[BAY NATIONAL CORPORATION LOGO]

                                   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, 2001

[ ]   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:  None

      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] The issuer's  revenues for its most
recent fiscal year were $2,152,766.

<PAGE>

      The aggregate market value of the common equity held by non-affiliates was
$8,694,140  as of March 26,  2002,  based on a sales price of $7.00 per share of
Common Stock, which is the sales price at which shares of Common Stock were last
sold at in over the counter trading on March 12, 2002.

      The  number  of  shares  outstanding  of the  issuer's  Common  Stock  was
1,242,020 as of March 26, 2002.

      Transitional Small Business Disclosure Format (check one):

                                   Yes __ No X


                                       2

<PAGE>

                                    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

      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  organized  Bay  National  Bank  because they
believe that the banking needs of certain segments of these  communities are not
being served  adequately by existing  banks.  Specifically,  as a result of bank
mergers over the past decade, many banks in the Baltimore  metropolitan area and
the Eastern Shore of Maryland are local  branches of large regional and national
banks.  Although  size gives the larger banks some  advantages  in competing for
business  from  large  corporations,  including  economies  of scale and  higher
lending limits,  the organizers believe that these "megabanks" have focused on a
mass market  approach  which  de-emphasizes  personal  contact and service.  The
organizers  also believe that the  centralization  of  decision-making  power at
these large institutions has resulted in a lack of customer service.  At many of
these institutions,  determinations are made at the "home office" by individuals
who lack  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  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.

      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.

                                       3

<PAGE>

      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 70% of the loan portfolio as of December 31, 2001.

      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,
            2001,  these loans  represented  approximately  65% of Bay  National
            Bank's loan  portfolio.  Bay National  Bank is  targeting  small and
            mid-sized  businesses  in its market area with  credit  needs in the
            range of up to $5,000,000.

      o     Real estate loans,  including land development and construction loan
            financing, primarily for owner-occupied premises. As of December 31,
            2001,  these loans  represented  approximately  13% 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, 2001, 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 and home equity loans secured by single-family  owner-occupied
            residences.  As  of  December  31,  2001,  these  loans  represented
            approximately  16% of Bay National Bank's loan  portfolio.  Like its
            consumer loans,

                                       4

<PAGE>

            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  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  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,  2001,  mortgage  loans,  all of which were held for
            sale totaled $682,000.

      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  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,  2001,  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,  pursuant  to  recently  enacted  legislation,   insurance  companies,
securities  brokers and other non-bank  entities or their affiliates may provide
services which historically have been considered banking in nature.

                                       5

<PAGE>

      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 26, 2002, Bay National Bank employed  twenty-two  individuals.
Fifteen people operate from Bay National Bank's  headquarters in North Baltimore
and seven people from the Salisbury,  Maryland branch. 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 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

                                       6

<PAGE>

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.  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.

                                       7

<PAGE>

      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 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.

                                       8

<PAGE>


      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  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

                                       9

<PAGE>

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, 2001.

      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 (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.

                                       10

<PAGE>


      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 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

                                       11

<PAGE>

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 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

                                       12

<PAGE>

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.

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.

      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.  Management  expects that Bay National Bank
will incur  operating  losses  during its initial years of operation and may not
achieve profitability, if at all, for at least two to three years.

      In addition, management expects that additional capital may be required in
the future to support growth of Bay National Bank.  Any additional  capital,  if
available  at all,  may be on terms which are not as favorable to the Company as
that  desired  by  management  and  may  result  in  dilution  to the  Company's
shareholders.  If adequate capital is not available, the Company may be required
to curtail significantly its expected growth strategy.

      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  offices  may  not  enhance  the  results  of   operations  as
anticipated. Bay National Bank has no current plans to open additional 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 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,
2001, such loans  accounted for  approximately  70% 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.

                                       13

<PAGE>

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 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.

      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,
Baltimore, 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 includes Bay National  Corporation's  share of taxes and
building operating costs.

                                       14

<PAGE>

      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  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. After the
termination  of the  sublease,  management  will  reassess  whether Bay National
Corporation or Bay National Bank requires the use of this  additional  space for
operations.

      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  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, 2001 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 26,  2002,  the number of  holders  of record of Bay  National
Corporation's  common stock was  approximately  450. Bay National  Corporation's
common stock is traded on the Over the Counter  Bulletin Board  ("OTCBB")  under
the symbol "BANI."

      Bay  National  Corporation  completed  an initial  public  offering 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>
                                        2001                                     2000
                                  Bid Price Range                           Bid Price Range
      Quarter                  Low               High                  Low                  High
                            ----------------------------            ------------------------------
<S>                         <C>                 <C>                 <C>                  <C>
          1st               $   7.50            $   9.00            $    --              $    --
          2nd                   6.05                7.70                10.00                10.00
          3rd                   6.18                8.60                10.00                10.00
          4th                   7.00                7.33                 8.50                10.38
</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 for at least the first three
years of operations. 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.

                                       16

<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,  2001 and 2000 and for the years  then  ended.
Comparative discussion of the results of operations for the years ended December
31,  2001 and  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 those periods.

 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.  Subscription  funds received  during the offering were
placed  in  an  escrow  account  and  invested  temporarily  in  bank  accounts,
short-term certificates of deposit or short-term securities issued or guaranteed
by the United States government.  Upon completion of the offering,  subscription
proceeds were released from escrow.

      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.

OVERVIEW

      On a consolidated basis, the Company recorded a net loss of $1,615,879 for
the year ended December 31, 2001. This is a slight  improvement  over a net loss
of $1,652,920 for the year ended December 31, 2000. Included in the loss for the
year ended December 31, 2000 was $1,321,014 associated with Bank operations. The
remainder  of the loss was the  result of  organizational  activities  performed
prior to the opening of the Bank.

      The losses for the years ended  December  31, 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,  community
banks do not achieve profitability for the first 24 to 36 months of operation.

      As of December 31, 2001,  total assets of the Company were  $47,025,826 as
compared to total assets of $24,025,825 as of December 31, 2000. This represents
growth of  approximately  $23 million  since  December 31,  2000.  The growth in
assets was a direct result of growth in deposits.  Deposits at December 31, 2001
were  $38,139,127  as compared to deposits of  $13,656,640 at December 31, 2000.
Deposit  growth  was  attributable  to the  marketing  efforts of  officers  and
directors of the Bank. Management has set the interest

                                       17

<PAGE>

rates paid on  deposits to be  competitive  in the market and has  continued  to
increase marketing  activities  throughout the year. The Company has no brokered
funds.

      As of December 31,  2001,  loans  including  loans held for sale (net of a
$447,000  allowance for credit losses) totaled  $35,415,055.  This represents an
increase of $29,836,734  or 535% from December 31, 2000. The  composition of the
loan  portfolio  as of December  31,  2001 was  approximately  $23.5  million of
commercial  loans,  $2.1 million of consumer  loans,  and $10.3  million of real
estate loans excluding $682,000 of mortgage loans held for sale. The composition
of the loan portfolio as of December 31, 2000 was approximately  $2.6 million of
commercial  loans,  $738,000 of consumer loans,  and $2.3 million of real estate
loans. There were no mortgage loans held for sale as of December 31, 2000. Funds
not  extended in loans are held in cash and due from banks,  federal  funds sold
and other overnight investments, and Federal Reserve Bank stock. At December 31,
2001, the Company had federal funds sold and other  overnight  investments,  and
investments  in Federal  Reserve Bank stock  totaling  $6,764,401 as compared to
$16,863,218  as of December 31, 2000.  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.

