##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
Of The Securities Exchange Act of 1934

|                      |  |                    |  |                        |          | 
|--------------------- |  | ------------------ |  | ---------------------- | -------- | 
|For the quarter ended |  | September 30, 2002 |  | Commission file number | 33-20417 | 
|                      |  |                    |  |                        |          | 

Capital Directions,
Inc.

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Michigan                                                       |  | 38-2781737                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               |  |                                        
|322 South Jefferson St., Mason, Michigan                       |  | 48854-0130                             
|                                                               |  |                                        
|(Address of principal executive offices)                       |  | (Zip Code)                             
|                                                               |  |                                        
|Registrants telephone number, including area code:            |  | (517) 676-0500                         
|                                                               |  |                                        

None

Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such 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 o

As of October 22, 2002 the registrant had outstanding 590,308 shares of common
stock having a par value of $5 per share.





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TABLE OF CONTENTS



|                                      |                                                                                               |                                                                                                                 |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION       
|                                      | Item 1. Consolidated Balance Sheets September 30, 2002 and December 31, 2001                 
|                                      |                                                                                               | Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and 2001              
|                                      |                                                                                               | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001                    
|                                      |                                                                                               | Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2002 and 2001
|                                      |                                                                                               | Notes to Interim Consolidated Financial Statements                                                             
|                                      | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                      | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                      | Item 4. Controls and Procedures Disclosure                                                   
|PART II  OTHER INFORMATION          
|                                      | Item 1. Legal Proceedings                                                                    
|                                      | Item 2. Changes in Securities and Use of Proceeds                                            
|                                      | Item 3. Defaults Upon Senior Securities                                                      
|                                      | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                      | Item 5. Other Information                                                                    
|                                      | Item 6. Exhibits and Reports on Form 8-K                                                     
|                                      |                                                                                               | Signatures                                                                                                     
|                                      |                                                                                               | Certifications                                                                                                 
|                                      |                                                                                               | Index to Exhibits                                                                                              
|Certification Pursuant to Section 906
|Certification Pursuant to Section 906



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##### Table of Contents



CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

|           |         |                                                                 |                                                            |             |       |    |  |  | 
|---------- | ------- | --------------------------------------------------------------- | ---------------------------------------------------------- | ----------- | ----- | -- |  |  | 
|           |         |                                                                 |                                                            | Page
Number
|PART I    |         | FINANCIAL INFORMATION                                           |                                                            |             |       |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 1. |                                                                 | Consolidated Balance Sheets                                |             |       |    | 
|           |         | September 30, 2002 and December 31, 2001                        |                                                            |             | 1     |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Consolidated Statements of Income for the Three and Nine Months |                                                            |             |       |   
|           |         | Ended September 30, 2002 and 2001                               |                                                            |             | 2     |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Consolidated Statements of Cash Flows for the Nine Months       |                                                            |             |       |   
|           |         | Ended September 30, 2002 and 2001                               |                                                            |             | 3     |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Consolidated Statements of Comprehensive Income                 |                                                            |             |       |   
|           |         | for the Three and Nine Months Ended September 30, 2002 and 2001 |                                                            |             | 4     |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Notes to Interim Consolidated Financial Statements              |                                                            |             | 5-8   |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 2. |                                                                 | Management's Discussion and Analysis of Financial          |             |       |    | 
|           |         | Condition and Results of Operations                             |                                                            |             | 8-14  |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 3. |                                                                 | Quantitative and Qualitative Disclosures About Market Risk |             |       | 14 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 4. |                                                                 | Controls and Procedures Disclosure                         |             |       | 14 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|PART II   |         | OTHER INFORMATION                                               |                                                            |             |       |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 1. |                                                                 | Legal Proceedings                                          |             |       | 15 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 2. |                                                                 | Changes in Securities and Use of Proceeds                  |             |       | 15 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 3. |                                                                 | Defaults Upon Senior Securities                            |             |       | 15 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 4. |                                                                 | Submission of Matters to a Vote of Security Holders        |             |       | 15 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 5. |                                                                 | Other Information                                          |             |       | 15 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           | Item 6. |                                                                 | Exhibits and Reports on Form 8-K                           |             |       | 15 | 
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Signatures                                                      |                                                            |             | 16    |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Certifications                                                  |                                                            |             | 17-18 |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Index to Exhibits                                               |                                                            |             | 19    |   
|           |         |                                                                 |                                                            |             |       |    |  | 
|           |         | Exhibits 99.1 and 99.2                                          |                                                            |             | 20-21 |   





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PART I  FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

|                                     |                                                                                                                                             |                             |                                 |                                            |        |               |         |        |              |        |         |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------ | ------------ | ------ | ------- | -
|                                     |                                                                                                                                             |                             |                                 |                                            |        | September 30, |         |        | December 31, |       
|                                     |                                                                                                                                             |                             |                                 |                                            |        | 2002          |         |        | 2001         |       
|                                     |                                                                                                                                             |                             |                                 |                                            |        |               |         |        |              |       
|                                     |                                                                                                                                             |                             |                                 |                                            |        | (Unaudited)   |         |        |              |        |        
|ASSETS                               |                                                                                                                                             |                             |                                 |                                            |        |               |         |       
|                                     | Cash and non interest bearing deposits                                                                                                      |                             | $                               | 3,831                                      |        |               | $       | 2,642  |             
|                                     | Interest bearing deposits                                                                                                                   |                             |                                 | 740                                        |        |               |         | 38     |             
|                                     | Federal funds sold                                                                                                                          |                             |                                 | 5,690                                      |        |               |         | 4,293  |             
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             | Total cash and cash equivalents |                                            |        | 10,261        |         |        |              | 6,973  |        
|                                     | Securities held to maturity                                                                                                                 |                             |                                 | 400                                        |        |               |         |       |             
|                                     | Securities available for sale                                                                                                               |                             |                                 | 11,455                                     |        |               |         | 12,200 |             
|                                     | Federal Home Loan Bank (FHLB) stock                                                                                                         |                             |                                 | 1,967                                      |        |               |         | 1,967  |             
|                                     |                                                                                                                                             |                             |                                 |                                            |        |               |        
|                                     |                                                                                                                                             |                             | Total securities                |                                            |        | 13,822        |         |        |              | 14,167 |        
|                                     | Loans held for sale                                                                                                                         |                             |                                 | 531                                        |        |               |         |       |             
|                                     | Loans:                                                                                                                                      |                             |                                 |                                            |        |               |         |        |             
|                                     |                                                                                                                                             | Commercial and agricultural |                                 |                                            | 5,112  |               |         |        | 5,188        |       
|                                     |                                                                                                                                             | Installment                 |                                 |                                            | 1,907  |               |         |        | 2,266        |       
|                                     |                                                                                                                                             | Real estate mortgages       |                                 |                                            | 92,882 |               |         |        | 85,378       |       
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Total loans                                |        |               | 99,901  |        |              |        | 92,832  |  
|                                     |                                                                                                                                             |                             |                                 | Allowance for loan losses                  |        |               | (1,050  | )      |              |        | (1,048  | )
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Net loans                                  |        |               | 98,851  |        |              |        | 91,784  |  
|                                     | Premises and equipment, net                                                                                                                 |                             |                                 | 1,047                                      |        |               |         | 1,107  |             
|                                     | Accrued income and other assets                                                                                                             |                             |                                 | 3,446                                      |        |               |         | 3,246  |             
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Total assets                               |        | $             | 127,958 |        |              | $      | 117,277 |  
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|LIABILITIES
AND SHAREHOLDERS EQUITY |                                                                                                                                             |                             |                                 |                                            |        |               |         |       
|LIABILITIES                          |                                                                                                                                             |                             |                                 |                                            |        |               |         |       
|                                     | Deposits:                                                                                                                                   |                             |                                 |                                            |        |               |         |        |             
|                                     |                                                                                                                                             |                             | Non interest bearing            |                                            | $      | 11,869        |         |        | $            | 10,470 |        
|                                     |                                                                                                                                             |                             | Interest bearing                |                                            |        | 65,194        |         |        |              | 60,463 |        
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Total deposits                             |        |               | 77,063  |        |              |        | 70,933  |  
|                                     | Long-term FHLB borrowings                                                                                                                   |                             |                                 | 35,108                                     |        |               |         | 31,125 |             
|                                     | Other liabilities                                                                                                                           |                             |                                 | 1,663                                      |        |               |         | 1,456  |             
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Total liabilities                          |        |               | 113,834 |        |              |        | 103,514 |  
|SHAREHOLDERS EQUITY                 |                                                                                                                                             |                             |                                 |                                            |        |               |         |       
|                                     | Common stock: $5 par value, 1,300,000 shares authorized;
590,308 outstanding at Sept. 30, 2002 and 595,956 outstanding
at December 31, 2001 |                             |                                 | 2,952                                      |        |               |         | 2,980  |             
|                                     | Additional paid in capital                                                                                                                  |                             |                                 | 2,610                                      |        |               |         | 2,597  |             
|                                     | Retained earnings                                                                                                                           |                             |                                 | 8,381                                      |        |               |         | 7,912  |             
|                                     | Accumulated other comprehensive income,
net of tax of $93 as of September 30, 2002 and $141 as of
December 31, 2001                         |                             |                                 | 181                                        |        |               |         | 274    |             
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Total shareholders equity                 |        |               | 14,124  |        |              |        | 13,763  |  
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              
|                                     |                                                                                                                                             |                             |                                 | Total liabilities and shareholders equity |        | $             | 127,958 |        |              | $      | 117,277 |  
|                                     |                                                                                                                                             |                             |                                 |                                            |        |              

See accompanying notes to consolidated financial statements.

