UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





QUARTERLY
      REPORT UNDER SECTION 13 OR 15 (d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 30, 2007





Commission
      file number: 000-51765





**Bay
      National Corporation**


(Exact
      name of small business issuer as specified in its charter)





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





2328
      West Joppa Road, Lutherville, MD 21093


Address
      of principal executive offices





(410)
      494-2580


Issuer’s
      telephone number





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).Yes ____No X__





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:





At
      November 13, 2007, the issuer had
      2,137,633 shares of Common Stock outstanding.





Transitional
      Small Business Disclosure
      Format (Check
      One):                                                                                                                     Yes
      ____No X__












**PART
      I  -            FINANCIAL
      INFORMATION**





**Item
      1.                 Financial
      Statements**





**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      BALANCE SHEETS


As
      of
      September 30, 2007 and December 31, 2006





September
                30,
              2007
            
            
            December
                31,
              2006ASSETS
            
            (Unaudited)Cash
                and due from
                banks
            
            $
            15,912,972
            
            
            $
            2,348,304Federal
                funds sold and other
                overnight investments
            
            
            15,295,649
            
            
            
            31,549,900Investment
                securities available
                for sale (AFS) - at fair value
            
            
            399,415
            
            
            
            697,526Other equity securities
            
            
            1,065,800
            
            
            
            1,117,100Loans
                held for sale
            
            
            5,181,748
            
            
            
            1,444,303Loans,
                net of unearned
                fees
            
            
            220,760,600
            
            
            
            216,571,375Total
                loans
            
            
            225,942,348
            
            
            
            218,015,678Less:
                Allowance for credit
                losses
            
            
            (3,209,011
            )
            
            
            (3,175,000
            )Loans,
                net
            
            
            222,733,337
            
            
            
            214,840,678Other real estate owned
            
            
            1,048,012
            
            
            
            -Premises
                and equipment,
                net
            
            
            1,128,633
            
            
            
            1,100,220Accrued
                interest receivable and
                other assets
            
            
            3,290,860
            
            
            
            3,151,119Total
                Assets
            
            $
            260,874,678
            
            
            $
            254,804,847LIABILITIESNon-interest-bearing
                deposits
            
            $
            29,254,683
            
            
            $
            34,808,624Interest-bearing
                deposits
            
            
            195,814,181
            
            
            
            189,340,328Total
                deposits
            
            
            225,068,864
            
            
            
            224,148,952Short-term
                borrowings
            
            
            6,002,903
            
            
            
            1,545,000Subordinated
                debt
            
            
            8,000,000
            
            
            
            8,000,000Accrued
                expenses and other liabilities
            
            
            1,351,247
            
            
            
            2,268,402Total
                Liabilities
            
            
            240,423,014
            
            
            
            235,962,354STOCKHOLDERS'
                EQUITYCommon
                stock - $.01 par value,
                authorized:9,000,000
                shares authorized,
                2,137,633 and 1,935,369 issuedand
                outstanding as of September
                30, 2007 and December 31, 2006, respectively
            
            
            21,376
            
            
            
            19,354Additional
                paid in
                capital
            
            
            17,755,073
            
            
            
            17,649,678Retained
                earnings
            
            
            2,675,215
            
            
            
            1,173,461Total
                Stockholders'
                Equity
            
            
            20,451,664
            
            
            
            18,842,493Total
                Liabilities and
                Stockholders' Equity
            
            $
            260,874,678
            
            
            $
            254,804,847







See
      accompanying notes to consolidated financial statements.






2





**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      STATEMENTS OF OPERATIONS


For
      the
      three and nine-month periods ended September 30, 2007 and 2006


(Unaudited)





Three
                Months Ended
              September
                30
            
            
            Nine
                Months Ended
              September
                302007
            
            
            2006
            
            
            2007
            
            
            2006INTEREST
                INCOME:Interest
                and fees on
                loans
            
            $
            4,941,695
            
            
            $
            5,090,710
            
            
            $
            15,152,372
            
            
            $
            14,052,984Interest
                on federal funds sold and other  overnight
                investments
            
            
            184,057
            
            
            
            108,350
            
            
            
            611,271
            
            
            
            258,813Taxable
                interest and dividends
                on investmentsecurities
            
            
            12,894
            
            
            
            9,990
            
            
            
            62,540
            
            
            
            71,120Total
                interest
                income
            
            
            5,138,646
            
            
            
            5,209,050
            
            
            
            15,826,183
            
            
            
            14,382,917INTEREST
                EXPENSE:Interest
                on deposits
            
            
            1,978,220
            
            
            
            1,935,216
            
            
            
            6,108,747
            
            
            
            5,075,211Interest
                on short-term borrowings
            
            
            88,671
            
            
            
            16,298
            
            
            
            149,375
            
            
            
            69,234Interest
                on subordinated debt
            
            
            151,764
            
            
            
            151,742
            
            
            
            450,327
            
            
            
            451,819Total
                interest expense
            
            
            2,218,655
            
            
            
            2,103,256
            
            
            
            6,708,449
            
            
            
            5,596,264Net
                interest income
            
            
            2,919,991
            
            
            
            3,105,794
            
            
            
            9,117,734
            
            
            
            8,786,653Provision
                for credit losses
            
            
            350,000
            
            
            
            127,931
            
            
            
            350,000
            
            
            
            127,931Net
                interest income after provision forcredit
                losses
            
            
            2,569,991
            
            
            
            2,977,863
            
            
            
            8,767,734
            
            
            
            8,658,722NON-INTEREST
                INCOME:Service
                charges on deposit
                accounts
            
            
            38,885
            
            
            
            41,597
            
            
            
            111,296
            
            
            
            124,358Gain
                on sale of mortgage loans
            
            
            91,442
            
            
            
            146,664
            
            
            
            351,934
            
            
            
            421,523Other
                income
            
            
            17,759
            
            
            
            18,104
            
            
            
            58,062
            
            
            
            54,979Total
                non-interest
                income
            
            
            148,086
            
            
            
            206,365
            
            
            
            521,292
            
            
            
            600,860NON-INTEREST
                EXPENSES:Salaries
                and employee
                benefits
            
            
            1,397,783
            
            
            
            1,328,702
            
            
            
            4,270,560
            
            
            
            3,906,713Occupancy
                expenses
            
            
            163,850
            
            
            
            126,428
            
            
            
            484,327
            
            
            
            370,370Furniture
                and equipment
                expenses
            
            
            86,905
            
            
            
            88,211
            
            
            
            256,816
            
            
            
            252,047Legal
                and professional
                fees
            
            
            99,058
            
            
            
            91,823
            
            
            
            238,963
            
            
            
            183,912Data
                processing and other
                outside services
            
            
            225,875
            
            
            
            167,383
            
            
            
            619,738
            
            
            
            513,303Advertising
                and marketing related expenses
            
            
            111,155
            
            
            
            126,693
            
            
            
            322,662
            
            
            
            363,050Other
                expenses
            
            
            190,305
            
            
            
            135,826
            
            
            
            593,719
            
            
            
            434,191Total
                non-interest
                expenses
            
            
            2,274,931
            
            
            
            2,065,066
            
            
            
            6,786,785
            
            
            
            6,023,586Income
                before income taxes
            
            
            443,145
            
            
            
            1,119,162
            
            
            
            2,502,241
            
            
            
            3,235,996Income
                tax expense
            
            
            182,000
            
            
            
            443,067
            
            
            
            1,000,000
            
            
            
            1,285,000NET
                INCOME
            
            $
            261,145
            
            
            $
            676,095
            
            
            $
            1,502,241
            
            
            $
            1,950,996Per
                Share Data:Net
                Income (basic) (1)
            
            $
            .12
            
            
            $
            .32
            
            
            $
            .70
            
            
            $
            .92Net
                Income (diluted)(1)
            
            $
            .12
            
            
            $
            .31
            
            
            $
            .68
            
            
            $
            .88Weighted
                Average shares
                outstanding (basic) (1)
            
            
            2,135,688
            
            
            
            2,126,694
            
            
            
            2,131,671
            
            
            
            2,122,669Effect
                of Dilution – Stock options and Restricted shares (1)
            
            
            77,052
            
            
            
            85,455
            
            
            
            79,433
            
            
            
            88,809Weighted
                Average shares
                outstanding (diluted) (1)
            
            
            2,212,740
            
            
            
            2,212,149
            
            
            
            2,211,104
            
            
            
            2,211,478


(1)
      Adjusted to reflect 1.1 stock split in the form of a dividend recorded on June
      29, 2007.





See
      accompanying notes to consolidated financial statements.






3




**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For
      the
      nine-months ended September 30, 2007 and 2006


(Unaudited)


Common
                Stock
            
            
            Additional
              Paid
                in
              Capital
            
            
            Retained
                Earnings
            
            
            Total
              Stockholders’
                EquityBalances
                at January 1, 2007
            
            $
            19,354
            
            
            $
            17,649,678
            
            
            $
            1,173,461
            
            
            $
            18,842,493Stock-based
                compensation expense
            
            
            -
            
            
            
            48,504
            
            
            
            -
            
            
            
            48,504Issuance
                of Common Stock
            
            
            87
            
            
            
            58,826
            
            
            
            -
            
            
            
            58,9131.1
                to one stock split in the form of a stock dividend
            
            
            1,935
            
            
            
            (1,935
            )
            
            
            -
            
            
            
            -Cash
                paid in lieu of fractional shares on stock dividend
            
            
            -
            
            
            
            -
            
            
            
            (487
            )
            
            
            (487
            )Net
                Income
            
            
            -
            
            
            
            -
            
            
            
            1,502,241
            
            
            
            1,502,241Balances
                at September 30, 2007
            
            $
            21,376
            
            
            $
            17,755,073
            
            
            $
            2,675,215
            
            
            $
            20,451,664Common
                Stock
            
            
            Additional
              Paid
                in
              Capital
            
            
            Accumulated
              Deficit
            
            
            Total
              Stockholders’
                EquityBalances
                at January 1, 2006
            
            $
            19,244
            
            
            $
            17,451,201
            
            
            $
            (1,256,367
            )
            
            $
            16,214,078Stock-based
                compensation expense
            
            
            -
            
            
            
            57,532
            
            
            
            -
            
            
            
            57,532Issuance
                of Common Stock
            
            
            103
            
            
            
            77,653
            
            
            
            -
            
            
            
            77,756Net
                Income
            
            
            -
            
            
            
            -
            
            
            
            1,950,996
            
            
            
            1,950,996Balances
                at September 30, 2006
            
            $
            19,347
            
            
            $
            17,586,386
            
            
            $
            694,629
            
            
            $
            18,300,362










See
      accompanying notes to consolidated financial statements.






