establishes risk limits and other measurement
systems, with a focus on risk reduction strategies, and capital allocation
practices.

Financial Overview

         The Company recorded a net loss of $992,494 for the year ended December
31, 2002. This is a 38.6% improvement over a net loss of $1,615,879 for the year
ended December 31, 2001, and a 40.0% improvement over a net loss of $1,652,920
for the year ended December 31, 2000. The loss for the year ended December 31,
2000 included $331,906 of losses incurred as the result of organizational
activities performed prior to the opening of the Bank.

         The losses for the years ended December 31, 2002, 2001 and 2000 were
expected since loan and deposit growth initially were not expected to produce
net interest income sufficient to cover operating expenses. On average, start-up
community banks do not achieve profitability for the first 24 to 36 months of
operation.

                                       20
<PAGE>

         As of December 31, 2002, total assets of the Company were $84,609,183
as compared to total assets of $47,025,826 as of December 31, 2001. This
represents growth of approximately $37.6 million since December 31, 2001. The
growth in assets was a direct result of growth in deposits. Deposits at December
31, 2002 were $76,078,731 as compared to deposits of $38,139,127 at December 31,
2001. Deposit growth was attributable to the marketing efforts of officers and
directors of the Bank, and the use of two Internet based listing services for
certificates of deposit. Management has set the interest rates paid on deposits
to be competitive in the market and has continued to increase marketing
activities throughout the year. As of December 31, 2002, the Company has
outstanding certificates of deposit totaling approximately $4.0 million that
have been classified as "Brokered Deposits" for bank regulatory purposes. These
"Brokered Deposits" were issued in average amounts of approximately $99,000 with
an average yield of 3.26% and an average term of 16 months.

         As of December 31, 2002, loans including loans held for sale (net of a
$851,500 allowance for credit losses) totaled $70,045,261. This represents an
increase of $33,948,206 or 94.1% from December 31, 2001. The composition of the
loan portfolio as of December 31, 2002 was approximately $42.6 million of
commercial loans (excluding real estate loans), $4.0 million of consumer loans,
and $21.5 million of real estate loans excluding $2.8 million of mortgage loans
held for sale. The composition of the loan portfolio as of December 31, 2001 was
approximately $23.5 million of commercial loans (excluding real estate loans),
$2.1 million of consumer loans, and $10.3 million of real estate loans excluding
$0.7 million of mortgage loans held for sale. Growth in the loan portfolio is a
direct result of the marketing efforts of bank employees as well as members of
the Board of Directors, and the Baltimore and Salisbury Advisory Boards. The mix
of loans is consistent with the initial plans for the business.

         Funds not extended in loans are held in cash and due from banks, and
various investments including federal funds sold and other overnight
investments, United States Treasury securities, Federal Reserve Bank stock and
Federal Home Loan Bank stock. At December 31, 2002, such investments totaled
$13,056,906 as compared to $6,764,401 at December 31, 2001. Other than the
investments in Federal Reserve Bank stock and Federal Home Loan Bank stock,
totaling $355,840 at December 31, 2002, all investments have maturities of 90
days or less. Management has made a decision to maintain liquidity in the
investment portfolio in order to ensure that funds are readily available to fund
the rapid growth of the loan portfolio.

         Total capital at December 31, 2002 was $7,609,658 as compared to
$8,602,152 at December 31, 2001. The decrease in capital is a result of the
losses incurred in 2002 and is consistent with the initial expectations of
management.

NET INTEREST INCOME / MARGINS

         Net interest income is the difference between income on assets and the
cost of funds supporting those assets. Earning assets are composed primarily of
loans, investments, and federal funds sold; interest-bearing deposits, and other
short-term borrowings make up the cost of funds. Non-interest bearing deposits
and capital are also funding sources. Changes in the volume and mix of earning
assets and funding sources along with changes in associated interest rates
determine changes in net interest income.

         Interest income from loans and investments for the year ended December
31, 2002 was $3,486,302, compared to 1,881,987, and $782,590 for the years ended
December 31, 2001 and 2000, respectively. The 85.2% increase over 2001, and the
345.5% increase over 2000 are directly related to the 97.4% increase in average
interest earning assets from 2001, and the 407.2% increase in average interest
earning assets from 2000. The increases in average earning assets were somewhat
offset by declines in average yields due to a declining interest rate
environment. The yields on these assets declined from 6.42% for the year ended



                                       21
<PAGE>

December 31, 2000 to 6.01% for the year ended December 31, 2001 to 5.64% for the
year ended December 31, 2002.

         Growth in the percentage of interest-earning assets represented by the
loan portfolio would normally be expected to result in an increase in average
yields on interest-earning assets. This would occur because the yields on loans
are normally higher than yields on investment securities. However, the
significant loan growth in 2002, and 2001 was partially offset by a reduction in
loan yields as a result of actions taken by the Federal Reserve to reduce its
target for the federal funds rate from 6.50% at December 31, 2000 to 1.75% at
December 31, 2001 to 1.25% at December 31, 2002. For the year ended December 31,
2002, the average yield on the loan portfolio decreased to 6.52% from 7.38% for
the year ended December 31, 2001. This decrease is due to the fact that the rate
environment in 2002 was weak at the beginning of the year and remained weak
throughout. In contrast, in 2001 the rate environment was initially strong and
declined steadily throughout the year. As a result, in 2001 the Company received
some benefit from the initial stronger rate environment. For the year ended
December 31, 2001, the average yield on the loan portfolio actually increased to
7.38% from 7.19% for the year ended December 31, 2000. The increase in average
yield was the result of maintaining pricing discipline throughout 2001, as well
as increasing the percentage of fixed rate loans in the loan portfolio.

        The average yield on the investment portfolio was 1.36% for the year
ended December 31, 2002 as compared to 3.79%, and 6.35% for the years ended
December 31, 2001 and 2000, respectively. These yield declines were a direct
result of the Federal Reserve actions discussed above. The percentage of average
earning assets represented by investment securities declined from 91.7% to 38.0%
to 17.0% for the years ended December 31, 2000, 2001, and 2002, respectively.
This decline is a direct result of the emphasis on development of the loan
portfolio.

          As of December 31, 2002, the weighted average gross yield on the loans
outstanding, excluding loans held for sale, was 6.15%; the weighted average
yield on federal funds sold and other overnight investments held on December 31,
2002 was 1.36%. As of December 31, 2001, the weighted average gross yield on the
loans outstanding, excluding loans held for sale, was 6.68%; the weighted
average yield on federal funds sold and other overnight investments held on
December 31, 2001 was 1.69%.

         The market in which the Company operates is very competitive, and the
rates of interest paid on deposits are affected by rates paid by other
depository institutions. Management closely monitors rates offered by other
institutions, and seeks to be competitive within the market. The Company has
chosen to selectively compete for large certificates of deposits. The Company
will choose to pursue such deposits when expected loan growth provides for
adequate spreads to support the cost of those funds. As of December 31, 2002,
the Company had outstanding certificates of deposit of approximately $15.9
million that were obtained through the listing of certificate of deposit rates
on two Internet based listing services. These certificates of deposit were
issued with an average yield of 3.36% and an average term of 25 months. Included
in the $15.9 million of Internet originated certificates of deposit are
approximately $4.0 million that have been classified as "Brokered Deposits" for
bank regulatory purposes. These "Brokered Deposits" were issued in average
amounts of approximately $99,000 with an average yield of 3.26%, and an average
term of 16 months.

         The following tables set forth, for the periods indicated, information
regarding the average balances of interest-earning assets and interest-bearing
liabilities, the amount of interest income and interest expense and the
resulting yields on average interest-earning assets and rates paid on average
interest-bearing liabilities. Average balances are also provided for
non-interest-earning assets and non-interest-bearing liabilities.


                                       22
<PAGE>
<TABLE>
<CAPTION>

                                                Year Ended December 31, 2002

                                                                       Average         Interest         Yield/
                                                                       Balance         and fees          Rate
                                                                       -------         --------          ----
<S>                                                                 <C>              <C>                     <C>
ASSETS
Loans:
    Real Estate - Home Equity Line of Credit                        $   7,632,755    $    370,279            4.85%
    Real Estate - Construction                                          1,618,539         105,006            6.49
    Commercial                                                         37,471,778       2,525,572            6.74
    Consumer                                                            2,914,756         152,603            5.24
    Loans held for sale *                                               1,629,502         189,330           11.62
                                                                     -------------    ------------
         Total Loans                                                   51,267,330       3,342,790            6.52
Investment Securities                                                     796,439          25,949            3.26
Federal funds sold and other overnight investments                      9,724,297         117,563            1.21
                                                                     -------------    ------------
         Total Earning Assets                                          61,788,066       3,486,302            5.64%
                                                                                      ------------
Less: Allowance for credit losses                                        (607,823)
Cash and due from banks                                                   688,916
Premises and equipment, net                                               770,440
Accrued interest receivable and other assets                              287,930
                                                                     -------------
         Total Assets                                               $  62,927,529
                                                                     =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits                                    $  22,882,007         495,510            2.17%
Regular savings deposits                                                2,530,480          30,352            1.20
Time deposits                                                          22,379,802         836,763            3.74
Short-term borrowings                                                     325,786           4,877            1.50
                                                                     -------------    ------------
         Total interest-bearing liabilities                            48,118,075       1,367,502            2.84%
                                                                                      ------------    ------------
         Net interest income and spread                                              $  2,118,800            2.80%
                                                                                      ============    ============
Non-interest-bearing demand deposits                                    6,512,685
Accrued expenses and other liabilities                                    226,776
Stockholders' equity                                                    8,069,993
                                                                     -------------
         Total Liabilities and Stockholders' Equity                 $  62,927,529
                                                                     =============

Interest and fee income/earning assets                                       5.64 %
Interest expense/earning assets                                              2.21
                                                                     -------------
Net interest margin                                                          3.43 %
                                                                     =============

Return on Average Assets                                                    (1.58)%
                                                                     =============
Return on Average Equity                                                   (12.30)%
                                                                     =============
Average Equity to Average Assets                                            12.82 %
                                                                     =============
</TABLE>

         * Interest and fee income on Loans held for sale includes certain fees
collected from the borrower and as a result, average yields on these loans are
not indicative of actual rates paid by the borrower.


                                       23
<PAGE>
<TABLE>
<CAPTION>




                                                Year Ended December 31, 2001

                                                                       Average         Interest         Yield/
                                                                       Balance         and fees          Rate
                                                                       -------         --------          ----
<S>                                                                 <C>              <C>                     <C>
ASSETS
Loans:
    Real Estate - Home Equity Line of Credit                        $   3,570,447    $    240,646            6.74%
    Real Estate - Construction                                            618,755          40,392            6.53
    Commercial                                                         13,182,861         984,383            7.47
    Consumer                                                            1,394,337         106,320            7.63
    Loans held for sale *                                                 628,646          59,289            9.43
                                                                     -------------    ------------
         Total Loans                                                   19,395,046       1,431,030            7.38
Investment Securities                                                     275,940          16,200            5.87
Federal funds sold and other overnight investments                     11,624,139         434,757            3.74
                                                                     -------------    ------------
         Total Earning Assets                                          31,295,125       1,881,987            6.01%
                                                                                      ------------
Less: Allowance for credit losses                                        (234,580)
Cash and due from banks                                                   769,649
Premises and equipment, net                                               889,748
Accrued interest receivable and other assets                              115,669
                                                                     -------------
         Total Assets                                               $  32,835,611
                                                                     =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits                                    $  14,119,718         519,783            3.68%
Regular savings deposits                                                2,435,613          52,000            2.13
Time deposits                                                           3,993,259         188,155            4.71
                                                                     -------------    ------------
         Total interest-bearing liabilities                            20,548,590         759,938            3.70%
                                                                                      ------------    ------------
         Net interest income and spread                                              $  1,122,049            2.31%
                                                                                      ============    ============
Non-interest-bearing demand deposits                                    2,710,623
Accrued expenses and other liabilities                                    141,699
Stockholders' equity                                                    9,434,699
                                                                     -------------
         Total Liabilities and Stockholders' Equity                 $  32,835,611
                                                                     =============

Interest and fee income/earning assets                                       6.01 %
Interest expense/earning assets                                              2.43
                                                                     -------------
Net interest margin                                                          3.58 %
                                                                     =============

Return on Average Assets                                                    (4.92)%
                                                                     =============
Return on Average Equity                                                   (17.13)%
                                                                     =============
Average Equity to Average Assets                                            28.73 %
                                                                     =============

         * Interest and fee income on Loans held for sale includes certain fees
collected from the borrower and as a result, average yields on these loans are
not indicative of actual rates paid by the borrower.
</TABLE>



                                       24
<PAGE>

<TABLE>
<CAPTION>



                                                Year Ended December 31, 2000

                                                                       Average                          Yield/
                                                                       Balance          Interest         Rate
                                                                       -------          --------         ----
<S>                                                                 <C>               <C>                    <C>
ASSETS
Loans:
    Real Estate - Home Equity Line of Credit                        $     410,181     $    27,875            6.80%
    Real Estate - Construction                                              3,070             209            6.81
    Commercial                                                            441,235          33,498            7.59
    Consumer                                                              162,235          11,536            7.11
                                                                     -------------     -----------
         Total Loans                                                    1,016,721          73,118            7.19
Investment Securities                                                   1,292,289          79,600            6.16
Federal funds sold and other overnight investments                      9,872,259         629,872            6.38
                                                                     -------------     -----------
         Total Earning Assets                                          12,181,269         782,590            6.42%
                                                                                       -----------
Less: Allowance for credit losses                                          (9,583)
Cash and due from banks                                                   240,876
Premises and equipment, net                                               547,483
Accrued interest receivable and other assets                               25,834
                                                                     -------------
         Total Assets                                               $  12,985,879
                                                                     =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits                                    $   3,310,811         170,684            5.16%
Regular savings deposits                                                   39,094             879            2.25
Time deposits                                                             518,329          31,457            6.07
                                                                     -------------     -----------
         Total interest-bearing liabilities                             3,868,234         203,020            5.25%
                                                                                       -----------    ------------
         Net interest income and spread                                               $   579,570            1.17%
                                                                                       ===========    ============
Non-interest-bearing demand deposits                                      531,623
Accrued expenses and other liabilities                                    175,041
Stockholders' equity                                                    8,410,981
                                                                     -------------
         Total Liabilities and Stockholders' Equity                 $  12,985,879
                                                                     =============

Interest income/earning assets                                               6.42 %
Interest expense/earning assets                                              1.67
                                                                     -------------
Net interest margin                                                          4.75 %
                                                                     =============

Return on Average Assets                                                   (12.73)%
                                                                     =============
Return on Average Equity                                                   (19.65)%
                                                                     =============
Average Equity to Average Assets                                            64.77 %
                                                                     =============
</TABLE>





                                       25
<PAGE>



RATE/VOLUME ANALYSIS

         A rate/volume analysis, which demonstrates changes in
taxable-equivalent interest income and expense for significant assets and
liabilities, appears below. The calculation of rate, volume and rate/volume
variances is based on a procedure established for banks by the Securities and
Exchange Commission. Rate, volume and rate/volume variances presented for each
component may not total to the variances presented on totals of interest income
and interest expense because of shifts from year to year in the relative mix of
interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>

                                                                Year ended December 31,
                                         ----------------------------------------------------------------------
                                                                     2002 vs. 2001
                                                                  Due to variances in
                                            Total              Rates             Volumes          Rate/ Volume
                                         ----------------------------------------------------------------------
<S>                                     <C>               <C>               <C>                  <C>
Interest earned on:
Loans:
    Real Estate - Home Equity Line of
    Credit                              $     129,633     $      (67,437)   $        273,797     $     (76,727)
    Real Estate - Construction                 64,614               (249)             65,265              (402)
    Commercial                              1,541,189            (95,867)          1,813,688          (176,632)
    Consumer                                   46,283            (33,319)            115,934           (36,332)
    Loans held for sale                       130,041             13,753              94,393            21,895
Investment Securities                           9,749             (7,210)             30,558           (13,599)
Federal funds sold and other
overnight investments                        (317,194)          (294,226)            (71,056)           48,088
                                         -------------     --------------    -----------------    -------------
         Total interest income              1,604,315           (484,555)          2,322,579          (233,709)

Interest paid on:
Interest-bearing demand deposits              (24,273)          (214,020)            322,562          (132,815)
Regular savings deposits                      (21,648)           (22,786)              2,025              (887)
Time deposits                                 648,608            (38,850)            866,340          (178,882)
Short-term borrowings                           4,877            -                  -                    4,877
                                         -------------     --------------    -----------------    -------------
         Total interest expense               607,564           (275,656)          1,190,927          (307,707)
                                         -------------     --------------    -----------------    -------------

Net interest earned                     $     996,751     $     (208,899)   $      1,131,652     $      73,998
                                         =============     ==============    =================    =============


                                                                Year ended December 31,
                                         ----------------------------------------------------------------------
                                                                     2001 vs. 2000
                                                                  Due to variances in
                                            Total              Rates             Volumes          Rate/ Volume
                                         ----------------------------------------------------------------------
Interest earned on:
Loans:
    Real Estate - Home Equity Line of
    Credit                              $     212,771     $         (229)   $        214,765     $      (1,765)
    Real Estate - Construction                 40,183                 (9)             41,915            (1,723)
    Commercial                                950,885               (550)            967,328           (15,893)
    Consumer                                   94,784                835              87,611             6,338
    Loans held for sale                        59,289            -                  -                   59,289
Investment Securities                         (63,400)            (3,732)            (62,603)            2,935
Federal funds sold and other
overnight investments                        (195,115)          (260,638)            111,774           (46,251)
                                         -------------     --------------    -----------------    -------------
         Total interest income              1,099,397           (264,323)          1,360,790             2,930

Interest paid on:
Interest-bearing demand deposits              349,099            (48,804)            557,237          (159,334)
Regular savings deposits                       51,121                (44)             53,884            (2,719)
Time deposits                                 156,698             (7,034)            210,891           (47,159)
                                         -------------     --------------    -----------------    -------------
         Total interest expense               556,918            (55,882)            822,012          (209,212)
                                         -------------     --------------    -----------------    -------------

Net interest earned                     $     542,479     $     (208,441)   $        538,778     $     212,142
                                         =============     ==============    =================    =============

</TABLE>




                                       26
<PAGE>



COMPOSITION OF LOAN PORTFOLIO

         As previously discussed, the yields on loans are normally higher than
yields on investment securities. As of December 31, 2002, and 2001, the weighted
average yields on the loan portfolio were 4.79% and 4.99% higher than the
weighted average yields on the investment portfolio. This difference in yields
makes it important for the Company to continue to increase the overall level of
loans, as well as maintain a relatively high percentage of loans to total
earning assets. Accomplishing this goal will ultimately result in maximizing net
interest margin. As of December 31, 2002 and 2001, loans represented 81.09% and
82.81% of total earning assets, respectively.

