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 June 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
      August 14, 2007, the issuer had
      2,134,883 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
      June 30, 2007 and December 31, 2006





June
                30,
              2007
            
            
            December
                31,
              2006ASSETS
            
            (Unaudited)Cash
                and due from
                banks
            
            $
            2,672,251
            
            
            $
            2,348,304Federal
                funds sold and other
                overnight investments
            
            
            21,842,033
            
            
            
            31,549,900Investment
                securities available
                for sale (AFS) - at fair value
            
            
            399,353
            
            
            
            697,526Other
                equity securities
            
            
            1,785,800
            
            
            
            1,117,100Loans
                held for sale
            
            
            15,219,654
            
            
            
            1,444,303Loans,
                net of unearned
                fees
            
            
            215,454,165
            
            
            
            216,571,375Total
                loans
            
            
            230,673,819
            
            
            
            218,015,678Less:
                Allowance for credit
                losses
            
            
            (3,202,931
            )
            
            
            (3,175,000
            )Loans,
                net
            
            
            227,470,888
            
            
            
            214,840,678Premises
                and equipment,
                net
            
            
            1,106,069
            
            
            
            1,100,220Accrued
                interest receivable and
                other assets
            
            
            3,057,398
            
            
            
            3,151,119Total
                Assets
            
            $
            258,333,792
            
            
            $
            254,804,847LIABILITIESNon-interest-bearing
                deposits
            
            $
            31,672,053
            
            
            $
            34,808,624Interest-bearing
                deposits
            
            
            176,836,317
            
            
            
            189,340,328Total
                deposits
            
            
            208,508,370
            
            
            
            224,148,952Short-term
                borrowings
            
            
            20,227,025
            
            
            
            1,545,000Subordinated
                debt
            
            
            8,000,000
            
            
            
            8,000,000Accrued
                expenses and other liabilities
            
            
            1,468,442
            
            
            
            2,268,402Total
                Liabilities
            
            
            238,203,837
            
            
            
            235,962,354STOCKHOLDERS'
                EQUITYCommon
                stock - $.01 par value,
                authorized:9,000,000
                shares authorized,
                2,131,076 and 1,935,369 issuedand
                outstanding as of June 30,
                2007 and December 31, 2006, respectively
            
            
            21,311
            
            
            
            19,354Additional
                paid in
                capital
            
            
            17,694,575
            
            
            
            17,649,678Retained
                earnings
            
            
            2,414,069
            
            
            
            1,173,461Total
                Stockholders'
                Equity
            
            
            20,129,955
            
            
            
            18,842,493Total
                Liabilities and
                Stockholders' Equity
            
            $
            258,333,792
            
            
            $
            254,804,847







See
      accompanying notes to consolidated financial statements.






2





**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      STATEMENTS OF OPERATIONS


For
      the
      three and six-month periods ended June 30, 2007 and 2006


(Unaudited)





Three
                Months Ended
              June
                30
            
            
            Six
                Months Ended
              June
                302007
            
            
            2006
            
            
            2007
            
            
            2006INTEREST
                INCOME:Interest
                and fees on loans
            
            $
            5,125,869
            
            
            $
            4,738,860
            
            
            $
            10,210,677
            
            
            $
            8,962,274Interest
                on federal funds sold and other overnight investments
            
            
            184,928
            
            
            
            88,074
            
            
            
            427,214
            
            
            
            150,463Taxable
                interest and dividends on investmentsecurities
            
            
            33,526
            
            
            
            39,688
            
            
            
            49,646
            
            
            
            61,130Total
                interest
                income
            
            
            5,344,323
            
            
            
            4,866,622
            
            
            
            10,687,537
            
            
            
            9,173,867INTEREST
                EXPENSE:Interest
                on deposits
            
            
            2,101,080
            
            
            
            1,705,133
            
            
            
            4,130,527
            
            
            
            3,139,995Interest
                on short-term borrowings
            
            
            39,523
            
            
            
            35,216
            
            
            
            60,704
            
            
            
            52,936Interest
                on subordinated debt
            
            
            150,109
            
            
            
            150,088
            
            
            
            298,563
            
            
            
            300,077Total
                interest expense
            
            
            2,290,712
            
            
            
            1,890,437
            
            
            
            4,489,794
            
            
            
            3,493,008Net
                interest income
            
            
            3,053,611
            
            
            
            2,976,185
            
            
            
            6,197,743
            
            
            
            5,680,859Provision
                for credit losses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
                interest income after provision forcredit
                losses
            
            
            3,053,611
            
            
            
            2,976,185
            
            
            
            6,197,743
            
            
            
            5,680,859NON-INTEREST
                INCOME:Service
                charges on deposit
                accounts
            
            
            35,470
            
            
            
            42,022
            
            
            
            72,411
            
            
            
            82,761Gain
                on sale of mortgage loans
            
            
            125,043
            
            
            
            191,603
            
            
            
            260,492
            
            
            
            274,859Other
                income
            
            
            20,465
            
            
            
            20,590
            
            
            
            40,303
            
            
            
            36,875Total
                non-interest
                income
            
            
            180,978
            
            
            
            254,215
            
            
            
            373,206
            
            
            
            394,495NON-INTEREST
                EXPENSES:Salaries
                and employee
                benefits
            
            
            1,375,588
            
            
            
            1,347,869
            
            
            
            2,872,777
            
            
            
            2,578,011Occupancy
                expenses
            
            
            163,263
            
            
            
            121,534
            
            
            
            320,477
            
            
            