4




**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
      the
      nine-months ended September 30, 2007 and 2006


(Unaudited)





2007
            
            
            2006Cash
                Flows From Operating ActivitiesNet
                income
            
            $
            1,502,241
            
            
            $
            1,950,996Adjustments
                to reconcile net
                income to net cash (used in) provided byoperating
                activities:Depreciation
            
            
            210,655
            
            
            
            180,061Accretion
                of investment discounts
            
            
            (20,282
            )
            
            
            (41,850
            )Provision
                for credit losses
            
            
            350,000
            
            
            
            127,931Stock-based
                compensation expense
            
            
            48,504
            
            
            
            57,532Gain
                on sale of mortgage loans
            
            
            (351,934
            )
            
            
            (421,523
            )Origination
                of loans held for sale
            
            
            (111,589,665
            )
            
            
            (99,249,953
            )Proceeds
                from sale of loans
            
            
            108,204,154
            
            
            
            110,810,594Net
                increase
                in accrued interest receivable and other assets
            
            
            (139,741
            )
            
            
            (448,713
            )Net
                (decrease) increase in accrued expenses and other
                liabilities
            
            
            (917,155
            )
            
            
            243,156Net
                cash (used in) provided by
                operating activities
            
            
            (2,703,223
            )
            
            
            13,208,231Cash
                Flows From Investing ActivitiesPurchases
                of investment securities – AFS
            
            
            (1,481,607
            )
            
            
            (4,116,401
            )Maturities
                of investment securities – AFS
            
            
            1,800,000
            
            
            
            5,000,000Purchase
                of Federal Reserve Bank stock
            
            
            -
            
            
            
            (154,960
            )Redemption
                (purchase) of Federal Home Loan Bank of Atlanta stock
            
            
            51,300
            
            
            
            (167,700
            )Loan
                disbursements in excess of principal payments
            
            
            (5,553,226
            )
            
            
            (27,940,363
            )Capital
                expenditures
            
            
            (239,068
            )
            
            
            (455,375
            )Net
                cash used in investing activities
            
            
            (5,422,601
            )
            
            
            (27,834,799
            )Cash
                Flows From Financing ActivitiesNet
                increase in
                deposits
            
            
            919,912
            
            
            
            24,219,201Net
                increase in short-term borrowings
            
            
            4,457,903
            
            
            
            105,842Net
                proceeds from stock issuance
            
            
            58,913
            
            
            
            77,756Cash
                dividends paid in lieu of fractional shares
            
            
            (487
            )
            
            
            -Net
                cash provided by financing activities
            
            
            5,436,241
            
            
            
            24,402,799Net
                (decrease) increase in cash and cash equivalents
            
            
            (2,689,583
            )
            
            
            9,776,231Cash
                and cash equivalents at beginning of period
            
            
            33,898,204
            
            
            
            7,493,621Cash
                and cash equivalents at end of period
            
            $
            31,208,621
            
            
            $
            17,269,852Cash
                paid for:Interest
            
            $
            6,886,338
            
            
            $
            5,367,026Income
                taxes
            
            $
            1,430,168
            
            
            $
            1,361,466Amount
                transferred from loans to other real estate owned
            
            $
            1,048,012
            
            
            $
            -







See
      accompanying notes to consolidated financial statements.








5





**BAY
      NATIONAL CORPORATION**





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


For
      the
      Three and Nine Months Ended September 30, 2007 and 2006


(Unaudited)





**1.      GENERAL**





*Organization*





Bay
      National Corporation (the “Company”) 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 (the “Bank”). On May 12, 2000, the Company
      purchased all the shares of common stock issued by 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, obtaining the approval
      of the Federal Deposit Insurance Corporation to insure its deposit accounts,
      and
      meeting certain other regulatory requirements.





*Basis
      of Presentation*





The
      accompanying consolidated financial statements include the activity of Bay
      National Corporation and its wholly owned subsidiary, Bay National Bank. All
      significant intercompany transactions and balances have been eliminated in
      consolidation.





The
      foregoing consolidated financial statements are unaudited; however, in the
      opinion of management, all adjustments (comprising only normal recurring
      accruals) necessary for a fair presentation of the results of the interim
      periods have been included. The balances as of December 31, 2006 have been
      derived from audited financial statements. These consolidated financial
      statements should be read in conjunction with the financial statements and
      accompanying notes included in Bay National Corporation’s 2006 Annual Report on
      Form 10-KSB. There have been no significant changes to the Company’s Accounting
      Policies as disclosed in the 2006 Annual Report. The results shown in this
      interim report are not necessarily indicative of results to be expected for
      the
      full year 2007 or any other interim period.





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.





*Reclassifications*





Certain
      reclassifications have been
      made to amounts previously reported to conform to the current presentation.
      These reclassifications had no effect on previously reported results of
      operations or retained earnings.





**2.      REGULATORY
      MATTERS**





The
      Bank
      is 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 financial statements. Under capital 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 weighting and other factors.






6




Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios. Management believes, as of September
      30,
      2007, that the Bank meets all capital adequacy requirements to which it is
      subject.





As
      of
      September 30, 2007, 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.





**3.      INCOME
      TAXES**





The
      Company employs the liability method of accounting for income taxes as required
      by Statement of Financial Accounting Standards (“SFAS”) No. 109, “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 basis 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.  The Company adopted the provisions of FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” in the first
      quarter of 2007.  The Company utilizes statutory requirements for its
      income tax accounting and avoids risks associated with potentially problematic
      tax positions that may incur challenge upon audit, where an adverse outcome
      is
      more likely than not.  Therefore, no provisions are made for either
      uncertain tax positions nor accompanying potential tax penalties and interest
      for underpayments of income taxes in the Company’s tax reserves.





**4.      EARNINGS
      PER SHARE**





Earnings
      per common share are
      computed by dividing net income by the weighted average number of common shares
      outstanding during the period. Diluted earnings per common share is computed
      by
      dividing net income by the weighted average number of common shares outstanding
      during the period, including any potential dilutive common shares outstanding,
      such as options.  There were no shares as of September 30, 2007 and
      2006 excluded from the diluted net income per share computation because their
      inclusion would be anti-dilutive.  All shares and per share data have
      been adjusted to reflect the 1.1 stock split in the form of a dividend recorded
      on June 29, 2007.





**5.    STOCK-BASED
      COMPENSATION**





Effective
      January 1, 2006, the Company adopted SFAS No. 123(R), *Share-based Payment,*and has included the stock-based employee compensation cost in its
      income
      statements for the three and nine-month periods ended September 30, 2007 and
      2006.** Amounts recognized in the financial statements with respect
      to stock-based compensation are as follows:





Three
                Months Ended
              September
                30
            
            
            Nine
                Months Ended
              September
                302007
            
            
            2006
            
            
            2007
            
            
            2006Amounts
                charged against income, before tax benefit
            
            $
            16,810
            
            
            $
            -
            
            
            $
            48,504
            
            
            $
            57,532Amount
                of related income tax benefit recognized in income
            
            $
            5,715
            
            
            $
            -
            
            
            $
            14,546
            
            
            $
            1,766








7




The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions used for grants during the year ended December 31,
      2002:





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





No
      stock
      options have been issued since 2002.





The
      Bay
      National Corporation 2007 Stock Incentive Plan (the “Incentive Plan”) was
      established effective May 22, 2007 and provides for the granting of incentive
      stock options intended to comply with the requirements of Section 422 of the
      Internal Revenue Code (“incentive stock options”), non-qualified stock options,
      stock appreciation rights (“SARs”), restricted or unrestricted stock awards,
      awards of phantom stock, performance awards, other stock-based awards, or any
      combination of the foregoing (collectively “Awards”).  Awards will be
      available for grant to officers, employees and directors of the Company and
      its
      affiliates, including the Bank, except that non-employee directors will not
      be
      eligible to receive awards of incentive stock options.




The
      Incentive Plan authorizes the issuance of up to 200,000 shares of common stock
      plus any shares that were available under the Company’s 2001 Stock Option Plan
      (“Option Plan”) that terminated as of May 22, 2007 and shares subject to options
      granted under the Option Plan that expire or terminate without having been
      fully
      exercised.  The Incentive Plan 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 three non-employee directors
      appointed by the Board of Directors. In general, the options have an exercise
      price equal to 100% of the fair market value of the common stock on the date
      of
      the grant.  As of September 30, 2007, nine Awards had been granted
      under the Incentive Plan.  Five of these Awards included an
      unrestricted stock grant of 550 shares to five employees in August 2007 based
      on
      their 2006 performance.  The Awards vested immediately upon issuance
      and the closing stock price on the grant date was $15.46.  The
      remaining four Awards represent restricted stock awards and are discussed in
      more detail below in the section entitled “Restricted Stock Units.”