         The following table sets forth the composition of the principal
balances of Company's loan portfolio as of December 31, 2002 and 2001,
respectively.
<TABLE>
<CAPTION>

                                                              2002                           2001
                                                              ----                           ----
<S>                                              <C>                              <C>                     <C>
      Real Estate - Home Equity Line of Credit   $    9,960,943        14.63%     $     5,641,198         15.73%
      Real Estate - Construction                      3,700,389         5.44            2,230,067          6.22
      Real Estate - Mortgage                          7,816,997        11.48            2,448,595          6.83
      Commercial                                     42,566,165        62.52           23,488,566         65.50
      Consumer                                        4,033,767         5.93            2,053,629          5.72
                                                  ---------------- ----------      --------------- -------------
               Total loans                       $   68,078,261       100.00%     $   35,862,055         100.00%
                                                  ================ ==========      =============== =============

      The following table sets forth the maturity distribution for the Company's
loan portfolio at December 31, 2002. Some of the loans may be renewed or repaid
prior to maturity. Therefore, the following table should not be used as a
forecast of future cash flows.

                                                   Within one     One to three         Three to       Over five
                                                      year            years           five years        years
                                                      ----            -----           ----------        -----
      Real Estate - Home Equity Line of Credit
                                                 $    9,960,943  $      -         $      -         $      -
      Real Estate - Construction                      3,337,935         362,454          -                -
      Real Estate - Mortgage                          4,422,294         815,336         2,579,367         -
      Commercial                                     28,333,281       5,136,119         7,585,327       1,511,438
      Consumer                                        3,726,344         155,915           151,508         -
                                                  --------------  --------------   ---------------  --------------
               Total                             $   49,780,797  $    6,469,824   $    10,316,202  $    1,511,438
                                                  ==============  ==============   ===============  ==============

      Fixed interest rate                        $    6,204,893  $    6,469,824   $    10,316,202  $    1,511,438
      Variable interest rate                         43,575,904         -                 -               -
                                                  --------------  --------------   ---------------  --------------
               Total                             $   49,780,797  $    6,469,824   $    10,316,202  $    1,511,438
                                                  ==============  ==============   ===============  ==============

</TABLE>

         The scheduled repayments as shown above are reported in the maturity
category in which the payment is due, except for the adjustable rate loans,
which are reported in the period of repricing.

         The Company's loan portfolio composition as of December 31, 2002
reflects a 64.01% concentration in variable rate loans. Fixed rate loans total
$24,502,357 or 35.99% of the Company's loan portfolio. Interest rates on
variable rate loans adjust to the current interest rate environment, whereas
fixed rates do not allow this flexibility. If interest rates were to increase in
the future, the interest earned on the variable rate loans would improve, and if
rates were to fall, the interest earned would decline.
See "- Liquidity and Interest Rate Sensitivity."



                                       27
<PAGE>

         The officers and directors of the Company have loans due to the Bank of
$4,972,128 at December 31, 2002. All loans made to officers and directors are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unaffiliated
third parties and do not involve more than the normal risk of repayment or
present other unfavorable features.

CREDIT RISK MANAGEMENT

         The provision for credit losses represents an expense to fund the
allowance for credit losses. This allowance is established to absorb credit
losses in the current loan portfolio. The amount of the allowance is determined
by management based on many factors, including economic conditions and trends,
the value and adequacy of collateral, the volume and mix of the loan portfolio,
the performance of the portfolio, and internal loan processes of the Company.

         Management uses a loan grading system where all loans are graded based
on management's evaluation of the risk associated with each loan. A factor,
based on the loan grading, is applied to the loan balance to reserve for
potential losses. In addition, management judgmentally establishes an additional
unallocated reserve. The unallocated portion of the allowance reflects
management's estimate of probable inherent but undetected losses within the
portfolio due to uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, the difficulty in identifying triggering events that correlate
perfectly to subsequent loss rates, and risk factors that have not yet
manifested themselves in loss allocation factors.

         Based upon management's analysis of the loan portfolio as of December
31, 2002, the allowance for credit losses increased to $851,500 as compared to
$447,000 at December 31, 2001. The increase is reflective of the overall
increase in the size of the loan portfolio. The amount equates to 1.25% of
outstanding loans, net of loans held for sale, as of December 31, 2002 and 2001.
This percentage has remained consistent because no additional information has
indicated that the overall level of reserves is inappropriate. This is an
estimate based on limited historical information, and may be revised over time
for changes in economic conditions, experience with the portfolio, and other
factors which may arise.

         Management considers the year-end allowance appropriate and adequate to
cover possible losses inherent in the loan portfolio; however, management's
judgment is based upon a number of assumptions, which are believed to be
reasonable, but which may or may not prove valid. Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
credit losses or that additional increases in the allowance will not be
required. Management considers, among other things, the findings and
recommendations of the Bank's primary regulator and, an independent loan review
service in evaluating management's underwriting decisions, and in determining
the adequacy of the allowance.




                                       28
<PAGE>
<TABLE>
<CAPTION>



       The following table presents the allocation of the allowance for credit
losses, reflecting use of the methodology presented above, along with the
percentage of total loans in each category as of December 31, 2002 and 2001.

                                        As of December 31, 2002
                                                                       Amount              Loan Mix
<S>                                                              <C>                            <C>
Real Estate - Home Equity Line of Credit                         $         52,720               14.63%
Real Estate - Construction                                                 33,961                5.44
Real Estate - Mortgage                                                     84,548               11.48
Commercial                                                                626,699               62.52
Consumer                                                                   26,256                5.93
Unallocated                                                                27,316             -
                                                                    --------------       ------------
         Total Allowance                                         $        851,500              100.00%
                                                                    ==============       ============

                                        As of December 31, 2001
                                                                       Amount              Loan Mix
Real Estate - Home Equity Line of Credit                         $         30,987               15.73%
Real Estate - Construction                                                 23,551                6.22
Real Estate - Mortgage                                                     27,069                6.83
Commercial                                                                244,308               65.50
Consumer                                                                    8,811                5.72
Unallocated                                                               112,274             -
                                                                    --------------       ------------
         Total Allowance                                         $        447,000              100.00%
                                                                    ==============       ============
</TABLE>

         The allocated portion of the allowance for credit losses increased in
2002 as a result of an increase in the average risk grade of the loan portfolio.

         As of December 31, 2002, the Company has not charged off any loans.

NONPERFORMING LOANS AND OTHER DELINQUENT ASSETS

         Management performs reviews of all delinquent loans. Management will
generally classify loans as non-accrual when collection of full principal and
interest under the original terms of the loan is not expected or payment of
principal or interest has become 90 days past due. Classifying a loan as
non-accrual results in the Company no longer accruing interest on such loan and
reversing any interest previously accrued but not collected. A non-accrual loan
may be restored to accrual status when delinquent principal and interest
payments are brought current and future monthly principal and interest payments
are expected to be collected. The Company will recognize interest on non-accrual
loans only when received. As of December 31, 2002 and 2001, the Company did not
have any non-accrual loans.

         Any property acquired by the Company as a result of foreclosure on a
mortgage loan will be classified as "real estate owned" and will be recorded at
the lower of the unpaid principal balance or fair value at the date of
acquisition and subsequently carried at the lower of cost or net realizable
value. Any required write-down of the loan to its net realizable value will be
charged against the allowance for credit losses. Upon foreclosure, the Company
generally will require an appraisal of the property and, thereafter, appraisals
of the property on at least an annual basis and external inspections on at least
a quarterly basis. As of December 31, 2002, and December 31, 2001, the Company
held no real estate acquired as a result of foreclosure.

         The Company applies the provisions of Statements of Financial
Accounting Standards No. 114 ("SFAS No. 114"), "Accounting by Creditors for
Impairment of a Loan," as amended by Statements of Financial Accounting
Standards No. 118 ("SFAS No. 118"), "Accounting by Creditors for Impairment of a
Loan-


                                       29
<PAGE>

Income Recognition and Disclosure." SFAS No. 114 and SFAS No. 118 require that
impaired loans, which consist of all modified loans and other loans for which
collection of all contractual principal and interest is not probable, be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
an impairment is recognized through a valuation allowance and corresponding
provision for credit losses. The Company considers consumer loans as homogenous
loans and thus does not apply the SFAS No. 114 impairment test to these loans.
Impaired loans will be written off when collection of the loan is doubtful.

         The Company had no impaired loans as of December 31, 2002, or December
31, 2001.

LIQUIDITY AND INTEREST RATE SENSITIVITY

         The Company's principal sources of liquidity are cash and assets that
can be readily converted into cash, including investment securities maturing
within one year. As of December 31, 2002, the Company had $363,031 in cash and
due from banks, and $11,752,705 in federal funds sold and other overnight
investments. As of December 31, 2001, the Company had $3,065,479 in cash and due
from banks, and $6,488,461 in federal funds sold and other overnight
investments. The increase in the overall level of liquid assets is the result of
an ongoing effort by management to maintain adequate liquidity to fund loan
growth and declines in deposit levels. Growth in the Company's loan portfolio,
without corresponding growth in deposits, would reduce liquidity, as would
reductions in the level of customer deposits.

         The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary earnings component, net interest income.
Net interest income can fluctuate with significant interest rate movements. To
minimize the risk associated with these rate swings, management works to
structure the Company's balance sheet so that the ability exists to adjust
pricing on interest-earning assets and interest-bearing liabilities in roughly
equivalent amounts at approximately the same time intervals. Imbalances in these
repricing opportunities at any point in time constitute interest rate
sensitivity.

         The measurement of the Company's interest rate sensitivity, or "gap,"
is one of the principal techniques used in asset/liability management. The
interest sensitive gap is the dollar difference between assets and liabilities
which are subject to interest rate pricing within a given time period, including
both floating rate or adjustable rate instruments and instruments which are
approaching maturity.




                                       30
<PAGE>
<TABLE>
<CAPTION>



The following table sets forth the amount of the Company's interest-earning
assets and interest-bearing liabilities as of December 31, 2002, which are
expected to mature or reprice in each of the time periods shown:

                                                                            Maturity or repricing within
                                                    Percent
                                                      of          0 to 3       4 to 12         1 to 5      Over 5
                                        Amount       Total         Months       Months          Years       Years
                                        ------       -----         ------       ------          -----       -----
<S>                                 <C>               <C>      <C>                          <C>           <C>
  Interest-earning assets
        Federalfunds  sold  and
           other overnight
           investments              $  11,752,70      14.00% $  11,752,705      -         $     -       $    -
        Loans held for sale            2,818,500       3.36      2,818,500      -               -            -
        Investment securities
           available for sale            948,361       1.13        948,361      -               -            -
        Loans - Variable rate         43,575,904      51.90     43,575,904      -               -            -
        Loans - Fixed rate            24,502,357      29.19      2,603,994    3,600,899     16,786,026    1,511,438
        Other earning assets             355,840        .42         -           -               -           355,840
                                       ---------    -------     ----------   ---------      ---------     ---------
         Total interest-earning
            assets                  $ 83,953,667     100.00% $  61,699,464    3,600,899   $ 16,786,026  $ 1,867,278
                                       =========    =======     ==========   =========      ===========   =========
  Interest-bearing liabilities
     Deposits - Variable rate       $ 31,149,815      47.38% $  31,149,815      -         $     -       $    -
     Deposits - Fixed rate            34,094,566      51.85      4,069,077   10,471,212     19,554,277       -
     Short-term borrowings               507,000        .77        507,000      -               -            -
                                       ---------    -------     ----------   ---------      ---------     ---------
        Total interest-bearing
           liabilities              $ 65,751,381     100.00% $  35,725,892   10,471,212   $  19,554,27  $    -
                                       =========    =======     ==========   ==========     ==========    =========

  Periodic repricing differences
     Periodic gap                                            $  25,973,572   (6,870,313)  $ (2,768,251)   1,867,278
                                                                ==========   ==========     ==========    =========
     Cumulative gap                                          $  25,973,572   19,103,259   $ 16,335,008  $18,202,286
                                                                ==========   ==========     ==========    =========

  Ratio of rate  sensitive  assets
      to rate sensitive liabilities                                 172.70%       34.39%         85.84%        N/A
</TABLE>

         The Company has 65.90% of its interest-earning assets, and 48.15% of
its interest-bearing liabilities in variable rate balances. The excess of
interest-earning assets over interest-bearing liabilities of $19,103,259 in the
categories of items maturing or repricing within 12 months comprises the
majority of the overall gap. This gap is generally reflective of the Company's
emphasis on originating variable rate loans, and the demand in the market for
higher yielding fixed rate deposits. This analysis indicates that the Company
generally will benefit from increasing market rates of interest. However, since
all interest rates and yields do not adjust at the same pace, the gap is only a
general indicator of interest rate sensitivity. The analysis of the Company's
interest-earning assets and interest-bearing liabilities presents only a static
view of the timing of maturities and repricing opportunities, without taking
into consideration the fact that changes in interest rates do not affect all
assets and liabilities equally. Net interest income may be affected by other
significant factors in a given interest rate environment, including changes in
the volume and mix of interest-earning assets and interest-bearing liabilities.

         Management will constantly monitor and manage the structure of the
Company's balance sheet, control interest rate exposure, and evaluate pricing
strategies. Strategies to better match maturities of interest-earning assets and
interest-bearing liabilities include structuring loans with rate floors and
ceilings on variable rate notes and by providing for repricing opportunities on
fixed rate notes. Management believes that a lending strategy focusing on
variable rate loans and short-term fixed rate loans will best facilitate the
goal of minimizing interest rate risk. However, management will
opportunistically enter into longer term fixed rate


                                       31
<PAGE>

loans and/or investments when, in management's judgment, rates adequately
compensate the Company for the interest rate risk. The Company's current
investment concentration in federal funds sold and other overnight investments
provides the most flexibility and control over rate sensitivity since it
generally can be restructured more quickly than the loan portfolio. On the
liability side, deposit products can be restructured so as to offer incentives
to attain the maturity distribution desired although competitive factors
sometimes make control over deposits difficult.

         In theory, maintaining a nominal level of interest rate sensitivity can
diminish interest rate risk. In practice, this is made difficult by a number of
factors, including cyclical variation in loan demand, different impacts on
interest sensitive assets and liabilities when interest rates change, and the
availability of funding sources. Management generally attempts to maintain a
balance between rate-sensitive assets and liabilities as the exposure period is
lengthened to minimize the overall interest rate risk to the Company.

INVESTMENT PORTFOLIO

         The Company has chosen to invest its available funds primarily in
federal funds sold and other overnight investments. As a result, investment
securities as of December 31, 2002, consist only of $275,940 of Federal Reserve
Bank stock, $79,900 of Federal Home Loan Bank stock, and $948,361 of U.S.
Treasury securities which mature within 3 months. Investment securities as of
December 31, 2001, consisted only of $275,940 of Federal Reserve Bank stock.
Management has made the decision to maintain its available funds in highly
liquid assets because it desires to ensure that funds are readily available to
fund the growth of the loan portfolio, and because the yields available on other
longer-term securities are not substantially better than those currently being
earned on short-term investments. Management believes that this strategy will
allow the Company to maximize interest margins while maintaining appropriate
levels of liquidity to fund loan growth.

