OFFICIAL STATEMENT DATED AUGUST 21, 2007 NEW ISSUE – BOOK ENTRY ONLY In the opinion of McGuireWoods LLP, Bond Counsel, assuming continuous compliance with certain covenants described herein, under existing law, the interest on the Bonds (a) is excludable from gross income of the owners thereof for Federal income tax purposes, and (b) is not an enumerated item of tax preference or adjustment for purposes of the Federal alternative minimum tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on corporations, and may be subject to the branch profits tax imposed on foreign corporations engaged in a trade or business in the United States. It is also the opinion of Bond Counsel that, by the terms of the Enabling Act, the principal of and interest on the Bonds is exempt from taxation of any kind or nature whatsoever by the State of Maryland and by any county, municipal corporation or other political subdivision thereof; however, the law of the State of Maryland does not expressly refer to, and no opinion is expressed concerning, estate or inheritance taxes, or any other taxes not levied directly on the Bonds or the interest thereon. See the information contained herein under the caption “LEGAL MATTERS – Tax Exemptions”.

$28,900,000 CITY OF ANNAPOLIS, MARYLAND

General Obligation Bonds Public Improvements Bonds

2007 Series

Dated: August 15, 2007 Due: August 1, as shown below Bond Ratings Fitch: AA+ Moody’s: Aa2 S & P: AA Redemption Bonds maturing on or after August 1, 2018, are redeemable in whole or

in part, on or after August 1, 2017 at par. — Page 3 Security General obligations of the City of Annapolis, Maryland Purpose The proceeds are being used to provide funds for the design, planning,

renovation and construction of some or all of the following: Water system, public safety buildings, public garage facilities, educational and recreational facilities, public vehicles and certain roads, public works and other general governmental projects. — Page 1

Interest Payment Dates February 1 and August 1, beginning February 1, 2008 Closing/Settlement On or about September 6, 2007 Denominations $5,000 Book-Entry Only Form The Depository Trust Company, New York, NY Registrar/Paying Agent Manufacturers and Traders Trust Company, Baltimore, MD Bond Counsel McGuireWoods LLP, Baltimore, MD Financial Advisor Davenport & Company LLC, Towson, MD Issuer Contact Director of Finance: (410) 263-7952

MATURITIES, AMOUNTS, INTEREST RATES AND YIELDS OR PRICES

(Accrued interest from August 15, 2007 to be added) ______________________ * The interest rates shown above are the interest rates payable by the City resulting from the successful bid for the Bonds on August 21, 2007 by BB&T Capital Markets. The prices or yields shown above were furnished by the successful bidders for the Bonds. Other information concerning the terms of reoffering of the Bonds, if any, should be obtained from the successful bidders and not from the City (see “SALE AT COMPETITIVE BIDDING” herein).

Priced to the first call date. The Bonds are offered for delivery when, as and if issued, subject to the delivery of the opinion of McGuireWoods LLP, Baltimore, Maryland, Bond Counsel. It is expected that the Bonds in definitive form will be available for delivery on or about September 6, 2007.

Maturing August 1

Principal Amount

Interest Rate*

Price or Yield*

CUSIP

Maturing August 1

Principal Amount

Interest Rate*

Price or Yield*

CUSIP

2008.................... $1,880,000 4.25% 3.63% 035771TN4 2016 ................. $1,930,000 5.00% 4.13% 035771TW4 2009.................... 1,885,000 4.25 3.71 035771TP9 2017 ................. 1,935,000 5.00 4.20 035771TX2 2010................... 5 1,890,000 4.25 3.71 035771TQ7 2018 ................. 1,945,000 5.00 4.28 035771TY0 2011.................... 1,900,000 4.375 3.76 035771TR5 2019 ................. 1,955,000 4.50 4.40 035771TZ7 2012.................... 1,905,000 4.50 3.82 035771TS3 2020 ................. 1,965,000 4.75 4.45 035771UA0 2013.................... 1,910,000 4.50 3.89 035771TT1 2021 ................. 1,975,000 4.75 4.53 035771UB8 2014.................... 1,920,000 5.00 3.97 035771TU8 2022 ................. 1,985,000 4.75 4.58 035771UC6 2015.................... 1,920,000 5.00 4.05 035771TV6

CITY OF ANNAPOLIS

Elected Officials

Mayor Ellen O. Moyer

Aldermen

Richard E. Israel Michael I. Christman David H. Cordle, Sr. Sheila M. Finlayson Julie M. Stankivic

Dr. Classie G. Hoyle Samuel Shropshire Ross H. Arnett, III

_____________________

Certain Appointed Officials Acting City Administrator—Robert D. Agee

Finance Director—Timothy E. Elliott Public Works Director— Vacant

Planning and Zoning Director—Jon L. Arason Recreation and Parks Director—LeeAnn Plumer

Transportation Director—Danielle S. Matland City Attorney—Shaem C. Spencer, Esq.

Acting Central Services Director—Robert Schuetz Police Chief—Joseph S. Johnson

Acting Fire Chief—Jerome W. Smith

_____________________

BOND COUNSEL FINANCIAL ADVISOR McGuireWoods LLP Baltimore, Maryland

Davenport & Company LLC Towson, Maryland

AUDITORS REGISTRAR AND PAYING AGENT

SB & Company, LLC Manufacturers and Traders Trust Company Hunt Valley, Maryland Baltimore, Maryland

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No dealer, broker, salesman or other person has been authorized by the City of Annapolis (the “City”) or the successful bidders for the Bonds to give any information or to make any representations with respect to the City or its general obligation bonds, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by either of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale.

TABLE OF CONTENTS

PageINTRODUCTION........................................................................ 1 The Issuer................................................................................. 1 The Bonds ................................................................................ 1 Security for the Bonds.............................................................. 1 Use of Proceeds........................................................................ 1 Auditors.................................................................................... 1 Official Statement .................................................................... 1 Additional Information............................................................. 2 General..................................................................................... 2 THE BONDS................................................................................ 3 General..................................................................................... 3 Authorization ........................................................................... 3 Redemption .............................................................................. 3 Form and Denominations ......................................................... 4 Payment and Transfer............................................................... 4 Sources of Payment.................................................................. 4 Bondholders’ Remedies ........................................................... 5 Ratings ..................................................................................... 5 BOOK-ENTRY ONLY SYSTEM ............................................... 5 The Depository Trust Company ............................................... 5 Book-Entry Only System – Miscellaneous............................... 7 Termination of Book-Entry Only System................................. 7 LEGAL MATTERS ..................................................................... 7 Approval of Legal Proceedings ................................................ 7 Tax Exemptions ....................................................................... 7 CITY OF ANNAPOLIS ............................................................... 9 The City ................................................................................... 9 CITY GOVERNMENT, ADMINISTRATION AND PERSONNEL............................................................................... 10 General..................................................................................... 10 Mayor and Aldermen of the City.............................................. 10 Certain Administration Officials .............................................. 12 CERTAIN SERVICES AND RESPONSIBILITIES.................... 13 Police and Fire ......................................................................... 13 Recreation and Parks................................................................ 13 Planning and Zoning ................................................................ 13 Public Transportation and Off-Street Parking .......................... 13 Water Supply and Sewerage..................................................... 14 Roadways................................................................................. 14 Refuse Collection and Disposal................................................ 14

Page Market House........................................................................... 14 Dock and Harbor Facilities ...................................................... 14 Organizational Chart of City.................................................... 15 Pension and Retirement System............................................... 15 Accounting for Annual Vacation and Disability Leave ........... 16 Labor Relations........................................................................ 16 Basis of Accounting................................................................. 16 Other Post-Employment Benefits............................................. 17 Budget...................................................................................... 17 CITY INDEBTEDNESS.............................................................. 17 General..................................................................................... 17 Legal Debt Limitation.............................................................. 17 Overlapping Debt..................................................................... 21 Future Debt .............................................................................. 21 CITY REVENUES AND EXPENDITURES............................... 21 General..................................................................................... 21 2008 Budget............................................................................. 23 Tax Revenues by Source.......................................................... 24 Local Property Taxes ............................................................... 24 Income Taxes........................................................................... 26 Shared Revenue ....................................................................... 26 Overlapping Tax Rate .............................................................. 26 Water and Sewer Funds ........................................................... 27 SELECTED DEMOGRAPHIC AND ECONOMIC FACTORS ............................................................................... 32 Population ................................................................................ 32 Employment............................................................................. 32 Income ..................................................................................... 33 Household Income ................................................................... 34 Tourism Industry...................................................................... 35 LITIGATION............................................................................... 36 SALE AT COMPETITIVE BIDDING ........................................ 36 FINANCIAL ADVISOR.............................................................. 36 INDEPENDENT AUDITORS..................................................... 36 CONTINUING DISCLOSURE ................................................... 36 MISCELLANEOUS .................................................................... 37 Appendix A—Financial Statements ............................................. A-1 Appendix B—Draft Approving Opinion of Bond Counsel .......... B-1 Appendix C—Official Notice of Sale .......................................... C-1

This Official Statement is not to be construed as a contract or agreement between the City and the purchasers or holders of any of the Bonds. All quotations from and summaries and explanations of provisions of laws and documents herein do not purport to be complete and reference is made to

such laws and documents for full and complete statements of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale of the Bonds shall under any circumstances create any implication that there has been no change in the affairs of the City since the respective dates as of which information is given herein.