      Total  capital  at  December  31,  2001  was  $8,602,152  as  compared  to
$10,218,031  at December  31,  2000.  The decrease in capital is a result of the
losses  incurred  in 2001 and is  consistent  with the initial  expectations  of
management.  Management  believes that this capital is adequate to support asset
growth and losses in 2002 similar to those  achieved in the year ended  December
31, 2001. However, management expects that additional capital may be required in
the future to support  growth.  Management and the Board of Directors  regularly
monitor capital levels, and will proactively  evaluate various  alternatives for
raising  capital  in  advance  of the  actual  need.  Any such  capital  raising
alternatives, if available at all, may be on terms which are not as favorable to
the Company as desired by management and may result in dilution to the Company's
shareholders.  If adequate capital is not available, the Company may be required
to curtail significantly its expected growth strategy.

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 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,
2001 was  $1,881,987,  compared  to $782,590  for the same  period in 2000.  The
140.5% increase for the year 2001 is directly  related to the 156.9% increase in
average interest earning assets from $12,181,269 for the year ended December 31,
2000 to  $31,295,125  for the year ended  December  31,  2001.  The  increase in
average earning assets was somewhat offset by a decline in average yields due to
a declining interest rate environment.  The yields on these assets declined from
6.42% for the year ended  December 31, 2000 to 6.01% for the year ended December
31, 2001.

      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  2001  was  partially  offset  by a  reduction  in
investment  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.

                                       18

<PAGE>


For the year ended  December 31, 2001,  the average yield on the loan  portfolio
actually increased to 7.38% from 7.20% 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 3.79% for the
year ended  December  31, 2001 as compared to 6.35% for the year ended  December
31, 2000.

      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%. As of December 31, 2000, the weighted average gross yield on the
loans  outstanding was 9.75%;  the weighted  average yield on federal funds sold
and other overnight investments held on December 31, 2000 was 6.28%.

      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 jumbo  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.  During the year ended
December 31, 2001, the Company obtained  approximately $4.7 million in new funds
from the listing of  certificate  of deposit rates on an Internet  based listing
service.  These  certificates  of deposit  were issued with an average  yield of
3.97% and an average  term of 16 months.  The average  rate on interest  bearing
deposits was 3.70% for the year ended  December  31, 2001,  as compared to 5.25%
for the year ended  December 31, 2000.  As of December 31, 2001,  the  Company's
weighted  average  cost of  interest-bearing  deposits  was 3.38%  and  weighted
average cost of total deposits was 2.84%,  as compared to weighted  average cost
of  interest-bearing  deposits  of  5.62%  and  weighted  average  cost of total
deposits  was 4.68% as of December  31, 2000.  It is  anticipated  that both the
volume of deposits and the interest expense will continue to increase during the
next twelve-month period based upon increased marketing activities.

                                       19

<PAGE>


         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.

<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 %
                                                                     ============
</TABLE>

                                       20

<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>

                                       21

<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,
                                         ----------------------------------------------------------------------
                                                                     2001 vs. 2000
                                                                  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                              $     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>


COMPOSITION OF LOAN PORTFOLIO

      As  previously  discussed,  the yields on loans are  normally  higher than
yields on  investment  securities.  At December 31, 2001 and 2000,  the weighted
average  yields on the loan  portfolio  were  4.99% and  3.47%  higher  than the
weighted average yields on federal funds sold and 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
increases  in net  interest  margin.  As of December  31,  2001 and 2000,  loans
represented 82.81% and 25.09% of total earning assets, respectively.

                                       22

<PAGE>


      The following table sets forth the  composition of the principal  balances
of Company's loan portfolio as of December 31, 2001 and 2000, respectively.

<TABLE>
<CAPTION>
                                                               2001                               2000
                                                               ----                               ----
<S>                                              <C>                   <C>        <C>                     <C>
      Real Estate - Home Equity Line of Credit   $    5,641,198        15.73%     $     2,230,613         39.49%
      Real Estate - Construction                      2,230,067         6.22              36,2500           .64
      Real Estate - Mortgage                          2,448,595         6.83                 -              -
      Commercial                                     23,488,566        65.50            2,642,972         46.79
      Consumer                                        2,053,629         5.72              738,486         13.08
                                                  --------------------------       ----------------------------
               Total loans                       $   35,862,055       100.00%     $     5,648,321        100.00%
                                                  ==========================       ============================
</TABLE>

      The following table sets forth the maturity distribution for the Company's
loan portfolio at December 31, 2001.  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.

<TABLE>
<CAPTION>
                                                   Within one     One to three         Three to      Over five
                                                      year            years           five years       years
                                                      ----            -----           ----------       -----
<S>                                              <C>             <C>              <C>              <C>
      Real Estate - Home Equity Line of Credit   $    5,641,198  $      -         $      -         $     -
      Real Estate - Construction                      2,230,067         -                -               -
      Real Estate - Mortgage                          1,370,864         -               1,077,731        -
      Commercial                                     11,379,022       1,925,290         8,873,741      1,310,513
      Consumer                                        1,541,028         242,514           270,087        -
                                                  -------------   -------------    --------------   ------------
               Total                             $   22,162,179  $    2,167,804   $    10,221,559  $   1,310,513
                                                  =============   =============    ==============   ============

      Fixed interest rate                        $    1,953,532  $    2,167,804   $    10,221,559  $   1,310,513
      Variable interest rate                         20,208,647         -                 -              -
                                                  -------------   -------------    --------------   ------------
               Total                             $   22,162,179  $    2,167,804   $    10,221,559  $   1,310,513
                                                  =============   =============    ==============   ============
</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, 2001 reflects
a  56.35%   concentration  in  variable  rate  loans.  Fixed  rate  loans  total
$15,653,408  or  43.65%  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."

      The  officers  and  directors of the Company have loans due to the Bank of
$2,670,548  at December 31, 2001.  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.

                                       23

<PAGE>

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.  Management  also  judgmentally  establishes  an additional  unallocated
reserve  based  upon the  belief  that the loan  portfolio  is not yet large and
diversified  enough to fully validate the  assumptions  used in the loan grading
system.

      Based upon management's  analysis of the loan portfolio as of December 31,
2001,  management  allocated  $447,000  to the  provision  for credit  losses as
compared  to $70,000  at  December  31,  2000.  The  amount  equates to 1.25% of
outstanding  loans,  net of loans  held for sale as of  December  31,  2001,  as
compared to 1.24% at December 31, 2000.  This allocation 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  about future  events,  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  loss or that  additional  increases  in the  allowance  will not be
required.

      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,  2001.  An
allocation  of the  allowance  for credit  losses as of December 31, 2000 is not
presented because such presentation was not considered meaningful.

<TABLE>
<CAPTION>
                                                                             Amount              Loan Mix
<S>                                                                    <C>                            <C>
       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>

      As of December 31, 2001,  the Company has not charged off any loans.  This
is not unusual given that the Company opened for business in May 2000.

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

                                       24

<PAGE>

payments are expected to be collected.  The Company will  recognize  interest on
non-accrual  loans only when received.  As of December 31, 2001, the Company did
not have any non-performing 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 loan 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, 2001,  and December 31, 2000 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  114"),  "Accounting  by Creditors for  Impairment of a
Loan," as amended by Statements of Financial Accounting Standards No. 118 ("SFAS
118"),  "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." SFAS 114 and SFAS 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
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, 2001, or December 31,
2000.

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, 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.  As of December 31, 2000,  the Company had $561,237 in cash and due
from  banks,   and  $16,587,278  in  federal  funds  sold  and  other  overnight
investments. The decrease in the overall level of liquid assets is the result of
a shifting of the asset mix to the loan portfolio during the year ended December
31, 2001. 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  constitutes  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.