SOURCES OF FUNDS

         Deposits and short-term borrowings in the form of repurchase agreements
and initial capital are the only current source of funds utilized by the Company
for lending and investment activities, and other general business purposes.

         The Company offers a variety of deposit products having a range of
interest rates and terms. The Company's deposits consist of checking accounts,
savings accounts, money market accounts and certificates of deposit. As of
December 31, 2002, the Company has outstanding certificates of deposit totaling
approximately $4.0 million that have been classified as "Brokered Deposits" for
bank regulatory purposes. These "Brokered Deposits" were issued in average
amounts of approximately $99,000 with an average yield of 3.26% and an average
term of 16 months.

          The following table sets forth the composition of the Company's
     deposits as of December 31, 2002 and December 31, 2001:
<TABLE>
<CAPTION>

                                                              2002                           2001
                                                              ----                           ----
<S>                                              <C>                   <C>        <C>                     <C>
      Demand Deposits                            $   25,154,309        33.06%     $     6,678,275         17.51%
      Savings                                         2,632,826         3.46            2,728,594          7.15
      Money Market and sweep                         14,197,030        18.66           18,851,242         49.43
      Certificates of deposit                        34,094,566        44.82            9,881,016         25.91
                                                  --------------- -----------      --------------- -------------
               Total deposits                    $   76,078,731       100.00%     $    38,139,127        100.00%
                                                  =============== ===========      =============== =============

</TABLE>



                                       32
<PAGE>



         The following table sets forth the maturity distribution for the
Company's deposits at December 31, 2002. Some of the deposits may be renewed or
withdrawn prior to maturity. Therefore, the following table should not be used
as a forecast of future cash flows.
<TABLE>
<CAPTION>

                                                  Within one     One to three         Three to        Over five
                                                     year            years           five years         years
                                                     ----            -----           ----------         -----
<S>                                             <C>             <C>              <C>               <C>
      Demand deposits                           $   25,154,309  $      -         $       -         $      -
      Savings                                        2,632,826         -                 -                -
      Money Market and sweep                        14,197,030         -                 -                -
      Certificates of deposit                       14,510,289        7,397,176        12,187,101         -
                                                 --------------  ---------------  ----------------  --------------
               Total                            $   56,494,454  $     7,397,176  $     12,187,101  $      -
                                                 ==============  ===============  ================  ==============
</TABLE>

         Certificates of deposit in amounts of $100,000 or more and their
remaining maturities at December 31, 2002 are as follows:


      Three months or less                                      $     2,412,699
      Over three months through six months                            1,746,820
      Over six months through twelve months                           2,512,425
      Over twelve months                                              4,726,376
                                                                   -------------
           Total                                                $    11,398,320
                                                                   =============

         Large certificate of deposit customers tend to be extremely sensitive
to interest rate levels, making these deposits less reliable sources of funding
for liquidity planning purposes than the remainder of the Company's deposits.
Management will selectively pursue such deposits in order to mitigate interest
rate risk on fixed rate loans. Competitively pricing certificates of deposit and
advertising the rates in the newspaper or on the Internet has facilitated the
acquisition of these deposits.

NON-INTEREST INCOME

         Non-interest income consists primarily of gains on the sale of mortgage
loans, mortgage origination fees, deposit account service charges, and cash
management fees. For the year ended December 31, 2002, the Company realized
non-interest income in the amount of $717,730 as compared to $270,779 and
$14,832 for the years ended December 31, 2001 and 2000, respectively. Gains on
the sale of mortgage loans of $574,029 are the most significant element of
non-interest income, comprising 80.00% of the total for the year ended December
31, 2002. This compares to gains on the sale of mortgage loans of $204,598 or
75.56% of total non-interest income for the year ended December 31, 2001. The
increase in gains on the sale of mortgage loans is due to the fact that the
Company began originating mortgages in February 2001 and, as a result,
production was limited for the year ended December 31, 2001. In addition, the
prevailing low interest rate environment, combined with a strong housing market
aided 2002 production. An increase in interest rates or a slow down in the
housing market could negatively impact the Bank's ability to maintain the same
level of income associated with mortgage loan production.

         Service charges on deposit accounts totaled $105,766 for the year ended
December 31, 2002, as compared to $26,630 and $3,017 for the years ended
December 31, 2001 and 2000, respectively. The increases of 297.17% over 2001,
and 3405.67% over 2000 can be directly attributed to the growth in the Company's
deposit portfolio, and to the fact that the Company introduced additional
commercial deposit products in 2002 that typically generate fee income.

         The Company will continue to seek ways to expand its sources of
non-interest income. The Company is working aggressively to enhance its ability
to offer cash management services to commercial


                                       33
<PAGE>

customers in order to generate additional deposits or increase cash management
fee income. In the future, the Company may also enter into fee arrangements with
strategic partners that offer investment advisory services, and risk management
and employee benefit services. No assurance can be given that such fee
arrangements will be obtained or maintained.

NON-INTEREST EXPENSE

         Non-interest expense for the year ended December 31, 2002, totaled
$3,424,524. This compares to non-interest expense for the comparable period in
2001 and 2000 of $2,631,707, and $2,177,322, respectively. The increase of
$792,817 or 30.13% for 2002 over 2001 resulted primarily from an increase in
salaries and benefits of $560,572 related to staff growth to increase marketing
efforts, manage the growth of the loan and deposit portfolios, and support
increased operational volume. The increase in salaries and benefits includes
approximately $183,000 of increased mortgage commissions and benefits resulting
from the heavy mortgage volume experienced during the period. Advertising and
marketing expense increased $45,806 or 35.77%, from $128,048 to $173,854 for the
year ended December 31, 2002 as compared to the same period in 2001. This was
primarily the result of increased expenditures made to increase public awareness
of the Company and its services, and to grow the Company's deposit and loan
portfolios. Other expenses increased $87,406 or 40.77%, from $214,393 to 301,799
for the year ended December 31, 2002 as compared to the same period in 2001.
This was primarily the result of increased operating expenses such as telephone,
postage, courier, and printing expenses of approximately $56,000 which have
increased with the growing customer base, and increased insurance expense of
approximately $12,000 related to rising prices for insurance coverage.

         The increase in non-interest expense of $454,385 or 20.87%, from
$2,177,322 for the year ended December 31, 2000 to $2,631,707 for the year ended
December 31, 2001, resulted from an increase in salaries and benefits of
$282,282, from $1,209,989 for the year ended December 31, 2000 to $1,492,271 for
the year ended December 31, 2001, related to increasing staff levels upon
opening the Bank, increased occupancy, furniture and equipment costs of $23,805,
from $343,419 for the year ended December 31, 2000 to $367,224 for the year
ended December 31, 2001, resulting from the opening and operation of two branch
offices, increased data processing and other outside services of $107,539, from
$192,644 for the year ended December 31, 2000 to $300,183 for the year ended
December 31, 2001, primarily related to the development and servicing of the
Bank's customer base, and increases in advertising and marketing expenses of
$50,660, from $77,388 for the year ended December 31, 2000 to $128,048 for the
year ended December 31, 2001, related to the effort to grow the bank.

         The growth of the Company's customer base will continue to require
additional staffing to service customers, and manage the business properly.
Management believes that continued growth in the customer base can be
accommodated without proportionate increases in these costs.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

         The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business. These financial instruments may include
commitments to extend credit, standby letters of credit and purchase
commitments. The Company uses these financial instruments to meet the financing
needs of its customers. Financial instruments involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. These do not represent
unusual risks and management does not anticipate any losses which would have a
material effect on the Company.




                                       34
<PAGE>



         Outstanding loan commitments and lines and letters of credit at
December 31 are as follows:

                                                    2002                2001
                                                    ----                ----
             Loan commitments                  $    2,421,928      $   2,558,598
             Unused lines of credit                19,989,764          9,882,798
             Letters of credit                        733,278            348,358

         Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. The
Company generally requires collateral to support financial instruments with
credit risk on the same basis as it does for on-balance sheet instruments. The
collateral is based on management's credit evaluation of the counter party.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Each customer's
credit-worthiness is evaluated on a case-by-case basis.

         Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.

CAPITAL RESOURCES

         The Company had stockholders' equity at December 31, 2002 of $7,609,658
as compared to $8,602,152 at December 31, 2001. The decrease in capital is a
result of the losses incurred in 2002 and is consistent with the initial
expectations of management. The Company has declared no cash dividends since its
inception.

         Banking regulatory authorities have implemented strict capital
guidelines directly related to the credit risk associated with an institution's
assets. Banks and bank holding companies are required to maintain capital levels
based on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support than assets with lower
risks. The Bank has exceeded its capital adequacy requirements to date.

         Banking regulations also limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agencies. Regulatory approval is
required to pay dividends that exceed the Bank's net profits for the current
year plus it's retained net profits for the preceding two years. The Bank could
not have paid dividends to the Company without approval from bank regulatory
agencies at December 31, 2002.

         Management and the Board of Directors regularly monitor capital levels,
and proactively evaluate various alternatives for raising capital in advance of
the actual need. See "Item 5 Market for Common Equity and Related Stockholder
Matters - Recent Sales of Unregistered Securities." If adequate capital is not
obtained, the Company may be required to curtail significantly its expected
growth strategy.




                                       35
<PAGE>
<TABLE>
<CAPTION>



          The tables below present the Bank's capital position relative to its
various minimum regulatory capital requirements as of December 31, 2002, and
2001. For a discussion of these capital requirements, see "Item 1 Description of
Business - Supervision and Regulation - Bay National Bank - Capital Adequacy
Guidelines."

                                                   December 31, 2002
-------------------------------------------------------------------------------------------------------------------------
                                                                                                      To Be Well
                                                                                                  Capitalized Under
                                                                         For Capital              Prompt Corrective
                                               Actual                 Adequacy Purpose            Action Provisions
                                          Amount      Ratio         Amount        Ratio           Amount       Ratio
                                          ------      -----         ------        -----           ------       -----
<S>                                   <C>              <C>       <C>                 <C>      <C>               <C>
Total Capital (to Risk Weighted
    Assets):                          $  7,808,473     10.21%  $  6,120,000        8.00%    $  7,650,000      10.00%
Tier I Capital (to Risk Weighted
    Assets):                             6,956,973      9.09%     3,060,000        4.00%       4,590,000       6.00%
Tier I Capital (to Average Assets):      6,956,973      9.13%     2,286,000        3.00%       3,810,000       5.00%


                                                   December 31, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                                                                      To Be Well
                                                                                                  Capitalized Under
                                                                         For Capital              Prompt Corrective
                                               Actual                 Adequacy Purpose            Action Provisions
                                          Amount      Ratio         Amount        Ratio           Amount       Ratio
                                          ------      -----         ------        -----           ------       -----
Total Capital (to Risk Weighted
    Assets):                          $  6,417,511     15.26%  $  3,365,000        8.00%    $  4,205,000      10.00%
Tier I Capital (to Risk Weighted
    Assets):                             5,970,511     14.19%     1,683,000        4.00%       2,525,000       6.00%
Tier I Capital (to Average Assets):      5,970,511     14.87%     1,205,000        3.00%       2,008,000       5.00%

</TABLE>

IMPACT OF INFLATION AND CHANGING PRICES

         The consolidated financial statements and notes thereto presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets of the Company are monetary in nature. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.




                                       36
<PAGE>


Item 7.  Financial Statements

         The following consolidated financial statements are filed with this
         report:

         Independent Auditors' Report

         Consolidated Balance Sheets - December 31, 2002 and 2001

         Consolidated Statements of Operations - For the years ended December
         31, 2002, 2001 and 2000

         Consolidated Statements of Changes in Stockholders' Equity - For the
         years ended December 31, 2002, 2001 and 2000

         Consolidated Statements of Cash Flows - For the year ended December 31,
         2002, 2001 and 2000

         Notes to Consolidated Financial Statements





                                       37
<PAGE>



                          INDEPENDENT AUDITORS' REPORT


Audit Committee of the
Board of Directors and Stockholders
Bay National Corporation

           We have audited the accompanying consolidated balance sheets of Bay
National Corporation and subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

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

/s/ Stegman & Company
Baltimore, Maryland
January 31, 2003






                                       38
<PAGE>







<TABLE>
<CAPTION>


                                                       BAY NATIONAL CORPORATION

                                                      CONSOLIDATED BALANCE SHEETS
                                                      ---------------------------
                                                      December 31, 2002 and 2001

                                                                                      2002                 2001
                                                                                ----------------      ---------------
ASSETS
<S>                                                                           <C>                    <C>
     Cash and due from banks                                                  $         363,031      $     3,065,479
     Federal funds sold and other overnight investments                              11,752,705            6,488,461
     Loans held for sale                                                              2,818,500              682,000
     Investment securities available for sale (AFS) - at fair value                     948,361             -
     Other equity securities                                                            355,840              275,940
     Loans, net of unearned fees                                                     68,078,261           35,862,055
         Less: Allowance for credit losses                                             (851,500)            (447,000)
                                                                                ----------------      ---------------
              Loans, net                                                             67,226,761           35,415,055
     Premises and equipment, net                                                        709,203              830,626
     Accrued interest receivable and other assets                                       434,782              268,265
                                                                                ----------------      ---------------

              Total Assets                                                    $      84,609,183      $    47,025,826
                                                                                ================      ===============


LIABILITIES

     Non-interest-bearing deposits                                            $      10,834,350      $     6,025,624
     Interest-bearing deposits                                                       65,244,381           32,113,503
                                                                                ----------------      ---------------
         Total deposits                                                              76,078,731           38,139,127

     Short-term borrowings                                                              507,000             -
     Accrued expenses and other liabilities                                             413,794              284,547
                                                                                ----------------      ---------------

              Total Liabilities                                                      76,999,525           38,423,674
                                                                                ----------------      ---------------

STOCKHOLDERS' EQUITY

     Common stock - $.01 par value, authorized:
         9,000,000 shares authorized, 1,242,020 issued and
         outstanding                                                                     12,420               12,420
     Additional paid in capital                                                      12,407,780           12,407,780
     Accumulated deficit                                                             (4,810,542)          (3,818,048)
                                                                                ----------------      ---------------

              Total Stockholders' Equity                                              7,609,658            8,602,152
                                                                                ----------------      ---------------

              Total Liabilities and Stockholders' Equity                      $      84,609,183      $    47,025,826
                                                                                ================      ===============
</TABLE>







          See accompanying notes to consolidated financial statements.

                                       39
<PAGE>
<TABLE>
<CAPTION>

                                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 -------------------------------------
                                        For the years ended December 31, 2002, 2001 and 2000

                                                                         2002             2001              2000
                                                                     -------------    -------------     -------------
<S>                                                                <C>               <C>               <C>
INTEREST INCOME:
   Interest and fees on loans                                      $    3,342,790    $   1,431,030     $      73,118
   Interest on federal funds sold and other overnight
        investments                                                       117,563          434,757           629,872
   Taxable interest and dividends on investment securities                 25,949           16,200            79,600
                                                                     -------------    -------------     -------------
     Total interest income                                              3,486,302        1,881,987           782,590
                                                                     -------------    -------------     -------------

INTEREST EXPENSE:
   Interest on deposits                                                 1,362,625          759,938           203,020
   Interest on short-term borrowings                                        4,877          -                 -
                                                                     -------------    -------------     -------------
     Total interest expense                                             1,367,502          759,938           203,020
                                                                                      -------------     -------------

Net interest income                                                     2,118,800        1,122,049           579,570

Provision for credit losses                                               404,500          377,000            70,000
                                                                     -------------    -------------     -------------

Net interest income after provision for credit losses                   1,714,300          745,049           509,570
                                                                     -------------    -------------     -------------

NON-INTEREST INCOME:
   Service charges on deposit accounts                                    105,766           26,630             3,017
   Gain on sale of mortgage loans                                         574,029          204,598           -
   Other income                                                            37,935           39,551            11,815
                                                                     -------------    -------------     -------------
     Total non-interest income                                            717,730          270,779            14,832
                                                                     -------------    -------------     -------------

NON-INTEREST EXPENSE:
   Salaries and employee benefits                                       2,052,843        1,492,271         1,209,989
   Occupancy expenses                                                     212,667          191,848           210,237
   Furniture and equipment expenses                                       192,900          175,376           133,182
   Legal and professional fees                                            143,778          129,588           100,770
   Data processing and other outside services                             346,683          300,183           192,644
   Advertising and marketing related expenses                             173,854          128,048            77,388
   Other expenses                                                         301,799          214,393           253,112
                                                                     -------------    -------------     -------------
     Total non-interest expenses                                        3,424,524        2,631,707         2,177,322
                                                                     -------------    -------------     -------------

Loss before income taxes                                                 (992,494)      (1,615,879)       (1,652,920)
Income tax benefit                                                        -                -                 -
                                                                     -------------    -------------     -------------
Net Loss                                                           $     (992,494)   $  (1,615,879)    $  (1,652,920)
                                                                     =============    =============     =============


Per Share Data:
   Net Loss (Basic and Diluted)                                    $         (.80)   $       (1.30)    $       (1.98)
   Average Shares Outstanding (Basic and Diluted)                       1,242,020        1,242,020           834,652

</TABLE>


          See accompanying notes to consolidated financial statements.