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$28,900,000 CITY OF ANNAPOLIS, MARYLAND

OFFICIAL STATEMENT GENERAL OBLIGATION BONDS

Public Improvements Bonds, 2007 Series ___________________

INTRODUCTION

The Issuer

The City of Annapolis, Maryland (the “City”), is located on the Chesapeake Bay at the mouth of the Severn River. The City encompasses a land area of seven and three-tenths square miles and has a population of 35,838. The legislative body of the City is the City Council, consisting of a Mayor as presiding officer and eight Aldermen. The City provides all municipal services to its citizens except for education, which is provided by Anne Arundel County.

The Bonds

The issue consists of the City of Annapolis, Maryland Public Improvements Bonds, 2007 Series (the “Bonds”) in the aggregate principal amount of $28,900,000. The Bonds are dated August 15, 2007 and mature annually on August 1 from 2008 through 2022 and will pay interest semi-annually every February 1 and August 1, beginning February 1, 2008. The Bonds will be issued in authorized denominations of $5,000 and multiples thereof and will be held by The Depository Trust Company (“DTC”), or its nominee, as securities depository with respect to the Bonds. See “THE BONDS—Book-Entry Only System.”

Security for the Bonds

The Bonds are general obligations of the City, to which full faith and credit and unlimited taxing power of the City are pledged for payment. Refer to “THE BONDS—Sources of Payment” for a more complete description of the security for the Bonds.

Use of Proceeds

The proceeds are being used to provide funds for the design, planning, renovation and construction of some or all of the

following: water system, public safety buildings, public garage facilities, educational and recreational facilities, public vehicles and certain roads, public works and other general governmental projects,

Auditors

The City’s general purpose financial statements for the fiscal year 2006 have been audited by the independent public

accounting firm of SB and Company, LLC and are included in Appendix A. These financial statements, along with the related Notes to Financial Statements, are intended to provide a broad overview of the financial position and results of the City’s various funds and account groups. The City’s financial statements are available for inspection at the City of Annapolis Department of Finance, 160 Duke of Gloucester Street, Annapolis, Maryland 21401.

Official Statement

This Official Statement has been approved and authorized by the City for use in connection with the sale of the Bonds. Its

purpose is to supply information to prospective buyers of the Bonds. Financial and other information contained in this official statement have been prepared by the City from its records, except where other sources are noted. The information is not intended to indicate future or continuing trends in the financial or economic position of the City.

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Additional Information

Any questions concerning the contents of this Official Statement should be directed to the following: Timothy Elliott, Finance Director, City of Annapolis, Maryland, Municipal Building, 160 Duke of Gloucester Street, Annapolis, Maryland 21401, (410-263-7952); and A. Samuel Ketterman, Davenport & Company LLC (410-296-9426).

General

The purpose of this Official Statement, including the cover page and appendices, is to provide information for prospective

purchasers and others who may become holders of any of the Bonds. All estimates and assumptions herein have been based upon information believed to be reliable and correct; however,

statements made involving estimates and assumptions, whether or not expressly so stated, are intended merely as such and not as representations of facts. Figures herein relating to tax collections, assessed value of property and the financial position of the City have been taken from official records of the City.

The material and information contained in this Official Statement have been provided by the City and the execution and

distribution of this Official Statement have been authorized by the City.

THE FOREGOING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED

INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT

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THE BONDS

General The Bonds will be dated August 15, 2007, will be issued in the aggregate principal amount of $28,900,000, and will

mature, subject to prior redemption, on August 1, in the years and amounts as set forth on the cover. The Bonds are valid and legally binding general obligations of the City to which its full faith and credit and taxing power

are irrevocably pledged (see “THE BONDS—Sources of Payment” herein). Interest on the Bonds will be payable on February 1, 2008 (five and one-half months), August 1, 2008, and semiannually

thereafter on February 1 and August 1 in each year until and including the date of maturity unless redeemed prior to that date. Bonds maturing on or after August 1, 2018 are subject to redemption prior to their maturities at the option of the City on or after August 1, 2017, either as a whole or in part at any time (see “Redemption” below) at par.

Authorization

The Bonds are issued pursuant to the authority of Sections 31 through 37, inclusive, of Article 23A of the Annotated Code

of Maryland (2005 Replacement Volume) (the “Enabling Act”), Article VII, Section 11 of the Annapolis City Charter, as amended, and in accordance with Ordinance No. O-34-07, adopted and approved by the City of Annapolis on July 9, 2007 (the “Ordinance”).

Redemption

Bonds maturing on or after August 1, 2018 are subject to redemption prior to their maturities at the option of the City on

or after August 1, 2017, either as a whole or in part at any time in any order of maturity at the option of the City, at par plus accrued interest thereon to the date fixed for redemption.

If less than all of the Bonds of any one maturity of an issue shall be called for redemption, the particular Bonds or portions of Bonds to be redeemed shall be selected by lot by the Bond Registrar; except that so long as DTC or its nominee is the sole registered owner of the Bonds, the selection of individual ownership interests in the Bonds to be credited with any such partial redemption shall be made through DTC, in such manner as DTC shall determine. When less than all of a Bond in a denomination in excess of $5,000 shall be redeemed, then, upon the surrender thereof, there shall be issued to the registered owner thereof, Bonds in any of the authorized denominations as shall be specified by the registered owner. The aggregate amount of such Bonds shall be equal to the unredeemed balance of the principal amount of such Bond. Such Bonds in such authorized denominations shall be issued without charge.

If the City elects to redeem all or a portion of the outstanding Bonds, a redemption notice as prescribed in the Ordinance

shall be mailed by the Bond Registrar, on behalf of the City, not less than 30 days prior to the date fixed for redemption, postage prepaid, to the registered owners of the Bonds to be redeemed by first class mail at their last addresses appearing on the registration books maintained by the Bond Registrar (the “Bond Register”); provided, however, that the failure to mail such notice with respect to a particular Bond to be redeemed or any defect in such notice, or in the mailing thereof, shall not affect the sufficiency of the redemption of any other Bond. So long as DTC or its nominee is the sole registered owner of the Bonds, any redemption notice shall be given to DTC by a secure means (e.g., legible facsimile transmission, registered or certified mail or overnight express delivery) in a timely manner designed to assure that such notice is in DTC’s possession no later than the close of business on such 30th day. From and after the date fixed for redemption, if notice has been given as therein provided and the funds sufficient for payment of the redemption price and accrued interest shall be available therefore on such date, the Bonds so designated for redemption shall cease to bear interest. Upon presentation and surrender in compliance with such notices, the Bonds so called for redemption shall be paid by the Paying Agent at the redemption price. If not so paid on presentation thereof, such Bonds so called shall continue to bear interest at the rates expressed therein until paid.

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Form and Denominations

The Bonds will be issued in fully registered form in denominations of $5,000 or any integral multiple thereof. The Bonds initially shall be maintained under a book-entry system; purchaser of the Bonds shall have no right to receive physical possession of the Bonds, and payments of the principal or redemption price of and interest on the Bonds will be made as described below under “BOOK-ENTRY ONLY SYSTEM—The Depository Trust Company.” The City may deem and treat the person in whose name a Bond is registered as the absolute owner thereof for the purpose of receiving payment of or on account of the principal thereof and interest thereon and for all other purposes. Manufacturers and Traders Trust Company will act as Bond Registrar and Paying Agent for the Bonds.

Payment and Transfer

The principal of each Bond or so much thereof as shall not have been paid upon prior redemption shall be paid upon

presentment and surrender of such Bond on the date such principal is payable or if such date is not a Business Day (hereinafter defined) then on the next succeeding Business Day at the designated corporate trust office of the Paying Agent.

The interest payable on each Bond, and punctually paid or duly provided for on any interest payment date, will be paid

semiannually on the first days of February and August, beginning February 1, 2008, in each year to the person in whose name such Bond is registered on the Bond Register as of the close of business on the Regular Record Date, which shall be the fifteenth day of the month immediately preceding each regular interest payment date (the “Regular Record Date”). Payment of the interest on each Bond shall be by check mailed to such person’s address as it appears on the Bond Register. Any such interest not punctually paid or duly provided for shall forthwith cease to be payable to the registered owner on such Regular Record Date, and may be paid to the person in whose name such Bond is registered as of the close of business on a date to be fixed by the Bond Registrar for the payment of such defaulted interest (the “Special Record Date”), notice whereof being given by letter mailed first class, postage prepaid, to each registered owner not less than 10 days prior to such Special Record Date, at the address of such person appearing on the Bond Register, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Bonds may be listed and upon such notice as may be required by such exchange. Interest will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from August 15, 2007.