The
      unrecognized compensation cost related to unvested stock option awards was
      $23,518 for the quarter ended September 30, 2007 based upon a weighted average
      fair value of $2.75.






8





The
      following is a summary of changes in outstanding options for the nine-month
      periods ended September 30, 2007 and 2006 (amounts previously reported have
      been
      adjusted to reflect a 1.1 to 1 stock split in the form of a stock dividend
      recorded on June 29, 2007):





**Number**
              **of
                Shares**
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Balance,
                January 1, 2006
            
            
            154,837
            
            
            $
            6.97Granted
            
            
            -
            
            
            
            -Cancelled
            
            
            (1,366
            )
            
            $
            6.89Exercised
            
            
            (11,283
            )
            
            $
            6.89Balance,
                September 30, 2006
            
            
            142,188
            
            
            $
            6.98Balance,
                January 1, 2007
            
            
            141,446
            
            
            $
            6.98Granted
            
            
            -
            
            
            
            -Cancelled
            
            
            -
            
            
            
            -Exercised
            
            
            (2,705
            )
            
            $
            6.89Balance,
                September 30, 2007
            
            
            138,741
            
            
            $
            6.99Weighted
                average fair value of options granted during 2002
            
            $
            2.75





The
      following table summarizes information about options outstanding at September
      30, 2007:





**Options
                Outstanding**
            
            
            **Options
                Exercisable****Range
                of Exercise Price**
            
            **Number**
            
            **Weighted
                Average Remaining Contractual Life**
              **(in
                years)**
            
            **Weighted
                Average Exercise Price**
            
            
            **Number**
            
            **Weighted
                Average Exercise Price**$6.89
            
            120,245
            
            1
            
            $6.89
            
            
            118,879
            
            $6.89$7.61
            
            18,496
            
            2
            
            $7.61
            
            
            11,310
            
            $7.61138,741
            
            
            
            $6.99
            
            
            130,189
            
            $6.95





The
      aggregate intrinsic value of options outstanding and exercisable as of September
      30, 2007 was $1,160,432 and $1,093,256, respectively, based upon a closing
      price
      of $15.35 per share.





**Restricted
      Stock Units**





Pursuant
      to an employment agreement (“Agreement”) dated June 1, 2006, a grant of 13,200
      shares of the Company’s common stock was awarded to a member of senior
      management.  This Agreement terminated effective July 20, 2007 upon
      resignation of this member of senior management. The stock grant vested as
      follows: 25% (3,300 shares) on the first anniversary of the Agreement; 25%
      (3,300 shares) on the second anniversary of the Agreement; 25% (3,300 shares)
      on
      the third anniversary of the Agreement; and 25% (3,300 shares) on the fourth
      anniversary of the Agreement.  This vesting was subject to the
      individual being employed under this Agreement at each vesting
      date.  As such, 3,300 shares had vested under this grant as of
      September 30, 2007.





As
      of
      July 20, 2007, the unvested grants as of September 30, 2007, totaling 9,900
      shares, were forfeited.  As such, the Company will no longer recognize
      compensation cost related to this restricted stock award.






9





During
      the three month period ending
      September 30, 2007, a grant of 24,000 shares of the Company’s common stock was
      awarded to four new employees.  Three of these awards vest 20% on each
      anniversary of the employee’s hiring date over 5 years and the remaining grant
      vests 25% on each anniversary of the employee’s hiring date over 4
      years.





The
      Company incurred compensation expense of $16,810 and $40,497 associated with
      restricted stock for the three-month and nine-month periods ending September
      30,
      2007, respectively.





The
      following table summarizes the changes in outstanding shares under restricted
      stock grants for the nine-month period ended September 30,
      2007.  Amounts have been adjusted to reflect a 1.1 to one stock split
      in the form of a dividend recorded on June 29, 2007.





**Number
                of**
              **Shares**
            
            **Weighted**
              **Value****at**
              **Issuance
                Date**Unvested
                grants at January 1, 2007
            
            13,200
            $
            17.23Granted
            
            24,000
            
            15.91Vested
            
            (3,300)
            
            17.23Cancelled
            
            (9,900)
            
            -Unvested
                grants at September 30, 2007
            
            24,000
            $
            15.91








10




**Item
      2.                      Management's
      Discussion and Analysis**





This
      discussion and analysis provides an overview of the financial condition and
      results of operations of Bay National Corporation (the “Parent”) and its
      national bank subsidiary, Bay National Bank (the “Bank”), collectively (the
“Company”), as of September 30, 2007 and December 31, 2006 and for the
      three-month and nine-month periods ended September 30, 2007 and
      2006.





**Overview**





On
      May
      12, 2000, the Parent became a bank holding company by purchasing all of the
      common stock of the Bank. The Bank opened its first office on May 12, 2000
      and
      its second office on May 26, 2000.





The
      Bank
      primarily serves the business communities in the Maryland counties of Anne
      Arundel County, Baltimore County, Wicomico County and Worcester
      County.





The
      Company experienced moderate asset growth, while a decrease in earnings was
      noted over prior year results for the three-month and nine-month periods ended
      September 30, 2007. Key measurements for the three-month and nine-month periods
      ended September 30, 2007 include the following:





·
            Total
                assets at September 30, 2007 increased to $260.9 million from $254.8
                million as of December 31, 2006.





·
            Net
                loans outstanding increased from $214.8 million as of December 31,
                2006 to
                $222.7 million as of September 30,
                2007.





·
            There
                was approximately $3.6 million in non-accrual loans as of September
                30,
                2007.  In addition, the Company foreclosed on three pieces of
                residential real estate related to investor owned residential real
                estate
                during the quarter. These properties were placed into other real
                estate
                owned at estimated net realizable value of approximately $1.05
                million.  There were no other non-performing assets as of
                September 30, 2007. There was one loan, of approximately $70,000,
                that was
                considered a nonperforming loan as of September 30, 2006.  The
                Company continues to maintain appropriate reserves for credit
                losses.





·
            Deposits
                at September 30, 2007 increased to $225.1 million from $224.1 million
                as
                of December 31, 2006.





·
            Net
                income was $261,145 and $1.5 million for the three-month and nine-month
                periods ended September 30, 2007, respectively, compared to $676,095
                and
                $1.9 million for the same periods in 2006. This represents decreases
                of
                61.4% and 23.0% in net income for the three-month and nine-month
                periods
                ended September 30, 2006.





·
            Net
                interest income, the Company’s main source of income, was $2.9 million and
                $9.1 million during the three-month and nine-month periods ended
                September
                30, 2007, respectively, compared to $3.1 million and $8.8 million
                for the
                same periods in 2006. This represents a decrease of 6.0% for the
                three-month period and an increase of 3.8% for the nine-month
                period.








11





·
            The
                Company added $350,000 to the allowance for credit losses in order
                to
                replenish the allowance for third quarter 2007 charge-offs totaling
                $344,000, the most significant charge-offs the Company had experienced
                in
                its more than seven-year history. These charge-offs were primarily
                a
                result of weaknesses in the Company’s portfolio of investor-owned
                residential construction and reconstruction loans resulting from
                problems
                in the housing market in the Company’s target markets. There was one
                charge-off of $37,931 for the three-month and nine-month periods
                ended
                September 30, 2006.





·
            Non-interest
                income decreased by $58,279 and $79,568, or 28.2% and 13.2%, for
                the
                three-month and nine-month periods ended September 30, 2007, respectively,
                as compared to the same periods in
                2006.





·
            Non-interest
                expenses increased by $209,865 and $763,199, or 10.2% and 12.7%,
                for the
                three-month and nine-month periods ended September 30, 2007, respectively,
                as compared to the same periods in
                2006.





·
            The
                Company’s common stock closed at $15.35 on September 28, 2007, which
                represented an 11.1% decline from its closing price of $17.27 on
                September
                30, 2006.





·
            During
                the quarter, the Company added four seasoned commercial bankers and
                a cash
                management specialist to lead its expansion into the Baltimore-Washington
                corridor.  The Company will continue to pursue expansion into
                other markets; however, this strategy may have a short-term impact
                on
                operating results.





A
      detailed discussion of the factors leading to these changes can be found in
      the
      discussion below.





**Results
      of Operations**





*General*





The
      Company recorded net income of $261,145 and $1.5 million for the three-month
      and
      nine-month periods ended September 30, 2007. This compares to net income of
      $676,095 and $1.9 million for the same periods in 2006. This is a decrease
      of
      $414,950 and $448,755, or 61.4% and 23.0%, for the three-month and nine-month
      periods, respectively. The decrease in year-over-year results is primarily
      due
      to a highly competitive market that has made revenue growth difficult, a
      $350,000 provision for credit losses during the quarter primarily due to the
      slowdown in the residential real estate market, and an increase in non-interest
      expenses for the nine-month period that exceeded the increase in net interest
      income.





The
      Bank’s mortgage origination operations, located in Towson and Salisbury,
      Maryland, originate conventional first and second lien residential mortgage
      loans. The Bank sells most of its first and second lien residential mortgage
      loans in the secondary market and typically recognizes a gain on the sale of
      these loans after the payment of commissions to the loan origination officer.
      Since its inception in February 2001, the Salisbury mortgage division has been
      a
      significant contributor to operating results. The Towson mortgage operation
      was
      initiated in February 2005 and began to contribute to the Company’s overall
      profitability during the second half of 2005. For the nine-month periods ended
      September 30, 2007 and 2006, net gains on the sale of mortgage loans totaled
      $351,934 and $421,523, respectively.