                                       40
<PAGE>
<TABLE>
<CAPTION>




                                      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      ----------------------------------------------------------
                                          For the years ended December 31, 2002, 2001 and 2000


                                         Common Stock                           Accumulated
                                                            Additional            Deficit            Total
                                                              Paid in
                                                              Capital
                                         -------------     --------------    -----------------    -------------
<S>                  <C> <C>            <C>               <C>               <C>                  <C>
Balances at December 31, 1999           $       1,125     $    1,123,875    $       (549,249) $       575,751

Issuance of Common Stock                       11,295         11,283,905            -              11,295,200

Net Loss                                      -                  -                (1,652,920)      (1,652,920)

                                         -------------     --------------    ---------------     -------------
Balances at December 31, 2000                  12,420         12,407,780          (2,202,169)      10,218,031

Net Loss                                      -                  -                (1,615,879)      (1,615,879)

                                         -------------     --------------    ---------------     -------------
Balances at December 31, 2001                  12,420         12,407,780          (3,818,048)       8,602,152

Net Loss                                      -                  -                  (992,494)        (992,494)

                                         -------------     --------------    ---------------     -------------
Balances at December 31, 2002           $      12,420     $   12,407,780      $   (4,810,542) $     7,609,658
                                         =============     ==============    =================   =============

</TABLE>





          See accompanying notes to consolidated financial statements.

                                       41
<PAGE>
<TABLE>
<CAPTION>

                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 -------------------------------------
                                         For the years ended December 31, 2002, 2001 and 2000


                                                                  2002                2001               2000
                                                              --------------     ---------------     -------------
<S>                                                          <C>                <C>                 <C>

Cash Flows From Operating Activities:
   Net loss                                                  $     (992,494)    $    (1,615,879)    $  (1,652,920)
   Adjustments to reconcile net loss to net cash used by
     operating activities:
       Depreciation                                                 189,872             179,736           102,031
       Amortization of investment (discounts) premiums, net          (7,648)           -                  (63,400)
       Provision for credit losses                                  404,500             377,000            70,000
       Gain on sale of loans                                       (574,029)           (204,598)          -
       Origination of loans held for sale                       (32,594,732)        (13,710,790)          -
       Proceeds from sale of loans                               31,032,261          13,233,388           -
       Net increase in accrued interest
              receivable and other assets                          (166,517)           (184,720)          (33,886)
       Net (decrease) increase in accrued
                 expenses and other liabilities                     129,247             133,393          (109,479)
                                                              --------------     ---------------     -------------

            Net cash used by operating activities                (2,579,540)         (1,792,470)       (1,687,654)
                                                              --------------     ---------------     -------------

Cash Flows From Investing Activities:
   Purchases of investment securities                            (2,440,713)           -               (3,212,540)
   Maturities of investment securities                            1,500,000            -                3,000,000
   Purchase of Federal Home Loan Bank of Atlanta
     stock                                                          (79,900)           -                  -
   Net increase in loans                                        (32,216,206)        (30,213,734)       (5,648,321)
   Expenditures for premises and equipment                          (68,449)            (70,858)       (1,018,767)
                                                              --------------     ---------------     -------------
            Net cash used by investing activities               (33,305,268)        (30,284,592)       (6,879,628)
                                                              --------------     ---------------     -------------

Cash Flows From Financing Activities:
   Net increase in deposits                                      37,939,604          24,482,487        13,656,640
   Net increase in short-term borrowings                            507,000            -                  -
   Issuance of common stock                                         -                  -               11,295,200
                                                              --------------     ---------------     -------------
            Net cash provided by financing activities            38,446,604          24,482,487        24,951,840
                                                              --------------     ---------------     -------------

Net increase in cash and cash equivalents                         2,561,796          (7,594,575)       16,384,558
Cash and cash equivalents at beginning of year                    9,553,940          17,148,515           763,957
                                                              --------------     ---------------     -------------

Cash and cash equivalents at end of period                   $   12,115,736     $     9,553,940     $  17,148,515
                                                              ==============     ===============     =============

Cash paid for:
   Interest                                                  $    1,296,200     $       731,603     $     182,362
                                                              ==============     ===============     =============
   Income taxes                                              $      -           $      -            $     -
                                                              ==============     ===============     =============
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       42
<PAGE>



                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The consolidated financial statements include the accounts of Bay
National Corporation and its subsidiary, Bay National Bank (the "Bank"),
collectively (the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation. The investment in subsidiary
is recorded on the parent's books on the basis of its equity in the net assets.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices in the banking industry.

         Nature of Business
         ------------------

         Bay National Corporation was incorporated on June 3, 1999 under the
laws of the State of Maryland to operate as a bank holding company of a national
bank with the name Bay National Bank. On May 12, 2000, the Company purchased all
the shares of common stock issued by the Bank. The Company's operations through
that date were limited to taking the necessary actions to organize and
capitalize the Company and the Bank. The Bank commenced operations on May 12,
2000 after successfully meeting the conditions of the Office of the Comptroller
of the Currency (the "OCC") to receive its charter authorizing it to commence
operations as a national bank, and obtaining the approval of the Federal Deposit
Insurance Corporation to insure its deposit accounts, and meeting certain other
regulatory requirements.

         The principal business of the Company is to make loans and other
investments and to accept time and demand deposits. The Company's primary market
areas are in Baltimore and Salisbury, Maryland, although the Company's business
development efforts generate business outside of these areas. The Company offers
a broad range of banking products, including a full line of business and
personal savings and checking accounts, money market demand accounts,
certificates of deposit, and other banking services. The Company 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
Company's customers are primarily individuals and small businesses.

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

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

         Cash and Cash Equivalents
         -------------------------

         The Company has included cash and due from banks, and federal funds
sold and other overnight investments as cash and cash equivalents for the
purpose of reporting cash flows.




                                       43
<PAGE>


                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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

         Investment securities may be classified into three categories: trading,
held-to-maturity, and available-for-sale. Trading securities are purchased and
held principally for the purpose of reselling them within a short period of
time. Their unrealized gains and losses are included in non-interest income. The
Company held no securities classified as trading during 2002, 2001 and 2000.
Securities classified as held-to-maturity are reported at amortized cost, and
require the Company to have both the positive intent and the ability to hold
those securities to maturity. Securities not classified as either trading or
held-to-maturity are considered to be available-for-sale. Unrealized holding
gains or losses on available-for-sale securities are excluded from earnings and
reported, net of any deferred taxes, as accumulated other comprehensive income,
a separate component of stockholders' equity. Realized gains or losses on the
sale of investment securities are recognized at the time of the sale using the
specific identification method, and are classified as non-interest income in the
accompanying consolidated statements of operations.

         The Company also invests in Federal Reserve Bank stock and Federal Home
Loan Bank stock, which is considered restricted as to marketability.

         Loans Held for Sale
         -------------------

         The Company engages in sales of residential mortgage loans originated
by the Bank. Loans held for sale are carried at the lower of aggregate cost or
fair value. Fair value is derived from secondary market quotations for similar
instruments. Gains and losses on sales of these loans are recorded as a
component of non-interest income in the accompanying consolidated statements of
operations.

         Loans
         -----

         Loans are stated at the principal amount outstanding net of any
deferred fees and costs. Interest income on loans is accrued at the contractual
rate on the principal amount outstanding. It is the Company's policy to
discontinue the accrual of interest when circumstances indicate that collection
is doubtful. Fees charged and costs capitalized for originating certain loans
are being amortized on the interest method over the term of the loan.

         Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, the Company may measure impairment based on a loan's
observable market price or the fair value of the collateral, if the loan is
collateral dependent. The Company recognizes interest income on impaired loans
on a cash basis if the borrower demonstrates the ability to meet the contractual
obligation and collateral is sufficient. If there is doubt regarding the
borrowers ability to make payments or the collateral is not sufficient, payments
received are accounted for as a reduction in principal.




                                       44
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements



         Allowance for Credit Losses
         ---------------------------

         The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the principal
is unlikely. The allowance, based on evaluations of the collectibility of loans,
is an amount that management believes will be adequate to absorb possible losses
on existing loans that may become uncollectible. The 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 and trends that may affect the borrowers' ability to
pay.

         The allowance for loan losses represents an estimation done pursuant to
either Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting
for Contingencies", or SFAS No. 114 "Accounting by Creditors for Impairment of a
Loan." The Company uses a loan grading system where loans are graded based on
management's evaluation of the risk associated with each loan. A factor, based
on the loan grading is applied to the loan balance to reserve for potential
losses. In addition, management judgmentally establishes an additional
unallocated reserve. The unallocated portion of the allowance reflects
management's estimate of probable inherent but undetected losses within the
portfolio due to uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, the difficulty in identifying triggering events that correlate
perfectly to subsequent loss rates, and risk factors that have not yet
manifested themselves in loss allocation factors.

         While management believes it has established the allowance for credit
losses in accordance with generally accepted accounting principles and has taken
into account the views of its regulators and the current economic environment,
there can be no assurance that in the future the Company's regulators or the
economic environment will not require further increases in the allowance.

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

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

         Long-lived depreciable assets are evaluated periodically for impairment
when events or changes in circumstances indicate the carrying amount may not be
recoverable. Impairment exists when the expected undiscounted future cash flows
of a long-lived asset are less than its carrying value. In that event, the
Company recognizes a loss for the difference between the carrying amount and the
estimated fair value of the asset based on a quoted market price, if applicable,
or a discounted cash flow analysis.

                                       45
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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

         The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock option plan.
Compensation expense for stock option awards is disclosed as a pro forma income
adjustment ratably recognized over the vesting period, based on the fair value
of the stock on the date of grant under SFAS No. 123, and SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure."

         Advertising Costs
         -----------------

         Advertising costs are generally expensed as incurred.

         Costs Associated with Start-Up Activities
         -----------------------------------------

         The Company expensed costs incurred during the start-up phase of
organization in accordance with the American Institute of Certified Public
Accountants' Statement of Position 98-5 Reporting on the Costs of Start-Up
Activities, which requires such costs to be expensed in the period incurred.

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

         The Company uses the liability method of accounting for income taxes.
Under the liability method, deferred-tax assets and liabilities are determined
based on differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities (i.e., temporary differences) and
are measured at the enacted rates that will be in effect when these differences
reverse. Deferred income taxes will be recognized when it is deemed more likely
than not that the benefits of such deferred income taxes will be realized;
accordingly, no deferred income taxes or income tax benefits have been recorded
by the Company.

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

         Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period,
including any potential dilutive common shares outstanding, such as options and
warrants. No consideration was given to the outstanding options and warrants
because of their anti-dilutive effect.

         New Accounting Standards
         ------------------------

         In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions,



                                       46
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

for the disposal of a segment of a business (as previously defined in that
Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for
recognizing and measuring impairment losses in long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS No. 121. The provisions
of SFAS No. 144 are effective for years beginning after December 15, 2001, and
its adoption had no affect on the financial position or results of operations of
the Company.

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

2.       INVESTMENT SECURITIES

         Investments available-for-sale
         ------------------------------

         The amortized cost and estimated fair values of investments
available-for-sale at December 31, 2002 are as follows:
<TABLE>
<CAPTION>

                                                   Amortized         Gross        Gross Unrealized    Estimated
                                                                   Unrealized
                                                     Cost            Gains             Losses        Fair Value
                                                 --------------  ---------------  ----------------  --------------
<S>                                             <C>             <C>              <C>               <C>
      U.S. Treasury securities                  $      948,361  $      -         $       -         $      948,361
                                                 --------------  ---------------  ----------------  --------------
         Total investments available-for-sale   $      948,361  $      -         $       -         $      948,361
                                                 ==============  ===============  ================  ==============
</TABLE>


        The amortized cost and estimated fair values of debt securities
available-for-sale at December 31, 2002 by contractual maturity are shown below.

                                                Amortized Cost     Estimated
                                                                  Fair Value
                                               ----------------  --------------
  Due in one year or less                     $        948,361  $      948,361
                                               ----------------  --------------
     Total investments available-for-sale     $        948,361  $      948,361
                                               ================  ==============

        There were no investments available-for-sale as of December 31, 2001 or
2000, and there were no sales of investments available-for-sale during 2002,
2001 or 2000.

        At December 31, 2002 investments available-for-sale with a carrying
value of $507,000 were pledged as collateral for certain short-term borrowings.

                                       47
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

        Other equity securities
        -----------------------

        At December 31 the Company's investment in other equity securities
consisted of:
<TABLE>
<CAPTION>

                                                                                    2002              2001
                                                                              ----------------   ---------------
<S>                                                                          <C>                <C>
              Federal Reserve Bank stock                                     $        275,940   $       275,940
              Federal Home Loan Bank stock                                             79,900          -
                                                                              ----------------   ---------------
                   Total investments in other equity securities              $        355,840   $       275,940
                                                                              ================   ===============

3.    LOANS AND ALLOWANCE FOR CREDIT LOSSES

         Major loan categories at December 31 are presented below:

                                                                        2002                 2001
                                                                        ----                 ----
Real Estate - Home Equity Line of Credit                         $      9,960,943     $     5,641,198
Real Estate - Construction                                              3,700,389           2,230,067
Real Estate - Mortgage                                                  7,816,997           2,448,595
Commercial                                                             42,566,165          23,488,566
Consumer                                                                4,033,767           2,053,629
                                                                    --------------       -------------
     Total Loans                                                       68,078,261          35,862,055
Less: Allowance for credit losses                                        (851,500)           (447,000)
                                                                    --------------       -------------
     Net Loans                                                   $     67,226,761     $    35,415,055
                                                                    ==============       =============

         Activity in the allowance for credit losses for the year ended December
31, 2002, 2001 and 2000 is shown below:

                                                                2002            2001             2000
                                                                ----            ----             ----
             Balance at beginning of year                  $    447,000    $      70,000     $    -
             Provision for credit losses                        404,500          377,000          70,000
             Loan charge-offs                                    -               -                -
             Loan recoveries                                     -               -                -
                                                            -------------   -------------     -----------
             Net charge-offs                                     -               -                -
                                                            -------------   -------------     -----------
             Balance at end of year                        $    851,500    $     447,000     $    70,000
                                                            =============   =============     ===========
</TABLE>

         There were no loans that were considered impaired under SFAS No. 114 as
of December 31, 2002, 2001 and 2000 and for the years then ended.




                                       48
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>


4.   PREMISES AND EQUIPMENT

         Premises and equipment at December 31 include the following:

                                                                                          2002              2001
                                                                                          ----              ----
<S>                                                                                <C>                <C>
             Furniture and equipment                                               $       348,982    $    315,645
             Computer hardware and software                                                540,654         505,542
             Leasehold improvements                                                        293,974         293,974
                                                                                      ------------       -----------
                                                                                         1,183,610       1,115,161
                Less accumulated depreciation                                             (474,407)       (284,535)
                                                                                      ------------       -----------

                  Net premises and equipment                                       $       709,203    $    830,626
                                                                                      ============       ===========
</TABLE>


         The Company rents office space in two locations under three
non-cancelable lease arrangements accounted for as operating leases. The initial
lease periods are for five years and provide for one or more five-year renewal
options. The two leases for the Baltimore location provide for percentage annual
rent escalations. The lease for the Salisbury location requires that the lessee
pay certain operating expenses applicable to the leased space.

         Rent expense applicable to operating leases for the periods ended
December 31, was as follows:
<TABLE>
<CAPTION>

                                                                           2002            2001             2000
                                                                           ----            ----             ----
<S>                                                                   <C>             <C>               <C>
             Minimum rentals                                          $    187,760    $     181,021     $   143,897
             Less: Sublease rentals                                        (40,784 )        (39,215)         (28,55)
                                                                       -------------   -------------     -----------
                Net rent expense                                      $    146,976    $     141,806     $   115,342
                                                                       =============   =============     ===========
</TABLE>


         At December 31, 2002, future minimum lease payments under
non-cancelable operating leases having an initial term in excess of one year are
as follows:

  Years ending December 31:
           2003                                              $      193,854
           2004                                                     181,179
           2005                                                      37,809
           2006                                                      -
           2007                                                      -
                                                                ------------
           Total minimum lease payments                      $      412,842
                                                                ============

         Total minimum future rental payments have not been reduced by $10,295
of sublease rentals expected to be received in 2003 under a non-cancelable
sublease expiring in March 2003.