1



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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except share and per share data)

|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |       |     |       |       | 
|--------------------------------------------------- | ------------------------------------- | ---------- | -------------------------- | --------------------- | --- | ------------------ | ------- | ----- | ----------------- | --- | ------- | ----- | --- | ----- | ------- | ----- | --- | ----- | ----- | 
|                                                    |                                       |            |                            |                       |     | Three Months Ended |         |       | Nine Months Ended |    
|                                                    |                                       |            |                            |                       |     | September 30,      |         |       | September 30,     |    
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |    
|                                                    |                                       |            |                            |                       |     | 2002               |         |       | 2001              |     |         | 2002  |     |       | 2001    |      
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |      
|Interest and Dividend Income                        |                                       |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |      
|                                                    | Interest and fees on loans            |            | $                          | 1,767                 |     |                    | $       | 1,683 |                   |     | $       | 5,310 |     |       | $       | 5,121 |    
|                                                    | Federal funds sold                    |            |                            | 9                     |     |                    |         | 52    |                   |     |         | 20    |     |       |         | 155   |    
|                                                    | Interest and dividends on securities: |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |       |    
|                                                    |                                       | Taxable    |                            |                       | 157 |                    |         |       | 216               |     |         |       | 490 |       |         |       | 671 |      
|                                                    |                                       | Tax exempt |                            |                       | 42  |                    |         |       | 42                |     |         |       | 121 |       |         |       | 118 |      
|                                                    | Other interest income                 |            |                            | 1                     |     |                    |         |      |                   |     |         | 1     |     |       |         | 1     |    
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|                                                    |                                       |            |                            | Total interest income |     |                    | 1,976   |       |                   |     | 1,993   |       |     |       | 5,942   |       |     |       | 6,066 | 
|Interest Expense                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |      
|                                                    | Deposits                              |            |                            | 362                   |     |                    |         | 499   |                   |     |         | 1,112 |     |       |         | 1,615 |    
|                                                    | Short-term borrowings                 |            |                            | 3                     |     |                    |         |      |                   |     |         | 6     |     |       |         | 1     |    
|                                                    | Long-term borrowings                  |            |                            | 489                   |     |                    |         | 424   |                   |     |         | 1,417 |     |       |         | 1,242 |    
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|                                                    |                                       |            | Total interest expense     |                       |     | 854                |         |       |                   | 923 |         |       |     | 2,535 |         |       |     | 2,858 |      
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|Net Interest Income                                 |                                       |            | 1,122                      |                       |     |                    | 1,070   |       |                   |     | 3,407   |       |     |       | 3,208   |      
|Provision for loan losses                           |                                       |            |                           |                       |     |                    |        |       |                   |     |        |       |     |       |        |      
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|Net interest income after provision for loan losses |                                       |            | 1,122                      |                       |     |                    | 1,070   |       |                   |     | 3,407   |       |     |       | 3,208   |      
|Non Interest Income                                 |                                       |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |      
|                                                    | Service charges on deposit accounts   |            |                            | 77                    |     |                    |         | 81    |                   |     |         | 236   |     |       |         | 245   |    
|                                                    | Investment commission fees            |            |                            | 6                     |     |                    |         | 23    |                   |     |         | 37    |     |       |         | 45    |    
|                                                    | Net gains on sale of loans            |            |                            | 117                   |     |                    |         | 2     |                   |     |         | 168   |     |       |         | 55    |    
|                                                    | Other income                          |            |                            | 59                    |     |                    |         | 86    |                   |     |         | 222   |     |       |         | 264   |    
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|                                                    |                                       |            | Total non interest income  |                       |     | 259                |         |       |                   | 192 |         |       |     | 663   |         |       |     | 609   |      
|Non Interest Expense                                |                                       |            |                            |                       |     |                    |         |       |                   |     |         |       |     |       |         |      
|                                                    | Salaries and employee benefits        |            |                            | 392                   |     |                    |         | 347   |                   |     |         | 1,173 |     |       |         | 1,089 |    
|                                                    | Premises and equipment                |            |                            | 80                    |     |                    |         | 87    |                   |     |         | 251   |     |       |         | 257   |    
|                                                    | Other operating expense               |            |                            | 184                   |     |                    |         | 195   |                   |     |         | 629   |     |       |         | 613   |    
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|                                                    |                                       |            | Total non interest expense |                       |     | 656                |         |       |                   | 629 |         |       |     | 2,053 |         |       |     | 1,959 |      
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|Income before income tax expense                    |                                       |            | 725                        |                       |     |                    | 633     |       |                   |     | 2,017   |       |     |       | 1,858   |      
|Income tax expense                                  |                                       |            | 228                        |                       |     |                    | 196     |       |                   |     | 626     |       |     |       | 572     |      
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|Net Income                                          |                                       | $          | 497                        |                       |     | $                  | 437     |       |                   | $   | 1,391   |       |     | $     | 1,286   |      
|                                                    |                                       |            |                            |                       |     |                    |         |       |                   |     |         |      
|Average common shares outstanding                   |                                       |            | 589,515                    |                       |     |                    | 598,056 |       |                   |     | 592,469 |       |     |       | 598,056 |      
|Basic earnings per common share                     |                                       |            | 0.84                       |                       |     |                    | 0.73    |       |                   |     | 2.35    |       |     |       | 2.15    |      
|Diluted earnings per common share                   |                                       |            | 0.84                       |                       |     |                    | 0.73    |       |                   |     | 2.33    |       |     |       | 2.13    |      
|Dividends per share of common stock, declared       |                                       |            | 0.39                       |                       |     |                    | 0.36    |       |                   |     | 1.17    |       |     |       | 1.05    |      

See accompanying notes to consolidated financial statements.

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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