12





Gains
      on
      the sale of mortgage loans have decreased for the nine-month period ended
      September 30, 2007 as compared to the same period in 2006 due to a slowdown
      in
      the real estate market in the Company’s markets.





During
      the second quarter of 2004, the Company began purchasing 100% participations
      in
      mortgage loans originated by a mortgage company in the Baltimore metropolitan
      area. These participations are for loans which a secondary market investor
      has
      committed to purchase. The participations are typically held for a period of
      three to four weeks before being sold to the secondary market investor. This
      holding period represents the amount of time taken by the secondary market
      investor to review the loan files for completeness and accuracy. During this
      holding period, the Company earns interest on these loans at a rate indexed
      to
      the prime rate.





As
      of
      September 30, 2007, the Company held $2.8 million of these loans which were
      classified as held for sale. The Company earned $306,871 of interest on this
      program for the nine-month period ended September 30, 2007. This compares to
      $258,683 for the same period in 2006. The increase in interest from this program
      is due to an increase in average balances from $4.5 million for the nine-months
      ended September 30, 2006 to $5.3 million for the same period in
      2007.





Management
      expects the remainder of 2007 to continue to be challenging for earnings and
      asset growth as a result of the slowing economy and the Company’s need to
      continue to invest in personnel to support its long-term
      growth.  Management also expects to face this challenge in 2008 if the
      condition of the economy does not improve.  Actual results will be
      subject to the volatility of the provision for credit losses, which is related
      to loan growth, the volatility of volume in the mortgage participations
      purchasing program, the volatility of mortgage loan production, which is
      sensitive to economic and interest rate fluctuations and other competitive
      pressures that arise in a slowing economy.





*Net
      Interest Income*





Net
      interest income is the difference between income on earning assets and the
      cost
      of funds supporting those assets. Earning assets are composed primarily of
      loans, investments, and federal funds sold. Interest-bearing deposits, other
      short-term borrowings and subordinated debt 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.





As
      previously stated, net interest income was $2.9 million and $9.1 million for
      the
      three-month and nine-month periods ended September 30, 2007, as compared to
      $3.1
      million and $8.8 million for the same periods in 2006. This represents a
      decrease of 6.0% for the three-month period and an increase of 3.8% for the
      nine-month period ended September 30, 2007, as compared to the same periods
      in
      2006.





Interest
      income from loans and investments for the three-month and nine-month periods
      ended September 30, 2007 was $4.9 million and $15.2 million, compared to $5.1
      million and $14.1 million for the same periods ended September 30, 2006. The
      2.9% decrease for the three-month period over the same period in 2006 was
      primarily attributed to lost interest from the impact of $3.6 million of
      non-accrual loans and the decline in residential construction loan
      originations.  The 7.8% increase for the nine-month period was
      directly related to the 11.0% increase in average interest-earning assets for
      the nine months ended September 30, 2007 as compared to the same period in
      2006.  The increase in interest income for the nine-month period was
      primarily aided by an increase in average yields on federal funds sold and
      overnight investments.  In addition, the target federal funds rate
      increased from 4.25% as of January 1, 2006 to 4.75% effective September 18,
      2007; however, this rate was reduced from 5.25%, which had been the rate in
      effect since June 29, 2006.  The yields on interest earning assets
      decreased from 8.67% for the nine-months ended September 30, 2006 to 8.59%
      for
      the nine months ended September 30, 2007.






13





The
      percentage of average interest-earning assets represented by loans was 91.0%
      and
      93.8% for the nine-month periods ended September 30, 2007 and 2006,
      respectively. The high percentage of loans to earning assets is consistent
      with
      management’s strategy to maximize net interest income by maintaining a higher
      concentration of loans, which typically earn higher yields than investment
      securities. For the nine-month period ended September 30, 2007, the average
      yield on the loan portfolio marginally increased to 9.03% from 9.02% for the
      nine-month period ended September 30, 2006.





The
      average yield on the investment portfolio and other earning assets, such as
      federal funds sold, was 4.07% for the nine-month period ended September 30,
      2007
      as compared to 3.23% for the same period in 2006. This improvement in the
      average yield was a direct result of an increase in the rates paid on these
      investments for the majority of the 2007 period.  The percentage of
      average interest-earning assets represented by investments was 9.0% and 6.2%
      for
      the nine-month periods ended September 30, 2007 and 2006,
      respectively.





Interest
      expense from deposits and borrowings for the three-month and nine-month periods
      ended September 30, 2007 was $2.2 million and $6.7 million, respectively,
      compared to $2.1 million and $5.6 million for the same periods in 2006. The
      5.5%
      and 19.9% increases for the three-month and nine-month periods are the result
      of
      a 11.0% increase in average interest-bearing liabilities for the nine-month
      period ended September 30, 2007 as compared to the same period in 2006 as well
      as an increase in average rates paid. Average rates paid on these liabilities
      increased from 4.21% for the nine-month period ended September 30, 2006 to
      4.55%
      for the nine-month period ended September 30, 2007. The increase in rates paid
      is directly attributable to the Federal Reserve actions discussed
      above.





As
      a
      result of the factors discussed above, net interest margins decreased to 4.95%
      for the nine-month period ended September 30, 2007 from 5.30% for the same
      period in 2006. Although management has been able to carefully implement deposit
      rate increases, cost of funds increased at a higher rate than the yield on
      loans
      and investments. Management has observed ongoing pressure to pay higher rates
      on
      deposits as the market for funds has become more competitive.  In
      addition, the market is very competitive for loans, which, as is typical, has
      created downward pressure on loan pricing.






14






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.





No
      tax
      equivalent adjustments were made and no income was exempt from federal income
      taxes. All average balances are daily average balances. The amortization of
      loan
      fees is included in computing interest income; however, such fees are not
      material.





**Nine
                Months Ended September 30, 2007****Average**
              **Balance**
            
            
            **Interest**
              **and
                fees**
            
            
            **Yield/**
              **Rate**ASSETSLoans
                and loans held for sale
            
            $
            224,214,486
            
            $
            15,152,372
            
            
            9.03
            %Investment
                securities
            
            
            1,684,930
            
            
            62,540
            
            
            4.96Federal
                funds sold and other overnight investments
            
            
            20,447,334
            
            
            611,271
            
            
            4.00Total
                earning assets
            
            
            246,346,750
            
            
            15,826,183
            
            
            8.59
            %Less:
                Allowance for credit losses
            
            
            (3,196,732
            )Cash
                and due from banks
            
            
            2,510,890Other
                real estate owned
            
            
            11,517Premises
                and equipment, net
            
            
            1,108,267Accrued
                interest receivable and other assets
            
            
            2,824,694Total
                assets
            
            $
            249,605,386LIABILITIES
                AND STOCKHOLDERS’ EQUITYInterest-bearing
                demand deposits
            
            $
            74,909,337
            
            
            2,058,879
            
            
            3.67
            %Regular
                savings deposits
            
            
            4,462,053
            
            
            69,596
            
            
            2.08Time
                deposits
            
            
            105,606,487
            
            
            3,980,272
            
            
            5.04Short-term
                borrowings
            
            
            4,304,175
            
            
            149,375
            
            
            4.64Subordinated
                debt
            
            
            8,000,000
            
            
            450,327
            
            
            7.53Total
                interest-bearing liabilities
            
            
            197,282,052
            
            
            6,708,449
            
            
            4.55
            %Net
                interest income and spread
            
            
            
            
            $
            9,117,734
            
            
            4.04
            %Non-interest-bearing
                demand deposits
            
            
            30,804,512Accrued
                expenses and other liabilities
            
            
            1,613,505Stockholders’
                equity
            
            
            19,905,317Total
                liabilities and stockholders’ equity
            
            $
            249,605,386Interest
                and fee income/earning assets
            
            
            8.59
            %Interest
                expense/earning assets
            
            
            3.64Net
                interest margin
            
            
            4.95
            %Return
                on Average Assets (Annualized)
            
            
            0.80
            %Return
                on Average Equity (Annualized)
            
            
            10.09
            %Average
                Equity to Average Assets
            
            
            7.98
            %











15







**Nine
                Months Ended September 30, 2006****Average**
              **Balance**
            
            
            **Interest**
              **and
                fees**
            
            
            **Yield/**
              **Rate**ASSETSLoans
                and loans held for sale
            
            $
            208,210,918
            
            $
            14,052,984
            
            
            9.02
            %Investment
                securities
            
            
            2,265,407
            
            
            71,120
            
            
            4.02Federal
                funds sold and other overnight investments
            
            
            11,405,557
            
            
            258,813
            
            
            3.03Total
                earning assets
            
            
            221,881,882
            
            
            14,382,917
            
            
            8.67
            %Less:
                Allowance for credit losses
            
            
            (3,005,441
            )Cash
                and due from banks
            
            
            2,050,263Premises
                and equipment, net
            
            
            926,898Accrued
                interest receivable and other assets
            
            
            2,731,175Total
                assets
            
            $
            224,584,777LIABILITIES
                AND STOCKHOLDERS’ EQUITYInterest-bearing
                demand deposits
            
            $
            60,199,478
            
            
            1,602,848
            
            
            3.56
            %Regular
                savings deposits
            
            
            6,721,544
            
            
            48,063
            
            
            .96Time
                deposits
            
            
            100,788,864
            
            
            3,424,300
            
            
            4.54Short-term
                borrowings
            
            
            2,055,513
            
            
            69,234
            
            
            4.50Subordinated
                debt
            
            
            8,000,000
            
            
            451,819
            
            
            7.55Total
                interest-bearing liabilities
            
            
            177,765,399
            
            
            5,596,264
            
            
            4.21
            %Net
                interest income and spread
            
            
            
            
            $
            8,786,653
            
            
            4.46
            %Non-interest-bearing
                demand deposits
            
            
            28,095,382Accrued
                expenses and other liabilities
            
            
            1,571,903Stockholders’
                equity
            
            
            17,152,093Total
                liabilities and stockholders’ equity
            
            $
            224,584,777Interest
                and fee income/earning assets
            
            
            8.67
            %Interest
                expense/earning assets
            
            
            3.37Net
                interest margin
            
            
            5.30
            %Return
                on Average Assets (Annualized)
            
            
            1.16
            %Return
                on Average Equity (Annualized)
            
            
            15.21
            %Average
                Equity to Average Assets
            
            
            7.64
            %






16




*Provision
      for Credit Losses*





There
      was
      a $350,000 provision******for credit losses for the
      three-month and nine-month periods ended September 30, 2007 compared to a
      provision of $127,931 for the comparable periods in 2006. The provision for
      credit losses is normally reflective of the growth in loan balances outstanding
      in all segments of the portfolio, changes in the relative level of risk in
      the
      portfolio and replenishment of the allowance for credit losses after reduction
      for charge-offs. For additional information regarding the methodology used
      to
      determine the provision for credit losses, see the Management Discussion and
      Analysis section entitled “Allowance for Credit Losses and Credit Risk
      Management.”