                                       25

<PAGE>


      The   following   table  sets   forth  the   amount  of  the   Company  's
interest-earning  assets and  interest-bearing  liabilities  as of December  31,
2001, which are expected to mature or reprice in each of the time periods shown:

<TABLE>
<CAPTION>
                                                                            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>           <C>
Interest-earning assets
      Federal funds sold and
         other overnight
         investments               $ 6,488,461     14.98%   $ 6,488,461    $        --    $        --   $        --
      Loans held for sale              682,000      1.58        682,000             --             --            --
      Loans - Variable rate         20,208,647     46.66     20,208,647             --             --            --
      Loans - Fixed rate            15,653,408     36.14        386,493      1,567,039     12,389,363     1,310,513
      Other earning assets             275,940       .64             --             --             --       275,940
                                   -----------    ------    -----------    -----------    -----------   -----------
       Total interest-earning
          assets                   $43,308,456    100.00%   $27,765,601    $ 1,567,039    $12,389,363   $ 1,586,453
                                   ===========    ======    ===========    ===========    ===========   ===========

Interest-bearing liabilities
   Deposits - Variable rate        $22,232,487     69.23%   $22,232,487    $        --    $        --   $        --
   Deposits - Fixed rate             9,881,016     30.77      1,021,589      6,587,386      2,272,041            --
                                   -----------    ------    -----------    -----------    -----------   -----------
      Total interest-bearing
         liabilities               $32,113,503    100.00%   $23,254,076    $ 6,587,386    $ 2,272,041   $        --
                                   ===========    ======    ===========    ===========    ===========   ===========

Periodic repricing differences
   Periodic gap                                             $ 4,511,525    $(5,020,347)   $10,117,322   $ 1,586,453
                                                            ===========    ===========    ===========   ===========
   Cumulative gap                                           $ 4,511,525    $  (508,822)   $ 9,608,500   $11,194,953
                                                            ===========    ===========    ===========   ===========

Ratio of rate  sensitive  assets
    to rate sensitive
    liabilities                                                  119.40%         23.79%        545.30%          N/A
</TABLE>

      As indicated by the table, the Company has 61.64% of its  interest-earning
assets,  and  69.23%  of  its  interest-bearing  liabilities  in  variable  rate
balances.   The  excess  of   interest-earning   assets  over   interest-bearing
liabilities of $10,117,322 in the category of items maturing or repricing within
1 to 5 years  comprises  the majority of the overall gap.  This gap is generally
reflective of the current market demand for fixed rate loans,  and variable rate
or short term fixed rate  deposits.  This  analysis  indicates  that the Company
generally will benefit from decreasing 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  could 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 will best  facilitate  the goal of minimizing  interest rate
risk  through  the  origination  of  variable  rate and short  term  fixed  rate
products. However, management will opportunistically enter into fixed rate loans
and/or investments when, in management's  judgment,  rates adequately compensate
the  Company  for the  interest  rate risk.  The  Company's  current  investment

                                       26

<PAGE>

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 will attempt 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
consist 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 that those  currently  being earned on short-term
investments. Management believes that this strategy will allow initial growth in
the loan portfolio without the use of borrowed funds, or more aggressive pricing
of deposit products.

SOURCES OF FUNDS

      Deposits 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, 2001, the Company had not used brokers to obtain deposits.

      The following table sets forth the  composition of the Company's  deposits
as of December 31, 2001 and December 31, 2000:

<TABLE>
<CAPTION>
                                                              2001                               2000
                                                              ----                               ----
<S>                                              <C>                   <C>        <C>                     <C>
      Demand Deposits                            $    6,678,275        17.51%     $     2,515,089         18.42%
      Savings                                         2,728,594         7.15              401,795          2.94
      Money Market and sweep                         18,851,242        49.43            9,449,466         69.19
      Certificates of deposit                         9,881,016        25.91            1,290,290          9.45
                                                  -------------    ----------      --------------    -----------
               Total deposits                    $   38,139,127       100.00%     $    13,656,640        100.00%
                                                  =============    ==========      ==============    ===========
</TABLE>

      The following table sets forth the maturity distribution for the Company's
deposits at December 31, 2001.  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                $ 6,678,275        $      --          $      --          $  --
      Savings                          2,728,594               --                 --             --
      Money Market and sweep          18,851,242               --                 --             --
      Certificates of deposit          7,608,975          1,404,303            867,738           --
                                     -----------        -----------        -----------        -------
               Total                 $35,867,086        $ 1,404,303        $   867,738        $  --
                                     ===========        ===========        ===========        =======
</TABLE>

                                       27

<PAGE>


      Certificates of deposit in amounts of $100,000 or more and their remaining
maturities at December 31, 2001 are as follows:

                                                       2001
                                                       ----
      Three months or less                         $  643,254
      Over three months through six months          1,343,447
      Over six months through twelve months         1,138,179
      Over twelve months                              901,499
                                                   ----------
           Total                                   $4,026,379
                                                   ==========

      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.  Aggressively 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, 2001,  the Company  realized
non-interest  income in the amount of  $270,779  as  compared to $14,832 for the
year ended December 31, 2000.  Gain on the sale of mortgage loans of $204,598 is
the most  significant  element of non-interest  income,  comprising 75.6% of the
total.  Cash  management  fees  totaled  $24,285 and mortgage  origination  fees
totaled $8,070 for the year ended December 31, 2001.  Cash  management  fees and
mortgage  origination  fees are included in other income.  Cash  management fees
totaled $7,214 for the year ended December 31, 2000.  There were no gains on the
sale of mortgage loans or mortgage origination fees earned during the year ended
December  31, 2000  because  the Bank began  originating  mortgages  for sale to
investors in February  2001.  The declining  interest rate  environment of 2001,
combined with a strong housing market created an exceptional market for mortgage
products.  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  $26,630 for the year ended
December  31, 2001 as compared to $3,017 for the year ended  December  31, 2000.
This increase as well as the increase in other income from $11,815 to $39,551, a
235%  increase,  can be directly  attributed to the growth in the Company's loan
and  deposit   portfolios,   and  the  addition  of  the  mortgage   origination
capabilities.

      The  Company  will  continue  to  seek  ways  to  expand  its  sources  of
non-interest  income.  The Company is currently  expanding  its ability to offer
cash management services to commercial 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 mutual fund
investment products,  investment advisory services,  and insurance products.  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,  2001,  totaled
$2,631,707.  This compares to  non-interest  expense for the year ended December
31, 2000 of $2,177,322. The increase of $454,385 for the period resulted from an
increase in salaries and benefits of $282,282 related to increasing staff levels
upon opening the Bank,  increased  occupancy,  furniture and equipment  costs of
$23,805  resulting  from  the  opening

                                       28

<PAGE>

and operation of two branch offices,  increased outside services (primarily data
and item  processing)  of  $107,539  primarily  related to the  development  and
servicing  of the Bank's  customer  base,  and  increases  in other  expenses of
$40,759 related to the increased size and complexity of the Bank's operations.

      Non-interest  expense for the  three-month  period ended December 31, 2001
decreased  by $47,512 as compared  to the same  period for the prior  year.  The
decrease of 6.6% is  significant  in that it indicates that the Company has been
able to significantly grow its loan and deposit portfolio without proportionally
growing its cost  structure.  Management  believes  that  further  growth in the
Company's  customer base can be accommodated  without  significant  increases in
these costs.

LIQUIDITY AND CAPITAL RESOURCES

      The Company had stockholders' equity at December 31, 2001 of $8,602,152 as
compared to  $10,218,031  at December  31,  2000.  The  decrease in capital is a
result  of the  losses  incurred  in 2001 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, 2001.

      Management  believes  that its capital is adequate to support asset growth
and losses in 2002  similar to those  achieved  in the year ended  December  31,
2001.  However,  management  expects that additional  capital may be required in
future years to support growth.  Management and the Board of Directors regularly
monitor capital levels, and will proactively  evaluate various  alternatives for
raising  capital  in  advance  of the  actual  need.  Any such  capital  raising
alternatives, if available at all, may be on terms which are not as favorable to
the  Company as those  desired by  management  and may result in dilution to the
Company's shareholders. If adequate capital is not available, the Company may be
required to curtail significantly its expected growth strategy.