|                                                 |                                                                           |                                                 |                                    |                                    |        |                   |        |        |        |     |       | 
|------------------------------------------------ | ------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------- | ---------------------------------- | ------ | ----------------- | ------ | ------ | ------ | --- | ----- | 
|                                                 |                                                                           |                                                 |                                    |                                    |        | Nine Months Ended |       
|                                                 |                                                                           |                                                 |                                    |                                    |        | September 30,     |       
|                                                 |                                                                           |                                                 |                                    |                                    |        |                   |       
|                                                 |                                                                           |                                                 |                                    |                                    |        | 2002              |        |        | 2001   |    
|                                                 |                                                                           |                                                 |                                    |                                    |        |                   |        |        |        |    
|Cash flows from operating activities             |                                                                           |                                                 |                                    |                                    |        |                   |        |       
|                                                 | Net income                                                                |                                                 | $                                  | 1,391                              |        |                   | $      | 1,286  |       
|                                                 | Adjustments to reconcile net income to net cash from
operating activities |                                                 |                                    |                                    |        |                   |        |        |       
|                                                 |                                                                           | Depreciation                                    |                                    |                                    | 93     |                   |        |        | 96     |    
|                                                 |                                                                           | Net amortization (accretion) on securities      |                                    |                                    | 3      |                   |        |        | (3     | )  
|                                                 |                                                                           | Loans originated for sale                       |                                    |                                    | (5,440 | )                 |        |        | (2,465 | )  
|                                                 |                                                                           | Proceeds from sale of loans originated for sale |                                    |                                    | 4,942  |                   |        |        | 2,473  |    
|                                                 |                                                                           | Net gain on sales of loans originated for sale  |                                    |                                    | (168   | )                 |        |        | (55    | )  
|                                                 | Changes in assets and liabilities:                                        |                                                 |                                    |                                    |        |                   |        |        |       
|                                                 |                                                                           | Accrued interest receivable                     |                                    |                                    | (8     | )                 |        |        | (16    | )  
|                                                 |                                                                           | Accrued interest payable                        |                                    |                                    | 9      |                   |        |        | (42    | )  
|                                                 |                                                                           | Other assets                                    |                                    |                                    | (10    | )                 |        |        | (18    | )  
|                                                 |                                                                           | Other liabilities                               |                                    |                                    | 189    |                   |        |        | 173    |    
|                                                 |                                                                           |                                                 |                                    |                                    |        |                  
|                                                 |                                                                           |                                                 |                                    | Net cash from operating activities |        |                   | 1,001  |        |        |     | 1,429 | 
|Cash flows from investing activities             |                                                                           |                                                 |                                    |                                    |        |                   |        |       
|                                                 | Securities available for sale:                                            |                                                 |                                    |                                    |        |                   |        |        |       
|                                                 |                                                                           | Purchases                                       |                                    |                                    | (1,536 | )                 |        |        | (1,028 | )  
|                                                 |                                                                           | Maturities, calls and principal payments        |                                    |                                    | 2,138  |                   |        |        | 2,614  |    
|                                                 | Securities held to maturity:                                              |                                                 |                                    |                                    |        |                   |        |        |       
|                                                 |                                                                           | Purchases                                       |                                    |                                    | (400   | )                 |        |        |       |    
|                                                 | Net change in loans                                                       |                                                 |                                    | (7,067                             | )      |                   |        | (1,130 | )     
|                                                 | Premises and equipment expenditures                                       |                                                 |                                    | (33                                | )      |                   |        | (262   | )     
|                                                 |                                                                           |                                                 |                                    |                                    |        |                  
|                                                 |                                                                           |                                                 |                                    | Net cash from investing activities |        |                   | (6,898 | )      |        |     | 194   | 
|Cash flows from financing activities             |                                                                           |                                                 |                                    |                                    |        |                   |        |       
|                                                 | Net change in deposits                                                    |                                                 |                                    | 6,130                              |        |                   |        | (791   | )     
|                                                 | Proceeds from long-term FHLB borrowings                                   |                                                 |                                    | 4,000                              |        |                   |        | 6,000  |       
|                                                 | Repayment of long-term FHLB borrowings                                    |                                                 |                                    | (17                                | )      |                   |        | (4,093 | )     
|                                                 | Repurchase of common stock                                                |                                                 |                                    | (263                               | )      |                   |        |       |       
|                                                 | Proceeds from shares issued upon exercise of stock options                |                                                 |                                    | 18                                 |        |                   |        |       |       
|                                                 | Dividends paid                                                            |                                                 |                                    | (683                               | )      |                   |        | (616   | )     
|                                                 |                                                                           |                                                 |                                    |                                    |        |                  
|                                                 |                                                                           |                                                 | Net cash from financing activities |                                    |        | 9,185             |        |        |        | 500 |      
|                                                 |                                                                           |                                                 |                                    |                                    |        |                  
|Net change in cash and cash equivalents          |                                                                           |                                                 | 3,288                              |                                    |        |                   | 2,123  |       
|Cash and cash equivalents at beginning of year   |                                                                           |                                                 | 6,973                              |                                    |        |                   | 8,566  |       
|                                                 |                                                                           |                                                 |                                    |                                    |        |                  
|Cash and cash equivalents at September 30        |                                                                           | $                                               | 10,261                             |                                    |        | $                 | 10,689 |       
|                                                 |                                                                           |                                                 |                                    |                                    |        |                  
|Supplemental disclosure of cash flow information |                                                                           |                                                 |                                    |                                    |        |                   |        |       
|                                                 | Cash paid during the period for:                                          |                                                 |                                    |                                    |        |                   |        |       
|                                                 |                                                                           | Interest                                        |                                    | $                                  | 2,526  |                   |        | $      | 2,900  |    
|                                                 |                                                                           | Income taxes federal                           |                                    | $                                  | 560    |                   |        | $      | 590    |    

See accompanying notes to consolidated financial statements.

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CAPITAL DIRECTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
September 30, 2002 and 2001

(In thousands)

|                                       |                                                                                          |   |                    |     |   |                   |     |     |      |   |       |      |   |   |       |     |  
|-------------------------------------- | ---------------------------------------------------------------------------------------- | - | ------------------ | --- | - | ----------------- | --- | --- | ---- | - | ----- | ---- | - | - | ----- | --- | -
|                                       |                                                                                          |   | Three Months Ended |     |   | Nine Months Ended |    
|                                       |                                                                                          |   | September 30,      |     |   | September 30,     |    
|                                       |                                                                                          |   |                    |     |   |                   |    
|                                       |                                                                                          |   | 2002               |     |   | 2001              |     |     | 2002 |   |       | 2001 |  
|                                       |                                                                                          |   |                    |     |   |                   |     |     |      |   |       |      |  
|Net income                             |                                                                                          | $ | 497                |     |   | $                 | 437 |     |      | $ | 1,391 |      |   | $ | 1,286 |    
|Other comprehensive income (loss),
net |                                                                                          |   |                    |     |   |                   |     |     |      |   |       |      |   |   |       |    
|                                       | Unrealized holding gains (losses)
on securities available for sale
arising during period |   |                    | (47 | ) |                   |     | 67  |      |   |       | (141 | ) |   |       | 229 |  
|                                       | Tax effects                                                                              |   |                    | 16  |   |                   |     | (23 | )    |   |       | 48   |   |   |       | (78 | )
|                                       |                                                                                          |   |                    |     |   |                   |     |     |      |   |       |     
|Other comprehensive income (loss), net |                                                                                          |   | (31                | )   |   |                   | 44  |     |      |   | (93   | )    |   |   | 151   |    
|                                       |                                                                                          |   |                    |     |   |                   |     |     |      |   |       |     
|Comprehensive income                   |                                                                                          | $ | 466                |     |   | $                 | 481 |     |      | $ | 1,298 |      |   | $ | 1,437 |    
|                                       |                                                                                          |   |                    |     |   |                   |     |     |      |   |       |     

See accompanying notes to consolidated financial statements.

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CAPITAL DIRECTIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



| | 1. |  | In the opinion of management of the Registrant, the accompanying
Consolidated Financial Statements contain all adjustments (consisting only
of normal recurring items) necessary to present fairly the consolidated
financial position of the Registrant as of September 30, 2002 and December
31, 2001, and results of operations for the three and nine month periods
ended September 30, 2002 and 2001, and the cash flows for the nine month
periods ended September 30, 2002 and 2001.                                                                                                                                                                                                            
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The results of operations for the nine months ended September 30, 2002
are not necessarily indicative of the results to be expected for the full
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | 3. |  | The accompanying unaudited Consolidated Financial Statements and the
notes thereto should be read in conjunction with the Notes to Consolidated
Financial Statements and the notes included therein, for the fiscal year
end 2001, included in the Registrants 2001 Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 4. |  | Management determines the adequacy of the allowance for loan losses based
on an evaluation of the loan portfolio, recent loss experience, historical
performance, current economic conditions, current analyses of asset
quality and other pertinent factors. Non-performing loans are defined as
all loans which are accounted for as non-accrual; loans 90 days or more
past due and still accruing interest; or loans which have been
renegotiated due to the borrowers inability to comply with the original
terms. As of September 30, 2002, non-performing loans totaled
$154,000 or .15% of total loans. This represents a decrease of $149,000 from the
$303,000 balance at December 31, 2001.

|                                      |                           |      |               |         |      |              |         |         |  
|------------------------------------- | ------------------------- | ---- | ------------- | ------- | ---- | ------------ | ------- | ------- | -
|                                      |                           |      | September 30, |         |      | December 31, |        
|Non-performing loans                  |                           | 2002 |               |         | 2001 |             
|                                      |                           |      |               |         |      |             
|Non-accrual                           |                           | $    | 68,000        |         |      | $            | 20,000  |        
|90 days or more past due              |                           |      | 61,000        |         |      |              | 255,000 |        
|Renegotiated                          |                           |      | 25,000        |         |      |              | 28,000  |        
|                                      |                           |      |               |         |      |             
|                                      | Total                     |      | $             | 154,000 |      |              | $       | 303,000 |  
|                                      |                           |      |               |         |      |             
|Non-performing loans as a percent of: |                           |      |               |         |      |              |         |        
|                                      | Total loans               |      |               | .15     | %    |              |         | .33     | %
|                                      | Allowance for loan losses |      |               | 14.67   | %    |              |         | 28.91   | %

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Note 4. Analysis of the allowance for loan losses (continued)