            243,942Furniture
                and equipment
                expenses
            
            
            84,674
            
            
            
            80,162
            
            
            
            169,911
            
            
            
            163,836Legal
                and professional
                fees
            
            
            76,044
            
            
            
            56,506
            
            
            
            139,905
            
            
            
            92,089Data
                processing and other
                outside services
            
            
            207,207
            
            
            
            183,756
            
            
            
            393,863
            
            
            
            345,920Advertising
                and marketing related expenses
            
            
            85,925
            
            
            
            167,723
            
            
            
            211,507
            
            
            
            236,357Other
                expenses
            
            
            224,262
            
            
            
            155,448
            
            
            
            403,414
            
            
            
            298,365Total
                non-interest
                expenses
            
            
            2,216,963
            
            
            
            2,112,998
            
            
            
            4,511,854
            
            
            
            3,958,520Income
                before income taxes
            
            
            1,017,626
            
            
            
            1,117,402
            
            
            
            2,059,095
            
            
            
            2,116,834Income
                tax expense
            
            
            396,000
            
            
            
            444,576
            
            
            
            818,000
            
            
            
            841,933NET
                INCOME
            
            $
            621,626
            
            
            $
            672,826
            
            
            $
            1,241,095
            
            
            $
            1,274,901Per
                Share Data:Net
                Income (basic) (1)
            
            $
            .29
            
            
            $
            .32
            
            
            $
            .58
            
            
            $
            .60Net
                Income (diluted)(1)
            
            $
            .28
            
            
            $
            .30
            
            
            $
            .56
            
            
            $
            .58Weighted
                Average shares
                outstanding (basic) (1)
            
            
            2,130,375
            
            
            
            2,122,611
            
            
            
            2,129,629
            
            
            
            2,120,623Effect
                of Dilution – Stock options and Restricted shares (1)
            
            
            79,866
            
            
            
            87,813
            
            
            
            80,388
            
            
            
            90,538Weighted
                Average shares
                outstanding (diluted) (1)
            
            
            2,210,241
            
            
            
            2,210,424
            
            
            
            2,210,017
            
            
            
            2,211,161





(1)
      Adjusted to reflect 1.1 stock split in the form of a dividend.





See
      accompanying notes to consolidated financial statements.






3


**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For
      the
      six-months ended June 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
            
            
            -
            
            
            
            31,694
            
            
            
            -
            
            
            
            31,694Issuance
                of Common Stock
            
            
            22
            
            
            
            15,138
            
            
            
            -
            
            
            
            15,1601.1
                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
            
            
            -
            
            
            
            -
            
            
            
            1,241,095
            
            
            
            1,241,095Balances
                at June 30, 2007
            
            $
            21,311
            
            
            $
            17,694,575
            
            
            $
            2,414,069
            
            
            $
            20,129,955Common
                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
            
            
            65
            
            
            
            48,887
            
            
            
            -
            
            
            
            48,952Net
                Income
            
            
            -
            
            
            
            -
            
            
            
            1,274,901
            
            
            
            1,274,901Balances
                at June 30, 2006
            
            $
            19,309
            
            
            $
            17,557,620
            
            
            $
            18,534
            
            
            $
            17,595,463










See
      accompanying notes to consolidated financial statements.






4




**BAY
      NATIONAL CORPORATION**





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
      the
      six-months ended June 30, 2007 and 2006


(Unaudited)





2007
            
            
            2006Cash
                Flows From Operating ActivitiesNet
                income
            
            $
            1,241,095
            
            
            $
            1,274,901Adjustments
                to reconcile net
                income to net cash (used in) provided byoperating
                activities:Depreciation
            
            
            135,884
            
            
            
            110,055Accretion
                of investment discounts
            
            
            (15,567
            )
            
            
            (33,302
            )Stock-based
                compensation expense
            
            
            31,694
            
            
            
            57,532Gain
                on sale of mortgage loans
            
            
            (260,492
            )
            
            
            (274,859
            )Origination
                of loans held for sale
            
            
            (77,689,381
            )
            
            
            (57,926,124
            )Proceeds
                from sale of loans
            
            
            64,174,522
            
            
            
            69,192,192Net
                decrease (increase) in
                accrued interest receivable and other assets
            
            
            93,721
            
            
            
            (250,800
            )Net
                decrease in accrued
                expenses and other liabilities
            
            
            (799,960
            )
            
            
            (146,421
            )Net
                cash (used in) provided by
                operating activities
            
            
            (13,088,484
            )
            
            
            12,003,174Cash
                Flows From Investing ActivitiesPurchases
                of investment securities – AFS
            
            
            (1,086,260
            )
            
            
            (2,824,724
            )Maturities
                of investment securities – AFS
            
            
            1,400,000
            
            
            
            3,700,000Purchase
                of Federal Reserve Bank stock
            
            
            -
            
            
            
            (113,700
            )Purchase
                of Federal Home Loan Bank of Atlanta stock
            
            
            (668,700
            )
            
            
            (167,700
            )Loan
                collections (disbursements) in excess of principal
                payments
            
            
            1,145,141
            
            
            
            (29,792,552
            )Capital
                expenditures
            
            
            (141,733
            )
            
            
            (389,321
            )Net
                cash provided by (used in) investing activities
            
            
            648,448
            
            
            
            (29,587,997
            )Cash
                Flows From Financing ActivitiesNet
                (decrease) increase in
                deposits
            
            
            (15,640,582
            )
            
            
            16,332,512Net
                increase in short-term borrowings
            
            
            18,682,025
            
            
            