“Business Day” means a day other than a Saturday, Sunday or day on which banking institutions under the laws of the

state governing the Paying Agent are authorized or obligated by law or required by executive order to remain closed.

All payment of the principal of, redemption price and interest on the Bonds shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts subject to the provision for payment of interest by check set forth above.

Bonds are transferable only upon the Bond Register kept at the designated corporate trust office of the Bond Registrar, by

the registered owner in person, or by his or her attorney duly authorized in writing, upon surrender together with a written instrument of transfer satisfactory to the Bond Registrar duly executed by the registered owner or duly authorized attorney, and thereupon, within a reasonable time, the City shall issue in the name of the transferee a new registered Bond or Bonds, of any of the authorized denominations, in aggregate principal amount equal to the principal amount of the Bond surrendered or the unredeemed portion thereof, and maturing on the same date and bearing interest at the same rate. The Bond Registrar may require payment by the owner of the Bond requesting exchange or transfer of any tax or governmental charge, shipping charges and insurance that may be required to be paid with respect to such exchange or transfer, but otherwise no charge shall be made to such owner for such exchange or transfer. Such new Bond or Bonds shall be delivered to the transferee only after due authentication thereof by an authorized officer of the Bond Registrar. The City shall not be required to issue, transfer or exchange any Bond during the period beginning fifteen (15) days before any selection of Bonds to be redeemed and ending on the day of publication and mailing of the notice of redemption or to transfer or exchange any Bond called or being called for redemption in whole or in part.

Sources of Payment

The Ordinance provides that the full faith and credit and unlimited taxing power of the City are irrevocably pledged to the

payment of the maturing principal of and interest on the Bonds as and when they become payable. The Ordinance further provides, and the City in the Ordinance has covenanted, that in each and every fiscal year that any of the Bonds is outstanding, the City shall levy or cause to be levied ad valorem taxes upon all the legally assessable property within the corporate limits of the City in rate and amount sufficient to provide for or assure the payment, when due, of the principal of and interest on all of

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the Bonds maturing in each such fiscal year and that, if the proceeds from the taxes so levied in any such fiscal year are inadequate for the above purposes, the City shall levy additional taxes in the succeeding fiscal year to make up any deficiency.

Bondholders’ Remedies

It is the opinion of Bond Counsel that the City may be sued in the event that it fails to perform its obligations under the

Bonds to the holders thereof, and that any judgments resulting from such suits would be enforceable against the City. Nevertheless, a holder of a Bond who has obtained any such judgment may be required to seek additional relief to compel the City to levy and collect such taxes as may be necessary to provide the funds from which such judgment may be paid. Although there is no Maryland law with respect to this issue, it is the opinion of Bond Counsel that the appropriate courts of Maryland have jurisdiction to grant additional relief, such as a mandatory injunction, if necessary, to enforce the levy and collection of such taxes and payment of the proceeds thereof to the holders of the City’s general obligation bonds, including the Bonds, ratably, subject to the inherent constitutional limitations referred to below.

It is also the opinion of Bond Counsel that, while remedies would be available to the holders of the Bonds and while the

Bonds are entitled to constitutional protection against the impairment of the obligation of contracts, such constitutional protection and the enforcement of such remedies would not be absolute. Enforcement of a claim for payment of the principal of or interest on the Bonds could be made subject to the applicable provisions of Federal bankruptcy law or of other statutes that hereafter may be constitutionally enacted by the United States Congress or the Maryland General Assembly extending the time for payment or imposing other constraints upon enforcement.

Ratings

Fitch Ratings, Moody’s Investors Service, Inc., and Standard & Poor’s Credit Market Services have given the Bonds the

ratings indicated on the cover page of this Official Statement. An explanation of the significance of such ratings may be obtained from the rating agency furnishing them. The City furnished the rating agencies information contained in a preliminary form of this Official Statement and other materials and information. Generally, the rating agencies base their ratings on such materials and information, and on their own investigations, studies and assumptions. It should be noted that such ratings may be changed at any time and that no assurance can be given that they will not be revised downward or withdrawn by any or all of the rating agencies if, in the judgment of any or all, circumstances should warrant such actions. Such circumstances may include, without limitation, changes in or unavailability of information relating to Annapolis. Any such downward revision or withdrawal of any of such ratings could have an adverse effect on the market price of the Bonds.

BOOK-ENTRY ONLY SYSTEM

The Depository Trust Company

The Depository Trust Company, New York, New York (“DTC”), will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee), or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate of the Bonds will be issued for each maturity of the Bonds in principal amount equal to the aggregate principal amount of the Bonds of such maturity, and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a

“banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the

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American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit

for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (the “Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of the Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect

Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to Cede & Co. If less than all of the Bonds of a maturity are being redeemed. DTC’s

practice is to determine by lot the amount of the interest of each Direct Participant in such Bonds to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless

authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by

an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City or Paying Agent, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, its nominee, the Bond Registrar and Paying Agent or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest on the Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Bond Registrar and Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving

reasonable notice to the City, the Bond Registrar and Paying Agent. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered.

The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities

depository). In that event, Bond certificates will be printed and delivered.

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Book-Entry Only System – Miscellaneous

The information in the section “BOOK-ENTRY ONLY SYSTEM — The Depository Trust Company” has been obtained by the City from DTC. The City takes no responsibility for the accuracy or completeness thereof. Neither the City, the Bond Registrar nor the Paying Agent will have any responsibility or obligations to the Participants or the persons for whom they act as nominees with respect to the payments to or in the providing of notice to the Participants, or the Indirect Participants, or Beneficial Owners. The City cannot and does not give any assurance that the Participants or others will distribute principal and interest payments paid to DTC or its nominees, as the registered owner, or any redemption or other notices to the Beneficial Owners, or that they will do so on a timely basis or that they will serve and act in the manner described in this Official Statement.

Termination of Book-Entry Only System

In the event that the Book-Entry Only System is discontinued, the Bonds will be delivered by DTC to the Bond Registrar and such Bonds will be exchanged for Bonds registered in the names of the Direct Participants or the Beneficial Owners identified to the Bond Registrar. In such event, certain provisions of the Bonds pertaining to ownership of the Bonds will be applicable to the registered owners of the Bonds as described herein.

LEGAL MATTERS Approval of Legal Proceedings

McGuire Woods LLP, Baltimore, Maryland, is acting as Bond Counsel in connection with the issuance of the Bonds.

Delivery of the Bonds is conditioned upon delivery by Bond Counsel of an opinion substantially in the form set forth in Appendix B of this Official Statement.

Tax Exemptions

Opinion of Bond Counsel – Federal Income Tax Status of Interest. In the opinion of Bond Counsel, under existing law, the interest on the Bonds (a) is excludable from gross income of the owners thereof for Federal income tax purposes, and (b) is not an enumerated item of tax preference or adjustment for purposes of the Federal alternative minimum tax imposed on individuals and corporations, but such interest is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on corporations, and may be subject to the branch profits tax imposed on foreign corporations engaged in a trade or business in the United States.

Bond Counsel will express no opinion regarding other Federal tax consequences arising with respect to the Bonds.

Bond Counsel's opinion speaks as of its date, is based on current legal authority and precedent, covers certain matters not directly addressed by such authority and precedent, and represents Bond Counsel's judgment as to the proper treatment of interest on the Bonds for Federal income tax purposes. Bond Counsel’s opinion does not contain or provide any opinion or assurance regarding the future activities of the City or about future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the Internal Revenue Service (the "IRS"). The City has covenanted, however, to comply with the requirements of the Code.

Reliance and Assumptions; Effect of Certain Changes. In delivering its opinion regarding the Bonds, Bond Counsel is relying upon certifications of representatives of the City as to facts material to the opinion, which Bond Counsel has not independently verified. In addition, Bond Counsel is assuming continuing compliance with the Covenants (as hereinafter defined) by the City. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied after the issuance of the Bonds in order for interest on the Bonds to be and remain excludable from gross income for purposes of Federal income taxation. These requirements include, by way of example and not limitation, restrictions on the use, expenditure and investment of the proceeds of the Bonds and the use of the property financed or refinanced by the Bonds, limitations on the source of the payment of and the security for the Bonds, and the obligation to rebate certain excess earnings on the gross proceeds of the Bonds to the United States Treasury. The Tax Certificate and Compliance Agreement executed and delivered by the City on the date of delivery of the Bonds (the “Tax Agreement”) contains covenants (the "Covenants") under which the City has agreed to comply with such requirements. Failure by the City to comply with the Covenants could cause interest on the Bonds to become includable in gross

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income for Federal income tax purposes retroactively to their date of issue. In the event of noncompliance with the Covenants, the available enforcement remedies may be limited by applicable provisions of law and, therefore, may not be adequate to prevent interest on the Bonds from becoming includible in gross income for Federal income tax purposes.