The following table summarizes changes in the allowance for loan losses
arising from loans charged- off, recoveries on loans previously
charged-off, and addition or reductions to the allowance which have been
charged or credited to expense.

|                                            |                                       |                                                     |                              |        |           |   |        |              |       |    |  
|------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ---------------------------- | ------ | --------- | - | ------ | ------------ | ----- | -- | -
|(Dollars in thousands)                      |                                       | Nine                                                |                              |        | Twelve    |  
|                                            |                                       | Months                                              |                              |        | Months    |  
|                                            |                                       |                                                     |                              |        | Ended     |   |        | Ended        |      
|                                            |                                       |                                                     |                              |        | Sept. 30, |   |        | December 31, |      
|                                            |                                       |                                                     |                              |        | 2002      |   |        | 2001         |      
|                                            |                                       |                                                     |                              |        |           |   |        |              |      
|                                            |                                       | Balance at beginning of period                      |                              | $      | 1,048     |   |        | $            | 1,053 |   
|                                            |                                       | Charge-offs                                         |                              |        | (6        | ) |        |              | (36   | ) 
|                                            |                                       | Recoveries                                          |                              |        | 8         |   |        |              | 31    |   
|                                            |                                       |                                                     |                              |        |           |  
|                                            |                                       |                                                     | Net (charge-offs) recoveries |        |           | 2 |        |              |       | (5 | )
|                                            |                                       | Additions (reductions) to allowance
for loan losses |                              |        |          |   |        |              |      |   
|                                            |                                       |                                                     |                              |        |           |  
|                                            |                                       | Balance at end of period                            |                              | $      | 1,050     |   |        | $            | 1,048 |   
|                                            |                                       |                                                     |                              |        |           |  
|Average loans outstanding during the period |                                       | $                                                   | 99,545                       |        |           | $ | 86,794 |             
|                                            |                                       |                                                     |                              |        |           |  
|Loans outstanding at end of period          |                                       | $                                                   | 99,901                       |        |           | $ | 92,832 |             
|                                            |                                       |                                                     |                              |        |           |  
|Allowance as a percent of:                  |                                       |                                                     |                              |        |           |   |        |             
|                                            | Total loans at end of period          |                                                     |                              | 1.05   | %         |   |        | 1.13         | %    
|                                            |                                       |                                                     |                              |        |           |  
|                                            | Non-performing loans at end of period |                                                     |                              | 681.82 | %         |   |        | 345.87       | %    
|                                            |                                       |                                                     |                              |        |           |  
|Net charge-offs as a percent of:            |                                       |                                                     |                              |        |           |   |        |             
|                                            | Average loans outstanding             |                                                     |                              | .00    | %         |   |        | (00          | )%   
|                                            |                                       |                                                     |                              |        |           |  
|                                            | Allowance for loan losses             |                                                     |                              | (.19   | )%        |   |        | .48          | %    
|                                            |                                       |                                                     |                              |        |           |  

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Note 5. Earnings per share



|5. |  | A reconciliation of basic and diluted earnings per share for the three
month and nine month periods; ending September 30 follows:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | (Dollars in thousands, except per share amounts)                                                                                 

|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |       |  |   |         |       | 
|------------------------------------------------------------------ | -------------------------------------------- | - | ------------------ | ----- |  | ----------------- | ------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                                   |                                              |   | Three months ended |       |  | Nine months ended |        
|                                                                   |                                              |   | September 30,      |       |  | September 30,     |        
|                                                                   |                                              |   |                    |       |  |                   |        
|                                                                   |                                              |   | 2002               |       |  | 2001              |         |       | 2002 |   |         | 2001  | 
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |       | 
|Basic earnings per share
Net income                                |                                              | $ | 497                |       |  | $                 | 437     |       |      | $ | 1,391   |       |  | $ | 1,286   |      
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|Weighted average shares
outstanding for basic
earnings per share   |                                              |   | 589,515            |       |  |                   | 598,056 |       |      |   | 592,469 |       |  |   | 598,056 |      
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|                                                                   | Per share amount                             |   | $                  | .84   |  |                   | $       | .73   |      |   | $       | 2.35  |  |   | $       | 2.15  | 
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|Diluted earnings per share
Net income                              |                                              | $ | 497                |       |  | $                 | 437     |       |      | $ | 1,391   |       |  | $ | 1,286   |      
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|Weighted average shares
outstanding for basic
earnings per share   |                                              |   | 589,515            |       |  |                   | 598,056 |       |      |   | 592,469 |       |  |   | 598,056 |      
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|                                                                   | Effect of dilutive securities-
Stock options |   |                    | 4,678 |  |                   |         | 1,606 |      |   |         | 4,136 |  |   |         | 4,773 | 
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|Weighted average shares
outstanding for diluted
earnings per share |                                              |   | 594,193            |       |  |                   | 599,662 |       |      |   | 596,605 |       |  |   | 602,829 |      
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      
|Per share amount                                                   |                                              | $ | .84                |       |  | $                 | .73     |       |      | $ | 2.33    |       |  | $ | 2.13    |      
|                                                                   |                                              |   |                    |       |  |                   |         |       |      |   |         |      

Note 6. Stock Option Plan



|6. |  | Options to buy common stock are granted to officers and other key
employees under a Stock Option
Plan which provides for the issuance of up to 40,000 shares of common
stock. The plan provides for stock options to be granted at prices that
approximate the fair value of the stock at the respective dates of grant.
The vesting of stock options does not start until two years from the date
of the grant. After two years, the options will vest evenly over a three
year period. The plan terminates on May 20, 2003. All shares and per
share amounts have been restated for stock splits.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Note 6. Stock Option Plan (continued)

A summary of activity in the plan is as follows:

|                             |  |           |        |   |             |  |        |          |         |          |         |              |  |          |      | 
|---------------------------- |  | --------- | ------ | - | ----------- |  | ------ | -------- | ------- | -------- | ------- | ------------ |  | -------- | ---- | 
|                             |  |           |        |   |             |  |        |          |         |          |         |              |  | Weighted |     
|                             |  |           |        |   |             |  |        |          |         | Weighted |         | Average Fair | 
|                             |  | Available |        |   |             |  |        |          | Average |          |         | Value of     | 
|                             |  | For       |        |   | Options     |  |        | Exercise |         |          | Options |             
|                             |  | Grant     |        |   | Outstanding |  |        | Price    |         |          | Granted |             
|                             |  |           |        |   |             |  |        |          |         |          |         |             
|Balance at
December 31, 2001 |  |           | 13,893 |   |             |  | 22,007 |          |         | $        | 32.12   |              |  |          |      | 
|Granted                      |  |           | (4,000 | ) |             |  | 4,000  |          |         |          | 38.00   |              |  | $        | 1.10 | 
|Exercised                    |  |           |       |   |             |  | (1,000 | )        |         |          | 18.00   |              |  |          |      | 
|                             |  |           |        |   |             |  |        |          |         |          |         |              |  |         
|Balance
September 30, 2002   |  |           | 9,893  |   |             |  | 25,007 |          |         | $        | 33.63   |              |  |          |      | 
|                             |  |           |        |   |             |  |        |          |         |          |         |              | 



| |  | For the options outstanding September 30, 2002, the range of exercise
prices was $12.75 to $41.50 per share with a weighted average remaining
contractual term of 5.10 years. At September 30, 2002, 13,028 were
exercisable at a weighted average price of $28.61 per share. Had
compensation cost for stock options been measured using SFAS No. 123, net
income and earnings per share would have been the pro forma amounts
indicated.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(Dollars in thousands, except per share amounts)

|                                   |                     |  |                |     |  |                |   |     |                |  |   |                |  |  |   |       | 
|---------------------------------- | ------------------- |  | -------------- | --- |  | -------------- | - | --- | -------------- |  | - | -------------- |  |  | - | ----- | 
|                                   |                     |  | Three Months   |     |  | Three Months   |   |     | Nine Months    |  |   | Nine Months    | 
|                                   |                     |  | Ended          |     |  | Ended          |   |     | Ended          |  |   | Ended          | 
|                                   |                     |  | Sept. 30, 2002 |     |  | Sept. 30, 2001 |   |     | Sept. 30, 2002 |  |   | Sept. 30, 2001 | 
|                                   |                     |  |                |     |  |                |   |     |                |  |   |                | 
|Net income                         |                     |  |                |     |  |                |   |     |                |  |   |                |  |  |   |      
|                                   | As reported         |  | $              | 497 |  |                | $ | 437 |                |  | $ | 1,391          |  |  | $ | 1,286 | 
|                                   | Pro forma           |  |                | 488 |  |                |   | 426 |                |  |   | 1,383          |  |  |   | 1,275 | 
|Basic and diluted income
per share |                     |  |                |     |  |                |   |     |                |  |   |                |  |  |   |      
|                                   | As reported basic   |  | $              | .84 |  |                | $ | .73 |                |  | $ | 2.35           |  |  | $ | 2.15  | 
|                                   | Pro forma basic     |  |                | .82 |  |                |   | .71 |                |  |   | 2.33           |  |  |   | 2.13  | 
|                                   | As reported diluted |  |                | .84 |  |                |   | .73 |                |  |   | 2.33           |  |  |   | 2.13  | 
|                                   | Pro forma diluted   |  |                | .82 |  |                |   | .71 |                |  |   | 2.32           |  |  |   | 2.11  | 