            2,530,842Net
                proceeds from stock issuance
            
            
            15,160
            
            
            
            48,952Cash
                dividends paid in lieu of fractional shares
            
            
            (487
            )
            
            
            -Net
                cash provided by financing activities
            
            
            3,056,116
            
            
            
            18,912,306Net
                (decrease) increase in cash and cash equivalents
            
            
            (9,383,920
            )
            
            
            1,327,483Cash
                and cash equivalents at beginning of period
            
            
            33,898,204
            
            
            
            7,493,621Cash
                and cash equivalents at end of period
            
            $
            24,514,284
            
            
            $
            8,821,104Cash
                paid for:Interest
            
            $
            4,520,506
            
            
            $
            3,342,323Income
                taxes
            
            $
            1,005,000
            
            
            $
            910,392







See
      accompanying notes to consolidated financial statements.


5




**BAY
      NATIONAL CORPORATION**





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


For
      the
      Three and Six Months Ended June 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 June 30,
      2007, that the Bank meets all capital adequacy requirements to which it is
      subject.





As
      of
      June 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 uses 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.





**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.





**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 six-month periods ended June 30, 2007 and
      2006.** Amounts recognized in the financial statements with respect
      to stock-based compensation are as follows:





Three
                Months Ended
              June
                30
            
            
            Six
                Months Ended
              June
                302007
            
            
            2006
            
            
            2007
            
            
            2006Amounts
                charged against income, before tax benefit
            
            $
            15,194
            
            
            $
            39,638
            
            
            $
            31,694
            
            
            $
            57,532Amount
                of related income tax benefit recognized in income
            
            $
            3,221
            
            
            $
            883
            
            
            $
            8,831
            
            
            $
            1,766





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.






7





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 June 30, 2007, no Awards had been granted under the
      Incentive Plan.





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





The
      following is a summary of changes in outstanding options for the six-month
      periods ended June 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):





**Number**
              **of
                Shares**
            
            
            **Weighted
                Average**
              **Exercise**
              **Price**Balance,
                January 1, 2006
            
            
            154,837
            
            
            $
            6.97Granted
            
            
            -
            
            
            
            -Cancelled
            
            
            (1,366
            )
            
            $
            6.89Exercised
            
            
            (7,103
            )
            
            $
            6.89Balance,
                June 30, 2006
            
            
            146,368
            
            
            $
            6.98Balance,
                January 1, 2007
            
            
            141,446
            
            
            $
            6.98Granted
            
            
            -
            
            
            
            -Cancelled
            
            
            -
            
            
            
            -Exercised
            
            
            (2,200
            )
            
            $
            6.89Balance,
                June 30, 2007
            
            
            139,246
            
            
            $
            6.99Weighted
                average fair value of options granted during 2002
            
            $
            2.75






8





The
      following table summarizes information about options outstanding at June 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
            
            120,750
            
            1
            
            $6.89
            
            
            119,384
            
            $6.89$7.61
            
            18,496
            
            2
            
            $7.61
            
            
            11,310
            
            $7.61139,246
            
            
            
            $6.99
            
            
            130,694
            
            $6.95





The
      aggregate intrinsic value of options outstanding and exercisable as of June
      30,
      2007 was $1,328,872 and $1,237,147, respectively, based upon a closing price
      of
      $16.53 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 June
      30, 2007. The Company incurred compensation expense associated with this
      restricted stock of $9,475 and $23,687 for the three-month and six–month periods
      ended June 30, 2007, respectively.





The
      Company has unrecognized compensation cost for unvested restricted stock awards
      of $170,577 for the six-month period ending June 30, 2007.  As of July
      20, 2007, the unvested grants as of June 30, 2007, totaling 9,900 shares, were
      forfeited.  As such, the Company will no longer recognize compensation
      cost related to this restricted stock award.





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





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






9




**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 June 30, 2007 and December 31, 2006 and for the three-month
      and six-month periods ended June 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
      serves the business communities of North Baltimore and Salisbury,
      Maryland.





Asset
      growth was flat for the six-month period ended June 30, 2007, while a slight
      decrease in earnings was noted over prior year results. Key measurements for
      the
      three-month and six-month periods ended June 30, 2007 include the
      following:





·
            Total
                assets at June 30, 2007 increased to $258.3 million from $254.8 million
                as
                of December 31, 2006.





·
            Net
                loans outstanding increased from $214.8 million as of December 31,
                2006 to
                $227.5 million as of June 30, 2007.





·
            There
                was approximately $1.9 million in non-accrual loans as of June 30,
                2007.
                There were no other non-performing assets as of June 30, 2007. The
                Company
                continues to maintain appropriate reserves for credit
                losses.





·
            Deposits
                at June 30, 2007 decreased to $208.5 million from $224.1 million
                as of
                December 31, 2006.





·
            Net
                income was $621,626 and $1,241,095 for the three-month and six-month
                periods ended June 30, 2007, respectively, compared to $672,826 and
                $1,274,901 for the same periods in 2006. This represents decreases
                of 7.6%
                and 2.7% in net income for the three-month and six-month periods
                ended
                June 30, 2006.





·
            Net
                interest income, the Company’s main source of income, was $3.1 million and
                $6.2 million during the three-month and six-month periods ended June
                30,
                2007, respectively, compared to $3.0 million and $5.7 million for
                the same
                periods in 2006. This represents increases of 2.6% and 9.1% for the
                three-month and six-month periods,
                respectively.