      Cash and due from  banks,  and  federal  funds  sold and  other  overnight
investments  provide  the  Company's  liquidity.  The levels of such  assets are
dependent upon the Company's operating,  financing and investment  activities at
any given time.  Variations  in levels of cash and cash  equivalents  are mostly
influenced by deposit flows and loan activity.

                                       29

<PAGE>

      The tables  below  present  the Bank's  capital  position  relative to its
various  minimum  regulatory  capital  requirements as of December 31, 2001, and
2000. For a discussion of these capital requirements, see "Item 1 Description of
Business - Supervision and Regulation - Capital Adequacy Guidelines."

<TABLE>
<CAPTION>
                                                          December 31, 2001
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     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):         $6,417,511    15.26%        $3,365,357      8.00%        $4,205,446     10.00%
     Tier I Capital (to Risk Weighted Assets):         5,970,511    14.19%         1,683,019      4.00%         2,524,529      6.00%
     Tier I Capital (to Average Assets):               5,970,511    14.87%         1,204,542      3.00%         2,007,569      5.00%


<CAPTION>
                                                          December 31, 2000
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     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):          $7,748,986    62.63%        $  989,832      8.00%        $1,237,290     10.00%
    Tier I Capital (to Risk Weighted Assets):          7,678,986    62.06%           494,916      4.00%           742,374      6.00%
    Tier I Capital (to Average Assets):                7,678,986    39.29%           371,187      3.00%           618,645      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.


                                       30

<PAGE>

Item 7.  Financial Statements

         The following  consolidated  financial  statements  are filed with this
         report:

         Independent Auditors' Report

         Consolidated Balance Sheets - December 31, 2001 and 2000

         Consolidated  Statements of  Operations - For the years ended  December
         31,  2001  and 2000  and for the  period  from  June 3,  1999  (date of
         inception) to December 31, 1999

         Consolidated  Statements of Changes in  Stockholders'  Equity - For the
         years ended  December 31, 2001 and 2000 and for the period from June 3,
         1999 (date of inception) to December 31, 1999

         Consolidated Statements of Cash Flows - For the year ended December 31,
         2001 and 2000 and for the period from June 3, 1999 (date of  inception)
         to December 31, 1999

         Notes to Consolidated Financial Statements


                                       31

<PAGE>

                          INDEPENDENT AUDITORS' REPORT


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, 2001 and 2000, and the
related consolidated statements of operations,  changes in stockholders' equity,
and cash flows for the years ended December 31, 2001 and 2000 and for the period
from June 3, 1999 (date of  inception)  to December  31, 1999.  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, 2001 and 2000, and the
results of their operations and cash flows for the years ended December 31, 2001
and 2000 and for the period  from June 3, 1999 (date of  inception)  to December
31, 1999, in conformity with  accounting  principles  generally  accepted in the
United States of America.

/s/ Stegman & Company
Baltimore, Maryland
January 31, 2002


                                       32

<PAGE>

                            BAY NATIONAL CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                           December 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                      2001                 2000
                                                                                  ------------         ------------

<S>                                                                               <C>                  <C>
           Cash and due from banks                                                $  3,065,479         $    561,237
           Federal funds sold and other overnight investments                        6,488,461           16,587,278
             Loans held for sale                                                       682,000                 --
           Federal Reserve Bank stock                                                  275,940              275,940
           Loans, net of unearned fees                                              35,862,055            5,648,321
               Less: Allowance for credit losses                                      (447,000)             (70,000)
                                                                                  ------------         ------------
                    Loans, net                                                      35,415,055            5,578,321
           Premises and equipment, net                                                 830,626              939,504
           Accrued interest receivable and other assets                                268,265               83,545
                                                                                  ------------         ------------

                    Total Assets                                                  $ 47,025,826         $ 24,025,825
                                                                                  ============         ============


      LIABILITIES

           Non-interest-bearing deposits                                          $  6,025,624         $  2,515,089
           Interest-bearing deposits                                                32,113,503           11,141,551
                                                                                  ------------         ------------
               Total deposits                                                       38,139,127           13,656,640

           Accrued expenses and other liabilities                                      284,547              151,154
                                                                                  ------------         ------------

                    Total Liabilities                                               38,423,674           13,807,794
                                                                                  ------------         ------------


      STOCKHOLDERS' EQUITY

           Common stock - $.01 par value, authorized:
               9,000,000 shares authorized, 1,242,020 issued and
               outstanding as of December 31, 2001 and 2000, respectively:              12,420               12,420
           Surplus                                                                  12,407,780           12,407,780
           Accumulated deficit                                                      (3,818,048)          (2,202,169)
                                                                                  ------------         ------------

                    Total stockholders' equity                                       8,602,152           10,218,031
                                                                                  ------------         ------------

                    Total Liabilities and Stockholders' Equity                    $ 47,025,826         $ 24,025,825
                                                                                  ============         ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       33

<PAGE>

                            BAY NATIONAL CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------
     For the years ended December 31, 2001 and 2000, and for the period from
              June 3, 1999 (date of inception) to December 31, 1999

<TABLE>
<CAPTION>
                                                                            2001               2000                1999
                                                                        -----------         -----------         -----------
<S>                                                                     <C>                 <C>                 <C>
      INTEREST INCOME:
         Interest and fees on loans                                     $ 1,431,030         $    73,118         $      --
         Interest on federal funds sold and other overnight
              investments                                                   434,757             629,872                --
         Taxable interest and dividends on investment securities             16,200              79,600              14,996
                                                                        -----------         -----------         -----------
         Total interest income                                            1,881,987             782,590              14,996

      INTEREST EXPENSE ON DEPOSITS:                                         759,938             203,020                --
                                                                        -----------         -----------         -----------

      Net interest income                                                 1,122,049             579,570              14,996

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

      Net interest income after provision for credit losses                 745,049             509,570              14,996
                                                                        -----------         -----------         -----------

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

      NON-INTEREST EXPENSE:
         Salaries and employee benefits                                   1,492,271           1,209,989             159,829
         Occupancy expenses                                                 191,848             210,237              27,599
         Furniture and equipment expenses                                   175,376             133,182                --
         Legal and professional fees                                        129,588             100,770             241,138
         Data processing and other outside services                         300,183             192,644                --
         Other expenses                                                     342,441             330,500             135,679
                                                                        -----------         -----------         -----------
           Total non-interest expenses                                    2,631,707           2,177,322             564,245
                                                                        -----------         -----------         -----------

      Loss before income taxes                                           (1,615,879)         (1,652,920)           (549,249)
      Income tax benefit                                                       --                  --                  --
                                                                        -----------         -----------         -----------
      Net Loss                                                          $(1,615,879)        $(1,652,920)        $  (549,249)
                                                                        ===========         ===========         ===========


      Per Share Data:
         Net Loss (Basic and Diluted)                                   $     (1.30)        $     (1.98)        $     (4.88)

         Average Shares Outstanding (Basic and Diluted)                   1,242,020             834,652             112,500
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       34

<PAGE>
                            BAY NATIONAL CORPORATION

               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               ----------------------------------------------------------

     For the years ended December 31, 2001 and 2000, and for the period from
              June 3, 1999 (date of inception) to December 31, 1999


<TABLE>
<CAPTION>
                                             Common                                Accumulated
                                              Stock               Surplus             Deficit              Total
                                           ------------        ------------        ------------         ------------
<S>                                       <C>                 <C>                 <C>                  <C>
      Balances at June 3, 1999             $       --          $       --          $       --           $       --

      Issuance of Common Stock                    1,125           1,123,875                --              1,125,000

      Net Loss                                     --                  --              (549,249)            (549,249)