The pro forma effects are computed with option pricing models. For the options
granted during the nine months ended September 30, 2002 the following weighted
average assumptions as of the grant date were used.

|                                |  |         |      |  
|------------------------------- |  | ------- | ---- | -
|Risk-free interest rate         |  |         | 4.95 | %
|Expected option life            |  | 5 years
|Expected stock price volatility |  |         | 4.02 | %
|Expected dividend yield         |  |         | 3.44 | %




Item 2. Managements discussion and analysis of financial condition and
results of operations



| |  | The following discussion and analysis of financial condition and results of
operations provides additional information to assess the Consolidated
Financial Statements of the Registrant and its wholly owned subsidiaries.
Capital Directions, Inc. is a one-bank holding company, which commenced
operations on July 22, 1988. This was facilitated by the acquisition of
100% of the outstanding shares of Mason State Bank in an exchange of common
stock. Mason State Mortgage Company, LLC was formed July 16, 2002. This
was facilitated by a 99% ownership provided by Mason State Bank and
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Item 2. Managements discussion and analysis of financial condition and
results of operations
(continued)

1% ownership provided by Capital Directions, Inc. The Company and its
subsidiaries provide banking
and financial services in the banking industry. Substantially all revenue
and services are derived from banking products and services. The Banks
primary services include accepting retail deposits and making residential,
consumer and commercial loans.

The corporation is not aware of any market or institutional trends, events
or circumstances that will have or are reasonably likely to have a material
effect on liquidity, capital resources, or results of operations except as
discussed herein.

Financial Condition (In thousands)

Assets totaled $127,958 at September 30, 2002. The 9.11% increase of $10,681
from $117,277 at December 31, 2001 resulted primarily from an increase of
$1,189 in cash and non interest bearing deposits, an increase of $1,397 in
Federal funds sold, an increase of $702 in short term interest bearing
deposits, a $345 decrease in investment securities, and an increase of
$7,069 in total loans.

Cash and cash equivalents have increased $3,288 or 47.15% in the nine month
period from December 31, 2001 to September 30, 2002. This is a result of an
increase in all categories of cash and cash equivalents due to increased
deposit balances.

Total outstanding loans have increased $7,069 during the first nine months
of 2002. This is an increase of 7.61% from December 31, 2001. This
increase has been concentrated in the residential real estate mortgage
portfolio, while commercial and installment loans have decreased slightly.
Currently, $531 in 1-4 family residential loans reside in the held-for-sale
category and as of September 30, 2002, all loans had been committed for
sale. During the first three quarters of 2002, the Company decided to sell
certain loans into the secondary market as part of the asset and liability
strategy to minimize risk associated with the recent reduction in interest
rates. Management will closely monitor this strategy in the near term.

The allowance for loan losses increased $2 or .19% during the nine month
period ending September 30, 2002. At September 30, 2002 the allowance as a
percent of outstanding loans was 1.05% compared to 1.13% at December 31,
2001. Management continues to maintain the allowance for loan losses at a
level considered appropriate to absorb losses inherent in the portfolio.

Total deposits as of September 30, 2002 compared to year-end 2001 increased
by $6,130 or 8.64%. The increase was recognized in both the non-interest
and interest bearing deposits, partially due to additional public fund
monies that were deposited. In addition, deposits from other financial
institutions have also been obtained through a new deposit gathering program
undertaken in the third quarter.

Total shareholders equity increased $361 or 2.62% in the first nine months
of 2002. Net income of $1,391 increased shareholders equity, while
dividends declared, repurchase of common stock of $263 and $93 net
unrealized loss on available for sale securities reduced shareholders
equity. Book value per share was $23.93 at September 30, 2002 compared to
$23.09 at December 31, 2001.

Results of Operations (In thousands)

For the third quarter of 2002, net income was $497, basic earnings per share
was $.84, and diluted earnings per share was $.84, compared to $437, $.73,
and $.73 for the same period in 2001. During the nine-month period ending
September 30, 2002, net income totaled $1,391, basic earnings per share was
$2.35, and diluted earnings per share was $2.33, compared to $1,286, $2.15
and $2.13 for the same period in 2001. Average earning assets increased by
7.32% or $7,835 from September 30, 2001

9



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##### Table of Contents



Item 2. Managements discussion and analysis of financial condition and
results of operations
(continued)

to September 30, 2002. The average yield on earnings assets decreased
to 6.99% for the nine month period ended September 30, 2002 from
7.66% for the comparable time period in 2001. Average costs
for rate related liabilities decreased to 3.58% at September 30, 2002
from 4.33% at September 30, 2001. Net interest margin decreased to 4.04%
for the first nine months of 2002 compared to 4.10%
in the same period of 2001. This is a result of the continued falling rate
environment. The Company is experiencing a declining margin related
primarily to the change in the structure of earning assets. As commercial
loan demand declined during 2001 and 2002, those funds were used to increase
the securities portfolio and residential mortgage portfolios, which tend to
be at lower yields as compared to commercial loans. A portion of security
maturities in 2002 were also used to fund residential loan growth. The
following table illustrates the change in net interest margin for the nine
months ended September 30, 2002 and September 30, 2001.

|                                 |                                    |   |         |         |  |              |       |       |         |        |      |         |         |   |             |         |  |         |       |        |  |  |      |      |  
|-------------------------------- | ---------------------------------- | - | ------- | ------- |  | ------------ | ----- | ----- | ------- | ------ | ---- | ------- | ------- | - | ----------- | ------- |  | ------- | ----- | ------ |  |  | ---- | ---- | -
|                                 |                                    |   |         |         |  |              | 2002  |       |         |        |      |         |         |   |             |         |  | 2001    |       |        |  |  |     
|                                 |                                    |   |         |         |  |              |       |       |         |        |      |         |         |   |             |         |  |         |       |        |  |  |     
|                                 |                                    |   | Average |         |  |              |       |       |         | Yield/ |      |         | Average |   |             |         |  |         |       | Yield/ | 
|                                 |                                    |   | Balance |         |  | Interest (1) |       |       | Rate(1) |        |      | Balance |         |   | Interest(1) |         |  | Rate(1) |      
|                                 |                                    |   |         |         |  |              |       |       |         |        |      |         |         |   |             |         |  |         |      
|Loans (taxable)                  |                                    | $ | 99,378  |         |  | $            | 5,298 |       |         |        | 7.13 | %       |         | $ | 84,747      |         |  | $       | 5,076 |        |  |  | 8.01 | %   
|Loans (non-taxable)              |                                    |   | 167     |         |  |              | 9     |       |         |        | 7.21 | %       |         |   | 585         |         |  |         | 38    |        |  |  | 8.68 | %   
|Loans held for sale              |                                    |   | 114     |         |  |              | 6     |       |         |        | 7.04 | %       |         |   | 476         |         |  |         | 21    |        |  |  | 5.90 | %   
|Taxable securities               |                                    |   | 10,350  |         |  |              | 490   |       |         |        | 6.33 | %       |         |   | 13,374      |         |  |         | 671   |        |  |  | 6.71 | %   
|Non-taxable securities           |                                    |   | 3,254   |         |  |              | 183   |       |         |        | 7.52 | %       |         |   | 3,029       |         |  |         | 179   |        |  |  | 7.90 | %   
|Federal funds sold and other     |                                    |   | 1,639   |         |  |              | 21    |       |         |        | 1.71 | %       |         |   | 4,856       |         |  |         | 155   |        |  |  | 4.27 | %   
|                                 |                                    |   |         |         |  |              |       |       |         |        |      |         |         |   |             |         |  |         |       |       
|                                 | Total interest earning assets      |   | $       | 114,902 |  |              | $     | 6,007 |         |        |      | 6.99    | %       |   | $           | 107,067 |  |         | $     | 6,140  |  |  |      | 7.66 | %
|Interest bearing demand deposits |                                    | $ | 10,202  |         |  | $            | 42    |       |         |        | .55  | %       |         | $ | 9,180       |         |  | $       | 42    |        |  |  | .61  | %   
|Savings deposits                 |                                    |   | 26,587  |         |  |              | 369   |       |         |        | 1.86 | %       |         |   | 22,716      |         |  |         | 483   |        |  |  | 2.84 | %   
|Time deposits <$100,000          |                                    |   | 16,167  |         |  |              | 503   |       |         |        | 4.16 | %       |         |   | 17,292      |         |  |         | 707   |        |  |  | 5.47 | %   
|Time deposits $100,000 or more   |                                    |   | 7,444   |         |  |              | 198   |       |         |        | 3.56 | %       |         |   | 10,180      |         |  |         | 383   |        |  |  | 5.03 | %   
|Federal funds purchased          |                                    |   | 415     |         |  |              | 6     |       |         |        | 1.93 | %       |         |   | 11          |         |  |         | 1     |        |  |  | 6.08 | %   
|Other borrowings                 |                                    |   | 33,622  |         |  |              | 1,417 |       |         |        | 5.63 | %       |         |   | 28,732      |         |  |         | 1,242 |        |  |  | 5.78 | %   
|                                 |                                    |   |         |         |  |              |       |       |         |        |      |         |         |   |             |         |  |         |       |       
|                                 | Total interest bearing liabilities |   | $       | 94,437  |  |              | $     | 2,535 |         |        |      | 3.58    | %       |   | $           | 88,111  |  |         | $     | 2,858  |  |  |      | 4.33 | %
|Net Interest                     |                                    |   |         |         |  | $            | 3,472 |       |         |        | 3.41 | %       |         |   |             |         |  | $       | 3,282 |        |  |  | 3.33 | %   
|Net Interest Margin              |                                    |   |         |         |  |              |       |       |         |        | 4.04 | %       |         |   |             |         |  |         |       |        |  |  | 4.10 | %   