·
            There
                were no charge-offs for the three-month period ended June 30, 2007.
                There
                was a full recovery of a 2006 charge-off of approximately $28,000
                during
                the six-month period ended June 30, 2007. There were no charge-offs
                or
                recoveries for the three-month period ended June 30,
                2006.





·
            Non-interest
                income decreased by $73,237 and $21,289, or 28.8% and 5.4%, for the
                three-month and six-month periods ended June 30, 2007, respectively,
                as
                compared to the same periods in
                2006.






10





·
            Non-interest
                expenses increased by $103,965 and $553,334, or 4.9% and 14.0%, for
                the
                three-month and six-month periods ended June 30, 2007, respectively,
                as
                compared to the same periods in
                2006.





·
            The
                Company’s common stock closed at $16.53 on June 29, 2007, which
                represented a 12.5% decline from its closing price of $17.18 on June
                30,
                2006.





·
            The
                Company declared a 10% stock dividend on June 12, 2007 payable on
                June 29,
                2007 to stockholders of record on June 18,
                2007.





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 $621,626 and $1,241,095 for the three-month
      and
      six-month periods ended June 30, 2007. This compares to net income of $672,826
      and $1,274,901 for the same periods in 2006. This is a decrease of $51,200
      and
      $33,806, or 7.6% and 2.7%, for the three-month and six-month periods,
      respectively. The decrease in year-over-year results is primarily due to a
      highly competitive market that has made revenue growth difficult as well as
      an
      increase in non-interest expenses.





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 six-month periods ended
      June 30, 2007 and 2006, net gains on the sale of mortgage loans totaled $260,492
      and $274,859, respectively.





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





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
      June 30, 2007, the Company held $8.0 million of these loans which were
      classified as held for sale. The Company earned $203,300 of interest on this
      program for the six-month period ended June 30, 2007. This compares to $148,421
      for the same period in 2006. The increase in interest from this program is
      due
      to an increase in average balances from $3.9 million for the six-months ended
      June 30, 2006 to $5.4 million for the same period in 2007.  The
      activity in this program declined in 2006 because the originating mortgage
      company utilized other available funding sources.






11





Management
      expects 2007 to be a challenging year 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 the long-term growth of the Company. 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 $3.1 million and $6.2 million for
      the
      three-month and six-month periods ended June 30, 2007, as compared to $3.0
      million and $5.7 million for the same periods in 2006. This represents increases
      of 2.6% and 9.1% for the three-months and six-months ended June 30, 2007, as
      compared to the same periods in 2006.





Interest
      income from loans and investments for the three-month and six-month periods
      ended June 30, 2007 was $5.3 million and $10.7 million, compared to $4.9 million
      and $9.2 million for the same periods ended June 30, 2006. The 9.8% and 16.5%
      increases for the three-month and six-month periods, respectively, over the
      same
      periods in 2006 were directly related to the 14.4% increase in average
      interest-earning assets for the six-months ended June 30, 2007 as compared
      to
      the same period in 2006.  The increase in interest income was also
      aided by an increase in average yields due to an increase in the target federal
      funds rate from 4.25% as of January 1, 2006 to the current target of 5.25%,
      which has been in effect since June 29, 2006.  The yields on interest
      earning assets increased from 8.54% for the six-months ended June 30, 2006
      to
      8.70% for the six-months ended June 30, 2007.





The
      percentage of average interest-earning assets represented by loans was 90.8%
      and
      93.9% for the six-month periods ended June 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
      six-month period ended June 30, 2007, the average yield on the loan portfolio
      increased to 9.16% from 8.89% for the six-month period ended June 30, 2006.
      This
      increase is primarily due to the Federal Reserve actions discussed above. The
      growth of the construction and rehabilitation loan portfolio also contributed
      to
      improved yields since these loans often are priced higher than other
      loans.





The
      average yield on the investment portfolio and other earning assets, such as
      federal funds sold, was 4.22% for the six-month period ended June 30, 2007
      as
      compared to 3.23% for the same period in 2006. This improvement in the average
      yield was a direct result of the Federal Reserve actions discussed above, as
      well as an increase in the Company’s holdings of Federal Reserve and Federal
      Home Loan Bank stocks, which pay dividend yields greater than those earned
      by
      the Company’s cash and cash equivalents. The percentage of average
      interest-earning assets represented by investments was 9.20% and 6.10% for
      the
      six-month periods ended June 30, 2007 and 2006, respectively.






12





Interest
      expense from deposits and borrowings for the three-month and six-month periods
      ended June 30, 2007 was $2.3 million and $4.5 million, respectively, compared
      to
      $1.9 million and $3.5 million for the comparable periods in 2006. The 21.2%
      and
      28.5% increases for the three-month and six-month periods are the result of
      a
      14.0% increase in average interest-bearing liabilities for the six-month
      period ended June 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 4.06% for the six-month period ended June 30, 2006 to 4.57%
      for
      the six-month period ended June 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 5.05%
      for the six-month period ended June 30, 2007 from 5.29% 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 increase rates paid
      on
      deposits as the market for funds has become more competitive.








13




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.