                                           ------------        ------------        ------------         ------------
      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)
                                           ============        ============        ============         ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       35

<PAGE>
                            BAY NATIONAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

     For the years ended December 31, 2001 and 2000, and for the period from
              June 3, 1999 (date of inception) to December 31, 1999


<TABLE>
<CAPTION>
                                                                        2001                2000                 1999
                                                                   ------------         ------------         ------------
<S>                                                                <C>                  <C>                  <C>
Cash Flows From Operating Activities:
   Net loss                                                        $ (1,615,879)        $ (1,652,920)        $   (549,249)
   Adjustments to reconcile net loss to net cash used by
     operating activities:
       Depreciation                                                     179,736              102,031                2,768
       Amortization of investment (discounts) premiums, net
                                                                           --                (63,400)                --
       Provision for credit losses                                      377,000               70,000                 --
          Gain on sale of loans                                        (204,598)                --                   --
          Origination of loans held for sale                        (13,710,790)                --                   --
          Proceeds from sale of loans                                13,233,388                 --                   --
       Net increase in accrued interest
              receivable and other assets                              (184,720)             (33,886)             (49,659)
       Net (decrease) increase in accrued
                 expenses and other liabilities                         133,393             (109,479)             260,633
                                                                   ------------         ------------         ------------

            Net cash used by operating activities                    (1,792,470)          (1,687,654)            (335,507)
                                                                   ------------         ------------         ------------

Cash Flows From Investing Activities:
   Purchases of investment securities                                      --             (3,212,540)                --
   Maturities of investment securities                                     --              3,000,000                 --
   Net increase in loans                                            (30,213,734)          (5,648,321)                --
   Capital expenditures                                                 (70,858)          (1,018,767)             (25,536)
                                                                   ------------         ------------         ------------
            Net cash used by investing activities                   (30,284,592)          (6,879,628)             (25,536)
                                                                   ------------         ------------         ------------

Cash Flows From Financing Activities:
   Net increase in deposits                                          24,482,487           13,656,640                 --
   Issuance of common stock                                                --             11,295,200            1,125,000
                                                                   ------------         ------------         ------------
            Net cash provided by financing activities                24,482,487           24,951,840            1,125,000
                                                                   ------------         ------------         ------------

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

Cash and cash equivalents at end of period                         $  9,553,940         $ 17,148,515         $    763,957
                                                                   ============         ============         ============

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


          See accompanying notes to consolidated financial statements.

                                       36

<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.

                                       37

<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  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 invests in Federal Reserve 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 cost.  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.

                                       38

<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  based upon the belief that the loan  portfolio  is not yet
large and diversified  enough to fully validate the assumptions used in the loan
grading system.

         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.  The costs of
major  renewals and  betterments  are  capitalized,  while the costs of ordinary
maintenance and repairs are 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

                                       39

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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 July 2001, the Securities and Exchange Commission (the "SEC") issued
Staff  Accounting  Bulletin  ("SAB")  No.  102,  Selected  Loan  Loss  Allowance
Methodology and Documentation  Issues.  SAB 102 summarizes  certain SEC views on
the development,  documentation,  and application of a systematic methodology as
required by Financial  Reporting  Release No. 28 for determining  allowances for
loan and  lease  losses  in  accordance  with  accounting  principles  generally
accepted in the United States of America. In particular, the guidance focuses on
the  documentation  the staff normally  would expect  registrants to prepare and
maintain in support of their allowances for loan losses.

         SAB 102  provides  parallel  guidance to the federal  banking  agencies
guidance issued through the Federal Financial  Institutions  Examination Council
as  interagency  guidance,  "Policy  Statement on  Allowance  for Loan and Lease
Losses  Methodologies  and  Documentation  for Banks and Savings  Institutions".
Management believes the Company is in compliance with the provision of SAB 102.

         In July 2001, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards ("SFAS") No. 141, Business  Combinations and
Statement No. 142, Goodwill and Other Intangible Assets.  SFAS 141 requires that
the  purchase  method  of  accounting  be  used  for all  business  combinations
initiated  after  June  30,  2001  as  well  as  all  purchase  method  business
combinations  completed  after June 30, 2001.  SFAS 141 also specifies  criteria
that intangible  assets acquired in a purchase method business  combination must
meet to be recognized and reported  apart from goodwill.  SFAS 142 requires that
goodwill  and  intangible  assets  with  indefinite  useful  lives no  longer be
amortized,  but instead be tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 also requires that  intangible  assets
with definite useful lives be amortized over their  respective  estimated useful
lives  to their  estimated  residual  values  and  reviewed  for  impairment  in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for  Long-Lived  Assets to be  Disposed  Of.  The  adoption  of SFAS No. 141
effective June 30, 2001 and SFAS No. 142 effective January 1, 2002 had no impact
on the financial position or results of operations of the Company.

         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,  for the  disposal  of a

                                       40

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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 is not expected to
affect the financial position or results of operations of the Company.

         Reclassifications
         -----------------

         Certain  reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.  These reclassifications
had no effect on previously reported results of operations or retained earnings.

2.    INVESTMENT SECURITIES

         At December  31, 2001 and 2000,  the  Company's  investment  securities
consisted of Federal Reserve Bank stock totaling  $275,940.  All other available
funds at December  31,  2001 and 2000 were held in cash and due from banks,  and
federal funds sold and other overnight investments. There were no sales of other
investment securities during 2001, 2000 and 1999.

3.    LOANS AND ALLOWANCE FOR CREDIT LOSSES

         Major loan categories at December 31 are presented below:

<TABLE>
<CAPTION>
                                                           2001                 2000
                                                      ------------         ------------
<S>                                                   <C>                  <C>
      Real Estate - Home Equity Line of Credit        $  5,641,198         $  2,230,613
      Real Estate - Construction                         2,230,067
                                                                                 36,250
      Real Estate - Mortgage                             2,448,595                 --
      Commercial                                        23,488,566
                                                                              2,642,972
      Consumer                                           2,053,629
                                                                                738,486
                                                      ------------         ------------
           Total Loans                                  35,862,055
                                                                              5,648,321
      Less: Allowance for credit losses                   (447,000)             (70,000)
                                                      ------------         ------------
           Net Loans                                  $ 35,415,055         $  5,578,321
                                                      ============         ============
</TABLE>

                                       41

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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

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

         At December 31, 2001, there were no loans that were considered impaired
under SFAS No. 114.

4.   PREMISES AND EQUIPMENT

         Premises and equipment at December 31 include the following:

<TABLE>
<CAPTION>
                                                   2001                2000
                                              -----------         -----------
<S>                                           <C>                 <C>
      Furniture and equipment                 $   315,645         $   303,194
      Computer hardware and software              505,542             465,196
      Leasehold improvements                      293,974             275,913
                                              -----------         -----------
                                                1,115,161           1,044,303
         Less accumulated depreciation           (284,535)           (104,799)
                                              -----------         -----------

           Net premises and equipment         $   830,626         $   939,504
                                              ===========         ===========
</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>
                                       2001              2000              1999
                                    ---------         ---------         ---------
<S>                                 <C>               <C>               <C>
      Minimum rentals               $ 181,021         $ 143,897         $  17,420
      Less: Sublease rentals          (39,215)          (28,555)             --
                                    ---------         ---------         ---------
         Net rent expense           $ 141,806         $ 115,342         $  17,420
                                    =========         =========         =========
</TABLE>

                                       42

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

         At  December  31,   2001,   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:
                 2002                                       $    187,312
                 2003                                            193,854
                 2004                                            181,179
                 2005                                             37,809
                 2006                                              -
                                                             -----------
                 Total minimum lease payments               $    600,154
                                                             ===========

         Total minimum  future rental  payments have not been reduced by $40,784
and  $10,295 of  sublease  rentals  expected  to be  received  in 2002 and 2003,
respectively, under a non-cancelable sublease expiring in March 2003.