|(1) |  | Earning assets are presented on a fully taxable equivalent
basis, using a 34% tax rate, and
average yields/rates are annualized.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

The two variables that have the most significant effect on the change in the
net interest income are volume and rate. The change in interest due to both
volume and rate has been allocated to volume and rate changes in proportion
to the relationship of the absolute dollar amounts of the change in each.
As illustrated in the following table, the Corporation had an increase in
net interest income due primarily to changes due to volume, while interest
rate changes among assets were greater than changes among liabilities.

10



---



##### Table of Contents



Item 2. Managements discussion and analysis of financial condition and
results of operations (continued)

|                              |                                   |                        |   |        |     |  |      |      |      |       |   |      |      |  
|----------------------------- | --------------------------------- | ---------------------- | - | ------ | --- |  | ---- | ---- | ---- | ----- | - | ---- | ---- | -
|Change in Net Interest Income |                                   |                        |   |        |     |  |      |      |      |       |   |     
|(Dollars in thousands)        |                                   | 2002 compared to 2001  |  
|                              |                                   |                        |   | Volume |     |  | Rate |      |      | Total |  
|                              |                                   |                        |   |        |     |  |      |      |      |       |  
|Earning Assets                |                                   |                        |   |        |     |  |      |      |      |       |   |     
|                              | Loans (taxable)                   |                        | $ | 817    |     |  | $    | (595 | )    |       | $ | 222  |     
|                              | Loans (non-taxable)               |                        |   | (23    | )   |  |      | (6   | )    |       |   | (29  | )   
|                              | Loans held for sale               |                        |   | (18    | )   |  |      | 3    |      |       |   | (15  | )   
|                              | Taxable investment securities     |                        |   | (145   | )   |  |      | (36  | )    |       |   | (181 | )   
|                              | Non-taxable investment securities |                        |   | 13     |     |  |      | (9   | )    |       |   | 4    |     
|                              | Federal funds sold                |                        |   | (70    | )   |  |      | (64  | )    |       |   | (134 | )   
|                              |                                   |                        |   |        |     |  |      |      |     
|                              |                                   | Total interest income  |   | $      | 574 |  |      | $    | (707 | )     |   | $    | (133 | )
|                              |                                   |                        |   |        |     |  |      |      |     
|Interest Bearing Liabilities  |                                   |                        |   |        |     |  |      |      |      |       |   |     
|                              | Interest bearing demand deposits  |                        | $ | 4      |     |  | $    | (4   | )    |       | $ |     |     
|                              | Savings deposits                  |                        |   | 73     |     |  |      | (187 | )    |       |   | (114 | )   
|                              | Time deposits <$100,000           |                        |   | (44    | )   |  |      | (160 | )    |       |   | (204 | )   
|                              | Time deposits $100,000 or more    |                        |   | (89    | )   |  |      | (96  | )    |       |   | (185 | )   
|                              | Federal funds purchased           |                        |   | 7      |     |  |      | (2   | )    |       |   | 5    |     
|                              | Other borrowings                  |                        |   | 207    |     |  |      | (32  | )    |       |   | 175  |     
|                              |                                   |                        |   |        |     |  |      |      |     
|                              |                                   | Total interest expense |   | $      | 158 |  |      | $    | (481 | )     |   | $    | (323 | )
|                              |                                   |                        |   |        |     |  |      |      |     
|                              | Net Interest Income               |                        | $ | 416    |     |  | $    | (226 | )    |       | $ | 190  |     
|                              |                                   |                        |   |        |     |  |      |      |     

Earning assets are presented on a fully taxable equivalent basis.

The provision for loan losses was $0 during the third quarter of 2002,
unchanged from the same period of 2001. For the nine months ended September
30, the provision was $0 in 2002 compared to $0 in 2001. This is consistent
with the decline in non-performing loans.

Non-interest income increased $67 or 34.90% during the third quarter of 2002
when compared to the third quarter of 2001. This is primarily attributable
to an increase in the recognition of mortgage servicing rights on loans sold
into the secondary market, an increase in the gain recognized on the sale of
mortgage loans which was partially offset by a decrease in service charge
income on deposit accounts, commissions earned on the sale of investments to
customers and lower ATM fee income. For the nine months ended September 30,
non-interest income has increased $54 or 8.87% when compared to the similar
period in 2001. This is a result of the same factors affecting the third
quarter decrease.

Non-interest expense increased $27 or 4.29% when comparing the third quarter
of 2002 to 2001. Most of this increase is a result of increased personnel
costs for salaries and employee benefits as some vacant positions have been
replaced. This is partially offset by a decrease in premises and equipment
costs. For the nine months ended September 30, 2002 non-interest expense
increased $94 or 4.80% compared to the same period in 2001. Salaries and
benefits increased $84 or 7.71% as some vacant positions have been filled.
Increases were also realized in legal expense, other real estate expense and
consulting services.

The federal income tax provision for the third quarter of 2002 was $228, up
$32 for the same period in 2001. Year-to-date the income tax provision has
increased by $54 or 9.44%. This increase reflects a higher taxable income
for 2002. The effective tax rate was 31% for the three and nine months
ended September 30, 2002 and 2001. The effective tax rates are lower than
the 34% statutory rate due to non-taxable income on loans and investments.

11



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##### Table of Contents



Item 2. Managements discussion and analysis of financial condition and
results of operations
(continued)



| |  | Liquidity and interest rate risk (In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The primary objective of asset/liability management is to assure the
maintenance of adequate liquidity and maximize net interest income by
maintaining appropriate maturities and balances between interest sensitive
earning assets and interest bearing liabilities. Liquidity management
ensures sufficient funds are maintained to meet the cash withdrawal
requirements of depositors and the credit demand of borrowers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Sources of liquidity include federal funds sold, investment security
maturities and principal payments. A net average balance of $1,644 in
federal funds sold was maintained during the third quarter of 2002. As a
member of the Federal Home Loan Bank system, the Bank has access to an
alternate funding source, lower cost for credit services, and an additional
tool to manage interest rate risk. During the first nine months of 2002,
the Bank used this source of funding to offset security purchases to be used
as collateral for public deposits. Other sources of liquidity include
internally generated cash flow, repayments and maturities of loans,
borrowing and normal deposit growth. The primary source of funds for the
parent company is the upstream of dividends from the Bank. Management
believes these sources of liquidity are sufficient for the Bank and parent
company to continue current business plans.
|
| |  | At September 30, 2002 the securities available for sale were valued at
$11,455. It is not anticipated that management will use these funds due to
the optional sources that may be available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Interest rate sensitivity management seeks to maximize net interest margin
through periods of changing interest rates. The Bank develops strategies to
assure desired levels of interest sensitive assets and interest bearing
liabilities mature or reprice within selected time frames.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Strategies include the use of variable rate loan products in addition to
managing deposit accounts and maturities in the investment portfolio. The
following table, using recommended regulatory standards,
reflects the rate sensitive position or the difference between loans and
investments, and liabilities that mature or reprice within the next year and
beyond. The financial industry has generally referred to this difference as
GAP and its handling as GAP Management. Throughout the third quarter of
2002, the results of the GAP analysis were within the Banks policy
guidelines. At September 30, 2002, the percentage of rate sensitive assets
to rate sensitive liabilities within the one-year time horizon was 57%.                                                                                                                                                                                          
|
| |  | The following table shows the Corporations GAP position as of September 30,
2002. The Corporation has a liability sensitive position of approximately
$27,748 within the one-year time horizon, which indicates higher net
interest income may be earned if rates decrease during the period. Due to
the limitations of GAP analysis, modeling is also used to enhance
measurement and control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