                                       49
<PAGE>


                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


5.    DEPOSITS

         Certificates of deposit in amounts of $100,000 or more and their
remaining maturities at December 31 are as follows:

                                                     2002             2001
                                                     ----             ----
Three months or less                          $      2,412,699 $       643,254
Over three months through six months                 1,746,820       1,343,447
Over six months through twelve months                2,512,425       1,138,179
Over twelve months                                   4,726,376         901,499
                                                 -------------    -------------
     Total                                    $     11,398,320 $     4,026,379
                                                 =============    =============

         Interest expense on deposits for the year ended December 31 is as
follows:
<TABLE>
<CAPTION>

                                                                          2002            2001             2000
                                                                          ----            ----             ----
<S>                                                                 <C>              <C>              <C>
              Interest-bearing transaction                          $     141,073    $        8,753   $       2,211
              Savings and money market                                    384,789           563,030         169,352
              Time, $100,000 or more                                      281,304            82,990          17,410
              Other time                                                  555,459           105,165          14,047
                                                                     --------------   --------------   -------------
                  Total interest on deposits                        $   1,362,625    $      759,938   $     203,020
                                                                     ==============   ==============   =============
</TABLE>

6. SHORT-TERM BORROWINGS

         Information relating to short-term borrowings as of December 31, 2002
is as follows:

                                                      Amount            Rate
                                                      ------            ----
As of year end                                    $     507,000          1.00%

Average for the year                              $     325,786          1.50%

Maximum month end balance                         $     724,035


         The Company had no short-term borrowings during the years ended
December 31, 2001 and 2000.

         The Company pledges U.S. Government Treasury Securities, based upon
their market values, as collateral for 100% of the principal and accrued
interest of its short-term borrowings.




                                       50
<PAGE>


                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


7.   ISSUANCE OF COMMON STOCK

         On April 30, 2000, the Company completed its initial public offering
and sold 1,129,520 shares of its common stock, $0.01 par value per share, for a
price of $10 per share and received aggregate consideration of $11,295,200.

8.   OPTIONS AND WARRANTS

         On August 31, 1999, the Board of Directors of the Company authorized
the issuance on September 10, 1999, to each stockholder of record of the Company
on August 31, 1999, a warrant to purchase one share of common stock at $10 per
share for every two shares that the stockholder purchased in the organizational
offering. As a result, the Company issued warrants to purchase 56,250 shares.
The warrants were issued in recognition of the financial and organizational risk
undertaken by the purchasers in the organizational offering. The warrants became
exercisable on April 30, 2001 and are exercisable in whole or in part until
November 16, 2004. No warrants have been exercised as of December 31, 2002.

         The Company's 2001 Stock Option Plan ("Option Plan") provides for the
granting of incentive and non-qualifying stock options to the Company's
directors and to selected employees on a periodic basis at the discretion of the
Board of Directors. The Option Plan authorizes the issuance of up to 200,000
shares of common stock, has a term of ten years, and is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
consists of at least two non-employee directors appointed by the Board of
Directors. In general, the options have an exercise price, which may not be less
than 100% of the fair market value on the date of the grant, must be exercised
within eight years and vest over a period of six years.




                                       51
<PAGE>


                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


         The following is a summary of changes in shares under options for the
years ended December 31, 2002 and 2001:
<TABLE>
<CAPTION>

                                                                                                       Weighted
                                                                                                        Average
                                                                                    Number of          Exercise
                                                                                     Shares              Price
                                                                                   ------------      --------------
<S>                                                                                    <C>                    <C>
         Balance, January 1, 2001                                                       -         $        -
               Granted                                                                 141,533                7.58
               Cancelled                                                                -                  -
               Exercised                                                                -                  -
                                                                                   ------------       -------------
         Balance, December 31, 2001                                                    141,533                7.58
              Granted                                                                   16,815                8.37
              Cancelled                                                                 (9,523)               7.58
              Exercised                                                                 -                  -
                                                                                   ------------      --------------
         Balance, December 31, 2002                                                    148,825    $           7.67
                                                                                   ============      ==============

         Weighted average fair value of options granted
              during 2001                                                       $         3.05
                                                                                   ============

         Weighted average fair value of options granted
              during 2002                                                       $         3.05
                                                                                   ============
</TABLE>
<TABLE>
<CAPTION>


         The following table summarizes information about options outstanding at
December 31, 2002:

             Range of Exercise                   Options Outstanding                       Options Exercisable
                   Price
           ----------------------     -------------------------------------------    ----------------------------
                                                      Weighted
                                                      Average
                                                     Remaining        Weighted                         Weighted
                                                    Contractual        Average                          Average
                                                        Life          Exercise                         Exercise
            Price                       Number       (in years)         Price            Number          Price
            -----                       ------
                <S>                        <C>             <C>              <C>      <C>            <C>
           $  7.58                      132,010          7        $         7.58          8,250    $     7.58
           $  8.37                       16,815          8                  8.37            -              -
                                      ----------
                                        148,825
                                      ==========

</TABLE>



                                       52
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements



         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during the year ended December 31:

                                                        2002           2001
                                                     -----------     ---------
           Dividend yield                                  -             -
           Expected volatility                             20.00%     20.00%
           Risk-free interest rate                          4.17%      5.23%
           Expected lives (in years)                           8          8

         The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock option plans. No
compensation expenses related to the Company's stock option plans was recorded
during the years ended December 31, 2002 and 2001.

         The following table illustrates the effect on net loss and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation for the years ending December 31:

<TABLE>
<CAPTION>

                                                                         2002            2001            2000
                                                                         ----            ----            ----

<S>                                                                 <C>              <C>             <C>
Net loss, as reported                                               $    (992,494)   $ (1,615,879)   $ (1,652,920)

 Less pro forma stock-based compensation expense determined
   under the fair value method, net of related tax effects                (15,445)         -               -

                                                                     -------------    ------------    ------------
 Pro forma net loss                                                 $  (1,007,939)   $ (1,615,879)   $ (1,652,920)
                                                                     =============    ============    ============

 Net loss per share:
    Basic and Diluted - as reported                                 $        (.80)   $      (1.30)   $      (1.98)
   Basic and Diluted - pro forma                                    $        (.81)   $      (1.30)   $      (1.98)
</TABLE>

8.    RETIREMENT PLAN

         The Company has a 401(k) profit sharing plan covering substantially all
full-time employees. The plan requires the Company to match 25% of employee
contributions of up to 3% of compensation as defined under the plan. The Company
has also elected to make a safe harbor contribution to the plan on behalf of all
eligible employees, as defined under the plan. The safe harbor contribution is
equal to 3% of compensation as defined under the plan. The plan permits
additional contributions at the discretion of management. Expense under this
plan totaled $58,447, $32,069 and $29,445 for the years ended December 31, 2002,
2001 and 2000, respectively.




                                       53
<PAGE>
<TABLE>
<CAPTION>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements



9.   INCOME TAXES

         Federal and state income tax expense (benefit) consists of the
following for the periods ended December 31:

                                                                          2002            2001             2000
                                                                          ----            ----             ----
<S>                                                                 <C>              <C>
              Current federal income tax                            $     -          $     -                -
              Current state income tax                                    -                -                -
              Deferred federal income tax expense (benefit)               -                -                -
              Deferred state income tax expense (benefit)                 -                -                -
                                                                     --------------   --------------   -------------
                 Total income tax expense (benefit)                 $     -          $     -          $     -
                                                                     ==============   ==============   =============
</TABLE>
<TABLE>
<CAPTION>

         The following table is a summary of the tax effect of temporary
differences that give rise to a significant portion of deferred tax assets:

            Deferred tax assets:                                                       2002                2001
                                                                                       ----                ----
<S>                                                                               <C>                 <C>
                 Net operating loss carryforwards                                 $    1,620,000      $    1,360,000
                 Other                                                                     6,000               1,000
                 Deferred loan fees, net                                                  12,000             -
                 Allowance for credit losses                                             205,000              98,000
                                                                                   --------------      --------------
                     Total deferred tax assets                                         1,843,000           1,459,000
                    Less valuation allowance                                          (1,783,000)         (1,377,000)
                                                                                   --------------      --------------
                     Deferred tax assets, net of valuation allowance                      60,000              82,000
                                                                                   --------------      --------------
            Deferred tax liabilities:
                    Depreciation and amortization                                        (60,000)            (82,000)
                                                                                   ==============      ==============
            Net deferred tax assets (liabilities)                                 $      -            $      -
                                                                                   ==============      ==============
</TABLE>

         No income tax benefit or deferred tax asset is reflected in the
financial statements. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carryforwards if their realization is "more
likely than not".

         At December 31, 2002 the Company had approximately $4.2 million in tax
loss carryforwards, which expire between 2019 and 2022. Realization depends on
generating sufficient taxable income before the expiration of the loss
carryforward periods. The amount of loss carryforward available for any one year
may be limited if the Company is subject to the alternative minimum tax.




                                       54
<PAGE>


                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


10.  RELATED PARTY TRANSACTIONS

         Certain directors and executive officers have loan transactions with
the Company. Such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with outsiders. The following
schedule summarizes changes in amounts of loans outstanding, both direct and
indirect, to these persons during 2002 and 2001.
<TABLE>
<CAPTION>

                                                             2002                2001
                                                             ----                ----
<S>                                                     <C>                 <C>
         Balance at beginning of period                 $    2,670,548      $      618,500
         Additions                                          11,124,909           3,479,790
         Repayments                                         (8,823,329)         (1,427,742)
                                                         --------------      --------------
         Balance at December 31                         $    4,972,128      $    2,670,548
                                                         ==============      ==============
</TABLE>

         An individual who is a director of the Company owns an office building,
which is leased to the Company. The lease term commenced September 1, 1999 and
is for a term of five years and contains renewal options for three additional
five-year terms. Rent expense under this agreement was $23,756 for each of the
periods ended December 31, 2002, 2001 and 2000, respectively. Management
believes that the terms of the foregoing lease are no more and no less favorable
to the Company than those which could have been received from unaffiliated
parties.

11.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

         The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business. These financial instruments may include
commitments to extend credit, standby letters of credit and purchase
commitments. The Company uses these financial instruments to meet the financing
needs of its customers. Financial instruments involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. These do not represent
unusual risks and management does not anticipate any losses which would have a
material effect on the accompanying financial statements.

         Outstanding loan commitments and lines and letters of credit at
December 31 are as follows:

                                                 2002                2001
                                                 ----                ----
             Loan commitments               $    2,421,928      $   2,558,598
             Unused lines of credit             19,989,764          9,882,798
             Letters of credit                     733,278            348,358

         Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. The
Company generally requires collateral to support financial instruments with
credit risk on the same basis as it does for on-balance sheet instruments. The
collateral is based on management's credit evaluation of the counter party.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Each customer's
credit-worthiness is evaluated on a case-by-case basis.



                                       55
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

         Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.

12.   REGULATORY MATTERS

         As of December 31, 2002 and 2001, the Company was not required to
maintain non-interest-bearing deposits with the Federal Reserve Bank. The actual
balance maintained with the Federal Reserve Bank at December 31, 2002 and 2001
were $189,609 and $2,950,896, respectively.

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

         Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002, that the Bank
met all capital adequacy requirements to which it is subject.

         The Bank has been categorized as "well capitalized" by the OCC under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios. There are no conditions or events that management
believes would prevent the Bank from continuing to be categorized as well
capitalized.

         The Bank's actual capital amounts and ratios as of December 31, 2002
and 2001 are presented in the following table:
<TABLE>
<CAPTION>

                                                   December 31, 2002
-------------------------------------------------------------------------------------------------------------------------
                                                                                                      To Be Well
                                                                                                  Capitalized Under
                                                                         For Capital              Prompt Corrective
                                               Actual                 Adequacy Purpose            Action Provisions
                                          Amount      Ratio         Amount        Ratio           Amount       Ratio
                                          ------      -----         ------        -----           ------       -----
<S>                                   <C>              <C>       <C>                 <C>      <C>               <C>
Total Capital (to Risk Weighted
    Assets):                          $  7,808,473     10.21%   $  6,120,000        8.00%   $  7,650,000      10.00%
Tier I Capital (to Risk Weighted
    Assets):                             6,956,973      9.09%      3,060,000        4.00%      4,590,000       6.00%
Tier I Capital (to Average Assets):      6,956,973      9.13%      2,286,000        3.00%      3,810,000       5.00%






                                       56
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

                                                   December 31, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                                                                      To Be Well
                                                                                                  Capitalized Under
                                                                         For Capital              Prompt Corrective
                                               Actual                 Adequacy Purpose            Action Provisions
                                          Amount      Ratio         Amount        Ratio           Amount       Ratio
                                          ------      -----         ------        -----           ------       -----
Total Capital (to Risk Weighted
    Assets):                          $  6,417,511     15.26%   $  3,365,000        8.00%   $  4,205,000      10.00%
Tier I Capital (to Risk Weighted
    Assets):                             5,970,511     14.19%      1,683,000        4.00%      2,525,000       6.00%
Tier I Capital (to Average Assets):      5,970,511     14.87%      1,205,000        3.00%      2,008,000       5.00%
</TABLE>

         Banking regulations also limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agencies. Regulatory approval is
required to pay dividends which exceed the Bank's net profits for the current
year, plus it's retained net profits for the preceding two years. The Bank could
not have paid dividends to the Company without approval from bank regulatory
agencies at December 31, 2002.




                                       57
<PAGE>
<TABLE>
<CAPTION>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements



13. PARENT COMPANY FINANCIAL INFORMATION

         Condensed financial information for Bay National Corporation (Parent
Only) is as follows:

                                                       CONDENSED BALANCE SHEETS
                                                       ------------------------
                                                      December 31, 2002 and 2001

                                                                                  2002                 2001
                                                                            -----------------   ----------------
<S>                                                                       <C>                  <C>
ASSETS
     Cash and cash equivalents                                            $          652,241   $      2,631,692
     Due from subsidiary                                                             250,736           -
     Investment in subsidiary                                                      6,956,973          5,970,512
                                                                            -----------------   ----------------

              Total Assets                                                $        7,859,950   $      8,602,204
                                                                            =================   ================


LIABILITIES
     Accrued expenses and other liabilities                               $          250,292   $             52
                                                                            -----------------   ----------------

              Total Liabilities                                                      250,292                 52
                                                                            -----------------   ----------------

STOCKHOLDERS' EQUITY

     Common stock - $.01 par value, authorized:
         9,000,000 shares authorized, 1,242,020 issued and outstanding:
                                                                                      12,420             12,420
     Additional paid in capital                                                   12,407,780         12,407,780
     Accumulated Deficit                                                          (4,810,542)        (3,818,048)
                                                                            -----------------   ----------------

              Total Stockholders' Equity                                           7,609,658          8,602,152
                                                                            -----------------   ----------------

              Total Liabilities and Stockholders' Equity                  $        7,859,950   $      8,602,204
                                                                            =================   ================
</TABLE>







                                       58
<PAGE>
<TABLE>
<CAPTION>


                                                       BAY NATIONAL CORPORATION

                                                  CONDENSED STATEMENTS OF OPERATIONS
                                                  ----------------------------------
                                        For the years ended December 31, 2002, 2001 and 2000


                                                                         2002             2001              2000
                                                                     -------------    -------------     -------------

<S>                                                                 <C>              <C>             <C>
Interest and dividends on investment securities                     $      23,931    $      98,610   $       218,267
Non-interest expense                                                        2,886            6,015           550,173
                                                                     -------------    -------------     -------------
   Income (loss) before income taxes and equity in undistributed
   losses of subsidiary                                                    21,045           92,595          (331,906)
Income tax expense (benefit)                                              -                -                 -
                                                                     -------------    -------------     -------------
   Loss before equity in undistributed losses of subsidiary                21,045           92,595          (331,906)
Equity in undistributed losses of subsidiary                           (1,013,539)      (1,708,474)      (1,321,014 )
                                                                     -------------    -------------     -------------
   Net Loss                                                         $    (992,494)   $  (1,615,879)  $    (1,652,920)
                                                                     =============    =============     =============



                                                  CONDENSED STATEMENTS OF CASH FLOWS
                                                  ----------------------------------
                                         For the years ended December 31, 2002, 2001 and 2000

                                                                         2002             2001              2000
                                                                     -------------    -------------     -------------
Cash Flows From Operating Activities
   Net Loss                                                         $    (992,494)   $  (1,615,879)    $  (1,652,920)
   Adjustments to reconcile net loss to net cash used by
     operating activities:
       Equity in undistributed loss of subsidiary                       1,013,539        1,708,474         1,321,014
       Net decrease (increase) in other assets                           (250,736)         -                  72,427
       Net (decrease) increase in other liabilities                       250,240         (194,385)          (66,196)
                                                                     -------------    -------------     -------------

            Net cash used by operating activities                          20,549         (101,790)         (325,675)
                                                                     -------------    -------------     -------------

Cash Flows From Investing Activities
   Investment in subsidiary                                            (2,000,000)         -              (9,000,000)
                                                                     -------------    -------------     -------------
            Net cash used by investing activities                      (2,000,000)         -              (9,000,000)
                                                                     -------------    -------------     -------------