5.    DEPOSITS

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

                                                       2001              2000
                                                       ----              ----
      Three months or less                         $  643,254        $  200,000
      Over three months through six months          1,343,447              --
      Over six months through twelve months         1,138,179           404,864
      Over twelve months                              901,499           103,103
                                                   ----------        ----------
           Total                                   $4,026,379        $  707,967
                                                   ==========        ==========


         Interest  expense on deposits  for the period  ended  December 31 is as
follows:

                                                2001            2000
                                                ----            ----
      Interest-bearing transaction           $  8,753        $  2,211
      Savings and money market                563,030         169,352
      Time, $100,000 or more                   82,990          17,410
      Other time                              105,165          14,047
                                             --------        --------
           Total interest on deposits        $759,938        $203,020
                                             ========        ========

6.   ISSUANCE OF COMMON STOCK

         During 1999, the Company  offered and sold 112,500 shares of its common
stock, $0.01 par value per share, in a private placement organizational offering
for a price of $10 per share and received aggregate consideration of $1,125,000.

         On April 30, 2000, the Company  completed its initial  public  offering
and sold 1,129,520 shares

                                       43

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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.

7.   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, 2001.

         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.

         The  following is a summary of changes in shares under  options for the
year ended December 31, 2001.

<TABLE>
<CAPTION>
                                                                          Weighted
                                                                          Average
                                                           Number of      Exercise
                                                             Shares        Price
                                                            -------       -------
<S>                                                         <C>           <C>
      Balance, beginning of year                               --          $ --
      Granted                                               141,533         7.58
      Cancelled                                                --            --
      Exercised                                                --            --
                                                            -------        -----

           Balance, end of year                             141,533        $7.58
                                                            =======        =====

      Weighted average fair value of options granted
           during the year                                  $  3.05
                                                            =======
</TABLE>

                                       44

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


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

<TABLE>
<CAPTION>
             Range of Exercise
                   Price                         Options Outstanding              Options Exercisable
           ------------------------------------------------------------------------------------------
                                             Weighted
                                             Average
                                            Remaining         Weighted                       Weighted
                                           Contractual        Average                        Average
                                               Life          Exercise                       Exercise
            Price         Number            (in years)         Price          Number          Price
           ------------------------------------------------------------------------------------------
<S>        <C>            <C>                   <C>          <C>             <C>             <C>
           $  7.58        141,533               8            $   7.58            -           $    -
</TABLE>

         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, 2001:

                                                                    2001
                                                                  ----------
           Dividend yield                                             -
           Expected volatility                                        20.00  %
           Risk-free interest rate                                     5.23  %
           Expected lives (in years)                                      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 year ended December 31, 2001. The options  granted during 2001 have a
4-year  vesting  schedule  beginning in 2003.  Accordingly,  no pro forma income
adjustment under SFAS No. 123 is necessary for the year ended December 31, 2001.

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 $32,069 and $29,445 for the years ended December 31, 2001 and 2000,
respectively. There were no costs associated with the plan in 1999.

                                       45

<PAGE>

                            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:

<TABLE>
<CAPTION>
                                                             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>

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

<TABLE>
<CAPTION>
      Deferred tax assets:                                                2001                2000
                                                                      -----------         -----------
<S>                                                                   <C>                 <C>
           Net operating loss carryforwards                           $ 1,360,000         $   800,000
           Other                                                            1,000                --
           Allowance for credit losses                                     98,000              16,000
                                                                      -----------         -----------
               Total deferred tax assets                                1,459,000             816,000
              Less valuation allowance                                 (1,377,000)           (797,000)
                                                                      -----------         -----------
               Deferred tax assets, net of valuation allowance             82,000              19,000
                                                                      -----------         -----------
      Deferred tax liabilities:
              Depreciation and amortization                               (82,000)            (19,000)
                                                                      ===========         ===========
      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, 2001 the Company had approximately  $3.5 million in tax
loss carryforwards,  which expire between 2019 and 2021.  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.


                                       46

<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 2001 and 2000.

                                                 2001                2000
                                            -----------         -----------
      Balance at beginning of period        $   618,500         $      --
      Additions                               3,479,790             622,131
      Repayments                             (1,427,742)             (3,631)
                                            -----------         -----------
      Balance at December 31                $ 2,670,548         $   618,500
                                            ===========         ===========

         An individual who is a director of the Company owns a 50% interest in a
partnership,  which  leases an office  facility 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,  2001  and  2000,
respectively,  and $9,900 for the period  ending  December 31, 1999.  Management
believes that the services  provided and 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:

                                       2001              2000
                                    ----------        ----------
      Loan commitments              $2,558,598        $  235,886
      Unused lines of credit         9,882,798         3,667,229
      Letters of credit                348,358           100,000

         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.

                                       47

<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, 2001 and 2000,  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, 2001 and 2000
were $2,950,896 and $82,763, 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, 2001, 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.

                                       48

<PAGE>

                            BAY NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


         The Bank's  actual  capital  amounts and ratios as of December 31, 2001
and 2000 are presented in the following table:

<TABLE>
<CAPTION>
                                                          December 31, 2001
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   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):       $6,417,511      15.26%      $3,365,357       8.00%     $4,205,446      10.00%
      Tier I Capital (to Risk Weighted Assets):       5,970,511      14.19%       1,683,019       4.00%      2,524,529       6.00%
      Tier I Capital (to Average Assets):             5,970,511      14.87%       1,204,542       3.00%      2,007,569       5.00%

<CAPTION>
                                                          December 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   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):       $7,748,986      62.63%      $  989,832       8.00%     $1,237,290      10.00%
      Tier I Capital (to Risk Weighted Assets):       7,678,986      62.06%         494,916       4.00%        742,374       6.00%
      Tier I Capital (to Average Assets):             7,678,986      39.29%         371,187       3.00%        618,645       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, 2001.


                                       49

<PAGE>

                            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:

<TABLE>
<CAPTION>
                            CONDENSED BALANCE SHEETS
                            ------------------------
                           December 31, 2001 and 2000

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

      ASSETS
           Cash and cash equivalents                                         $  2,631,692         $  2,733,482
           Investment in subsidiary                                             5,970,512            7,678,986
                                                                             ------------         ------------

                    Total Assets                                             $  8,602,204         $ 10,412,468
                                                                             ============         ============


      LIABILITIES
           Due to subsidiary                                                 $       --           $    169,415
           Accrued expenses and other liabilities                                      52               25,022
                                                                             ------------         ------------

                    Total Liabilities                                                  52              194,437
                                                                             ------------         ------------

      STOCKHOLDERS' EQUITY

           Common stock - $.01 par value, authorized:
               9,000,000 shares authorized, 1,242,020 and outstanding
               as of December 31, 2001 and 2000, respectively:                     12,420               12,420
           Surplus                                                             12,407,780           12,407,780
           Accumulated Deficit                                                 (3,818,048)          (2,202,169)
                                                                             ------------         ------------

                    Total Stockholders' Equity                                  8,602,152           10,218,031
                                                                             ------------         ------------

                    Total Liabilities and Stockholders' Equity               $  8,602,204         $ 10,412,468
                                                                             ============         ============
</TABLE>


                                       50

<PAGE>

                            BAY NATIONAL CORPORATION


                       CONDENSED STATEMENTS OF OPERATIONS
                       ----------------------------------

For the years ended December 31, 2001 and 2000, and for the period from June 3,
                 1999 (date of inception) to December 31, 1999


<TABLE>
<CAPTION>
                                                                                  2001                2000                1999
                                                                              -----------         -----------         -----------