*Non-Interest
      Income*





Non-interest
      income consists primarily of gains on the sale of mortgage loans, deposit
      account service charges, and cash management fees. For the three-month and
      nine-month periods ended September 30, 2007, the Company realized non-interest
      income of $148,086 and $521,292, respectively, as compared to $206,365 and
      $600,860 for the same periods ended September 30, 2006. Gains on the sale of
      mortgage loans of $91,442 and $351,934 comprised 61.7% and 67.5% of the total
      for the three-month and nine-month periods ended September 30, 2007,
      respectively. This compares to gains on the sale of mortgage loans of $146,664
      and $421,523, or 71.1% and 70.2%, of total non-interest income for the
      three-month and nine-month periods ended September 30, 2006.





The
      level
      of gains on the sale of mortgage loans decreased for the three-month and
      nine-month periods ended September 30, 2007 due to a general decrease in home
      purchase and refinance activity in the Company’s markets.





Service
      charges on deposit accounts totaled $38,885 and $111,296 for the three-month
      and
      nine-month periods ended September 30, 2007, as compared to $41,597 and $124,358
      for the same periods in 2006. The decreases of 6.5% and 10.5% are primarily
      attributable to a decline in the level of overdraft fees charged on transaction
      accounts. This is a result of the Company’s ongoing emphasis of attracting
      relationships that tend to maintain higher account balances.





The
      Company will continue to seek ways to expand its sources of non-interest income.
      In the future, the Company may enter into fee arrangements with strategic
      partners that offer investment advisory, risk management and employee benefit
      services. No assurance can be given that such fee arrangements will be obtained
      or maintained.





*Non-Interest
      Expense*





Non-interest
      expense for the three-month and nine-month periods ended September 30, 2007
      totaled $2.3 million and $6.8 million, respectively. This compares to
      non-interest expense for the comparable periods in 2006 of $2.1 million and
      $6.0
      million. A substantial portion of the increases of $209,865 and $763,199, or
      10.2% and 12.7%, resulted from period-over-period increases in salaries and
      benefits and other expenses. The increases in salaries and benefits of $69,081
      and $363,847 for the three-month and nine-month periods, respectively, related
      to staffing growth, including the addition of a Senior Business Development
      Officer in June 2006, as well as staffing growth in residential real estate
      lending, commercial account portfolio managers and other operational
      support.  In addition, the Company added four commercial bankers and a
      cash management specialist during the quarter to lead expansion into the
      Baltimore-Washington corridor. These additions were made to continue to expand
      the Bank’s market presence, as well as to manage the growth of the loan and
      deposit portfolios and support increased operational volume.  The
      Company’s strategy to continue to pursue additional markets may have a
      short-term impact on operating results.






17





Occupancy
      expenses increased by $37,422 and $113,957 for the three-months and nine-months
      ended September 30, 2007, as compared to the same periods in 2006. The 29.6%
      and
      30.8% increases for the periods were due to scheduled rent increases and the
      acquisition of new space obtained during the fourth quarter of 2006 for the
      Company’s Towson residential lending operation.





Legal
      and
      professional fees increased $7,235 and $55,051, or 7.9% and 29.9%, for the
      three-months and nine-months ended September 30, 2007, respectively, as compared
      to the same periods in 2006. The increase was related to legal fees incurred
      in
      connection with the drafting of a Stock Incentive Plan, increased costs
      associated with drafting the Annual Report and Proxy materials, and increased
      legal fees incurred to help manage loans in the Company’s residential real
      estate portfolio. There was also an increase in internal and external audit
      and
      other accounting fees related to Company growth and implementation of provisions
      of the Sarbanes-Oxley Act of 2002 related to the documentation and testing
      of
      internal control over financial reporting.





Data
      processing and other outside services expense increased $58,492 and $106,435,
      or
      34.9% and 20.7%, for the three months and nine months ended September 30, 2007
      as compared to the same periods in 2006. The increases for the periods are
      due
      to the cost of supporting a computer infrastructure at an additional location,
      the costs associated with enhanced security and preventive maintenance programs
      and an increase in outsourced data and item processing costs that are a function
      of the growth of the Bank and the number of customer accounts.





Advertising
      and marketing-related expenses decreased $15,538 and $40,388, or 12.3% and
      11.1%, for the three months and nine months ended September 30, 2007, as
      compared to the same periods in 2006. A decline in charitable contributions
      primarily contributed to these decreases.





The
      $53,173 and $164,297, or 23.7% and 23.9%, increases in all other non-interest
      expense items for the three-month and nine-month periods ended September 30,
      2007, related to a $8,000 and $56,000 increase in director fees for the same
      periods as well as increases in other various costs associated with the
      increased size and complexity of the Company. The increase in director fees
      was
      designed to attract and retain governance professionals that can capably oversee
      the strategic direction of the Company.





The
      banking industry utilizes an “efficiency ratio” as a key measure of expense
      management and overall operating efficiency. This ratio is computed by dividing
      non-interest expense by the sum of net interest income, before the loan loss
      provision, and non-interest income. The Company’s efficiency ratio was 74.1% and
      70.4% for the three-month and nine-month periods ended September 30, 2007.
      This
      compares to 62.3% and 64.2% for the same periods in 2006. The increase in the
      efficiency ratio from the prior year is a result of management’s decision to
      continue to invest in personnel to support the long-term growth of the
      Company.





Management
      will continue to focus on leveraging its cost structure to generate profitable
      growth.The Company
      will continue to seek opportunities to capitalize on market disruption created
      by the continued fallout from the consolidations of regional and national banks,
      most notably, the recent merger of one of the last independent Baltimore-based
      banks, Mercantile-Safe Deposit and Trust, with Pittsburgh-based PNC. The Company
      will continue to pursue experienced commercial bankers in order to expand its
      footprint in thriving markets. This strategy may have a short-term impact on
      operating results; however, management and the Board of Directors believe it
      is
      in the best long-term interests of the Company and its
      shareholders.






18






*Income
      Taxes*





For
      the
      three-month and nine-month periods ended September 30, 2007, the Company
      recorded income tax expense of $182,000 and $1.0 million, respectively. This
      compares to $443,067 and $1.3 million for the same periods in
      2006.  The decrease is primarily a result of a decrease in taxable
      income for the 2007 periods.






19





**Financial
      Condition**





*Composition
      of the Balance Sheet*





As
      of
      September 30, 2007 total assets were $260.9 million. This represents an increase
      of $6.1 million, or 2.4%, since December 31, 2006. The change in total assets
      includes increases of $13.6 million in cash and due from banks, $7.9 million
      in
      loans net of the allowance for credit losses, $1.0 million in other real estate
      owned and approximately $168,000 in other non-earning assets. These increases
      were offset by decreases of $16.3 million in Federal funds sold and other
      overnight investments, approximately $298,000 in investment securities available
      for sale and approximately $51,000 in other equity securities.





During
      the second quarter of 2004, the Company introduced a new loan program for
      conventional first lien and second lien residential mortgage loans. Under this
      program, the Company purchases a 100% participation in mortgage loans originated
      by a mortgage company in the Baltimore metropolitan area. These participations
      are for loans that a secondary market investor has committed to purchase. The
      participations are typically held for a period of three to four weeks before
      being sold to the secondary market investor, during which time the secondary
      market investor reviews the files for completeness and accuracy. The Company
      earns interest on these loans at a rate indexed to the prime rate. The primary
      risk of this program is that the secondary market investor may decline to
      purchase the loans due to documentary deficiencies or errors. The Company
      attempts to manage this risk by conducting a thorough review of the
      documentation prior to purchasing the participation. If the secondary market
      investor declines to purchase the loan, the Company could attempt to sell the
      loan to other investors or hold the loan in its loan portfolio.





As
      of
      September 30, 2007, the Company held $2.8 million of these loans which were
      classified as held for sale. There were no loans outstanding under this program
      as of December 31, 2006. This fluctuation in balances is indicative of the
      mortgage company’s ability to use other funding sources as its volume
      fluctuates. The remaining increase in loans held for sale resulted from normal
      fluctuations of loan volume originated by the Company’s Towson and Salisbury
      mortgage operations.  As of November 7, 2007, the Company sold $4.8
      million of loans classified as held for sale that were outstanding as of
      September 30, 2007.  One loan of approximately $86,000 could not be
      sold and was transferred to the Company’s portfolio in October
      2007.  This loan is current as of November 6, 2007 and the Bank has no
      reason to believe that it will become a problem.