Cash Flows From Financing Activities
   Issuance of common stock                                               -                -              11,295,200
                                                                     -------------    -------------     -------------
            Net cash provided by financing activities                     -                -              11,295,200
                                                                     -------------    -------------     -------------

Net (decrease) increase in cash and cash equivalents                   (1,979,451)        (101,790)        1,969,525
Cash and cash equivalents at beginning of year                          2,631,692        2,733,482           763,957
                                                                     -------------    -------------     -------------

Cash and cash equivalents at end of period                          $     652,241    $   2,631,692     $   2,733,482
                                                                     =============    =============     =============
</TABLE>


                                       59
<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


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

         There has been no occurrence requiring a response to this Item.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

Directors, Executive Officers, Promoters and Control Persons

        The directors of Bay National Corporation, their ages, the years in
which their terms expire and the year in which they became directors are as
follows:
<TABLE>
<CAPTION>
<S>                              <C>                      <C>                                    <C>

              Name                   Age               Term to Expire (1)                   Director Since
              ----                   ---               ------------------                   --------------
Hugh W. Mohler                       57               2003 Annual Meeting                     June 1999
Carroll A. Bodie                     57               2005 Annual Meeting                     June 1999
Charles E. Bounds                    84               2005 Annual Meeting                     June 1999
Gary T. Gill                         50               2003 Annual Meeting                    January 2003
John R. Lerch                        58               2005 Annual Meeting                     June 1999
Donald G. McClure, Jr.               59               2003 Annual Meeting                     April 2000
Robert L. Moore                      49               2003 Annual Meeting                   February 2001
H. Victor Rieger, Jr.                65               2003 Annual Meeting                     June 1999
Margaret Knott Riehl                 69               2003 Annual Meeting                     June 1999
William B. Rinnier                   61               2004 Annual Meeting                    August 1999
Edwin A. Rommel, III                 53               2004 Annual Meeting                     June 1999
Henry H. Stansbury                   63               2004 Annual Meeting                     June 1999
Kenneth H. Trout                     54               2004 Annual Meeting                    October 1999
Eugene M. Waldron, Jr.               59               2004 Annual Meeting                     June 1999
Carl A.J. Wright                     48               2003 Annual Meeting                     March 2003
<FN>

(1)      All of the directors with terms to expire in 2003 have been nominated
         to serve on the Board of Directors for an additional three (3) year
         term, with the exception of Gary T. Gill and Carl A.J. Wright who will
         serve an initial two (2) year term. Elections for these directors will
         take place at the 2003 Annual Meeting of Stockholders to be held in May
         2003.
</FN>
</TABLE>




                                       60
<PAGE>


Biographical information concerning the directors is set forth below.

         Hugh W. Mohler serves as chairman, president, and chief executive
officer, and has been a director of Bay National Corporation since June 1999,
and a director of Bay National Bank since April 2000. Mr. Mohler has 35 years'
experience in the financial services industry, holding positions in executive
management, commercial lending and business development. From 1977 to 1999, Mr.
Mohler was affiliated with Mercantile Bankshares Corporation, which is
headquartered in Baltimore, Maryland, most recently serving as executive vice
president with responsibility for 20 community banks in a three-state area. For
17 years, from 1977 to 1994, he was president of Mercantile's Salisbury,
Maryland-based affiliate, Peninsula Bank, the largest financial institution on
Maryland's Eastern Shore. Earlier he was a vice president in commercial lending
at First National Bank of Maryland.

         A native of Baltimore, Mr. Mohler earned his undergraduate degree in
economics from Loyola College of Maryland and his master of business
administration degree from the University of Baltimore. He is immediate past
president of the board of trustees of Associated Catholic Charities, Inc. in the
Roman Catholic Archdiocese of Baltimore. Currently he serves as a trustee of
Loyola Blakefield and Goucher College. Mr. Mohler also serves on the Board of
Directors of the Independent College Fund of Maryland and the Board of Sponsors
of the Sellinger School of Business at Loyola College of Maryland. He also
serves on the Board of Governors of The Maryland Club.

         Mr. Mohler's prior civic experiences include serving as chairman of the
Greater Salisbury Committee, chairman of the Salisbury School, and chairman of
the Governor's Lower Shore Economic Task Force. He also served on the boards of
Peninsula Regional Medical Center, Maryland Chamber of Commerce,
Salisbury-Wicomico Economic Development Committee, and the Somerset County
Economic Development Committee. Mr. Mohler also served as president of the
Maryland Bankers Association and on several committees of the American Bankers
Association.

         Carroll A. Bodie has been a director of Bay National Corporation since
June 1999, and a director of Bay National Bank since April 2000. Mr. Bodie is
vice president, general counsel and secretary of Noxell Corporation, a Hunt
Valley, Maryland-based subsidiary of Procter & Gamble Company for which he also
serves as associate general counsel. Mr. Bodie has served in that capacity since
1987. Prior to joining Noxell, Mr. Bodie spent more than two decades in the
brewing industry, his most recent position being with the Miller Brewing Company
subsidiary of Philip Morris Companies, Inc.

         A Baltimore native, Mr. Bodie holds an undergraduate degree in
marketing from the University of Baltimore and earned his law degree from the
University of Baltimore School of Law. Admitted to practice before numerous
courts, including those in the State of Maryland and the United States Supreme
Court, he is a member of the Baltimore County, Maryland Bar Association, the
American Bar Association and the American Corporate Counsel Association. Mr.
Bodie is chairman of the board of trustees of Loyola Blakefield, a board and
executive committee member for the Independent College Fund of Maryland, and a
Trustee at the College of Notre Dame of Maryland. He is a past director and
board chairman for the YMCA of Central Maryland.

         Charles E. Bounds has been a director of Bay National Corporation since
June 1999, and a director of Bay National Bank since April 2000. Mr. Bounds is a
retired executive who served from 1944 to 1969 as director of purchases and
inventory for Symington Wayne Corporation, an international conglomerate


                                       61
<PAGE>


headquartered in Salisbury, Maryland, which operated businesses in the United
States and seven foreign countries. From 1969 to 1999, he was a vice
president-investments for Morgan Stanley Dean Witter, working in the Salisbury,
Maryland office of the investment banking firm.

         A native of Salisbury, Maryland, Mr. Bounds is past chairman of the
Salvation Army Boys Club in Salisbury, Maryland, and headed the Salisbury,
Maryland Salvation Army administrative board. He has also chaired fund raising
efforts for the Boy Scouts of America, Delmarva District. Mr. Bounds was an
original member of the Ward Foundation, which is a Salisbury, Maryland based
non-profit organization, which operates The Ward Museum of Wildfowl Art. Mr.
Bounds is an alumnus of Beacom College.

         Gary T. Gill has been a director of Bay National Corporation and Bay
National Bank since January 2003. Mr. Gill is President and Chief Executive
Officer of the MacKenzie Companies, a Baltimore-based full-service commercial
real estate firm comprising Mackenzie Commercial Real Estate Services, LLC,
Mackenzie Management Corporation, MacKenzie Services Corporation, MacKenzie
Contracting Company, LLC, and MacKenzie Drywall Construction. Mr. Gill joined
MacKenzie in 1977 and has served in his capacity as president since 1985. Mr.
Gill serves also as Executive Vice President of MacKenzie Properties, Inc., the
managing partner of over 35 partnerships of income-producing commercial
properties.

         A native of Towson, Maryland, Mr. Gill received his Bachelor of Arts
degree in Business Administration in 1974 from Towson University. Mr. Gill
currently serves on the Baltimore County Economic Advisory Board, Towson
University Stadium Committee, USLacrosse Foundation Board, and chairs the Lax 4
Baltimore Committee for the NCAA National Men's Lacrosse Championships.

         John R. Lerch has been a director of Bay National Corporation since
June 1999, and a director of Bay National Bank since April 2000. Since January
1999, Mr. Lerch has been self-employed as a private investor trading as the
Chesapeake Venture Group. From 1973 to January 1999, Mr. Lerch was president of
Chesapeake Insurance-The Harris Riggin Agency, an independent insurance agency
based in Salisbury, Maryland. Mr. Lerch began his business career in the
securities industry, serving as a stockbroker at firms in Washington, D.C. and
Salisbury, Maryland. Mr. Lerch is a past director of the Independent Insurance
Agents of Maryland.

         Mr. Lerch is an alumnus of Dickinson College of Carlisle, Pennsylvania.
He served as an officer in the U.S. Army and holds a Bronze Star from his
service in Vietnam. He is a director of Barr International, Inc., a regional
medium and heavy truck sales and service organization. He is a past director of
Peninsula Bank, a subsidiary of Baltimore-based Mercantile Bankshares
Corporation. He is a past director and vice-chairman of the Greater Salisbury
Committee, past trustee of the Peninsula Regional Medical Center in Salisbury,
past president of Salisbury-Wicomico Economic Development Corporation and past
president and campaign chairman of the United Way of the Lower Eastern Shore. He
also has served as a director for the Mid-Delmarva Family YMCA and was a former
chairman and a current trustee for The Ward Foundation.

         Donald G. McClure, Jr. has been a director of Bay National Corporation
and Bay National Bank since April 2000. Mr. McClure is a principal in the
McClure Group, Inc, a Baltimore-based private equity investment firm originated
in 1979. He is the former Chairman and Co-Chief Executive of Americom Wireless
Services, Inc., which merged with a Fortune 200 company in 2000.

                                       62
<PAGE>

         Mr. McClure serves on several private company boards as well as
devoting substantial time to various civic, charitable and educational
organizations here and in other states.

         Robert L. Moore has been a director of Bay National Corporation since
February 2001 and Bay National Bank since June 2001. Mr. Moore is a certified
public accountant. He received his CPA designation twenty-five years ago, and is
the owner and founder of the Salisbury, Maryland accounting firm of Moore &
Company, P.A. His professional concentration is income tax and all facets of
business consulting.

         Mr. Moore received his Bachelor of Science degree from the University
of Virginia in 1976. Currently, he serves as Chairman of the Trustees of the
Wicomico County Pension System, a board member of Salisbury-Wicomico Economic
Development Corporation, a member of the Performance Review Committee for
Wicomico County, and a member of the Salisbury Area Chamber of Commerce.

         Mr. Moore is a past president of the Eastern Shore Chapter of the
Maryland Association of CPAs. He served as Chairman of the Administrative Board
of Asbury United Methodist Church. In addition, Mr. Moore served on the Board of
Directors of the Bank of Fruitland, Maple Shade Residential Homes, Inc., and the
Holly Foundation. He was also a member of the Executive Committee and Board of
Directors of the Green Hill Yacht & Country Club and a member and officer of the
Salisbury Jaycees.

         H. Victor Rieger, Jr. has been a director of Bay National Corporation
since June 1999, and a director of Bay National Bank since April 2000. Mr.
Rieger retired from Signet Banking Corporation, successor to Union Trust Company
of Maryland, in December 1997 after nearly four decades of service. Mr. Rieger
served in numerous capacities for Signet, including regional executive vice
president of international banking and as part of Signet's Maryland commercial
banking group. Mr. Rieger has extensive experience in commercial relationship
banking, credit administration and loan policy.

         An alumnus of Johns Hopkins University, Mr. Rieger is a graduate of the
Stonier School of Banking at Rutgers University. He is past president and a
current trustee of Family and Children's Services of Central Maryland, past
treasurer and board member of the National Flag Day Foundation and a past
vice-president and director of the Baltimore Junior Association of Commerce. He
is a former member of the loan committee for the Minority Small Business
Investment Company and a past advisory board member of the U.S. Small Business
Administration. Mr. Rieger also is past president of the Chesapeake Chapter of
Robert Morris Associates.

         Margaret K. Riehl has been a director of Bay National Corporation since
June 1999, and a director of Bay National Bank since April 2000. Mrs. Riehl is a
retired nurse and civic volunteer. She is currently a trustee of the Marion I.
and Henry J. Knott Foundation, a Baltimore, Maryland-based philanthropic
organization and has served in that capacity from 1978 to 1985 and again from
1993 to present. She serves as chair of the board of trustees of Baltimore's
Associated Catholic Charities, Inc., and as a trustee of St. Mary's Seminary &
University, also in Baltimore. Mrs. Riehl is a former trustee of the Community
Foundation of Baltimore, Mercy Medical Center, the Institute of Notre Dame and
St. Paul's School for Girls. A Baltimore native, Mrs. Riehl is an alumna of the
Mercy Hospital School of Nursing.

         William B. Rinnier has been a director of Bay National Corporation
since August 1999, and a director of Bay National Bank since April 2000. Mr.
Rinnier is the owner and president of Rinnier


                                       63
<PAGE>

Development Company, a Salisbury, Maryland based real estate development
company, which specializes in the development and sale or management of resort
condominiums, multi-family apartments, and commercial and industrial buildings.
He joined Rinnier Development Company nearly three decades ago after his
honorable discharge from the U.S. Navy.

         A native of Salisbury, Maryland, Mr. Rinnier earned a degree in
aerospace engineering from the Georgia Institute of Technology and attended the
Graduate School of Business at the University of Virginia. He is a board member
of the Greater Salisbury Committee and is past president of the
Salisbury-Wicomico Economic Development Corporation and the Coastal Board of
Realtors.

         Edwin A. Rommel III has been a director of Bay National Corporation
since June 1999, and a director of Bay National Bank since April 2000. Mr.
Rommel is a certified public accountant that, since 1974, has been a partner in
the Salisbury, Maryland, accounting firm of Twilley, Rommel & Stephens, P.A. Mr.
Rommel has been certified as a valuation analyst and accredited in business
evaluation by the American Institute of Certified Public Accountants.

         A Baltimore native, Mr. Rommel earned his undergraduate degree from
Loyola College of Maryland. Mr. Rommel is a current director of the Greater
Salisbury Committee and past president of the Salisbury Area Chamber of
Commerce. He serves as a director of the Maryland Association of Certified
Public Accountants and an officer of its Eastern Shore Chapter. Mr. Rommel is
past president of the St. Francis de Sales Board of Trustees and past member of
the Wicomico County Democratic Central Committee.

         Henry H. Stansbury has been a director of Bay National Corporation
since June 1999, and a director of Bay National Bank since April 2000. Since
1975, Mr. Stansbury has been the chief executive officer of Agency Services,
Inc., an independently owned premium finance company. Since 1989, Mr. Stansbury
has been the chief executive officer of Agency Insurance Company of Maryland,
Inc., a privately owned multi-line property/casualty insurance company. Mr.
Stansbury is a past president of the Maryland Association of Premium Finance
Companies and is a past president of the National Association of Premium Finance
Companies.

         Mr. Stansbury is a vice president and trustee of the Maryland
Historical Society, and a trustee of the Ward Museum of Wildfowl Art. He served
as director and chairman of the museum committee for the Lacrosse Hall of Fame
at the Johns Hopkins University and is vice president and a trustee of the St.
Paul's School for Boys. He is also past president of ReVisions, Inc., a
nonprofit organization that serves the mentally ill. Mr. Stansbury is a graduate
of Leadership Maryland and a director of Leadership Baltimore County. He is the
author of LLOYD J. TYLER: FOLK ARTIST AND DECOY MAKER and a contributing writer
for Decoy Magazine. Mr. Stansbury is an alumnus of the University of Maryland
and holds a master of business administration degree from George Washington
University.

         Kenneth H. Trout has been a director of Bay National Corporation since
October 1999, and a director of Bay National Bank since April 2000. Since
January 1999, Mr. Trout has served as the executive vice president and chief
operating officer of Rosemore, Inc., a Baltimore-based privately held investment
company primarily engaged in the business of oil and gas exploration and
production. He also serves as a director of Rosemore Holdings, Inc., Rosemore
Calvert, Inc., Tema Oil and Gas Company and Gateway Gathering and Marketing
Company, which are all subsidiaries of Rosemore, Inc. He is also a director of
KCI


                                       64
<PAGE>

Technologies, Inc. From 1970 to November 1997, Mr. Trout was employed by Signet
Banking Corporation. During his last five years of tenure with Signet, he served
as senior executive vice president-commercial banking and as president and chief
executive officer of Signet Bank-Maryland. Mr. Trout was retired from December
1997 to December 1998.

         A Bridgeton, New Jersey native, Mr. Trout received his undergraduate
degree in economics and business administration from Methodist College in North
Carolina. He is vice chairman of the Board of Trustees of The College of Notre
Dame of Maryland.

         Eugene M. Waldron, Jr. has been a director of Bay National Corporation
since June 1999, and a director of Bay National Bank since April 2000. Mr.
Waldron is a chartered financial analyst and since September 1998 has been a
senior vice president in the Washington, D.C., office of Capital Guardian Trust
Company, an employee-owned firm based in Los Angeles dedicated to institutional
investment management. From March 1994 to August 1998, Mr. Waldron was employed
by Loomis, Sayles & Company, an investment management firm. Mr. Waldron's more
than three decades of investment experience include employment at CS First
Boston Asset Management, Fidelity Management Trust Company, T. Rowe Price
Associates and Baker, Watts & Company.