<S>                                                                           <C>                 <C>                 <C>
      Interest and dividends on investment securities                         $    98,610         $   218,267         $    14,996
      Non-interest expense                                                          6,015             550,173             564,245
                                                                              -----------         -----------         -----------
         Income (loss) before income taxes and equity in undistributed             92,595            (331,906)           (549,249)
         losses of subsidiary
      Income tax expense (benefit)                                                   --                  --                  --
                                                                              -----------         -----------         -----------
         Loss before equity in undistributed losses of subsidiary                  92,595            (331,906)           (549,249)
      Equity in undistributed losses of subsidiary                             (1,708,474)         (1,321,014)               --
                                                                              -----------         -----------         -----------
         Net Loss                                                             $(1,615,879)        $(1,652,920)        $  (549,249)
                                                                              ===========         ===========         ===========
</TABLE>


                       CONDENSED STATEMENTS OF CASH FLOWS
                       ----------------------------------

     For the years ended December 31, 2001 and 2000, and for the period from
             June 3, 1999 (date of inception) to December 31, 1999

<TABLE>
<CAPTION>
                                                                           2001                 2000                 1999
                                                                      ------------         ------------         ------------
<S>                                                                   <C>                  <C>                  <C>
      Cash Flows From Operating Activities
         Net Loss                                                     $ (1,615,879)        $ (1,652,920)        $   (549,249)
         Adjustments to reconcile net loss to net cash used by
           operating activities:
             Equity in undistributed earnings of subsidiary              1,708,474            1,321,014                 --
             Net decrease (increase) other assets                             --                 72,427              (72,427)
             Net (decrease) increase in other liabilities                 (194,385)             (66,196)             260,633
                                                                      ------------         ------------         ------------

                  Net cash used by operating activities                   (101,790)            (325,675)            (361,043)
                                                                      ------------         ------------         ------------

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

      Cash Flows From Financing Activities
         Issuance of common stock                                             --             11,295,200            1,125,000
                                                                      ------------         ------------         ------------
                  Net cash provided by financing activities                   --             11,295,200            1,125,000
                                                                      ------------         ------------         ------------

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

      Cash and cash equivalents at end of period                      $  2,631,692         $  2,733,482         $    763,957
                                                                      ============         ============         ============
</TABLE>


                                       51

<PAGE>

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>
              Name                   Age               Term to Expire (1)                   Director Since
              ----                   ---               ------------------                  ---------------
<S>                                  <C>              <C>                                  <C>
Hugh W. Mohler                       56               2003 Annual Meeting                     June 1999
Carroll A. Bodie                     56               2002 Annual Meeting                     June 1999
Charles E. Bounds                    83               2002 Annual Meeting                     June 1999
John R. Lerch                        57               2002 Annual Meeting                     June 1999
Donald G. McClure, Jr.               58               2003 Annual Meeting                     April 2000
Robert L. Moore                      48               2003 Annual Meeting                   February 2001
H. Victor Rieger, Jr.                64               2003 Annual Meeting                     June 1999
Margaret Knott Riehl                 68               2003 Annual Meeting                     June 1999
William B. Rinnier                   60               2004 Annual Meeting                    August 1999
Edwin A. Rommel, III                 52               2004 Annual Meeting                     June 1999
Henry H. Stansbury                   62               2004 Annual Meeting                     June 1999
Kenneth H. Trout                     53               2004 Annual Meeting                    October 1999
Eugene M. Waldron, Jr.               58               2004 Annual Meeting                     June 1999

<FN>
(1)      All of the directors  with terms to expire in 2002 have been  nominated
         to serve on the Board of  Directors  for an  additional  three (3) year
         term.  Elections for these directors will take place at the 2002 Annual
         Meeting of Stockholders to be held in May 2002.
</FN>
</TABLE>

Biographical information concerning the directors is set forth below.

         Hugh W. Mohler serves as president,  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 more  than 25  years'
experience in the financial  services  industry,  holding positions in executive
management,

                                       52

<PAGE>


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
1978  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 both 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 and a board and
executive committee member for the Independent College Fund 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
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

                                       53

<PAGE>

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.

         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.

         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-two years ago, and has
practiced  with the Salisbury,  Maryland  accounting  firm of Twilley,  Rommel &
Moore for the last seventeen years where he is a partner/owner. His professional
concentration is income tax and 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 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.

                                       54

<PAGE>


         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 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 & Moore, 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.

                                       55

<PAGE>

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 Technologies,  Inc. and executive chairman of CS-Able. 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 international
investing.  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

                                       56

<PAGE>

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.

         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.

         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 38,  serves as 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 is also 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
25, 2002, the number of directors has been fixed at 14 with 13 positions filled,
and one  position  vacant.  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.

                                       57

<PAGE>

         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 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, 2001.
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 does not intend to pay
directors  fees until Bay National  Bank is  profitable.  However,  Bay National
Corporation reserves the right to pay directors' fees at any time. Directors are
reimbursed  for  reasonable   expenses   incurred  on  behalf  of  Bay  National
Corporation.

         In October  2001,  the Board of Directors  of Bay National  Corporation
authorized a special one-time payment of $10,000 to Mr. H. Victor Rieger, Jr., a
director of Bay National  Corporation  and Bay National  Bank.  This payment was
authorized in recognition of Mr. Rieger's outstanding service as a key member of
the Bay National Bank Loan Committee. This amount was paid in December 2001.

         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 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, 2001, no options were  exercisable.  The options expire on November
19, 2009. They are exercisable at $7.58 per share. None have been exercised.

                                       58

<PAGE>

Executive Compensation

Summary Compensation Table

         The following table sets forth the compensation paid by the Company and
the Bank to the Chief  Executive  Officer of the Company and the Bank and to any
other executive officer of the Company or the Bank who received  compensation in
excess  of  $100,000  during  2001.  Other  than  the  grant  of  options,   all
compensation below was paid by the Bank.

<TABLE>
<CAPTION>
                           Summary Compensation Table
                           --------------------------
                                                                         Long Term Compensation
                                                                   -----------------------------------
                                       Annual Compensation                 Awards            Payouts
                                ---------------------------------- ------------------------ ----------
Name and Principal              Salary    Bonus        Other                    Securities
                                                      Annual       Restricted   Underlying  LTIP         All Other
                                                    Compensation      Stock      Options/   Payouts    Compensation
Position                 Year     ($)       ($)          ($)       Award(s) ($)  SARs (#)      ($)          ($)
------------------------ ------ --------- --------- -------------- ------------- ---------- ---------- --------------
<S>                      <C>    <C>        <C>         <C>           <C>         <C>          <C>         <C>
Hugh W. Mohler
President and Chief      2001   $154,000     -            -             -           40,261      -           $  6,189
Executive Officer (1)    2000   $ 96,318     -            -             -            -          -           $  8,518

Mark A. Semanie
Vice President (2)       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  $5,775  and  $3,510  of  contributions  to  the
         Company's 401(k) retirement plan for 2001 and 2000,  respectively,  and
         $414 and $5,008 of term life insurance premiums paid by the Bank on Mr.
         Mohler's behalf for 2001 and 2000, respectively.

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

</TABLE>

                                       59

<PAGE>


OPTION GRANTS IN 2001

The following table contains  information  concerning the grant of stock options
under the Bay  National  Corporation  Stock  Option  Plan to Mr.  Mohler and Mr.
Semanie.