Bond Counsel has no responsibility to monitor compliance with the Covenants after the date of issue of the Bonds.

Certain requirements and procedures contained, incorporated or referred to in the Tax Agreement, including the Covenants, may be changed and certain actions may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Bond Counsel expresses no opinion concerning any effect on the excludability of interest on the Bonds from gross income for Federal income tax purposes of any such subsequent change or action that may be made, taken or omitted upon the advice or approval of counsel other than Bond Counsel.

Certain Collateral Federal Tax Consequences. The following is a brief discussion of certain collateral Federal income tax matters with respect to the Bonds. It does not purport to address all aspects of Federal taxation that may be relevant to a particular owner thereof. Prospective purchasers of the Bonds, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning or disposing of the Bonds.

Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral Federal income tax consequences to certain taxpayers including, without limitation, financial institutions, certain insurance companies, certain corporations (including S corporations and foreign corporations), certain foreign corporations subject to the "branch profits tax," individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and taxpayers attempting to qualify for the earned income tax credit.

In addition, prospective purchasers should be aware that the interest paid on, and the proceeds of the sale of, tax-exempt obligations, including the Bonds, are in many cases required to be reported to the IRS in a manner similar to interest paid on taxable obligations. Additionally, backup withholding may apply to any such payments made after March 31, 2007 to any Bond owner who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Bond owner who is notified by the IRS of a failure to report all interest and dividends required to be shown on Federal income tax returns. The reporting and withholding requirements do not in and of themselves affect the excludability of such interest from gross income for Federal tax purposes or any other Federal tax consequence of purchasing, holding or selling tax-exempt obligations.

Original Issue Discount The "original issue discount" ("OID") on any Bond is the excess of such Bond's stated redemption price at maturity (excluding certain "qualified stated interest" that is unconditionally payable at least annually at prescribed rates) over the issue price of such Bond. The "issue price" of a Bond is the initial offering price to the public at which price a substantial amount of the Bonds of the same maturity was sold. The "public" does not include bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers. The issue price for each maturity of the Bonds is expected to be the initial public offering price set forth on the front cover page of this Official Statement, but is subject to change based on actual sales. OID on the Bonds with OID (the "OID Bonds") represents interest that is excludable from gross income for purposes of Federal and Maryland income taxation. However, the portion of the OID that is deemed to have accrued to the owner of an OID Bond in each year may be included in determining the alternative minimum tax and the distribution requirements of certain investment companies and may result in some of the collateral Federal income tax consequences mentioned in the preceding subsection. Therefore, owners of OID Bonds should be aware that the accrual of OID in each year may result in alternative minimum tax liability, additional distribution requirements or other collateral Federal and state income tax consequences although the owner may not have received cash in such year.

Interest in the form of OID is treated under Section 1288 of the Code as accruing under a constant yield method that takes into account compounding on a semiannual or more frequent basis. If an OID Bond is sold or otherwise disposed of between semiannual compounding dates, then the OID which would have accrued for that semiannual compounding period for Federal income tax purposes is to be apportioned in equal amounts among the days in such compounding period.

In the case of an original owner of an OID Bond, the amount of OID that is treated as having accrued on such OID Bond is added to the owner's cost basis in determining, for Federal income tax purposes, gain or loss upon its disposition (including its sale, redemption or payment at maturity). The amounts received upon such disposition that are attributable to accrued OID will be excluded from the gross income of the recipients for Federal income tax purposes. The accrual of OID and its effect on the

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redemption, sale or other disposition of OID Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above.

Prospective purchasers of OID Bonds should consult their own tax advisors with respect to the precise determination for Federal income tax purposes of interest accrued upon sale or redemption of such OID Bonds and with respect to state and local tax consequences of owning OID Bonds.

Bond Premium. In general, if an owner acquires a bond for a purchase price (excluding accrued interest) or otherwise at a tax basis that reflects a premium over the sum of all amounts payable on the bond after the acquisition date (excluding certain "qualified stated interest" that is unconditionally payable at least annually at prescribed rates), that premium constitutes "bond premium" on that bond (a "Premium Bond"). In general, under Section 171 of the Code, an owner of a Premium Bond must amortize the bond premium over the remaining term of the Premium Bond, based on the owner's yield over the remaining term of the Premium Bond, determined based on constant yield principles. An owner of a Premium Bond must amortize the bond premium by offsetting the qualified stated interest allocable to each interest accrual period under the owner's regular method of accounting against the bond premium allocable to that period. In the case of a tax-exempt Premium Bond, if the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to that accrual period, the excess is a nondeductible loss. Under certain circumstances, the owner of a Premium Bond may realize a taxable gain upon disposition of the Premium Bond even though it is sold or redeemed for an amount less than or equal to the owner's original acquisition cost. Prospective purchasers of any Premium Bonds should consult their own tax advisors regarding the treatment of bond premium for Federal income tax purposes, including various special rules relating thereto, and state and local tax consequences, in connection with the acquisition, ownership, amortization of bond premium on, sale, exchange, or other disposition of Premium Bonds.

Possible Legislative or Regulatory Action. Legislation and regulations affecting tax-exempt bonds are continually being considered by the United States Congress, the U.S. Department of the Treasury ("Treasury") and the IRS. In addition, the IRS has established an expanded audit and enforcement program for tax-exempt bonds. There can be no assurance that legislation enacted or proposed after the date of issue of the Bonds or an audit initiated or other enforcement or regulatory action taken by the Treasury or the IRS involving either the Bonds or other tax-exempt bonds will not have an adverse effect on the tax status or the market price of the Bonds or on the economic value of the tax-exempt status of the interest thereon.

Opinion of Bond Counsel – State Tax Exemption. In the opinion of Bond Counsel, by the terms of the Enabling Act, the principal of and interest on the Bonds is exempt from taxation of any kind or nature whatsoever by the State of Maryland and by any county, municipal corporation or other political subdivision thereof; however, the law of the State of Maryland does not expressly refer to, and no opinion is expressed concerning, estate or inheritance taxes, or any other taxes not levied directly on the Bonds or the interest thereon.

The United States Supreme Court has agreed to hear an appeal of a Kentucky state court case (Davis v. Kentucky Dep’t of

Revenue of the Finance and Admin. Cabinet, 197 S.W.3d 557 (2006)) which ruled that Kentucky’s taxation of interest on bonds issued by states other than Kentucky violates the United States Constitution because Kentucky exempts from taxation interest on bonds issued by Kentucky and its political subdivisions. Maryland law currently has a similar disparity in the tax treatment of interest on bonds from the State of Maryland and the interest on bonds from other states. It is not clear what effect the outcome of this litigation, or any legislative response to the outcome of this litigation, could have on the state law tax exemption of interest on the Bonds. Prospective purchasers of the Bonds should consult with their own tax advisors regarding the outcome of this litigation and any legislative response to the outcome of this litigation.

Interest on the Bonds may be subject to state and local taxes in jurisdictions other than the State of Maryland under applicable

state or local laws. Prospective purchasers of the Bonds should consult their own tax advisors regarding the taxable status of the Bonds in a particular state or local jurisdiction other than the State of Maryland.

CITY OF ANNAPOLIS The City

Annapolis is an incorporated municipal corporation of the State of Maryland (the “State”), possessing substantial home

rule powers under the State constitution. First settled in 1649 by Puritans fleeing Virginia, the City was chartered in 1708 and served as the capital of the United States when the Congress met there in 1783-84. The City acquired home rule in 1954 and serves both as the capital of the State and as the county seat for Anne Arundel County. Annapolis is situated on the western

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shore of the Chesapeake Bay, at the mouth of the Severn River, east of and midway between Baltimore and Washington, D.C. The City has been the home of St. John’s College (founded as King William’s School) since 1696 and the United States Naval Academy since 1845.

The City covers an area of seven and three-tenths square miles. Population in 1950 was 10,047, but growth as well as annexation caused that figure to double by 1960 and more than triple by 1980. According to the 2000 Census, the population is 35,838, exclusive of the Naval Academy population of approximately 5,500 (see “SELECTED DEMOGRAPHIC AND ECONOMIC FACTORS—Population” herein). The Naval Academy constitutes a Federal enclave within the City, but is not within the corporate limits of Annapolis.

The appearance of the City is dominated by the handsome buildings of the Naval Academy and the historic State House of Maryland. In addition, there are a number of contemporary State and County office buildings which have been designed in keeping with the prevailing Georgian architecture of the community. Because of the number of residential structures of significant historic and architectural value for which Annapolis is famous, private and public groups have joined together to retain or to recapture the historic atmosphere of the community in keeping with modern urban requirements. An application to the Department of Interior to enlarge the then existing Historic District as designated on the National Register of Historic Places was approved in 1984. The Annapolis Comprehensive Plan was adopted by the City Council in April 1998.

Annapolis is served by three major highways, U.S. Routes 50/301, Maryland Route 2 and Interstate 97, which connect with the Chesapeake Bay Bridge, immediately northeast of the City. The District of Columbia is 27 miles to the west and the City of Baltimore is 27 miles to the north. Transportation with both metropolitan areas has been substantially enhanced with the completion of Interstate 97 and the upgrade of U.S. Routes 50/301.