         An alumnus of Mt. St. Mary's College, Emmitsburg, Maryland, Mr. Waldron
earned his master of business administration degree at the Bernard M. Baruch
College of the City University of New York. A native of Annapolis, Maryland, he
is a member of the Mt. St. Mary's Board of Trustees and the Newton,
Massachusetts Country Day School of the Sacred Heart's Endowment Committee.

         Carl A.J. Wright has been a director of Bay National Corporation and
Bay National Bank since March 2003. Mr. Wright is the Senior Vice President of
Spherion (formerly Interim Financial Solutions), an executive search and
staffing firm specializing in finance, human resources and information systems.
Along with his corporate responsibilities, he is an involved community member
and active in professional, civic and political organizations.

         Mr. Wright received his B.A. in Accounting from Loyola College in 1976,
then began his professional career with Ernst & Young. He served in the firm's
auditing and tax departments. He joined A.J. Burton in 1980. Throughout his
career, Carl has been active in professional organizations. He became a
Certified Public Accountant in 1978 and he has served on a number of committees
and boards for the Maryland Association of CPAs.

         Mr. Wright has demonstrated his continuing commitment to education
through membership of boards and committees of both Loyola College and Loyola
Blakefield. He is Past President of the Baltimore Junior Association of Commerce
and serves on Maryland Governor Robert Ehrlich's Strategic and Finance
Committees. In addition, he is an active supporter of the Catholic Charities and
Maryland Business for Responsive Government.

         Other than Mr. Mohler and Mr. Waldron who are first cousins, there are
no family relationships between any director or executive officer and any other
director or executive officer of Bay National Corporation.

                                       65
<PAGE>

         The one executive officer and significant employee of Bay National
Corporation and Bay National Bank that does not serve on the Board of Directors
of Bay National Corporation is Mark A. Semanie.

         Mr. Semanie, age 39, serves as Executive Vice President and Chief
Financial Officer, Treasurer and Secretary of Bay National Corporation and Vice
President and Chief Financial Officer, Chief Compliance Officer, Treasurer and
Secretary of Bay National Bank. Mr. Semanie is a Certified Public Accountant.
Mr. Semanie worked in the insurance industry for over 7 years. From July 1996 to
October 2000, he served as Executive Vice President and Chief Financial Officer
for Agency Holding Company of Maryland, Inc., parent company of Baltimore-based
Agency Services, Inc., an independently owned premium finance company, and
Agency Insurance Company of Maryland, Inc., a privately owned multi-line
property/casualty insurance company. From March 1993 to July 1996, he was
associated with USF&G Corporation where he served in various capacities,
including Manager of SEC and External Reporting. From August 1985 to March 1993,
Mr. Semanie worked in the Boston and Baltimore offices of the international
accounting firm of KPMG LLP. He last served as a Senior Manager in the Audit
practice with the firm. His background includes experience in financial planning
and reporting, backroom operations, human resources and compliance issues.

         A native of Connecticut, Mr. Semanie earned a Bachelor of Science
degree in accounting from Bentley College. He currently serves on the Board of
Directors of Agency Insurance Company of Maryland, Inc. He also serves as a
director of the Baltimore Child Abuse Center and as Chairman of its Finance
Committee. He is a member of the American Institute of Certified Public
Accountants, the American Institute of Chartered Property Casualty Underwriters,
and Financial Executives International.

         Bay National Corporation's charter and bylaws provide that Bay National
Corporation shall have at least three (3) directors, and that the number of
directors may be increased or decreased by the Board of Directors. As of March
24, 2003, the number of directors has been fixed at 15 with all positions
filled. Pursuant to Bay National Corporation's charter and bylaws, the Board of
Directors is divided into three classes, with each class serving a three-year
term, and the term of one class expiring each year. A director may only be
removed by the affirmative vote of at least 80% of the votes entitled to be cast
on the matter and only for cause.

         Bay National Corporation's officers are appointed by the Board of
Directors and hold office at the will of the board or as otherwise provided in
an employment agreement between an officer and Bay National Corporation.

         As Bay National Corporation is the sole stockholder of Bay National
Bank, each director of Bay National Bank is elected by the Board of Directors of
Bay National Corporation. Directors of Bay National Bank serve for a term of one
year and are elected each year at Bay National Bank's annual meeting of
stockholders. Bay National Bank's officers are appointed by its Board of
Directors and hold office at the will of the board.

         Bay National Corporation has established an advisory board of
directors, which is comprised of professionals and business persons, who provide
advice to Bay National Corporation's and Bay National Bank's Board of Directors
and who promote the interests of Bay National Corporation and Bay National Bank.
An advisory board of directors is not required by any Maryland or federal law or
regulation and advisory directors are not subject to regulatory approval or
supervision. The advisory directors do not have


                                       66
<PAGE>

the power to vote on any matter considered by the Board of Directors and they
serve at the pleasure of the board.

Compliance with Section 16(a) of the Exchange Act

         The Company did not have a class of equity securities registered
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), at any time during the Company's fiscal year ended December 31, 2002.
Accordingly, there is no requirement upon the Company's officers, directors and
10% or greater shareholders to file any reports required pursuant to Section
16(a) of the Exchange Act.

Item 10.  Executive Compensation

Director Compensation

         Except for discretionary grants of options to purchase shares of common
stock as described below and discretionary payments based on special
circumstances, the directors of Bay National Corporation and Bay National Bank
are not compensated for their attendance at regularly scheduled or special board
meetings or for other services. Bay National Corporation and Bay National Bank
do not intend to pay directors fees until Bay National Bank is profitable.
However, Bay National Corporation and Bay National Bank reserve the right to pay
directors' fees at any time. Directors are reimbursed for reasonable expenses
incurred on behalf of Bay National Corporation and Bay National Bank.

         In December 2002 and October 2001, the Board of Directors of Bay
National Corporation authorized special payments of $10,000 to Mr. H. Victor
Rieger, Jr., a director of Bay National Corporation and Bay National Bank. These
payments were authorized in recognition of Mr. Rieger's outstanding service as a
key member of the Bay National Bank Loan Committee. These amounts were paid in
December 2002 and December 2001.

         In November 2001, each then director of Bay National Corporation was
granted options to purchase 3,000 shares of Bay National Corporation common
stock. The options vest in four (4) equal installments with the first 25%
installment vesting on the third anniversary of the individual directors
appointment to the Board of Directors of Bay National Corporation. The remaining
25% installments vest on the fourth, fifth, and sixth anniversary of the
individual director's appointment to the Board of Directors of Bay National
Corporation. As of December 31, 2002, options to purchase 8,250 shares were
exercisable. The options expire on November 19, 2009. They are exercisable at
$7.58 per share. None have been exercised.

Executive Compensation

Summary Compensation Table

         The following table sets forth the compensation paid by Bay National
Corporation and Bay National Bank to the Chief Executive Officer of Bay National
Corporation and Bay National Bank and to any other executive officer of Bay
National Corporation and Bay National Bank who received compensation in excess
of $100,000 during 2002. Other than the grant of options, all compensation below
was paid by the Bay National Bank.


                                       67
<PAGE>
<TABLE>
<CAPTION>

                                             Summary Compensation Table
                                             --------------------------

                                                                         Long Term Compensation
                                                                   ------------------------------------
                                       Annual Compensation                  Awards            Payouts
                                ---------------------------------- ------------------------- ----------
                                                                                  Securities
                                                      Other Annual  Restricted   Underlying   LTIP        All Other
 Name and Principal                                   Compensation     Stock       Options/   Payouts    Compensation
 Position                Year    Salary($) Bonus($)      ($)         Award(s) ($)   SARs (#)      ($)         ($)
 ----------------------- ------ --------- --------- -------------- ------------- ----------- ---------- -------------
<S>                      <C>    <C>       <C>                                      <C>                       <C>
 Hugh W. Mohler
 President and Chief
 Executive Officer (1)   2002   $164,000                                                                    $  6,032
                         2001   $154,000     -            -             -            40,261      -          $  6,189
                         2000   $ 96,318     -            -             -            -           -          $  8,518
 Mark Semanie
 Vice President (2)      2002   $135,000  $ 30,000        -             -            -           -          $  6,838
                         2001   $125,000     -            -             -            18,630      -          $  5,233
                         2000   $ 19,232     -            -             -            -           -          $     72
<FN>

(1)      Mr. Mohler voluntarily declined any and all compensation during the
         Company's formative stage (June, 1999 through May, 2000). Other
         compensation includes $5,533, $5,775 and $3,510 of contributions to the
         Company's 401(k) retirement plan for 2002, 2001 and 2000, respectively,
         and $499, $414 and $5,008 of term life insurance premiums paid by the
         Bank on Mr. Mohler's behalf for 2002, 2001 and 2000, respectively.

(2)      Mr. Semanie joined the Company in October 2000. Other compensation
         includes $5,947, $4,543 of contributions to the Company's 401(k)
         retirement plan for 2002 and 2001, respectively, and $891, $690 and $72
         of term life insurance premiums paid by the Bank on Mr. Semanie's
         behalf for 2002, 2001 and 2000, respectively.
</FN>
</TABLE>

Aggregate Options Table

         The following table sets forth information on the aggregate number of
shares of common stock underlying unexercised options held as of December 31,
2002 by Mr. Mohler and Mr. Semanie and the aggregate dollar value of
in-the-money unexercised options held as of December 31, 2002 by Mr. Mohler and
Mr. Semanie.
<TABLE>
<CAPTION>

                                             Number of Securities
                                            Underlying Unexercised        Value of Unexercised
                                                  Options at             in-the-Money Options at
                 Name                         December 31, 2002             December 31, 2002
---------------------------------------- ----------------------------- ----------------------------
                                         Exercisable Unexercisable        Exercisable Unexercisable
                                         ---------- --------------        ----------- -------------
<S>                                             <C>        <C>               <C>         <C>
Hugh W. Mohler                                  750        39,511            $   390     $  20,546
Mark A. Semanie                              -             18,630             -              9,688
</TABLE>

The exercise price of these options is $7.58 per share. The market value of the
common stock was $8.10 per share, which is the sales price at which shares of
common stock were last sold in over the counter trading on December 31, 2002.

                                       68
<PAGE>

Employment Arrangements

         Bay National Bank has entered into a written employment agreement with
Mr. Mohler effective as of May 12, 2000. Under this agreement, Mr. Mohler serves
as the president of Bay National Bank at an initial annual base salary of
$154,000, subject to annual review. However, pursuant to Mr. Mohler's agreement,
Mr. Mohler did not receive any compensation until May 2000. The agreement has an
initial term of three years, automatically renewable for one-year terms unless
written notice is provided by either party 90 days before expiration of a term.
Written notice was not provided by either party 90 days before the expiration of
the initial term and accordingly the new term will expire in May 2004.

         Bay National Bank may terminate the employment agreement without cause
upon 30 days' prior written notice and may terminate the employment agreement
for cause at any time without prior notice. Mr. Mohler may terminate his
employment agreement at any time upon 30 days' prior written notice. In the
event Mr. Mohler is terminated without cause, he will continue to receive salary
payments for the earlier of six months from the date of termination or until he
has found comparable employment. Mr. Mohler is required to use his best efforts
to obtain comparable employment.

         Pursuant to this agreement, if Mr. Mohler is employed by Bay National
Bank on the date of a "change of control," he is entitled to a payment of 290%
of his base salary from Bay National Bank. The employment agreements define
"change of control" as (i) the acquisition by any person of forty percent (40%)
or more of the outstanding shares of common stock of Bay National Bank or Bay
National Corporation; (ii) the election of a majority of the members of the
Board of Directors who were not approved or nominated by then incumbent board or
(iii) the approval by the stockholders of Bay National Bank or Bay National
Corporation of (a) a reorganization, merger or consolidation of Bay National
Bank or Bay National Corporation, subject to certain exceptions; (b) a
liquidation or dissolution of Bay National Bank or Bay National Corporation or
(c) the sale or other disposition of all or substantially all of the assets of
Bay National Bank or Bay National Corporation.

         In the employment agreement, Mr. Mohler agrees that for a period of six
(6) months after employment with Bay National Bank or any affiliate, he will
not, directly or indirectly, own, operate or otherwise be associated with, any
financial institution which is located in the Bank's market area. Mr. Mohler
also agrees that for a period of one (1) year after employment with Bay National
Bank or any affiliate, he will not (i) solicit any person or entity which at the
time of his termination was, or within one (1) year prior thereto had been, a
customer of Bay National Bank or any of its affiliates or (ii) solicit the
employment of any person who was employed by Bay National Bank or any of its
affiliates on a full or part time basis at the time of his termination of
employment, unless such person (a) was involuntarily discharged by Bay National
Bank or the affiliate or (b) voluntarily terminated his relationship with Bay
National Bank or the affiliate prior to Mr. Mohler's termination of employment.

         In addition, pursuant to the employment agreement, upon adoption of a
stock option plan by Bay National Corporation's Board of Directors, Mr. Mohler
was entitled to options to purchase 3% of the shares of common stock outstanding
after the initial public offering. Accordingly, options to purchase 37,261
shares of common stock were granted to Mr. Mohler in November 2001. These
options are exercisable at $7.58 per share.

         Bay National Bank has purchased "key man" life insurance on Mr. Mohler.

                                       69
<PAGE>

         Bay National Bank and Bay National Corporation have not entered into
written employment agreements with any other employees.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

Securities Authorized For Issuance Under Equity Compensation Plans

     The following table sets forth certain information as of December 31, 2002,
with respect to compensation plans under which equity securities of Bay National
Corporation are authorized for issuance.
<TABLE>
<CAPTION>

                                          Equity Compensation Plan Information

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

                                                  (a)                         (b)                       (c)
 ---------------------------------------------------------------------------------------------------------------------

<S>                                             <C>                             <C>                       <C>
 Equity compensation plans approved
 by security holders                             148,825                      $ 7.67                    51,175
 ---------------------------------------------------------------------------------------------------------------------
 Equity compensation plans approved
 by security holders                              56,250                       10.00                      -
 ---------------------------------------------------------------------------------------------------------------------
 Total                                           205,075                      $ 8.31                    51,175
 ---------------------------------------------------------------------------------------------------------------------
</TABLE>

         Bay National Corporation issued warrants to purchase 56,250 shares of
common stock on September 10, 1999 to purchasers of Bay National Corporation's
organizational offering. The warrants were issued in recognition of the
financial and organizational risks undertaken by those investors. The warrants
became exercisable on April 30, 2001, and they expire on November 16, 2004.
Investors were given one warrant for every two shares purchased in the
organizational offering. The warrants are exercisable at $10 per share. None of
the warrants have been exercised.




                                       70
<PAGE>



Security Ownership

         The following table sets forth the beneficial ownership of Bay National
Corporation's common stock as of March 24, 2003 by its directors, executive
officers named in the Summary Compensation Table in Item 10 above, directors and
officers as a group and persons believed by management to beneficially own more
than five percent (5%) of the common stock. The table includes warrants and
options beneficially owned by these persons. Unless otherwise noted below,
management believes that each person named in the table has the sole voting and
sole investment power with respect to each of the shares of common stock
reported as beneficially owned by such person.
<TABLE>
<CAPTION>

Name and Address                                       Number of Shares   Percentage
of Beneficial Owner
(16)                                                         (16)          of Class
-----------------------------------------------------------------------------------------
<S>                                                             <C>             <C>

Carroll A. Bodie (1)
4005 Greenway
Baltimore, MD 21218                                               16,750         1.01%

Charles E. Bounds (2)
1707 Upper Millstone Lane
Salisbury, MD 21801                                                6,880          .41%

Citizens, Inc. (3)
P.O. Box 1550
Butler, PA 16003                                                 112,500         6.76%

Gary T. Gill
6 Brierleigh Court
Lutherville, Maryland   21093                                      2,500          .15%

John R. Lerch (4)
618 Indian Lane
Salisbury, MD 21801                                               43,750         2.63%

Donald G. McClure, Jr. (5)
11520 Pebble Creek Drive
Lutherville, MD 21093                                             14,750          .89%

Hugh W. Mohler (6)
23 Buchanan Road
Baltimore, MD 21212                                               63,865         3.84%

Robert L. Moore (7)
5673 N. Nithsdale Drive
Salisbury, MD 21801                                                7,500          .45%


                                       71
<PAGE>


H. Victor Rieger, Jr. (8)
1015 Ivy Hill Road
Cockeysville, MD 21030                                            28,750         1.73%

Margaret K. Riehl (9)
6200 Gentry Lane
Baltimore, MD 21210                                               23,250         1.40%

William B. Rinnier (10)
616 Manor Drive
Salisbury, MD 21801                                               13,250          .80%

Edwin A. Rommel, III (11)
5281 Silver Run Lane
Salisbury, MD 21801                                               31,250         1.88%

Mark A. Semanie (12)
1200 Corinthian Court
Bel Air, MD 21014                                                  1,680          .10%

Henry H. Stansbury (13)
6200 Foxhall Farm Road
Catonsville, MD 21228                                             39,550         2.38%

Kenneth H. Trout (14)
804 Hillstead Drive
Lutherville, MD 21093                                              2,750          .17%

Eugene M. Waldron, Jr. (15)
5309 Woodlawn Avenue
Chevy Chase, MD 20815                                             30,750         1.85%

Carl A.J. Wright
8609 Marburg Manor Drive
Lutherville, MD  21093                                            14,000          .84%

All directors and executive officers as a group:
Sixteen persons                                                  341,225        20.51%
</TABLE>

     (1) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003.