**Six
                Months Ended June 30, 2007****Average**
              **Balance**
            
            
            **Interest**
              **and
                fees**
            
            
            **Yield/**
              **Rate**ASSETSLoans
                and loans held for sale
            
            $
            224,881,716
            
            
            $
            10,210,677
            
            
            
            9.16
            %Investment
                securities
            
            
            1,764,766
            
            
            
            49,646
            
            
            
            5.67Federal
                funds sold and other overnight investments
            
            
            21,032,686
            
            
            
            427,214
            
            
            
            4.10Total
                earning assets
            
            
            247,679,168
            
            
            
            10,687,537
            
            
            
            8.70
            %Less:
                Allowance for credit losses
            
            
            (3,193,672
            )Cash
                and due from banks
            
            
            2,163,443Premises
                and equipment, net
            
            
            1,107,634Accrued
                interest receivable and other assets
            
            
            2,786,320Total
                assets
            
            $
            250,542,893LIABILITIES
                AND STOCKHOLDERS’ EQUITYInterest-bearing
                demand deposits
            
            $
            72,847,677
            
            
            
            1,350,634
            
            
            
            3.74
            %Regular
                savings deposits
            
            
            4,736,391
            
            
            
            43,238
            
            
            
            1.84Time
                deposits
            
            
            109,461,652
            
            
            
            2,736,655
            
            
            
            5.04Short-term
                borrowings
            
            
            2,859,097
            
            
            
            60,704
            
            
            
            4.28Subordinated
                debt
            
            
            8,000,000
            
            
            
            298,563
            
            
            
            7.53Total
                interest-bearing liabilities
            
            
            197,904,817
            
            
            
            4,489,794
            
            
            
            4.57
            %Net
                interest income and spread
            
            
            
            
            
            $
            6,197,743
            
            
            
            4.13
            %Non-interest-bearing
                demand deposits
            
            
            31,402,065Accrued
                expenses and other liabilities
            
            
            1,661,841Stockholders’
                equity
            
            
            19,574,170Total
                liabilities and stockholders’ equity
            
            $
            250,542,893Interest
                and fee income/earning assets
            
            
            8.70
            %Interest
                expense/earning assets
            
            
            3.65Net
                interest margin
            
            
            5.05
            %Return
                on Average Assets (Annualized)
            
            
            1.00
            %Return
                on Average Equity (Annualized)
            
            
            12.79
            %Average
                Equity to Average Assets
            
            
            7.81
            %











14










**Six
                Months Ended June 30, 2006****Average**
              **Balance**
            
            
            **Interest**
              **and
                fees**
            
            
            **Yield/**
              **Rate**ASSETSLoans
                and loans held for sale
            
            $
            203,344,870
            
            
            $
            8,962,274
            
            
            
            8.89
            %Investment
                securities
            
            
            2,503,112
            
            
            
            61,130
            
            
            
            4.93Federal
                funds sold and other overnight investments
            
            
            10,717,297
            
            
            
            150,463
            
            
            
            2.83Total
                earning assets
            
            
            216,565,279
            
            
            
            9,173,867
            
            
            
            8.54
            %Less:
                Allowance for credit losses
            
            
            (3,000,000
            )Cash
                and due from banks
            
            
            2,024,387Premises
                and equipment, net
            
            
            884,100Accrued
                interest receivable and other assets
            
            
            2,705,908Total
                assets
            
            $
            219,179,674LIABILITIES
                AND STOCKHOLDERS’ EQUITYInterest-bearing
                demand deposits
            
            $
            56,737,445
            
            
            
            959,429
            
            
            
            3.41
            %Regular
                savings deposits
            
            
            7,602,962
            
            
            
            30,550
            
            
            
            .81Time
                deposits
            
            
            98,780,977
            
            
            
            2,150,016
            
            
            
            4.39Short-term
                borrowings
            
            
            2,401,785
            
            
            
            52,936
            
            
            
            4.45Subordinated
                debt
            
            
            8,000,000
            
            
            
            300,077
            
            
            
            7.56Total
                interest-bearing liabilities
            
            
            173,523,169
            
            
            
            3,493,008
            
            
            
            4.06
            %Net
                interest income and spread
            
            
            
            
            
            $
            5,680,859
            
            
            
            4.48
            %Non-interest-bearing
                demand deposits
            
            
            27,438,611Accrued
                expenses and other liabilities
            
            
            1,465,004Stockholders’
                equity
            
            
            16,752,890Total
                liabilities and stockholders’ equity
            
            $
            219,179,674Interest
                and fee income/earning assets
            
            
            8.54
            %Interest
                expense/earning assets
            
            
            3.25Net
                interest margin
            
            
            5.29
            %Return
                on Average Assets (Annualized)
            
            
            1.17
            %Return
                on Average Equity (Annualized)
            
            
            15.35
            %Average
                Equity to Average Assets
            
            
            7.64
            %








15


*Provision
      for Credit Losses*





There
      was
      no provision******for credit losses for either of the
      three-month or six-month periods ended June 30, 2007 and 2006. The provision
      for
      credit losses is normally reflective of the growth in loan balances outstanding
      in all segments of the portfolio as well as changes in the relative level of
      risk in the portfolio. No provisions were necessary for the three-month and
      six-month periods ended June 30, 2007 and 2006 due to the fact that management
      previously recognized the inherent volatility in maintaining a residential
      real
      estate loan portfolio in its determination of its allowance for credit
      losses.  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
      six-month periods ended June 30, 2007, the Company realized non-interest income
      of $180,978 and $373,206, respectively, as compared to $254,215 and $394,495
      for
      the same periods ended June 30, 2006. Gains on the sale of mortgage loans of
      $125,043 and $260,492 comprised 69.1% and 69.8% of the total for the three-month
      and six-month periods ended June 30, 2007, respectively. This compares to gains
      on the sale of mortgage loans of $191,603 and $274,859, or 75.4% and 69.7%,
      of
      total non-interest income for the three-month and six-month periods ended June
      30, 2006.