<TABLE>
<CAPTION>
                                                            Individual Grants
                                           Options    % of Total         Exercise
                                           Granted     Options           or Base
                                           (Number    Granted to         Price
                                           of         Employees          ($ per      Expiration
                    Name                   Shares)     in Year           Share) (3)     Date
---------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>          <C>           <C>
Hugh W. Mohler (1)                         40,261         28.45%       $  7.58       11/19/2009
Mark A. Semanie (2)                        18,630         13.16%       $  7.58       11/19/2009

<FN>
(1)      Mr. Mohler  received  options to purchase 37,261 shares of common stock
         pursuant to the terms of his employment agreement.  Mr. Mohler received
         options to purchase  3,000  shares of common stock for his service as a
         director of Bay National  Corporation.  Options granted during 2001 for
         Mr.  Mohler's  service as a director of Bay  National  Corporation  are
         exercisable as follows:  one-fourth on June 3, 2002, one-fourth on June
         3, 2003,  one-fourth on June 3, 2004,  and  one-fourth on June 3, 2005.
         Options granted during 2001 under Mr. Mohler's employment agreement are
         exercisable as follows:  one-fourth on May 24, 2003,  one-fourth on May
         24, 2004, one-fourth on May 24, 2005, and one-fourth on May 24, 2006.

(2)      Options granted during 2001 are  exercisable as follows:  one-fourth on
         October 30, 2003, one-fourth on October 30, 2004, one-fourth on October
         30, 2005, and one-fourth on October 30, 2006.

(3)      In each case,  the exercise  price is equal to the fair market value of
         the Common Stock on the date of grant.
</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,
2001  by  Mr.  Mohler  and  Mr.  Semanie  and  the  aggregate  dollar  value  of
in-the-money  unexercised options held as of December 31, 2001 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, 2001             December 31, 2001
---------------------------------------------------------------------------------------------------
                                         Exercisable Unexercisable        Exercisable Unexercisable
                                         ----------- -------------        ----------- -------------
<S>                                        <C>            <C>               <C>          <C>
Hugh W. Mohler                               -             40,261             -            -
Mark A. Semanie                              -             18,630             -            -

         The exercise price of these options is $7.58 per share.
</TABLE>

                                       60

<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.

         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 with Bay National Bank, 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  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.

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

                                       61

<PAGE>


Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth the beneficial ownership of Bay National
Corporation's  common  stock as of March 26,  2002 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
of Beneficial Owner                                    Number of Shares   Percentage
(16)                                                         (16)          of Class
-----------------------------------------------------------------------------------------
<S>                                                      <C>               <C>
Carroll A. Bodie (1)
4005 Greenway
Baltimore, MD 21218                                         12,500            1.01%

Charles E. Bounds (2)
1707 Upper Millstone Lane
Salisbury, MD 21801                                          3,750             .30%

Citizens, Inc. (3)
P.O. Box 1550
Butler, PA 16003                                           112,500            9.06%

John R. Lerch (4)
618 Indian Lane
Salisbury, MD 21801                                         25,000            2.01%

Donald G. McClure, Jr. (5)
11520 Pebble Creek Drive
Lutherville, MD 21093                                       10,000             .81%

Hugh W. Mohler (6)
23 Buchanan Road
Baltimore, MD 21212                                         40,000            3.22%

Robert L. Moore (7)
5673 N. Nithsdale Drive
Salisbury, MD 21801                                          7,500             .60%

H. Victor Rieger, Jr. (8)
1015 Ivy Hill Road
Cockeysville, MD 21030                                      17,000            1.37%


                                       62

<PAGE>


Margaret K. Riehl (9)
6200 Gentry Lane
Baltimore, MD 21210                                         13,500            1.09%

William B. Rinnier (10)
616 Manor Drive
Salisbury, MD 21801                                         12,500            1.01%

Edwin A. Rommel, III (11)
5281 Silver Run Lane
Salisbury, MD 21801                                         19,500            1.57%

Mark A. Semanie (12)
1200 Corinthian Court
Bel Air, MD 21014                                              300             .02%

Henry H. Stansbury (13)
6200 Foxhall Farm Road
Catonsville, MD 21228                                       25,000            2.01%

Kenneth H. Trout (14)
804 Hillstead Drive
Lutherville, MD 21093                                        1,000             .08%

Eugene M. Waldron, Jr. (15)
5309 Woodlawn Avenue
Chevy Chase, MD 20815                                       30,000            2.42%

All directors and executive officers as a group:
Fourteen persons                                           191,050           15.38%

<FN>

         (1) 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 June
2002.

         (2) Includes  1,250 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 June
2002.

         (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.  Excludes  3,000  shares
issuable  upon the  exercise of options  that are  exercisable  starting in June
2002.  Includes  6,000 shares held by LFI  partnership,  of which Mr. Lerch is a
general partner;

                                       63

<PAGE>

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) Excludes  3,000 shares  issuable  upon the exercise of options that
are exercisable  starting in April 2003. 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.  Excludes  40,261  shares
issuable  upon the  exercise of options  that are  exercisable  starting in June
2002.  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.  Excludes  3,000  shares
issuable  upon the  exercise of options  that are  exercisable  starting in June
2002.  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.  Excludes  3,000  shares
issuable  upon the  exercise of options  that are  exercisable  starting in June
2002.  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.  Excludes  3,000  shares
issuable  upon the exercise of options that are  exercisable  starting in August
2002.  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.  Excludes  3,000  shares
issuable  upon the  exercise of options  that are  exercisable  starting in June
2002.

         (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.  Excludes  3,000  shares
issuable  upon the  exercise of options  that are  exercisable  starting in June
2002.  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.

                                       64

<PAGE>

         (14) Excludes  3,000 shares  issuable upon the exercise of options that
are exercisable starting in October 2002.

         (15) Includes 5,000 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 June
2002.  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.
</FN>
</TABLE>

         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 26, 2002. 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.

         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. None of these
options to purchase  shares were  exercisable as of, or within 60 days of, March
26, 2002. 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. None of these options to purchase shares were  exercisable as of,
or within 60 days of, March 26,  2002.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

                                       65

<PAGE>

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.

         Director John R. Lerch owns a 50% 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 and his partner  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 the Company have loans due to the Bank of
$2,670,548 at December 31, 2001. 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.

                                       66

<PAGE>



Item 13.  Exhibits and Reports on Form 8-K

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

<TABLE>
<CAPTION>
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
</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 2001.

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<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 25, 2002                       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>
             Name                         Position                                Date
             ----                         --------                                ----

<S>                                     <C>                                <C>
                                         Director and President
/s/ Hugh W. Mohler                       (Principal Executive Officer)      March 25, 2002
--------------------------------
Hugh W. Mohler
                                          Treasurer
/s/ Mark A. Semanie                      (Principal Accounting and          March 25, 2002
--------------------------------         Financial Officer)
Mark A. Semanie

/s/ Carroll A. Bodie                     Director                           March 22, 2002
--------------------------------
Carrol1 A. Bodie

/s/ Charles E. Bounds                    Director                           March 26, 2002
--------------------------------
Charles E. Bounds

/s/ John R. Lerch                        Director                           March 25, 2002
--------------------------------
John R. Lerch

                                         Director                           March __, 2002
--------------------------------
Donald G. McClure, Jr.

/s/ Robert L. Moore                      Director                           March 21, 2002
--------------------------------

Robert L. Moore

/s/ H. Victor Rieger                     Director                           March 25, 2002
--------------------------------
H. Victor Rieger, Jr.

/s/ Margaret Knott Riehl                 Director                           March 28, 2002
--------------------------------
Margaret Knott Riehl


                                       68

<PAGE>


                                         Director                           March __, 2002
--------------------------------
William B. Rinnier

/s/ Edwin A. Rommel, III                 Director                           March 27, 2002
--------------------------------
Edwin A. Rommel, III

/s/ Henry H. Stansbury                   Director                           March 21, 2002
--------------------------------
Henry H. Stansbury

/s/ Kenneth H. Trout                     Director                           March 28, 2002
--------------------------------
Kenneth H. Trout

/s/ Eugene M. Waldron, Jr.               Director                           March 27, 2002
--------------------------------
Eugene M. Waldron, Jr.
</TABLE>


                                       69

<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.


                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
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
</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



                                       70