                                       72
<PAGE>

     (2) Includes 1,250 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003.

     (3) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date.

     (4) Includes 4,000 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003. Includes 6,000 shares held by LFI partnership, of which
Mr. Lerch is a general partner; and 2,000 shares held by Mr. Lerch's spouse, and
1,000 shares issuable upon the exercise of warrants by Mrs. Lerch that are
exercisable within 60 days of the record date. Mr. Lerch disclaims beneficial
ownership as to the shares and warrants held by his spouse.

     (5) Includes 750 shares issuable upon the exercise of options that are
exercisable within 60 days of the record date. Excludes 2,250 shares issuable
upon the exercise of options that are exercisable starting in April 2004.
Includes 9,000 shares held in trust for the benefit of Mr. McClure's children
for which Mr. McClure is a co-trustee.

     (6) Includes 5,000 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 10,065 shares issuable
upon the exercise of options that are exercisable within 60 days of the record
date. Excludes 30,196 shares issuable upon the exercise of options that are
exercisable starting in June 2003. Includes 1,000 shares held by Mr. Mohler's
spouse. Mr. Mohler disclaims beneficial ownership as to the shares held by his
spouse.

     (7) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Excludes 3,000 shares issuable
upon the exercise of options that are exercisable starting in February 2004.

     (8) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003. Includes 1,000 shares held by Mr. Rieger's spouse. Mr.
Rieger disclaims beneficial ownership as to the shares held by his spouse.

     (9) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003. Includes 1,000 shares held by Mrs. Riehl's spouse. Mrs.
Riehl disclaims beneficial ownership as to the shares held by her spouse.

     (10) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable



                                       73
<PAGE>

starting in August 2003. Includes 3,000 shares held by Mr. Rinnier's spouse, and
2,000 shares held by Mr. Rinnier's children. Mr. Rinnier disclaims beneficial
ownership as to the shares held by his spouse and his children.

     (11) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003.

     (12) Excludes 18,630 shares issuable upon the exercise of options that are
exercisable starting in October 2003.

     (13) Includes 2,500 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003. Includes 10,000 shares held by Mr. Stansbury's spouse,
and 2,500 shares issuable upon the exercise of warrants by Mrs. Stansbury that
are exercisable within 60 days of the record date. Mr. Stansbury disclaims
beneficial ownership as to the shares and warrants held by his spouse.

     (14) Includes 750 shares issuable upon the exercise of options that are
exercisable within 60 days of the record date. Excludes 2,250 shares issuable
upon the exercise of options that are exercisable starting in October 2003.

     (15) Includes 5,000 shares issuable upon the exercise of warrants that are
exercisable within 60 days of the record date. Includes 750 shares issuable upon
the exercise of options that are exercisable within 60 days of the record date.
Excludes 2,250 shares issuable upon the exercise of options that are exercisable
starting in June 2003. Includes 3,000 shares held by Mr. Waldron's children. Mr.
Waldron disclaims beneficial ownership as to the shares held by his children.

     (16) All of the named individuals, other than Mr. Semanie, are directors of
Bay National Corporation. Mr. Mohler is a director and executive officer of Bay
National Corporation.

         The number of shares beneficially owned includes shares of common stock
subject to options or warrants held by the named persons that are exercisable as
of, or within 60 days of, March 24, 2003. Such shares are deemed outstanding for
the purpose of computing the percentage ownership of the person holding the
options or warrants, but are not deemed outstanding for the purpose of computing
the percentage ownership of any other person.

         The number of shares beneficially owned also includes 88,860 shares of
common stock subscribed under the private offering to accredited investors
commenced on October 31, 2003 (see "Item 5. Market for Common Equity and Related
Stockholder Matters") which are expected to be issued within 60 days of, March
24, 2003. Such shares are deemed outstanding for the purpose of computing the
percentage ownership of the person holding the subscriptions, but are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person.

                                       74
<PAGE>

         Bay National Corporation issued warrants to purchase 56,250 shares of
common stock on September 10, 1999 to purchasers of Bay National Corporation's
organizational offering. The warrants were issued in recognition of the
financial and organizational risks undertaken by those investors. The warrants
became exercisable on April 30, 2001, and they expire on November 16, 2004.
Investors were given one warrant for every two shares purchased in the
organizational offering. The warrants are exercisable at $10 per share. None of
the warrants have been exercised.

         In November 2001, each director of Bay National Corporation was granted
options to purchase 3,000 shares of Bay National Corporation common stock. The
options vest in four (4) equal installments with the first 25% installment
vesting on the third anniversary of the individual director's appointment to the
Board of Directors of Bay National Corporation. The remaining 25% installments
vest on the fourth, fifth, and sixth anniversary of the individual director's
appointment to the Board of Directors of Bay National Corporation. A total of
9,000 of these options to purchase shares were exercisable as of, or within 60
days of March 24, 2003. The options expire on November 19, 2009. They are
exercisable at $7.58 per share. None have been exercised.

         In November 2001, Mr. Mohler was granted options to purchase 37,261
shares of Bay National Corporation common stock, and Mr. Semanie was granted
options to purchase 18,630 shares of Bay National Corporation common stock. The
options vest in four (4) equal installments with the first 25% installment
vesting on the third anniversary of the officer's date of employment with Bay
National Bank. The remaining 25% installments vest on the fourth, fifth, and
sixth anniversary of the individual officer's date of employment with Bay
National Bank. A total of 9,315 of these options to purchase shares were
exercisable as of, or within 60 days of March 24, 2003.The options expire on
November 19, 2009. They are exercisable at $7.58 per share. None have been
exercised.

Item 12.  Certain Relationships and Related Transactions

         Prior to Bay National Corporation's initial public offering, the
organizers of Bay National Corporation and Bay National Bank and certain other
investors purchased an aggregate of 112,500 shares of Bay National Corporation's
common stock at a purchase price of $10.00 per share. The primary purpose of
this "organizational offering" was to provide Bay National Corporation and Bay
National Bank with the capital necessary to fund some of the initial
organizational and prepaid operating expenses.

         In recognition of the financial and organizational risk undertaken by
the purchasers in the organizational offering, on September 10, 1999, the
purchasers in the organizational offering received, for no additional
consideration, a warrant to purchase one share of common stock at $10.00 per
share for every two shares that they purchased in the organizational offering.
As a result, Bay National Corporation issued warrants to purchase an aggregate
of 56,250 shares of common stock to the purchasers in the organizational
offering.

         The warrants became exercisable on April 30, 2001 and are exercisable
in whole or in part until November 16, 2004. The warrants and the shares of
common stock issuable upon the exercise of the warrants are transferable subject
to compliance with applicable securities laws. Among other requirements, if the
OCC issues a capital directive or other order requiring Bay National Bank to
obtain additional capital, the warrants are forfeited if not immediately
exercised.

                                       75
<PAGE>

         Director John R. Lerch owns a 100% interest in the property being
leased for Bay National Bank's Salisbury, Maryland branch office. Pursuant to
that lease, which is for a five-year term and commenced as of September 1, 1999,
Bay National Corporation agreed to pay Mr. Lerch monthly rent of approximately
$1,980 plus all real estate taxes and utilities. Bay National Corporation
believes that the lease rate is at fair market value, based, in part, on an
evaluation of the lease terms by William E. Martin of ERA Martin Associates, a
Salisbury-based real estate brokerage firm. Bay National Corporation engaged Mr.
Martin to review the lease terms for the purpose of determining whether the
terms were consistent with the lease terms for similar properties in the
downtown Salisbury area.

         Some of Bay National Bank's directors and officers and the business and
professional organizations with which they are associated have banking
transactions with Bay National Bank in the ordinary course of business. It is
Bay National Bank's policy that any loans and loan commitments will be made in
accordance with applicable laws and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons of comparable credit standing. Loans to
directors and officers must comply with Bay National Bank's lending policies and
statutory lending limits, and directors with a personal interest in any loan
application will be excluded from considering any such loan application.

         The officers and directors of Bay National Corporation and Bay National
Bank have loans due to Bay National Bank of $4,972,128 at December 31, 2002. All
loans were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unaffiliated third parties and do not involve more than the normal risk of
repayment or present other unfavorable features.




                                       76
<PAGE>
<TABLE>
<CAPTION>


Item 13.  Exhibits and Reports on Form 8-K

         (a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report.

Exhibit
No.               Description of Exhibit
---               ----------------------

<S>              <C>
3.1*              Articles of Incorporation of Bay National Corporation
3.2*              Bylaws of Bay National Corporation
4.1*              Rights of Holders of Common Stock (as contained in Exhibit 3.1)
4.2*              Form of Common Stock Certificate
4.3*              Form of Warrant
10.1*             Form of Employment Agreement between Bay National Corporation and Hugh W. Mohler
10.2*             Form of Employment Agreement between Bay National Bank and Hugh W. Mohler
10.3*             Office Lease  Agreement dated July 16, 1999 between Bay National Corporation and Joppa Green II Limited
                  Partnership
10.4*             Office Lease Agreement dated July 16, 1999 between Bay National Corporation and Joppa Green II Limited Partnership
10.5*             Lease Agreement dated September 16, 1999 between Bay National Corporation and John R. Lerch and Thomas C. Thompson
10.6#             Bay National Corporation Stock Option Plan
21.1*             Subsidiaries of Bay National Corporation
23.1              Consent of Stegman & Company
99.1              Certification of Periodic Financial Report pursuant to 18 U.S.C.  Section 1350
99.2              Certification of Periodic Financial Report pursuant to 18 U.S.C.  Section 1350
</TABLE>

         The exhibits which are denominated with an asterisk (*) were previously
filed by Bay National Corporation as a part of, and are hereby incorporated by
reference from, Bay National Corporation's Registration Statement on Form SB-2,
as amended, under the Securities Act of 1933, Registration Number 333-87781.

         The exhibit which are denominated by the number sign (#) was previously
filed by Bay National Corporation as a part of, and is hereby incorporated by
reference from, Bay National Corporation's Registration Statement on Form S-8,
as amended, under the Securities Act of 1933, Registration Number 333-69428.

         (b) Reports of Form 8-K. No reports on Form 8-K were required to be
filed for the fourth quarter of 2002.

Item 14.  Controls and Procedures

         Within 90 days prior to the date of this report, Bay National
Corporation's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of Bay National Corporation's
disclosure controls and procedures. Based upon that evaluation, Bay National
Corporation's Chief Executive Officer and Chief Financial Officer concluded that
Bay National Corporation's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are


                                       77
<PAGE>

designed to ensure that information required to be disclosed in Bay National
Corporation's reports filed or submitted under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.

         In addition, since the Chief Executive Officer's and Chief Financial
Officer's most recent review of Bay National Corporation's internal controls,
there have been no significant changes in Bay National Corporation's internal
controls or in other factors that could significantly affect those controls.







                                       78
<PAGE>



                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                            BAY NATIONAL CORPORATION

Date:  March 24, 2003                       By: /s/ Hugh W. Mohler
                                               ---------------------------------
                                                Hugh W. Mohler,   President

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>

<S>                                     <C>                             <C>

                      Name              Position                                       Date
                      ----              --------                                       ----
                                        Director and President
/s/ Hugh W. Mohler                      (Principal Executive Officer)      March 24, 2003
------------------------------------
Hugh W. Mohler
                                        Treasurer
/s/ Mark A. Semanie                     (Principal Accounting and          March 24, 2003
------------------------------------
Mark A. Semanie                         Financial Officer)

/s/ Carroll A. Bodie                    Director                           March 27, 2003
------------------------------------
Carrol1 A. Bodie

/s/ Charles E. Bounds                   Director                           March 25, 2003
------------------------------------
Charles E. Bounds

___________________________             Director                           March --, 2003
Gary T. Gill

/s/ John R. Lerch                       Director                           March 27, 2003
------------------------------------
John R. Lerch

/s/ Donald G. McClure, Jr.              Director                           March 26, 2003
------------------------------------
Donald G. McClure, Jr.

/s/ Robert L.Moore                      Director                           March 25, 2003
------------------------------------
Robert L. Moore

/s/ H. Victor Rieger                    Director                           March 26, 2003
------------------------------------
H. Victor Rieger, Jr.

/s/ Margaret Knott Riehl                Director                           March 25, 2003
------------------------------------
Margaret Knott Riehl

                                       79
<PAGE>

/s/ William B. Rinnier                  Director                           March 24, 2003
------------------------------------
William B. Rinnier

/s/ Edwin A. Rommel, III                Director                           March 25, 2003
------------------------------------
Edwin A. Rommel, III

/s/ Henry H. Stansbury                  Director                           March 24, 2003
------------------------------------
Henry H. Stansbury

/s/ Kenneth H. Trout                    Director                           March 27, 2003
------------------------------------
Kenneth H. Trout

/s/ Eugene M. Waldron, Jr.              Director                           March 24, 2003
------------------------------------
Eugene M. Waldron, Jr.

                                        Director                           March --, 2003
------------------------------------
Carl A.J. Wright


</TABLE>




                                       80
<PAGE>



                                 CERTIFICATIONS

I, Hugh W. Mohler, certify that:

1.   I have reviewed this annual report on Form 10-KSB of Bay National
     Corporation;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
     have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's Board of Directors (or persons performing the
     equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could



                                       81
<PAGE>

     significantly affect internal controls subsequent to the date of our most
     recent evaluation, including any corrective actions with regard to
     significant deficiencies and material weaknesses.


    Date: March 26, 2003               By: /s/ Hugh W. Mohler
                                           ----------------------
                                       Name:  Hugh W. Mohler
                                       Title: Chairman, President and Chief
                                              Executive Officer











                                       82
<PAGE>



I, Mark A. Semanie, certify that:

1.   I have reviewed this annual report on Form 10-KSB of Bay National
     Corporation;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
     have:

     d)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     e)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     f)   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's Board of Directors (or persons performing the
     equivalent function):

     c)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     d)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation,



                                       83
<PAGE>

     including any corrective actions with regard to significant deficiencies
     and material weaknesses.


   Date: March 26, 2003               By: /s/ Mark A. Semanie
                                          -------------------
                                      Name:  Mark A. Semanie
                                      Title: Executive Vice President and Chief
                                             Financial Officer




                                       84
<PAGE>




     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
           SECTION 15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

         Bay National Corporation has not sent and will not send to its security
holders an annual report other than this annual report on Form 10-KSB.
Subsequent to the date of this filing, Bay National Corporation intends to
provide proxy materials to its security holders in connection with its annual
meeting of security holders. A copy of such proxy materials will be furnished to
the Securities and Exchange Commission for its information and Bay National
Corporation understands that such materials will not be considered to be filed
or subject to the liabilities of Section 18 of the Exchange Act.


<TABLE>
<CAPTION>


                                  EXHIBIT INDEX


Exhibit
No.               Description of Exhibit
---               ----------------------

<S>               <C>
3.1*              Articles of Incorporation of Bay National Corporation
3.2*              Bylaws of Bay National Corporation
4.1*              Rights of Holders of Common Stock (as contained in Exhibit 3.1)
4.2*              Form of Common Stock Certificate
4.3*              Form of Warrant
10.1*             Form of Employment Agreement between Bay National Corporation and Hugh W. Mohler
10.2*             Form of Employment Agreement between Bay National Bank and Hugh W. Mohler
10.3*             Office   Lease  Agreement dated July 16, 1999 between Bay National Corporation and Joppa Green II Limited
                  Partnership
10.4*             Office Lease Agreement dated July 16, 1999 between Bay National Corporation and Joppa Green II Limited Partnership
10.5*             Lease Agreement dated September 16, 1999 between Bay National Corporation and John R. Lerch and Thomas C. Thompson
10.6#             Bay National Corporation Stock Option Plan
21.1*             Subsidiaries of Bay National Corporation
23.1              Consent of Stegman & Company
99.1              Certification of Periodic Financial Report pursuant to 18 U.S.C.  Section 1350
99.2              Certification of Periodic Financial Report pursuant to 18 U.S.C.  Section 1350

</TABLE>

* Previously filed by Bay National Corporation as a part of Bay National
Corporation's Registration Statement on Form SB-2, as amended, under the
Securities Act of 1933, Registration Number 333-87781

# Previously filed by Bay National Corporation as a part of Bay National
Corporation's Registration Statement on Form S-8, as amended, under the
Securities Act of 1933, Registration Number 333-69428






                                       85
<PAGE>