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





Service
      charges on deposit accounts totaled $35,470 and $72,411 for the three-month
      and
      six-month periods ended June 30, 2007, as compared to $42,022 and $82,761 for
      the same periods in 2006. The decreases of 15.6% and 12.5% are primarily
      attributable to a decline in the level of overdraft fees charged on transaction
      accounts. This decline occurred as the average level of overdrawn balances
      declined by approximately 16.0% for the six-month period ended June 30, 2007
      as
      compared to the same period in 2006. The decline 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 six-month periods ended June 30, 2007 totaled
      $2.2 million and $4.5 million, respectively. This compares to non-interest
      expense for the comparable periods in 2006 of $2.1 million and $4.0 million.
      The
      majority of the increases of $103,965 and $553,334, or 4.9% and 14.0%, resulted
      from period-over-period increases in salaries and benefits and other expenses.
      The increases in salaries and benefits of $27,719 and $294,766 for the
      three-month and six-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. 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.






16





Occupancy
      expenses increased by $41,729 and $76,535 for the three-months and six-months
      ended June 30, 2007, as compared to the same periods in 2006. The 34.3% and
      31.4% increases for the periods were due to scheduled rent increases and the
      acquisition of new space obtained to facilitate the relocation of the Company’s
      Towson residential lending operation during the fourth quarter of
      2006.





Legal
      and
      professional fees increased $19,538 and $47,816, or 34.6% and 51.9%, for the
      three-months and six-months ended June 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, as well as increased
      costs associated with drafting the Annual Report and Proxy materials. 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 $23,451 and $47,943,
      or
      12.8% and 13.9%, for the three-months and six-months ended June 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 $81,798 and $24,850, or 48.8% and
      10.5%, for the three-months and six-months ended June 30, 2007, as compared
      to
      the same periods in 2006. A decline in charitable contributions primarily
      contributed to these decreases.





The
      $73,326 and $111,124, or 31.1% and 24.0%, increases in all other non-interest
      expense items for the three-month and six-month periods ended June 30, 2007,
      relate to a $24,000 and $48,000 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 68.5% and
      68.7% for the three-month and six-month periods ended June 30, 2007. This
      compares to 65.4% and 65.2% 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. Management believes that, while continued growth of the Company’s
      customer base will require additional staffing and space in order to generate
      new business, service customers and effectively manage the business, this
      additional growth can continue without impairing the long-term efficiency of
      the
      Company.





*Income
      Taxes*





For
      the
      three-month and six-month periods ended June 30, 2007, the Company recorded
      income tax expense of $396,000 and $818,000, respectively. This compares to
      $444,576 and $841,933 for the same periods in 2006.  The decrease is
      primarily a result of a decrease in taxable income for the 2007
      periods.






17




**Financial
      Condition**





*Composition
      of the Balance Sheet*





As
      of
      June 30, 2007 total assets were $258,333,792. This represents an increase of
      $3,528,945, or 1.4%, since December 31, 2006. The change in total assets
      includes increases of $323,947 in cash and due from banks, $668,700 in other
      equity securities, and $12,630,210 in loans net of the allowance for credit
      losses. These increases were offset by decreases of $9,707,867 in Federal funds
      sold and other overnight investments, $298,173 in investment securities
      available for sale, and $87,872 in other non-earning assets.





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
      June 30, 2007, the Company held $8.0 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 August 7, 2007, the Company sold $5.5
      million of loans classified as held for sale that were outstanding as of June
      30, 2007.





As
      of
      June 30, 2007, loans, excluding loans held for sale, totaled $215,454,165.
      This
      represents a decrease of $1,117,210, or 0.5%, from a balance of $216,571,375
      as
      of December 31, 2006 due to significant pay downs and payoffs. A total of
      approximately $19.4 million in loans, that were outstanding as of December
      31,
      2006, were paid off during the first six months of 2007. This activity, combined
      with normal fluctuations in revolving credit balances and installment payments
      on amortizing loans, offset all of the approximately $23.6 million in new loans
      funded during that same period. Continued growth was noted in residential
      construction and rehabilitation lending generated by the Towson residential
      lending group for the first six months of 2007; however, the Company expects
      that this growth will be impacted during the remainder of 2007 by continued
      softening of the real estate markets in both of its territories. The Company
      continues to seek prudent growth through the identification of new market
      segments, hiring of experienced commercial lenders, and the development and
      use
      of referral sources including accountants, lawyers and existing customers,
      as
      well as members of the Board of Directors and the Baltimore and Salisbury
      Advisory Boards.





The
      composition of the loan portfolio as of June 30, 2007 was approximately $91.1
      million of commercial loans, $2.6 million of consumer loans, and $121.7 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 $15.2 million and $1.4 million as of June 30, 2007 and December 31,
      2006, respectively.




18


Funds
      not
      extended in loans are invested in cash and due from banks 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 $26.7 million as of June 30,
      2007
      compared to approximately $35.7 million as of December 31, 2006.





At
      June
      30, 2007, the Company had federal funds sold and other overnight investments
      totaling $21,842,033 as compared to $31,549,900 as of December 31, 2006. This
      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
      June
      30, 2007 and December 31, 2006. The Company also held Federal Home Loan Bank
      of
      Atlanta stock of $1,178,500 and $509,800 as of June 30, 2007 and December 31,
      2006, respectively, and United States Treasury bills with a maturity value
      of
      $400,000 and $700,000 as of June 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 June 30, 2007.  As of June 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 June 30, 2007 were $208.5 million, of which approximately $5.4 million,
      or
      2.6%, was related to one customer. Deposits at December 31, 2006 were $224.1
      million, of which deposits for this same customer stood at approximately $8.2
      million, or 3.7%, of total deposits. The deposits for this customer 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 from December 31, 2006
      was also primarily attributed to a decrease in national market certificates
      of
      deposits, which is discussed in more detail below.