The City is governed by a Mayor and a City Council (see “CITY GOVERNMENT, ADMINISTRATION AND PERSONNEL” herein). The City is authorized to issue debt, subject to certain indebtedness limitations, for the purpose of financing its capital projects and to incur certain other indebtedness (see “CERTAIN DEBT INFORMATION” herein).

The executive offices of the City are located at the Municipal Building, 160 Duke of Gloucester Street, Annapolis, Maryland 21401. The City’s central telephone number is (410) 263-7940. The City’s e-mail address is info@annapolis.gov and its web page is at www.annapolis.gov.

All references in this Official Statement to the County’s Internet home page are provided for convenience only. The information on the County’s Internet home page is not incorporated herein, by reference or otherwise.

CITY GOVERNMENT, ADMINISTRATION AND PERSONNEL General

The legislative body of the City is the City Council, consisting of the Mayor as the presiding officer and eight Aldermen

who together comprise the City Council. One Alderman is elected from each of the eight wards into which the City is divided and must be a resident of the ward. The Mayor is elected at large. The Aldermen and the Mayor serve a four-year term, commencing in December of the year following the presidential election. The City Council has six standing legislative committees: Economic Matters, Finance, Public Safety, Rules and Government, Environmental Matters, and Housing and Human Welfare. The Mayor and each Alderman have one vote. A simple majority is sufficient to pass legislation.

The City has independent jurisdiction over streets, street lighting, refuse collection and disposal, police, parks, harbor, off-street parking, public transportation, fire suppression and emergency services, planning and zoning, public health, water production and distribution, and sewage collection. Schools are provided by the Board of Education of Anne Arundel County.

Under the Charter, the Mayor is the chief executive. The mayoralty is a full-time office. The Mayor is responsible for the supervision of the financial administration and the preparation of the annual operating and capital budgets. The Finance Committee reviews the administration’s budget and submits recommendations to the City Council.

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Mayor and Aldermen of the City Ellen O. Moyer, Mayor, is the first woman Mayor of the City of Annapolis. She came to Annapolis as a district

coordinator for the Girl Scouts of America. Later, as first lady of the City, she spearheaded a number of initiatives in beautification, recreation and the arts. As a community activist, she was the founder of Maryland Hall for the Creative Arts, served as president of the Annapolis Summer Garden Theatre, and developed the Parks and Paths for People program. She had represented Ward 8 on the City Council since 1987. During her tenure as Alderman, she was responsible for founding GreenScape and the Maryland Maritime Heritage Festival, initiating the Street End Parks, promoting the Barge House Museum and the Eastport Historic Walking Trail, developing an innovative zoning overlay to protect the maritime industry, and bringing the Whitbread yacht race to Annapolis. Recently retired from a career as a teacher and Director of Government Relations with the Maryland State Teachers Association, she earned her Bachelor of Arts degree from Penn State University and her Master of Education from Goucher College. She received the Citizen of the Year Award from Maryland Citizen Action in 1995; she was inducted into the Towson High School Alumni Hall of Fame in 1991; received the YMCA Leadership Award in 1994, 1995 and 1996; was acknowledged Volunteer of the Year with Citations for Excellence by Maryland Recreation and Parks for 1991-1992; and was honored with the Fannie Lou Hamer Award for Women of Excellence in 1999. She is serving her second term, which expires in 2009.

Richard E. Israel has lived in Ward One for 30 years. In 1975 he came to Annapolis to join the staff of the Department of Legislative Reference, and then served 25 years as an Assistant Attorney General. Retired in 2003, Mr. Israel has not until now been involved in politics, but has been active in civic affairs for decades, including membership on the Historic District Commission and Election Board. He was a founding member of the Murray Hill Resident’s Association, and served as board member, vice president and president. He is a member of the Board of the Friends of St John’s College. Born and raised in Hutchinson, Kansas, Mr. Israel is a graduate of the University of the South (BA), Washington and Lee University (LLB), and Oxford University (MA). A member of St Anne’s Episcopal Church, he served on the church vestry and as registrar. He is serving his first term which expires in 2009.

Michael I. Christman grew up in West Annapolis. Mr. Christman graduated from St Mary's High School and the US Naval Academy, then served 10 years in the United States Navy as a helicopter pilot. He concluded his active service as an ethics instructor at the Academy. He also earned a masters degree from the Naval Postgraduate School. Mr. Christman is now the chief operating officer of a local retail company. He is serving his first term which expires in 2009.

David H. Cordle has served over 23 years as an investigator with the Anne Arundel County State’s Attorney’s Office,

where he is currently the chief investigator. In 1995, he was appointed to the Emergency Medical Services 2000 Committee. In 2001, he became a member of the Annapolis Governmental Structural and Charter Review Commission. He served as a unit commander during the Bosnia Peacekeeping Mission. He retired from the Army Reserve on May 1, 2002 as a lieutenant colonel with 23 years of service. He is a board member of the Hunt Meadow Homeowners’ Association. He is serving his second term which expires in 2009.

Samuel Shropshire has been active in the community since he first moved to Annapolis in 1987. He has experience

dealing with social issues including poverty, AIDS, and crime. Mr. Shropshire served as a founding member on the Maryland State AIDS Commission. He has been active in local politics, and has been active in promoting maritime business and helping raise support for local nonprofit organizations. Mr. Shropshire has a BA degree in education from Shelton College and has continued his education at the University of Central Florida and National Chengchi University in Taipei, Taiwan. He served as executive director of Christian Solidarity International (1983-1987); founder and director of Love & Action and Project Friendship (1987-2002); and is now employed as grants administrator for the Annapolis Maritime Museum. He is serving his first term which expires in 2009.

Julie M Stankivic holds a degree in Fashion Buying & Merchandising and a BS (1987) in Marketing from the Fashion Institute of Technology, State University of New York. In 1991, she received a MA in Public Administration from the Graduate School of Public and International Affairs at the University of Pittsburgh, where she majored in public management and policy with a particular focus on health policy and international business. She is currently employed as a health policy analyst for the Centers for Medicare & Medicaid Services in Baltimore. Ms. Stankivic has lived in Annapolis for 14 years. An active participant in the community, she has volunteered for various organizations and received multiple awards for her efforts. She is currently a member of the Spa Creek Conservancy, is a Neighborhood Watch Block Captain, and volunteers for the Salvation Army. She is serving her first term which expires in 2009.

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Classie Gillis Hoyle, Ph.D. has served as a professional educator for 41 years. Dr. Hoyle has held various career positions including Assistant Secretary for the Maryland Higher Education Commission; Vice President for Academic Affairs at Clarke College in Dubuque, Iowa; Special Expert for the National Institute of General Medical Sciences at NIH; Assistant to the Dean of Dentistry at the University of Iowa; Director of Affirmative Action; Director of Cooperative Education; Counselor for Talent Search at Anne Arundel Community College; adjunct faculty member at Sojourner-Douglas College; and science teacher for 14 years at Morgan State University and the Baltimore City Public Schools. Dr. Hoyle serves as Chair of A Tribute to Women of Color; Chair of the Annapolis Democratic Central Committee; Board Member of the YMCA of Annapolis and Anne Arundel County; member of the Parole Neighborhood Watch Program; and a member of the Annapolis Alumnae of Delta Sigma Theta Sorority, Inc. She is serving her second term which expires in 2009.

Ross H. Arnett, III is a retired senior executive with 32 years of public service with the U.S. Department of Health and

Human Services. He is a professional economist and a nationally known expert on private health insurance and on health care use and spending. Before retiring, Mr. Arnett managed a professional staff of 65 and an annual budget in excess of $50 million. He now manages a small health economics consulting business. As an Annapolis resident, he has served on the Eastport Civic Association Board for many years and was President for two years. He is a member of the Eastport Business Association and the Maritime Republic of Eastport. He is serving his first term which expires in 2009. Sheila M. Finlayson is a native Annapolitan. She attended Anne Arundel County Public Schools, Morgan State University, earning a BS in English, and the University of Wisconsin at Milwaukee, earning an MS in Cultural Foundations. Returning to Annapolis, Ms. Finlayson taught English and public speaking. In 2002, she was elected President of the Teachers Association of Anne Arundel County. She was elected, and served for six years, as the East Regional Director for the National Counsel of Urban Education Associations, representing nine states on the east coast. She served the students and faculties of Anne Arundel County for 33 years before her retirement in June of 2007. As an educator, Sheila was a consultant to the Maryland State Board of Education and the National Policy Forum, Washington, D.C., and presented at numerous conferences and conventions at the local, state and national levels. She volunteered on the Boards of Directors for Maryland Hall for the Creative Arts, the Banneker Douglass Museum, the Community Action Agency and the Wiley H. Bates Development Committee and Legacy Center. Ms. Finlayson received gubernatorial and county executive appointments for both educational and historical committees and commissions. She is a trained political organizer, managing numerous campaigns for other elected officials, and a special events coordinator. She is a member of the Annapolis Chapter of the Links, Incorporated and has recently been named as Chairperson for Services to Youth in the East Region, advising 73 chapters in most major cities. She is serving her first term which expires in 2009.