12



---



##### Table of Contents



GAP Measurement (Dollars in thousands)



|                              |       |   |         |        |  |       |         |        |         |   |         |         |  |   |         |       |  |   |         |       | 
|----------------------------- | ----- | - | ------- | ------ |  | ----- | ------- | ------ | ------- | - | ------- | ------- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                              |       |   | 0-30    |        |  | 31-90 |         |        | 2nd     |   |         | 3rd     |  |   | 4th     |      
|                              |       |   | Days    |        |  | Days  |         |        | Quarter |   |         | Quarter |  |   | Quarter |      
|                              |       |   |         |        |  |       |         |        |         |   |         |         |  |   |         |      
|Assets                        |       |   |         |        |  |       |         |        |         |   |         |         |  |   |         |       |  |   |         |      
|Loans                         |       | $ | 3,657   |        |  | $     | 8,683   |        |         | $ | 3,005   |         |  | $ | 2,568   |       |  | $ | 3,074   |      
|Allowance for
loan losses     |       |   |        |        |  |       |        |        |         |   |        |         |  |   |        |       |  |   |        |      
|Loans held for
Sale           |       |   | 531     |        |  |       |         |        |         |   |         |         |  |   |         |       |  |   |         |      
|Investments                   |       |   | 2,042   |        |  |       | 2,428   |        |         |   | 1,028   |         |  |   | 1,532   |       |  |   | 2,107   |      
|Short-term
Investments        |       |   | 5,737   |        |  |       | 693     |        |         |   |        |         |  |   |        |       |  |   |        |      
|Other non-
earning assets     |       |   |        |        |  |       |        |        |         |   |        |         |  |   |        |       |  |   |        |      
|                              |       |   |         |        |  |       |         |        |         |   |         |         |  |   |        
|                              | Total |   | $       | 11,967 |  |       | $       | 11,804 |         |   | $       | 4,033   |  |   | $       | 4,100 |  |   | $       | 5,181 | 
|                              |       |   |         |        |  |       |         |        |         |   |         |         |  |   |        
|Liabilities                   |       |   |         |        |  |       |         |        |         |   |         |         |  |   |         |       |  |   |         |      
|Non interest
bearing
deposits |       | $ |        |        |  | $     |        |        |         | $ |        |         |  | $ |        |       |  | $ |        |      
|Interest
bearing
deposits     |       |   | 45,000  |        |  |       | 3,930   |        |         |   | 2,377   |         |  |   | 1,891   |       |  |   | 1,698   |      
|Long-term
FHLB
borrowings     |       |   |        |        |  |       | 707     |        |         |   | 3,230   |         |  |   | 4,000   |       |  |   | 2,000   |      
|Other
liabilities             |       |   |        |        |  |       |        |        |         |   |        |         |  |   |        |       |  |   |        |      
|Capital                       |       |   |        |        |  |       |        |        |         |   |        |         |  |   |        |       |  |   |        |      
|                              |       |   |         |        |  |       |         |        |         |   |         |         |  |   |        
|                              | Total |   | $       | 45,000 |  |       | $       | 4,637  |         |   | $       | 5,607   |  |   | $       | 5,891 |  |   | $       | 3,698 | 
|                              |       |   |         |        |  |       |         |        |         |   |         |         |  |   |        
|GAP                           |       | $ | (33,033 | )      |  | $     | 7,167   |        |         | $ | (1,574  | )       |  | $ | (1,791  | )     |  | $ | 1,483   |      
|Cumulative                    |       |   |         |        |  |       |         |        |         |   |         |         |  |   |         |       |  |   |         |      
|GAP                           |       | $ | (33,033 | )      |  | $     | (25,866 | )      |         | $ | (27,440 | )       |  | $ | (29,231 | )     |  | $ | (27,748 | )    
|GAP ratio                     |       |   | 27      | %      |  |       | 255     | %      |         |   | 72      | %       |  |   | 70      | %     |  |   | 140     | %    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                              |       |   |         |        |  |       |         |        |       |   |         |        |  |   |        |        |  |   |        |         | 
|----------------------------- | ----- | - | ------- | ------ |  | ----- | ------- | ------ | ----- | - | ------- | ------ |  | - | ------ | ------ |  | - | ------ | ------- | 
|                              |       |   | Annual  |        |  | 1-3   |         |        | 3-5   |   |         | Over 5 |  |   |        |        | 
|                              |       |   | Total   |        |  | Years |         |        | Years |   |         | Years  |  |   | Total  |       
|                              |       |   |         |        |  |       |         |        |       |   |         |        |  |   |        |       
|Assets                        |       |   |         |        |  |       |         |        |       |   |         |        |  |   |        |        |  |   |        |        
|Loans                         |       | $ | 20,987  |        |  | $     | 4,017   |        |       | $ | 12,432  |        |  | $ | 62,465 |        |  | $ | 99,901 |        
|Allowance for
loan losses     |       |   |        |        |  |       |        |        |       |   |        |        |  |   |       |        |  |   | (1,050 | )      
|Loans held for
Sale           |       |   | 531     |        |  |       |         |        |       |   |         |        |  |   |        |        |  |   | 531    |        
|Investments                   |       |   | 9,137   |        |  |       | 3,623   |        |       |   | 602     |        |  |   | 460    |        |  |   | 13,822 |        
|Short-term
Investments        |       |   | 6,430   |        |  |       |        |        |       |   |        |        |  |   |       |        |  |   | 6,430  |        
|Other non-
earning assets     |       |   |        |        |  |       |        |        |       |   |        |        |  |   |       |        |  |   | 8,324  |        
|                              |       |   |         |        |  |       |         |        |       |   |         |        |  |   |       
|                              | Total |   | $       | 37,085 |  |       | $       | 7,640  |       |   | $       | 13,034 |  |   | $      | 62,925 |  |   | $      | 127,958 | 
|                              |       |   |         |        |  |       |         |        |       |   |         |        |  |   |       
|Liabilities                   |       |   |         |        |  |       |         |        |       |   |         |        |  |   |        |        |  |   |        |        
|Non interest
bearing
deposits |       | $ |        |        |  | $     |        |        |       | $ |        |        |  | $ |       |        |  | $ | 11,869 |        
|Interest
bearing
deposits     |       |   | 54,896  |        |  |       | 7,235   |        |       |   | 2,993   |        |  |   | 70     |        |  |   | 65,194 |        
|Long-term
FHLB
borrowings     |       |   | 9,937   |        |  |       | 5,249   |        |       |   | 9,058   |        |  |   | 10,864 |        |  |   | 35,108 |        
|Other
liabilities             |       |   |        |        |  |       |        |        |       |   |        |        |  |   |       |        |  |   | 1,663  |        
|Capital                       |       |   |        |        |  |       |        |        |       |   |        |        |  |   |       |        |  |   | 14,124 |        
|                              |       |   |         |        |  |       |         |        |       |   |         |        |  |   |       
|                              | Total |   | $       | 64,833 |  |       | $       | 12,484 |       |   | $       | 12,051 |  |   | $      | 10,934 |  |   | $      | 127,958 | 
|                              |       |   |         |        |  |       |         |        |       |   |         |        |  |   |       
|GAP                           |       | $ | (27,748 | )      |  | $     | (4,844  | )      |       | $ | 983     |        |  | $ | 51,991 |        |  |   |        |        
|Cumulative                    |       |   |         |        |  |       |         |        |       |   |         |        |  |   |        |        |  |   |        |        
|GAP                           |       | $ | (27,748 | )      |  | $     | (32,592 | )      |       | $ | (31,609 | )      |  | $ | 20,382 |        |  |   |        |        
|GAP ratio                     |       |   | 57      | %      |  |       | 61      | %      |       |   | 108     | %      |  |   | 575    | %      |  |   |        |        



| |  | Capital Resources                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Corporations capital adequacy is reviewed regularly to ensure that
sufficient capital is available to meet current and future funding needs and
comply with regulatory requirements. Shareholders equity, excluding the
net unrealized gain on securities available for sale, increased $454 or 7%
to