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 June 30, 2007, the Company had
      approximately $3.4 million of CDARS deposits outstanding of which $2.4 million
      was placed on behalf of customers and $1.0 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 June 30, 2007, the Company had
      outstanding certificates of deposit of approximately $15.8 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 5.00% and an average term of 34.0
      months. Included in the $15.8 million are national market certificates of
      deposit totaling $795,000 that have been classified as “Brokered Deposits” for
      bank regulatory purposes. These “Brokered Deposits” were issued with an average
      yield of 5.62% and an average term of 21.0 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.






19





Core
      deposits, which management categorizes as all deposits other than national
      market certificates of deposit, CDARS deposits and $2.4 million of the $5.4
      million deposits from the large customer described above, stood at $189.3
      million as of June 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 June 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
      June 30, 2007, short-term borrowings included borrowings of $4.2 million of
      borrowings under an Overnight Commercial Paper program and $16.0 million of
      Federal Home Loan Bank advances that were fully repaid in July 2007. Borrowings
      under the Overnight Commercial Paper are unsecured and are subordinated to
      all
      deposits.





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





Subordinated
      debt consists of $8 million of fixed interest rate trust preferred securities
      (the “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 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.






20





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.





The
      allowance for credit losses as of June 30, 2007 and December 31, 2006 was
      $3,202,931 and $3,175,000, respectively. The amount equates to 1.39% and 1.46%
      of outstanding loans, including loans held for sale, as of June 30, 2007 and
      December 31, 2006, respectively. The decreased percentage as of June 30, 2007
      was primarily due to the increase in loans held for sale.  Excluding
      loans held for sale, the allowance for credit losses equated to 1.49% and 1.47%
      of outstanding loans as of June 30, 2007 and December 31, 2006,
      respectively.  This increased percentage reflects the increased level
      of risk in the residential real estate loan portfolio and a decrease in the
      level of loans outstanding, excluding loans held for sale.  Bay
      National Corporation has no exposure to foreign countries or foreign
      borrowers.





As
      of
      June 30, 2007, the Company had non-accrual loans totaling $1,941,124 of
      which the majority, or $1,936,025, were included in the 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 0.84% of total
      outstanding loans, including loans held for sale, as of June 30,
      2007.  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.






21




The
      Company recovered $27,930 of 2006 charge-offs during the six-month period ended
      June 30, 2007; there were no charge-offs or recoveries 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
      June
      30, 2007, the Company had $2,672,251 in cash and due from banks, $21,842,033
      in
      federal funds sold and other overnight investments, $399,353 in three-month
      U.S.
      Treasury Securities, and $15,219,654 in loans expected to be sold within 60
      days. As of December 31, 2006, the Company had $2,348,304 in cash and due from
      banks, $31,549,900 in federal funds sold and other overnight investments,
      $697,526 in three-month U.S. Treasury Securities, and $1,444,303 in loans
      expected to be sold within 60 days.





The
      increase in the overall level of liquid assets was driven by the $13.8 million
      growth in loans expected to be sold within 60 days.  Excluding this
      growth, liquid assets decreased $9.7 million as a 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 $20 million of borrowing
      capacity with the Federal Home Loan Bank of Atlanta as of June 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.








22





*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 interest sensitive
      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.





The
      following table sets forth the amount of the Company's interest-earning assets
      and interest-bearing liabilities as of June 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
            
            $
            21,842,033
            
            
            
            8.58
            %
            
            $
            21,842,033
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Loans
                held for sale
            
            
            15,219,654
            
            
            
            5.97
            %
            
            
            15,219,654
            
            
            
            -
            
            
            
            -
            
            
            
            -Loans
                – Variable rate
            
            
            107,038,391
            
            
            
            42.02
            %
            
            
            107,038,391
            
            
            
            -
            
            
            
            -
            
            
            
            -Loans
                – Fixed rate
            
            
            108,415,774
            
            
            
            42.57
            %
            
            
            26,120,526
            
            
            
            35,666,085
            
            
            
            41,984,722
            
            
            
            4,644,441Other
                earning assets
            
            
            2,185,153
            
            
            
            0.86
            %
            
            
            399,353
            
            
            
            -
            
            
            
            -
            
            
            
            1,785,800Total
                interest-earning assets
            
            $
            254,701,005
            
            
            
            100.00
            %
            
            $
            170,619,957
            
            
            $
            35,666,085
            
            
            $
            41,984,722
            
            
            $
            6,430,241Interest-bearing
                liabilitiesDeposits
                – Variable rate
            
            $
            79,946,832
            
            
            
            38.99
            %
            
            $
            79,946,832
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Deposits
                – Fixed rate
            
            
            96,889,485
            
            
            
            47.25
            %
            
            
            42,634,382
            
            
            
            31,046,117
            
            
            
            23,208,986
            
            
            
            -Short-term
                borrowings – Variable rate
            
            
            20,227,025
            
            
            
            9.86
            %
            
            
            20,227,025
            
            
            
            -
            
            
            
            -
            
            
            
            -Subordinated
                debt
            
            
            8,000,000
            
            
            
            3.90
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,000,000Total
                interest-bearing liabilities
            
            $
            205,063,342
            
            
            