Certain Administration Officials

Timothy E. Elliott, Finance Director, was appointed Finance Director in July 2002 after serving as acting Finance Director

since January 2002. Mr. Elliott has been employed with the Finance Department for over 24 years, including 8 years as Assistant Director. He graduated from the University of Maryland with a B.S. degree in Business Management/Accounting.

Jon Arason, Planning & Zoning Director, has been with the City Planning Department for over 12 years. He began as

Chief of Comprehensive Planning in 1987. In 1989, he was named as Deputy Director of the Department and in 1996 was named as Director. Mr. Arason graduated from the University of Virginia with a M.A. in Urban and Regional Planning. He received a B.A. in Fine Arts from the College of William and Mary. He has over 19 years of experience in municipal planning.

LeeAnn Plumer, Recreation and Parks Director, has been with the City Recreation Department for 8 years. Previously, Ms. Plumer served as the Superintendent for Parks and Recreation in the City of Piqua, Ohio and has over 12 years experience in recreation and parks management. She has a B.S. of Education in Recreation Administration from Bowling Green State University and a Masters of Business Administration from the University of Maryland University College.

Danielle Matland, Transportation Director, has been involved with transportation in Annapolis since 1987, when the City

took over a three vehicle bus system from the bankrupt private operator. During Ms. Matland’s tenure as Director, transit services have expanded to a total of ten routes, three new routes serve Anne Arundel County, while the increased earned revenues and operating grants have substantially reduced the operational deficit. Ms. Matland holds a degree in Philosophy and certification as a community transportation manager.

Shaem Spencer, City Attorney, received his B.A. degree in Political Science from Western Maryland College and his Juris

Doctor Degree from the University of Maryland School of Law. Prior to his appointment as City Attorney, Mr. Spencer served as Assistant City Attorney for the City of Annapolis. His background experience also includes serving as Assistant

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State’s Attorney for Prince Georges County, Maryland and as a judicial law clerk to Judge Graydon S. McKee, III, Circuit Court for Prince Georges County.

Robert Schuetz, Acting Central Services Director, has a B.S. degree in Architecture from the University of Maryland. In

over 20 years of private service Mr. Schuetz has managed all areas of real estate development and facilities management, from private subdivisions of only 100 units, to condominium developments, retail development and complete renovations and maintenance operations of leased and occupied government facilities of over 2,000,000 square feet. Mr. Schuetz also has a background in land use law, having worked as Chairman of the Board of Appeals of Baltimore County, Maryland.

Joseph S. Johnson, Police Chief, graduated from the University of Baltimore with a B.S. degree in Criminal Justice. Chief

Johnson has 32 years of law enforcement service and is a retired colonel from the Baltimore City Police Department. Upon his retirement in 1991, he became the assistant chief of police, and was elevated to the position of Police Chief in December 1994.

Jerome W. Smith, Acting Fire Chief, from August, 2005 to present. During his tenure he has implemented changes to the

sprinkler ordinances for the safety of the city, changed the EMS Division qualification and re-certification processes, and increased the number of employees. An employee of Annapolis Fire Department since 1966, he worked his way through all ranks of the department, including both Fire Suppression and EMS Divisions and received several awards and accolades. Acting Chief Smith holds degrees in both fire science technology and government career services.

CERTAIN SERVICES AND RESPONSIBILITIES

Through its various departments and offices (see “CITY GOVERNMENT, ADMINISTRATION AND PERSONNEL”), the City supplies the following services:

Police and Fire

The Annapolis Police Department, comprised of 131 sworn officers, 46 full-time and 22 part-time civilians, is charged with the responsibility for the preservation of law and order and the protection of life and property. The Police Department provides a full range of police services, including uniformed patrol of the community, enforcement of criminal and motor vehicle laws and City ordinances, and 24-hour emergency services.

Fire protection is provided by the Fire Department from three fire stations housing 125 fire fighting and paramedic personnel. The Department provides fire suppression, investigation and prevention services, as well as emergency medical services, to City residents. It also provides these services to certain neighboring areas through mutual aid agreements.

Recreation and Parks

The City’s policy is to provide a basic level of constructive and affordable programs of leisure time activities and outdoor

recreational opportunities which contribute to the physical and social health of the City’s residents and generally enhance the quality of their lives. The Department operates and maintains two multi-purpose indoor facilities, the Stanton Community Center, Truxtun Park (70 acres), Weems-Whelan Field (3 acres), Back Creek Nature Park (12.5 acres), and 18 neighborhood mini (pocket) parks. It also collects service fees charged for the rental of its facilities and for participation in the various programs and activities conducted by its full- and part-time staff.

Planning and Zoning

Under Maryland law, the City has a Planning and Zoning Commission. The Planning and Zoning Director supervises the

implementation of programs and policies of the Commission and serves as administrative head of the Planning and Zoning Department. The Planning Director is responsible for all land use, environmental, and transportation planning. Economic Development and Housing and Community Development are administered by the Planning and Zoning Department. The City has a ten year Comprehensive Plan, which was last adopted in 1998 and is currently being updated. Implementation of the plan and coordination of new projects with the plan has been a priority for the department.

Public Transportation and Off-Street Parking

The Department of Public Transportation of the City was created in 1981. The Department is responsible for operating a

transit and para-transit system and for regulating taxicabs. The transit system was subsidized by the Federal and State Department of Transportation for operating assistance through June 30, 2006. The City was moved under a different funding

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classification starting in fiscal year 2007 and thus was not eligible for Federal operating assistance, but the State has provided that funding at least through fiscal year 2008. The City still qualifies for Federal Capital Assistance as in previous years.

Water Supply and Sewerage

The City operates its own water production facility and distribution system. Customers are billed according to metered

rates. The City and Anne Arundel County share the cost for treatment of waste at a jointly-owned facility which is operated by the County. The collection system within the City is maintained by the City. The City charges for wastewater at a rate based on a customer’s water usage. The City has over 12,000 water accounts and sewerage accounts.

Roadways

There are approximately 90 miles of roadway in the City, of which approximately 4 miles are state-owned, 3 miles are

county-owned, 11 miles are privately owned, and 72 are City-owned. The City Public Works Department sweeps streets, empties street-side refuse receptacles, repairs potholes, resurfaces small areas, repairs curbs, and cleans storm drain inlets.

Refuse Collection and Disposal

The City of Annapolis operates a twice weekly residential collection service of municipal garbage and has a weekly

curbside collection program for over 8,500 single family residences for the collection of recyclable materials. The City operates its own yard waste pickup program on a bi-weekly basis and collects bulk trash on a quarterly basis. The disposition of refuse is handled at the U.S.A. Waste Transfer station at Annapolis Junction, Maryland, which is approximately 25 miles from the City at Maryland Route 32.

Market House

A Market House is situated at the head of the City Dock in the downtown commercial area. The City has a master lease

for the enclosed pavilion. The vendors carry a wide variety of quality goods, including local produce, dairy products, bakery items, fresh seafood, prepared foods, and gourmet items and accessories.

Dock and Harbor Facilities

The City maintains a dock in the downtown commercial section, and oversees the waterways. Tour boats, watermen,

and transient leisure vessels use the creeks and facilities and are subject to usage fees to cover services provided by the City.

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Organizational Chart of City

ELECTORATE

CITIZEN BOARDS, COMMITTEES CITY COUNCIL STANDING LEGISLATIVE AND COMMISSIONS COMMITTEES

MAYOR

ECONOMIC DEVELOPMENT CITY AND PUBLIC INFORMATION

ADMINISTRATOR

LAW PERSONNEL CENTRAL SERVICES FINANCE PLANNING AND ZONING

TRANSPORTATION RECREATION AND PARKS FIRE POLICE PUBLIC WORKS Pension and Retirement System

Generally, all regular City employees, except uniformed police and fire personnel, and certain exempt employees are

provided pension and retirement benefits under two plans, each of which is administered by the State of Maryland through a single board of trustees (the “board of trustees”). Employees hired on or after January 1, 1980, are covered under the Pension System for Employees (the “Pension System”) which was established by the Maryland General Assembly in its 1979 session. Employees hired before January 1, 1980, have the option of electing to be covered by the Pension System or remaining in the Employees’ Retirement System of the State of Maryland (the “Retirement System” which together with the Pension System is sometimes referred to herein as the “Systems”). Both plans are defined in Article 73B of the Annotated Code of Maryland, as amended. The plans provide different benefits to employees and are funded in slightly different ways.