As
      of
      September 30, 2007, loans, excluding loans held for sale, totaled $220.8
      million. This represents an increase of $4.2 million, or 1.9%, from a balance
      of
      $216.6 million as of December 31, 2006. Loan growth was relatively flat due
      to
      significant pay downs and payoffs which offset new loan originations. A total
      of
      approximately $44.6 million in loans, that were outstanding as of December
      31,
      2006, were paid off during the first nine months of 2007. This activity,
      combined with normal fluctuations in revolving credit balances and installment
      payments on amortizing loans, offset all of the approximately $44.9 million
      in
      new loans funded during that same period.





The
      composition of the loan portfolio as of September 30, 2007 was approximately
      $96.0 million of commercial loans, $3.3 million of consumer loans, and $121.5
      million of real estate loans (excluding mortgage loans held for sale). The
      composition of the loan portfolio as of December 31, 2006 was approximately
      $88.5 million of commercial loans, $3.3 million of consumer loans, and $124.8
      million of real estate loans (excluding mortgage loans held for sale). Mortgage
      loans held for sale were $5.2 million and $1.4 million as of September 30,
      2007
      and December 31, 2006, respectively.






20





The
      Company has begun to experience weakness in its portfolio of investor-owned
      residential construction and reconstruction loans. The total portfolio as of
      September 30, 2007 was approximately $32.2 million of which $3.6 million was
      classified as non-accrual and an additional $3.2 million was 30 days or more
      past due. Management is proactively and aggressively addressing the problems
      in
      this portfolio by reviewing the specific credits more frequently, consulting
      with legal counsel when necessary, working with borrowers for potential
      restructure or working with potential investors to facilitate the sale of the
      property.   In addition, the Company has significantly tightened
      underwriting standards for these types of loans and is currently originating
      very little of this business.  Resolving these issues will take time
      as the residential real estate market works through its downturn and housing
      inventories return to normal levels, and there can be no assurance that
      management’s actions will result in decreases in the rate of non-accrual and
      past due loans.





During
      the three-month period ending September 30, 2007, the Company foreclosed on
      three pieces of residential real estate related to investor owned residential
      real estate. These properties were placed into other real estate owned at
      estimated net realizable value of approximately $1.05 million. The difference
      between the related loan balances totaling approximately $1.38 million and
      the
      net realizable value was charged off to the allowance for credit losses during
      the period. Prior to these foreclosures, the Company had no other real estate
      owned.





Funds
      not
      extended in loans are invested in cash and due from banks, other real estate
      owned and various investments, including federal funds sold and other overnight
      investments, U.S. Treasury securities, Federal Reserve Bank stock and Federal
      Home Loan Bank stock. These investments totaled approximately $33.7 million
      as
      of September 30, 2007 compared to approximately $35.7 million as of December
      31,
      2006.





At
      September 30, 2007, the Company had cash and due from banks of $15.9 million
      as
      compared to $2.3 million as of December 31, 2006. The large balance as of
      September 30, 2007 was due to the receipt of a large amount of cash, $18.1
      million, from one customer at the end of September. These funds were
      subsequently wired out at the beginning of the following month. As of September
      30, 2007, the Company had federal funds sold and other overnight investments
      totaling $15.3 million as compared to $31.5 million as of December 31, 2006.
      The
      decrease is a result of management’s decision to maintain margins by using
      available liquidity to fund loan growth and allow non-core time deposits to
      mature. The Company held $607,300 of Federal Reserve Bank stock as of both
      September 30, 2007 and December 31, 2006. The Company also held Federal Home
      Loan Bank of Atlanta stock of $458,500 and $509,800 as of September 30, 2007
      and
      December 31, 2006, respectively, and United States Treasury bills with a
      maturity value of $400,000 and $700,000 as of September 30, 2007 and December
      31, 2006, respectively. A portion of the Treasury securities were used to
      collateralize repurchase agreements, which are classified as short-term
      borrowings under which $300,000 were outstanding as of December 31, 2006. There
      were no outstanding borrowings under repurchase agreements as of September
      30,
      2007.  As of September 30, 2007 and December 31, 2006, approximately
      $281,000 and $334,000, respectively, of Treasury securities were pledged to
      collateralize uninsured deposits held for a municipal
      government.  Management has made a decision to maintain an appropriate
      level of liquidity in the investment portfolio in order to ensure that funds
      are
      readily available to fund the growth of the loan portfolio and to meet the
      needs
      of deposit customers.





Deposits
      at September 30, 2007 were $225.1 million, of which approximately $24.7 million,
      or 11.0%, was related to two customers. Deposits at December 31, 2006 were
      $224.1 million, of which deposits for one of the same customers stood at
      approximately $8.2 million, or 3.7%, of total deposits. The second customer
      had
      no balances with the Company as of December 31, 2006. The deposits for these
      customers tends to fluctuate significantly; as a result, management monitors
      these deposits on a daily basis to ensure that liquidity levels are adequate
      to
      compensate for these fluctuations.  The decline in total deposits,
      after adjustment for these customers, from December 31, 2006 was also primarily
      attributed to a decrease in national market certificates of deposits, which
      is
      discussed in more detail below.






21





In
      the
      first quarter of 2006, the Company began using brokered certificates of deposit
      through the Promontory Financial Network. Through this deposit matching network
      and its certificate of deposit account registry service (CDARS), the Company
      has
      the ability to offer its customers access to FDIC-insured deposit products
      in
      aggregate amounts exceeding current insurance limits. When the Company places
      funds through CDARS on behalf of a customer, it receives matching deposits
      through the network. The Company also has the ability to raise deposits directly
      through the network.  These deposits are also considered “Brokered
      Deposits” for bank regulatory purposes. As of September 30, 2007, the Company
      had approximately $5.4 million of CDARS deposits outstanding of which $2.4
      million were placed on behalf of customers and $3.0 million was raised by the
      Company. As of December 31, 2006, the Company had approximately $4.6 million
      of
      CDARS deposits outstanding of which $1.6 million were placed on behalf of
      customers and $3.0 million were raised by the Company.





The
      market in which the Company operates is very competitive; therefore, the rates
      of interest paid on deposits are affected by rates paid by other depository
      institutions. Management closely monitors rates offered by other institutions
      and seeks to be competitive within the market. The Company has chosen to
      selectively compete for large certificates of deposits. The Company will choose
      to pursue such deposits when expected loan growth provides for adequate spreads
      to support the cost of those funds. As of September 30, 2007, the Company had
      outstanding certificates of deposit of approximately $12.5 million that were
      obtained through the listing of certificate of deposit rates on two
      Internet-based listing services (such deposits are sometimes referred to herein
      as national market certificates of deposit). The national market certificates
      of
      deposit were issued with an average yield of 5.12% and an average term of 34
      months. Included in the $12.5 million are national market certificates of
      deposit totaling approximately $893,000 that have been classified as “Brokered
      Deposits” for bank regulatory purposes. These “Brokered Deposits” were issued
      with an average yield of 5.60% and an average term of 26 months.  As
      of December 31, 2006, the total certificates of deposit obtained through the
      listing of certificate of deposit rates on the Internet-based listing services
      were approximately $26.6 million. Included in the $26.6 million were national
      market certificates of deposit totaling $1.4 million that had been classified
      as
“Brokered Deposits” for bank regulatory purposes.





Core
      deposits, which management categorizes as all deposits other than national
      market certificates of deposit, CDARS deposits and $3.0 million of the $24.7
      million deposits from the two large customers described above, stood at $187.9
      million as of September 30, 2007, relatively unchanged from the total as of
      December 31, 2006 of $189.4 million. The Company did not aggressively compete
      for new deposits during the period ended September 30, 2007, since adequate
      liquidity was available to fund loan growth. Core deposits are closely monitored
      by management because they consider such deposits not only a relatively stable
      source of funding but also reflective of the growth of commercial and consumer
      depository relationships.





As
      of
      September 30, 2007, short-term borrowings consisted of $6.0 million borrowed
      under an Overnight Commercial Paper program. Borrowings under the Overnight
      Commercial Paper are unsecured and are subordinated to all deposits. While
      these
      amounts are not classified as deposits, they do represent customer relationships
      with commercial enterprises.





As
      of
      December 31, 2006, short-term borrowings included $300,000 of repurchase
      agreements collateralized by pledges of U.S. Government Treasury Securities,
      based upon their market values, equal to 100% of the principal and accrued
      interest of its short-term borrowings. Short-term borrowings as of December
      31,
      2006 also included $1.2 million of borrowings under the Overnight Commercial
      Paper program.






22





Subordinated
      debt consists of $8 million of fixed interest rate trust preferred
      securities  issued through a Delaware trust subsidiary, Bay National
      Capital Trust I (the “Trust”). The Company formed the Trust on December 12,
      2005, and the Trust issued $8 million of trust preferred securities to investors
      at a fixed interest rate of 7.20%. The trust preferred securities bear a
      maturity date of February 23, 2036, but may be redeemed at the Company’s option
      on any February 23, May 23, August 23 or November 23 on or after February 23,
      2011, and require quarterly distributions by the trust to the holder of the
      trust preferred securities. The securities are subordinated to the prior payment
      of any other indebtedness of the Company that, by its terms, is not similarly
      subordinated securities. The trust preferred securities qualify as Tier 1
      capital, subject to regulatory guidelines that limit the amount included to
      an
      aggregate of 25% of Tier 1 capital.