            100.00
            %
            
            $
            142,808,239
            
            
            $
            31,046,117
            
            
            $
            23,208,986
            
            
            $
            8,000,000Periodic
                repricing differencesPeriodic
                gap
            
            
            
            
            
            
            
            
            
            $
            27,811,718
            
            
            $
            4,619,968
            
            
            $
            18,775,736
            
            
            $
            (1,569,759
            )Cumulative
                gap
            
            
            
            
            
            
            
            
            
            $
            27,811,718
            
            
            $
            32,431,686
            
            
            $
            51,207,422
            
            
            $
            49,637,663Ratio
                of rate sensitive assets to rate
              sensitive
                liabilities
            
            
            
            
            
            
            
            
            
            
            119.48
            %
            
            
            114.88
            %
            
            
            180.90
            %
            
            
            80.38
            %





The
      Company has 56.6% of its interest-earning assets and 48.8% of its
      interest-bearing liabilities in variable rate balances. Interest-earning assets
      exceed interest-bearing liabilities by $49,637,663. The majority of this gap
      is
      concentrated in items maturing or repricing within one year. This gap is
      generally reflective of the Company’s emphasis on originating variable rate
      loans and short-term fixed rate loans and the demand in the market for higher
      yielding fixed rate deposits. This analysis indicates that the Company generally
      will benefit from increasing market rates of interest. However, since all
      interest rates and yields do not adjust at the same pace, the gap is only a
      general indicator of interest rate sensitivity. The analysis of the Company's
      interest-earning assets and interest-bearing liabilities presents only a static
      view of the timing of maturities and repricing opportunities, without taking
      into consideration the fact that changes in interest rates do not affect all
      assets and liabilities equally. Net interest income may be affected by other
      significant factors in a given interest rate environment, including changes
      in
      the volume and mix of interest-earning assets and interest-bearing
      liabilities.






23





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.





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 June 30, 2007 and
      December 31, 2006 are as follows:





**June
                30,**
              **2007**
            
            
            **December
                31, 2006**Loan
                commitments
            
            $
            27,015,748
            
            
            $
            33,782,891Unused
                lines of credit
            
            
            68,008,311
            
            
            
            66,660,250Letters
                of credit
            
            
            2,928,872
            
            
            
            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.






24





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 June 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 June 30, 2007 as compared to December
      31, 2006 is reflective of the overall level of loan growth during the
      periods.





*Capital
      Resources*





The
      Company had stockholders’ equity at June 30, 2007 of $20,129,955 as compared to
      $18,842,493 at December 31, 2006. The increase in capital is a result of the
      positive operating results for the six months ended June 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
      June
      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 June 30, 2007 and
      December 31, 2006, respectively:





**June
                30,**
              **2007**
            
            
            **December
                31, 2006**Total
                deposits
            
            $
            208,508,370
            
            
            $
            224,148,952National
                market certificates of deposit (includes CDARS deposits)
            
            
            (16,830,564
            )
            
            
            (29,586,997
            )Variable
                balance accounts (1 customer at June 30, 2007 and December 31,
                2006)
            
            
            (5,369,169
            )
            
            
            (8,197,951
            )Portion
                of variable balance accounts considered to be core
            
            
            3,000,000
            
            
            
            3,000,000Core
                deposits
            
            $
            189,308,637
            
            
            $
            189,364,004






25





**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.





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.”






26





**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 June 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 June 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
      profitability, liquidity, allowance for loan losses, interest rate sensitivity,
      market risk and financial and other goals 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 limited operating history; 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.









27





**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.





At
      the Company’s Annual Meeting of
      Stockholders held May 22, 2007, the following directors were elected to serve
      a
      three-year term expiring upon the date of the Company’s 2010 Annual Meeting or
      until their respective successors are duly elected and qualified:





Votes
                CastFor
            Withheld
            TotalWilliam
                B. Rinnier
            1,252,783
            3,500
            1,256,283Edwin
                A. Rommel, III
            1,252,783
            3,500
            1,256,283Henry
                H. Stansbury
            1,252,783
            3,500
            1,256,283Kenneth
                H. Trout
            1,252,783
            3,500
            1,256,283Eugene
                M. Waldron, Jr.
            1,252,783
            3,500
            1,256,283





Names
      of
      other directors continuing in office:





Charles
                E. BoundsGary
                T. GillR.
                Michael GillJohn
                R. LerchDonald
                G. McClure, Jr.Hugh
                W. MohlerRobert
                L. MooreJames
                P. O’ConorH.
                Victor Rieger, Jr.Carl
                A.J. Wright








At
      the Company’s Annual Meeting of
      Stockholders held May 22, 2007, the selection of Stegman & Company to serve
      as independent registered public accountants to audit the Company’s financial
      statements for the 2007 fiscal year was ratified by the following
      vote:





Votes
                CastFor
            Against
            Abstain
            Total1,256,283
            0
            0
            1,256,283





There
      were no broker non-votes on these
      matters.






28





At
      the Company’s Annual Meeting of
      Stockholders held May 22, 2007, the proposal to approve the Bay National
      Corporation 2007 Stock Incentive Plan was approved by the following
      vote:





Votes
                CastFor
            Against
            Abstain
            Broker
              non-votes
            Total856,637
            17,250
            11,080
            371,316
            1,256,283








Item
      5.        Other
      Information.





None





Item
      6.        Exhibits.





(a)
            Exhibits.







10.15
            Separation
                Agreement and General Release between Bay
                National Bank and Richard C.
                Springer




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








29





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





30