The Retirement System is funded in part by employee contributions amounting to 5% of each employee’s earnable compensation and 5% (compounded) on the annual cost-of-living adjustment or an increase in the rate of contribution from 5% to 7% of compensation. Employee contributions to the Pension System are limited to 5% of the excess, if any, of an employee’s earnable compensation over the maximum amount of annual earnings for employees subject to tax under the Federal Contribution Act, as amended.

Under each plan, the City is obligated to make a contribution fixed on the basis of the liabilities of the respective Systems by actuarial valuation. For each System, the board of trustees’ actuary, on the basis of interest and mortality and service tables and other actuarial assumptions adopted by the board of trustees, determines a “normal contribution” on account of each member, net of employee contributions, on the basis of the entry-age actuarial cost method. The ratio of the sum of the normal contributions so determined to the total earnable compensation of all members of the System, statewide, is the “Normal Contribution Rate”. Under each System, the City must contribute an amount equal to the total earnable compensation of its employees in that System multiplied by the Normal Contribution Rate (the “Normal Contribution”). The board of trustees may adjust the Normal Contribution Rate and such adjustments may provide for experience gains and losses, the effect of changes in actuarial assumption and the effect of legislation enacted after July 1, 1980.

The board of trustees annually certifies to the Finance Director of the City the Normal Contribution Rate, any adjustment in the Normal Contribution Rate made by the board of trustees, and the Normal Contribution for the City.

Police and Fire personnel participate in a separate pension and retirement plan that has two categories of membership. One is for personnel hired prior to July 1, 1980, the other is for personnel hired on or after July 1, 1980 and members of the prior to July 1, 1980 category who elect to transfer to the newer after July 1, 1980 category. Any such transfers serve to reduce the combined unfunded accrued liability of the plan, because of differing levels of benefits, employee contributions, and social security integration features. As of July 1, 2006, there are 225 police and fire non-retired personnel covered by the plan.

See note (7) to the General Purpose Financial Statements in Appendix A for additional information on pension plans.

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The following table sets forth the City’s contributions for the various retirement and pension systems for the five most recent fiscal years ended June 30:

Fiscal Retirement Pension Police & Fire Year System System System 2007 ............................................... $37,817 $1,076,214 $294,570 2006 ............................................... 45,272 942,141 250,250 2005 ............................................... 43,600 894,466 229,166 2004 ............................................... 35,045 608,629 181,293 2003 ............................................... 40,470 464,257 271,940

______________ Source: Office of Finance Director.

The City’s share of social security and Medicare taxes amounted to $2,533,243 for the fiscal year 2007.

Accounting for Annual Vacation and Disability Leave

Annual vacation leave, which is limited to a maximum accumulation of 30 days per employee, earned but not taken by City employees was $2,282,488 as of June 30, 2007. This amount has been reflected in the City’s financial statements. Annual disability leave is paid as a normal wage and salary benefit and is recorded when taken. Accumulation of disability leave is unlimited; however, there is no lump sum payment when an employee leaves City service.

Labor Relations

As of July 1, 2007, the City’s budget authorized 579 employment positions. All employees are in a civil service system

except the Mayor, City Administrator, Department Directors and certain other executive level employees who are in the exempt service. The majority of City employees are represented collectively as follows:

1. Local 1926, International Association of Firefighters, AFL-CIO (Annapolis Professional Firefighters); 2. United Food and Commercial Workers Union, Local 400 (Police); 3. Annapolis Trades, Maintenance and Labor Force Employees, Local 3406, Maryland Public Employees Council 67,

American Federation of State, County and Municipal Employees, AFL-CIO; 4. Annapolis Clerical and Technical Employees, Local 3162, Maryland Public Employees Council 67, American

Federation of State, County and Municipal Employees, AFL-CIO.

Basis of Accounting

The accounting policies of the City conform to generally accepted accounting principles as applicable to governmental units. The modified accrual basis of accounting is followed by the General Fund and the other governmental funds. The accrual basis is employed in the proprietary funds. The fiduciary fund follows a basis of accounting which does not materially differ from the accrual basis. Under the modified accrual basis of accounting, revenues are recorded when susceptible to accrual, i.e., both measurable and available. Available means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Expenditures are recorded when the liability is incurred, if measurable except for debt service which is recognized when due.

Licenses and permits, charges for non-enterprise services, fines and forfeits and miscellaneous revenues (except

investment earnings) are recorded as revenues when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned since they are measurable and available.

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Other Post Employment Benefits

The City provides a post-employment health insurance program through the General Fund in addition to other pension benefits. These post-employment benefits are subject to change at any time. All employees who retire from the City may participate in the program. In order to be eligible, the retiree must meet normal service retirement criteria, and immediately preceding retirement, been enrolled in a medical, vision or prescription drug insurance plan offered to active employees of the City. The City will pay 80% of the retirees health insurance premium based upon these criteria. Other retirees who do not meet the eligibility criteria are permitted to participate in the health insurance program by paying the full premium at the group rate. The City has funded these benefits on a pay-go basis since the inception date of July 1, 2002. Starting with fiscal year 2009, the City is required to fund these benefits on an actuarial basis. Initial projections estimate an unfunded future liability of $27 million. The City has reserved $500,000 as of June 30, 2007 and has budgeted $1.2 million for fiscal year 2008 to offset the future costs. An actuarial analysis will be performed in fiscal year 2008, after which further considerations for change will be addressed by the City Council.

Budget

By the second Monday in March, the Mayor submits to the Finance Committee a proposed operating budget for the fiscal

year commencing on the following first day of July. The budget includes proposed expenditures and the means of financing them. The Committee makes recommendations on the proposed budget to the full City Council by the second Monday in May. The Council conducts public hearings on the budget. No later than the 30th day of June, the budget is enacted through passage of a budget ordinance. Supplemental appropriations and transfers of funds require approval by the City Council.

CITY INDEBTEDNESS

General

The City has the power to issue general obligation bonds pursuant to the authority of Sections 31-37, inclusive, of Article 23A of the Annotated Code of Maryland and the Annapolis City Charter. The City’s short-term borrowing authority is currently limited by its Charter to $3,000,000 at any time outstanding, and each sum so borrowed must be repaid within 12 months. The City has no outstanding short-term debt at present. The most recent public sale of a general obligation bond issue of the City occurred in August, 2005, when the City issued $15,000,000 in aggregate principal amount of its general obligation bonds.

Legal Debt Limitation

Unless and until otherwise provided by Section 11(b) of the Annapolis City Charter, the aggregate amount of bonds and

other evidences of indebtedness outstanding at any one time may not exceed 10% of the assessable basis of the City. However, (1) bonds or other indebtedness of the City pursuant to the authority of any public local law enacted by the General Assembly of Maryland prior to January 1, 1955 or any public general law other than said Sections of Article 23A, (2) tax anticipation notes, (3) bonds or other evidences of indebtedness payable solely from revenues of one or more revenue-producing projects and (4) notes or other short-term obligations of the City issued in an amount not exceeding $3,000,000, are not subject to and are not included in the calculation of the debt limitation described above.

The following table represents the debt margin of the City as of June 30, 2007.

Assessable Basis Upon Which Tax Levy for Year Beginning July 1, 2006 was Calculated.....................................................$4,454,607,350 Debt Limit: 10% of Assessable Basis......................................................................... 445,460,735 City Debt Subject to Charter Limitation (1) ................................................................ 35,949,989 Debt Margin................................................................................................................. 409,510,746 Ratio of City Debt to Assessable Basis ....................................................................... .81%

________________ Note: (1) Amount does not include water and sewer fund debt as these enterprise funds are self supporting. Source: Office of Finance Director.

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The following table presents the City’s bonded indebtedness as a percentage of assessed value for each of its five most recent fiscal years ended June 30.

Bonded Debt

To Assessed Value (Unaudited)

Assessed

Value

Bonded Debt(*)

Debt to

Assessed Value (%)

2007.................. $4,454,607,350 $35,949,989 0.81% 2006.................. 4,150,982,690 39,161,946 0.94 2005.................. 3,709,072,022 27,330,628 0.74 2004.................. 3,224,255,118 30,060,941 0.93 2003.................. 2,786,719,148 32,715,169 1.17

________________ Notes: (*) Includes only General Obligation Debt, except that of the Water and Sewer Funds. Source: Office of Finance Director.

The Bonded Debt per Capita as of June 30, 2007 is $1,003 based upon the 2000 population estimate of 35,838 from the U.S. Census Bureau.

The following table sets forth the rapidity of the City’s net debt payments.

Rapidity of Net Debt Payments

Term Principal Paid* Percentage Paid 5 Years .................................................... $10,053,961 38.9% 10 Years .................................................... 18,451,635 71.4 15 Years .................................................... 22,708,009 87.9 20 Years .................................................... 25,846,957 100.0

_______________ *Does not include Bonds offered herein. Source: City of Annapolis

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Schedule of Principal and Interest Payments on Long-Term Obligations

The following table sets forth the projected principal and interest payment schedule as of June 30, 2007 for the City’s long-term obligations.