*Allowance
      for Credit Losses and Credit Risk Management*





Originating
      loans involves a degree of risk that credit losses will occur in varying amounts
      according to, among other factors, the type of loans being made, the
      credit-worthiness of the borrowers over the term of the loans, the quality
      of
      the collateral for the loan, if any, as well as general economic
      conditions.  The Company charges the provision for credit losses to
      earnings to maintain the total allowance for credit losses at a level considered
      by management to represent its best estimate of the losses known and inherent
      in
      the portfolio that are both probable and reasonable to estimate, based on,
      among
      other factors, prior loss experience, volume and type of lending conducted,
      estimated value of any underlying collateral, economic conditions (particularly
      as such conditions relate to the Company’s market area), regulatory guidance,
      peer statistics, management’s judgment, past due loans in the loan portfolio,
      loan charge off experience and concentrations of risk (if any).  The
      Company charges losses on loans against the allowance when it believes that
      collection of loan principal is unlikely.  Recoveries on loans
      previously charged off are added back to the allowance.





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





The
      reserve factors used are based on management’s judgment as to appropriate
      reserve percentages for various categories of loans, and those values are
      adjusted based on the following: historical losses in each category, historical
      and current delinquency in each category, underwriting standards in each
      category, comparison of losses and delinquencies to peer group performance
      and
      an assessment of the likely impact of economic and other external conditions
      on
      the performance of each category.





A
      test of
      the adequacy of the allowance for credit losses is performed and reported to
      the
      Board of Directors on a monthly basis.  Management uses the
      information available to make a determination with respect to the allowance
      for
      credit losses, recognizing that the determination is inherently subjective
      and
      that future adjustments may be necessary depending upon, among other factors,
      a
      change in economic conditions of specific borrowers, or generally in the
      economy, and new information that becomes available.  However, there
      are no assurances that the allowance for credit losses will be sufficient to
      absorb losses on nonperforming assets or that the allowance will be sufficient
      to cover losses on nonperforming assets in the future.






23





The
      allowance for credit losses as of September 30, 2007 and December 31, 2006
      was
      $3,209,011 and $3,175,000, respectively. The amount equates to 1.42% and 1.46%
      of outstanding loans, including loans held for sale, as of September 30, 2007
      and December 31, 2006, respectively. Excluding loans held for sale, the
      allowance for credit losses equated to 1.45% and 1.47% of outstanding loans
      as
      of September 30, 2007 and December 31, 2006, respectively.  Although
      the Company experienced an increase in the level of risk in the residential
      real
      estate loan portfolio, this exposure was offset by improvements in the risk
      profile of the commercial loan portfolio.  In addition, management
      previously recognized the inherent volatility in maintaining a residential
      real
      estate loan portfolio in its determination of its allowance for credit
      losses.   For these reasons, minor fluctuations were noted in the
      percentages and overall level of reserves. Bay National Corporation has no
      exposure to foreign countries or foreign borrowers.





As
      of
      September 30, 2007, the Company had non-accrual loans totaling $3.6 million,
      all
      of which were included in the investor owned residential real estate
      construction loan portfolio. This is a direct result of the slowdown in the
      real
      estate market, which has resulted in an increase in loan extensions and
      delinquencies due to the inability of investors to resell properties as quickly
      as anticipated.  These nonperforming loans represented 1.59% of total
      outstanding loans, including loans held for sale, as of September 30,
      2007.  All of these loans are at least partially collateralized by
      real estate. As of December 31, 2006, the Company had one non-accrual loan
      with
      a fully paid principal balance and unpaid fees of approximately
      $13,000.  Management will continue to closely monitor these loans and
      the overall level of delinquencies; however, management believes that the
      allowance for credit losses is adequate for these loans.  Any losses
      on these loans will be charged off as soon as the amount of loss is
      determinable.





The
      Company recorded $315,989 of net charge-offs during the nine-month period ended
      September 30, 2007; there were charge-offs of $37,931 during the same period
      in
      2006.





Management
      believes that the overall allowance for credit losses is adequate for each
      period presented.





*Liquidity*





The
      Company’s overall asset/liability strategy takes into account the need to
      maintain adequate liquidity to fund asset growth and deposit runoff. Management
      monitors the liquidity position daily.





The
      Company’s primary sources of funds are deposits, short-term borrowings in the
      form of repurchase agreements, borrowings under Federal funds and Federal Home
      Loan Bank credit facilities, scheduled amortization and prepayment of loans,
      funds provided by operations and capital. While scheduled principal repayments
      on loans are a relatively predictable source of funds, deposit flows and loan
      prepayments are greatly influenced by economic conditions and rates offered
      by
      our competition.





The
      Company's most liquid assets are cash and assets that can be readily converted
      into cash, including investment securities maturing within one year. As of
      September 30, 2007, the Company had $15.9 million in cash and due from banks,
      $15.3 million in federal funds sold and other overnight investments, $399,415
      in
      three-month U.S. Treasury Securities, and $5.2 million in loans expected to
      be
      sold within 60 days. As of December 31, 2006, the Company had $2.3 million
      in
      cash and due from banks, $31.5 million in federal funds sold and other overnight
      investments, $697,526 in three-month U.S. Treasury Securities, and $1.4 million
      in loans expected to be sold within 60 days.






24




The
      relative stability in the overall level of liquid assets was the result of
      a
      deliberate effort by management to tightly manage liquidity by allowing higher
      cost certificates of deposits to mature in order to better match liquidity
      with
      loan growth to maximize net interest margin. 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
      Company has commitments for a total of $9.0 million of borrowing availability
      under unsecured Federal funds lines of credit with three separate financial
      institutions. The Company also has approximately $22 million of borrowing
      capacity with the Federal Home Loan Bank of Atlanta as of September 30, 2007.
      These credit facilities can be used in conjunction with the normal deposit
      strategies, which include pricing changes to increase deposits as necessary.
      From time to time, the Company may sell or participate out loans to create
      additional liquidity as required.





The
      Company has sufficient liquidity to meet its loan commitments as well as
      fluctuations in deposits. The Company will choose to retain maturing
      certificates of deposit, when necessary, by offering competitive
      rates.





Management
      is not aware of any known trends, events or uncertainties that will have or
      are
      reasonably likely to have a material effect on liquidity, capital or operations,
      nor is management aware of any current recommendation by regulatory authorities,
      which if implemented, would have a material effect on liquidity, capital or
      operations.





*Interest
                Rate Sensitivity*





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





The
      measurement of the Company’s interest rate sensitivity, or “gap,” is one of the
      principal techniques used in asset/liability management. The gap is the dollar
      difference between assets and liabilities 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





The
      following table sets forth the amount of the Company's interest-earning assets
      and interest-bearing liabilities as of September 30, 2007, which are expected
      to
      mature or reprice in each of the time periods shown:





**Maturity
                or repricing within****Amount**
            
            **Percent
                of Total**
            
            
            **0
                to 3 Months**
            
            **4
                to 12 Months**
            
            
            **1
                to 5**
              **Years**
            
            **Over
                5 Years**Interest-earning
                assetsFederal
                funds sold and other
              overnight
                investments
            $
            15,295,649
            
            6.30
            %
            $
            15,295,649
            $
            -
            
            $
            -
            $
            -Loans
                held for sale
            
            5,181,748
            
            2.14
            
            
            5,181,748
            
            -
            
            
            -
            
            -Loans
                – Variable rate
            
            111,624,355
            
            45.99
            
            
            111,624,355
            
            -
            
            
            -
            
            -Loans
                – Fixed rate
            
            109,136,245
            
            44.97
            
            
            33,077,590
            
            30,007,212
            
            
            40,871,857
            
            5,179,586Other
                earning assets
            
            1,465,215
            
            .60
            
            
            399,415
            
            -
            
            
            -
            
            1,065,800Total
                interest-earning assets
            $
            242,703,212
            
            100.00
            %
            
            165,578,757
            
            30,007,212
            
            
            40,871,857
            
            6,245,386Interest-bearing
                liabilitiesDeposits
                – Variable rate
            $
            101,736,493
            
            48.49
            %
            $
            101,736,493
            $
            -
            
            $
            -
            $
            -Deposits
                – Fixed rate
            
            94,077,688
            
            44.84
            
            
            39,320,736
            
            32,483,646
            
            
            22,273,306
            
            -Short-term
                borrowings – Variable rate
            
            6,002,903
            
            2.86
            
            
            6,002,903
            
            -
            
            
            -
            
            -Subordinated
                debt
            
            8,000,000
            
            3.81
            
            
            -
            
            -
            
            
            -
            
            8,000,000Total
                interest-bearing liabilities
            $
            209,817,084
            
            100.00
            %
            
            147,060,132
            
            32,483,646
            
            
            22,273,306
            
            8,000,000Periodic
                repricing differencesPeriodic
                gap
            
            
            
            
            
            $
            18,518,625
            
            (2,476,434
            )
            
            18,598,551
            
            (1,754,614
            )Cumulative
                gap
            
            
            
            
            
            $
            18,518,625
            
            16,042,191
            
            
            34,640,742
            
            32,886,128Ratio
                of rate sensitive assets to rate
              sensitive
                liabilities
            
            
            
            
            
            
            112.59%
            
            92.38%
            
            
            183.50%
            
            78.07%





The
      Company has 54.43% of its interest-earning assets and 51.35% of its
      interest-bearing liabilities in variable rate balances. Interest-earning assets
      exceed interest-bearing liabilities by $32.9 million. The majority of this
      gap
      is concentrated in items maturing or repricing within five years. This gap
      is
      generally reflective of the Company’s effort, over the past 18 months, to better
      position the balance sheet for a decline in the interest rate environment.
      This
      analysis indicates that the Company generally will benefit from increasing
      market rates of interest, but is well positioned to reprice a majority of its
      liabilities should rates decline. 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
      constantly monitors and manages the structure of the Company's balance sheet,
      seeks to control interest rate exposure, and evaluates pricing strategies.
      Strategies to better match maturities of interest-earning assets and
      interest-bearing liabilities include structuring loans with rate floors and
      ceilings on variable-rate notes and providing for repricing opportunities on
      fixed rate notes. Management believes that a lending strategy focusing on
      variable-rate loans and short-term fixed rate loans will best facilitate the
      goal of minimizing interest rate risk. However, management will
      opportunistically enter into longer term fixed-rate loans and/or investments
      when, in management’s judgment, rates adequately compensate the Company for the
      interest rate risk. The Company's current investment concentration in federal
      funds sold and other overnight investments provides the most flexibility and
      control over rate sensitivity since it generally can be restructured more
      quickly than the loan portfolio. On the liability side, deposit products can
      be
      restructured so as to offer incentives to attain the maturity distribution
      desired although competitive factors sometimes make control over deposit
      maturity difficult.