13



---



##### Table of Contents





| |  | Item 2. Managements discussion and analysis of financial condition and
results of operations
(continued)                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | $13,943 for the first nine months of 2002. This represents 10.90% of
total assets. At September 30, 2001, the similar ratio of shareholders
equity to total assets was 11.41%. Dividends declared increased by 10.19%
to $692 in 2002 compared to $628 in 2001.                                                                                                                                                                                                                                                      
|
| |  | Regulators established risk-based capital guidelines that became effective
December 31, 1990. Under the guidelines, minimum capital levels are
established for risk based and total assets based on perceived risk in asset
categories and certain off-balance sheet items, such as loan commitments and
standby letters of credit. On September 30, 2002, the Bank has a
risk-based total capital to asset ratio of 19.09%. The ratio exceeds the
requirements established by regulatory agencies as shown below.

|                                         |  |        |        |  |       |  |       |        |  |                   |       |  |                         |        |      |   |       |   |       |  |  |  |       |  
|---------------------------------------- |  | ------ | ------ |  | ----- |  | ----- | ------ |  | ----------------- | ----- |  | ----------------------- | ------ | ---- | - | ----- | - | ----- |  |  |  | ----- | -
|(Dollars in thousands)                   |  |        |        |  |       |  |       |        |  | Minimum Required  |       |  |                         |        |      |   |       |   |      
|September 30, 2002                       |  |        |        |  |       |  |       |        |  | For Capital       |       |  | Under Prompt Corrective |       
|                                         |  |        |        |  |       |  |       |        |  | Adequacy Purposes |       |  | Action Regulations      |       
|                                         |  | Actual |        |  |       |  |       |        |  |                   |       |  |                        
|                                         |  | Amount |        |  | Ratio |  |       | Amount |  |                   | Ratio |  |                         | Amount |      |   | Ratio |  
|                                         |  |        |        |  |       |  |       |        |  |                   |       |  |                         |        |      |   |       |  
|Total Capital (to risk
weighted assets)  |  | $      | 14,832 |  |       |  | 19.09 | %      |  | $                 | 6,215 |  |                         |        | 8.00 | % |       | $ | 7,769 |  |  |  | 10.00 | %
|Tier 1 capital (to risk
weighted assets) |  |        | 13,860 |  |       |  | 17.84 |        |  |                   | 3,108 |  |                         |        | 4.00 |   |       |   | 4,661 |  |  |  | 6.00  |  
|Tier 1 capital (to
average assets)       |  |        | 13,860 |  |       |  | 11.22 |        |  |                   | 4,943 |  |                         |        | 4.00 |   |       |   | 6,179 |  |  |  | 5.00  |  



| |  | Bank management does not perceive that future rate changes or inflation will
have a material impact on capital adequacy. It is the opinion of management
that capital and shareholders equity is adequate and will continue to be so
throughout 2002.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Item 3. Quantitative and Qualitative Disclosures about Market Risk



| |  | Not required as Registrant meets requirements to be a small business
filer.
| |  | ---------------------------------------------------------------------------

Item 4. Controls and Procedures Disclosure



| |  | Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of Capital
Directions, Inc.s management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 (c) and 15d 14 (c)
under the Securities Exchange Act of 1934). Based on their evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by
Capital Directions, Inc. in reports that its files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms. Subsequent to the date of their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that there were no
significant changes in Capital Directions, Inc.s internal controls or in
other factors that could significantly affect its internal controls,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



---



##### Table of Contents






Part II  Other Information






| |  | Item 1. Legal proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Corporation is not involved in any material pending legal proceedings to
which the Registrant or its subsidiaries is a party or which any of its
property is subject, except for proceedings which arise in the ordinary
course of business. In the opinion of management, pending legal proceedings
will not have a material effect on the consolidated financial statements of
the Registrant or its subsidiaries as of and for the period ended September
30, 2002.






| |  | Item 2. Changes in securities and use of proceeds                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the nine months ended September 30, 2002, there werent any changes
in the Registrants securities, relevant to the requirements of this
section, that would cause any shareholders rights to be materially
modified, limited or qualified.






| |  | Item 3. Defaults upon senior securities                                             
| |  | ------------------------------------------------------------------------------------
|
| |  | No defaults have occurred involving senior securities on the part of the
Registrant.






| |  | Item 4. Submission of matters to a vote of security holders                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The annual meeting of security holders of the Company was held April 25,
2002. Information concerning the matters brought to a vote of security
holders is contained in the Companys Proxy Statement and Notice of Annual
Meeting of Shareholders held April 25, 2002, as previously filed. There
have been no further matters submitted to a vote of the Registrants
security holders during the nine months ended September 30, 2002.






| |  | Item 5. Other information
| |  | -------------------------
|
| |  | None                     






| |  | Item 6. Exhibits and reports on Form 8-K
| |  | ----------------------------------------



| | 1. |  | Exhibits required by Item 601 of Regulation S-K
See Index to Exhibits on page 19.                   
| | -- |  | ----------------------------------------------------------------------------------------------------
|
| | 2. |  | Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended September
30, 2002.

15



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                         |                   |  |     |                                                     
|------------------------ | ----------------- |  | --- | ----------------------------------------------------
|CAPITAL DIRECTIONS, INC.
|                        
|Date:                    | November 12, 2002 |  | By: | /s/ Timothy GaylordTimothy Gaylord
     President   
|                        
|Date:                    | November 12, 2002 |  |     | By:      /s/ Lois A. TothLois A. Toth
     Treasurer

16



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##### Table of Contents






Certifications

I, Timothy P. Gaylord, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Capital
Directions, Inc.;                                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                         



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of the date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Dare;                                                                                                                        



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

| | a) |  | all significant deficiencies in the design or
operation of internal controls which could
adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, the involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                         



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |                   |  |  |     |  |                                           
|----- | ----------------- |  |  | --- |  | ------------------------------------------
|Date: | November 12, 2002 |  |  |     |  |                                           
|      |                   |  |  | /s/ |  | Timothy P. Gaylord                        
|      |                   |  |  |     | 
|      |                   |  |  |     |  | Timothy P. Gaylord
Chief Executive Officer

17



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##### Table of Contents



Certifications

I, Lois A. Toth, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Capital
Directions, Inc.;                                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                         

|
|
|
|
|
|
|

|
|
|

|
|
|
|
|

|
|
|

|      |                   |  |     |                                        
|----- | ----------------- |  | --- | ---------------------------------------
|Date: | November 12, 2002 |  |     |                                        
|     
|      |                   |  | /s/ | Lois A. TothLois A. Toth
     Treasurer

18



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##### Table of Contents






Index to Exhibits

The following exhibits are filed or incorporated by reference as part of this
report:

|     |  |                                                                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2    |  | Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession  Consolidation
Agreement included in Amendment No. 1 to Form S-4 Registrant Statement No. 33-20417
|     |  |                                                                                                                                                                                
|3    |  | Instruments Defining the Rights of Security Holders, Including Debentures  Not applicable                                                                                     
|     |  |                                                                                                                                                                                
|11   |  | Statement Regarding Computation of Per Share Earnings  Not applicable                                                                                                         
|     |  |                                                                                                                                                                                
|15   |  | Letter Regarding Unaudited Interim Financial Information  Not applicable                                                                                                      
|     |  |                                                                                                                                                                                
|18   |  | Letter Regarding Change in Accounting Principals  Not applicable                                                                                                              
|     |  |                                                                                                                                                                                
|19   |  | Previous Unfiled Documents  Not applicable                                                                                                                                    
|     |  |                                                                                                                                                                                
|20   |  | Report Furnished to Security Holders  Not applicable                                                                                                                          
|     |  |                                                                                                                                                                                
|23   |  | Published Report Regarding Matters Submitted to Vote of Security Holders  Not applicable                                                                                      
|     |  |                                                                                                                                                                                
|24   |  | Consents of Experts and Counsel  Not applicable                                                                                                                               
|     |  |                                                                                                                                                                                
|25   |  | Power of Attorney  Not applicable                                                                                                                                             
|     |  |                                                                                                                                                                                
|27   |  | Additional Exhibits  Not applicable                                                                                                                                           
|     |  |                                                                                                                                                                                
|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                        
|     |  |                                                                                                                                                                                
|99.2 |  | Certification Pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                         

19