26




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





*Off-Balance
      Sheet Arrangements*





In
      the
      normal course of business, the Company is a party to financial instruments
      with
      off-balance sheet risk. These financial instruments primarily include
      commitments to extend credit, lines of credit and standby letters of credit.
      The
      Company uses these financial instruments to meet the financing needs of its
      customers. These financial instruments involve, to varying degrees, elements
      of
      credit, interest rate, and liquidity risk.





Outstanding
      loan commitments and lines and letters of credit as of September 30, 2007 and
      December 31, 2006 are as follows:





**September
                30,**
              **2007**
            
            **December
                31,**
              **2006**Loan
                commitments
            $
            29,392,452
            $
            33,782,891Unused
                lines of credit
            
            90,531,985
            
            66,660,250Letters
                of credit
            
            3,531,451
            
            2,188,659





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.  Commitments
      generally have interest rates fixed at current market amounts, fixed expiration
      dates or other termination clauses and may require payment of a fee. Unused
      lines of credit represent the unused portion of lines of credit previously
      extended and available to the customer as long as there is no violation of
      any
      contractual condition. These lines generally have variable interest rates.
      Since
      many of the commitments are expected to expire without being drawn upon, and
      since it is unlikely that customers will draw upon their line of credit in
      full
      at any time, the total commitment amount or line of credit amount does not
      necessarily represent future cash requirements. The Company is not aware of
      any
      loss it would incur by funding its commitments or lines of credit.





Standby
      letters of credit are conditional commitments issued to guarantee the
      performance of a customer to a third party. The Company’s exposure to credit
      loss in the event of nonperformance by the customer is the contract amount
      of
      the commitment.





In
      general, loan commitments, lines of credit and letters of credit are made on
      the
      same terms, including with respect to collateral, as outstanding loans. Each
      customer’s credit-worthiness and collateral requirement is evaluated on a
      case-by-case basis.





The
      decrease in the overall level of loan commitments as of September 30, 2007
      as
      compared to December 31, 2006 is due to a decline in construction lending
      activity resulting from the overall slow down in real estate activity. The
      increase in unused lines of credit as of September 30, 2007 as compared to
      December 31, 2006 is reflective of the emphasis on Commercial and Industrial
      lending during the periods.






27





*Capital
      Resources*





The
      Company had stockholders’ equity at September 30, 2007 of $20.5 million as
      compared to $18.8 million at December 31, 2006. The increase in capital is
      a
      result of the positive operating results for the nine months ended September
      30,
      2007. In addition, the Company’s Board of Directors declared a 10% stock
      dividend on June 12, 2007 payable on June 29, 2007 to stockholders of record
      on
      June 18, 2007.  Management believes that the Company has adequate
      capital to support projected asset growth over the next 12 months.





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 its
      retained net profits for the preceding two years. The Bank could have paid
      dividends to the Company without approval from bank regulatory agencies at
      September 30, 2007; however, such payments are not currently
      planned.





**Reconciliation
      of Non-GAAP Measures**





Below
      is
      a reconciliation of total deposits to core deposits as of September 30, 2007
      and
      December 31, 2006, respectively:





**September
                30,**
              **2007**
            
            
            **December
                31,**
              **2006**Total
                deposits
            
            
            $
            225,068,864
            
            $
            224,148,952National
                market certificates of deposit (includes CDARS deposits)
            
            
            
            (15,496,180
            )
            
            (29,586,997
            )Variable
                balance accounts (2 customers at September 30, 2007 and 1 customer
                at
                December 31, 2006)
            
            
            
            (24,663,785
            )
            
            (8,197,951
            )Portion
                of variable balance accounts considered to be core
            
            
            
            3,000,000
            
            
            3,000,000Core
                deposits
            
            
            $
            187,908,899
            
            $
            189,364,004





**Application
      of Critical Accounting Policies**





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




28




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





Management
      has significant discretion in making the judgments inherent in the determination
      of the provision and allowance for credit losses. The establishment of allowance
      factors is a continuing exercise and allowance factors may change over time,
      resulting in an increase or decrease in the amount of the provision or allowance
      based upon the same volume and classification of loans. Changes in allowance
      factors or in management’s interpretation of those factors will have a direct
      impact on the amount of the provision and a corresponding effect on income
      and
      assets. Also, errors in management’s perception and assessment of the allowance
      factors could result in the allowance not being adequate to cover losses in
      the
      portfolio, and may result in additional provisions or charge-offs, which would
      adversely affect income and capital.





For
      additional information regarding the allowance for loan and lease losses, see
      “Allowance for Credit Losses and Credit Risk Management.”








29





**Item
      3.                      Controls
      and Procedures**





As
      of the
      end of the period covered by this quarterly report on Form 10-QSB, Bay National
      Corporation’s Chief Executive Officer and Chief Financial Officer evaluated the
      effectiveness of Bay National Corporation’s disclosure controls and procedures,
      as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
      amended (“Exchange Act”). Based upon that evaluation, Bay National Corporation’s
      Chief Executive Officer and Chief Financial Officer concluded that Bay National
      Corporation’s disclosure controls and procedures are effective as of September
      30, 2007.  Disclosure controls and procedures are controls and other
      procedures that are designed to ensure that information required to be disclosed
      by Bay National Corporation in the reports that it files or submits under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and
      forms.





In
      addition, there were no changes in
      Bay National Corporation’s internal control over financial reporting (as defined
      in Rule 13a-15 under the Exchange Act) during the quarter ended September 30,
      2007, that have materially affected, or are reasonably likely to materially
      affect, Bay National Corporation’s internal control over financial
      reporting.





*Information
      Regarding Forward-Looking Statements*





This
      report contains certain forward-looking statements within the meaning of
      Section 27A of the Securities Exchange Act of 1933, as amended and
      Section 21E of the Exchange Act.  Forward-looking statements also
      may be included in other statements that we make.  All statements that
      are not descriptions of historical facts are forward-looking statements.
      Forward-looking statements often use words such as “believe,” “expect,” “plan,”
“may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,”
“intend” or other words of similar meaning. You can also identify them by the
      fact that they do not relate strictly to historical or current
      facts.





The
      statements presented herein with respect to, among other things, the Company’s
      plans, objectives, expectations and intentions, including statements regarding
      market expansion, hiring intentions, future sources of income, operating results
      and profitability, liquidity, allowance for credit losses, interest rate
      sensitivity, market risk and financial and other goals, as well as statements
      with respect to the future status of our loan portfolio are forward-looking.
      These statements are based on the Company’s beliefs and assumptions, and on
      information available to it as of the date of this filing, and involve risks
      and
      uncertainties. These risks and uncertainties include, among others, those
      discussed in this report on Form 10-QSB; the Company’s dependence on key
      personnel; risks related to the Bank’s choice of loan portfolio; risks related
      to the Bank’s lending limit; risks of a competitive market; the impact of any
      new or amended government regulations on operating results; and the effects
      of
      developments in technology. For a more complete discussion of these risks and
      uncertainties, see the discussion under the caption “Risk Factors” in Bay
      National Corporation’s Form 10-KSB for the year ended December 31, 2006. The
      Company’s actual results and the actual outcome of our expectations and
      strategies could differ materially from those anticipated or estimated because
      of these risks and uncertainties and you should not put undue reliance on any
      forward-looking statements. All forward-looking statements speak only as of
      the
      date of this filing, and the Company undertakes no obligation to update the
      forward-looking statements to reflect factual assumptions, circumstances or
      events that have changed after the forward-looking statements are
      made.








30





**PART
      II – OTHER INFORMATION**





Item
      1.       Legal Proceedings.





None





Item
      2.       Unregistered Sales of Equity
      Securities and Use of Proceeds.





None





Item
      3.       Defaults Upon Senior
      Securities.





Not
      applicable.





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





None





Item
      5.       Other Information.





None





Item
      6.       Exhibits.





(a)
            Exhibits.







31.1
            Rule
                13a-14(a)Certification
                of
                Chief Executive Officer




31.2
            Rule
                13a-14(a)Certification
                of
                Chief Financial Officer




32
            Rule
                13a-14(b)Certification
                of
                Chief Executive Officer and Chief Financial
                Officer






31







**SIGNATURES**





In
      accordance with the requirements of
      the Exchange Act, the registrant caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.





Bay
                National CorporationDate:
                November 14, 2007
            
            By:
            /s/
                Hugh W. MohlerHugh
                W. Mohler, President(Principal
                Executive Officer)Date:
                November 14, 2007
            
            By:
            /s/
                Mark A. SemanieMark
                A. Semanie, Treasurer(Principal
                Accounting and Financial Officer)





32