Schedule of Debt Service Requirements of Long-Term Obligations (As of June 30, 2007)

(Unaudited)

Fiscal Total Year General Water Sewer Enterprise Total Debt Ending Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Service 2008.......................... $2,056,913 $1,004,882 $523,582 $181,032 $465,136 $145,582 $954,196 $415,076 $3,999,827 $1,746,572 $5,746,399 2009.......................... 2,104,147 918,735 534,068 160,417 854,323 322,613 595,046 177,311 4,087,584 1,579,076 5,666,660 2010.......................... 1,915,065 848,061 494,921 143,576 459,010 114,880 846,434 337,266 3,715,430 1,443,783 5,159,213 2011.......................... 1,963,538 775,522 506,505 126,052 470,232 100,028 863,094 302,341 3,803,369 1,303,943 5,107,312 2012.......................... 2,014,298 700,924 518,712 108,081 482,005 84,810 881,389 266,553 3,896,404 1,160,368 5,056,772 2013.......................... 1,794,424 627,537 472,989 90,477 463,069 69,558 734,055 232,318 3,464,537 1,019,890 4,484,427 2014.......................... 1,836,612 558,583 481,828 74,159 472,798 54,941 746,534 201,955 3,537,772 889,638 4,427,410 2015.......................... 1,747,076 487,821 417,307 57,492 418,152 40,011 748,577 170,915 3,331,112 756,239 4,087,351 2016.......................... 1,492,048 417,924 255,778 42,217 168,646 26,322 738,528 138,937 2,655,000 625,400 3,280,400 2017.......................... 1,527,514 353,184 259,841 30,883 170,743 18,910 751,902 106,273 2,710,000 509,250 3,219,250 2018.......................... 1,562,980 285,937 263,904 19,106 172,840 11,223 765,276 72,321 2,765,000 388,587 3,153,587 2019.......................... 638,226 224,453 24,645 8,667 11,925 4,194 120,204 42,273 795,000 279,587 1,074,587 2020.......................... 658,296 198,522 25,420 7,666 12,300 3,709 123,984 37,390 820,000 247,287 1,067,287 2021.......................... 686,394 171,629 26,505 6,627 12,825 3,207 129,276 32,324 855,000 213,787 1,068,787 2022.......................... 710,478 143,691 27,435 5,549 13,275 2,685 133,812 27,062 885,000 178,987 1,063,987 2023.......................... 738,576 114,248 28,520 4,412 13,800 2,135 139,104 21,517 920,000 142,312 1,062,312 2024.......................... 770,688 83,120 29,760 3,210 14,400 1,553 145,152 15,654 960,000 103,537 1,063,537 2025.......................... 798,786 50,750 30,845 1,960 14,925 948 150,444 9,558 995,000 63,216 1,058,216 2026.......................... 830,898 17,137 32,085 662 15,525 320 156,492 3,228 1,035,000 21,347 1,056,347 Total ......................... $25,846,957 $7,982,660 $4,954,650 $1,072,245 $4,705,929 $1,007,629 $9,723,499 $2,610,272 $45,231,035 $12,672,806 $57,903,841

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Schedule of Debt Service Requirements as Adjusted To Reflect Issuance of the Bonds

Fiscal

Existing

Public Improvements Bonds, Series 2007

Total Year Ending

Debt Service

Principal

Interest(1)

Adjusted Debt Service(2)

2008....................... $5,746,399 $ - $ 621,140 $6,367,539 2009....................... 5,666,660 1,880,000 1,307,100 8,853,760 2010....................... 5,159,213 1,885,000 1,227,094 8,271,307 2011....................... 5,107,312 1,890,000 1,146,875 8,144,187 2012....................... 5,056,772 1,900,000 1,065,150 8,021,922 2013....................... 4,484,427 1,905,000 980,725 7,370,152 2014....................... 4,427,410 1,910,000 894,888 7,232,298 2015....................... 4,087,351 1,920,000 803,913 6,811,264 2016....................... 3,280,400 1,920,000 707,913 5,908,313 2017....................... 3,219,250 1,930,000 611,663 5,760,913 2018....................... 3,153,587 1,935,000 515,038 5,603,625 2019....................... 1,074,587 1,945,000 418,038 3,437,625 2020....................... 1,067,287 1,955,000 325,425 3,347,712 2021....................... 1,068,787 1,965,000 234,769 3,268,556 2022....................... 1,063,987 1,975,000 141,194 3,180,181 2023....................... 1,062,312 1,985,000 47,144 3,094,456 2024....................... 1,063,537 - - 1,063,537 2025....................... 1,058,216 - - 1,058,216 2026....................... 1,056,347 - - 1,056,347 Total ...................... $57,903,841 $28,900,000 $11,048,069 $97,851,910

__________________ (1) Interest rates from 4.25% to 5.00%. (2) Totals may not add due to rounding.

The following table presents the City’s annual debt service expenditures as a percentage of operating revenues for each of its five most recent years ended June 30.

Ratio of Annual Debt Service Expenditures to

Operating Revenues (Unaudited)

Operating Revenues

Annual Debt Service

Expenditures(1)

Percentage 2007......................................................................... $57,024,730(2) $ 4,745,810 8.32% 2006......................................................................... 54,099,811 4,064,853 7.51 2005......................................................................... 49,983,600 4,010,788 8.02 2004......................................................................... 46,441,020 3,791,564 8.16 2003......................................................................... 45,626,418 3,172,645 6.95 ________ Note: (1) Amounts include annual debt service of the General Fund and the Enterprise Funds other than the water and sewer funds. Amounts for the water and sewer funds are excluded since these Enterprise Funds are self supporting. (2) Estimated. Source: Office of Finance Director.

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Overlapping Debt

Property located in Annapolis is subject to taxation by Anne Arundel County (the “County”) to pay for services provided to residents of Annapolis by the County. As of June 30, 2006, the overlapping net general obligation bond debt of Anne Arundel County was $206,670,971.

During fiscal year 2007, the assessed value of property in Annapolis was approximately 8% of the assessed value of all

taxable County property. Under applicable Maryland law, Anne Arundel County may not impose taxes upon the residents of any incorporated municipality for services which that municipality provides for its residents. For the fiscal year 2007, the County tax rate within Annapolis was $0.548 per $100 of full property value.

Future Debt

The City anticipates incurring additional bonded debt in the amount of approximately $25,000,000 by the issuance of

public improvements bonds sometime in the next two years to finance various improvement projects.

CITY REVENUES AND EXPENDITURES

General

In accordance with the general practice of governmental units, the accounts of the City are organized on the basis of funds

and account groups, each of which is considered a separate entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund balance, revenues and expenditures/expenses. The General Fund is the largest of these funds and is the fund from which all general costs of City government are paid and to which taxes and other revenues, not specifically directed by law to be recorded in special funds, are recorded.

The City’s largest source of General Fund revenues is property taxes, which comprised approximately 54% of total

General Fund revenues in fiscal year 2007. The second largest source of General Fund revenues is revenue from the Federal, State of Maryland and Anne Arundel County governments, which comprised approximately 26.7% of total General Fund revenues in fiscal year 2007.

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The following table indicates the General Fund revenues and expenditures for the five most recent fiscal years ended June 30:

General Fund

Summary of Revenues and Expenditures And Changes in Fund Equity

(Unaudited)

2006 2005 2004 2003 2002 Revenues Taxes .................................................. $23,245,058 $21,862,959 $20,248,312 $19,048,995 $18,187,376 Licenses and permits .......................... 3,111,501 3,012,547 1,909,631 2,081,845 1,729,357 Fines and forfeitures........................... 1,472,700 1,523,993 1,296,411 1,027,917 734,721 Money and property ........................... 1,362,781 1,013,404 967,212 1,424,878 1,213,179 Intergovernmental .............................. 13,313,752 11,243,031 11,240,566 11,143,547 10,494,201 Current services.................................. 1,930,698 1,586,393 1,624,866 1,613,782 1,637,968

Total revenues ............................ 44,436,490 40,242,327 37,286,998 36,340,964 33,996,802 Expenditures General government ........................... 5,944,514 5,813,172 5,332,880 5,813,713 5,349,178 Public safety....................................... 28,336,451 25,423,167 22,083,091 21,735,510 19,506,612 Community services........................... 2,781,799 2,751,447 2,486,332 2,551,256 2,395,932 Public works....................................... 3,050,781 3,826,912 3,799,534 4,022,366 3,793,235 Interfund charges (credits) ................. - (63,915) (1,020,880) (41,909) (31,392) Debt service: ......................................

Principal ......................................... 1,733,449 2,028,003 1,818,659 1,480,813 1,369,924 Interest............................................ 1,104,761 758,986 849,403 777,536 660,276

Total expenditures ...................... 42,951,755 40,537,772 35,349,019 36,339,285 33,043,765 Excess (deficiency) of revenues

over expenditures ...............................

1,484,735

(295,445)

1,937,979

1,679

953,037

Other financing sources (uses) ........... (2,331,390) (884,000) (800,090) (4,023,372) (6,087,841) Net change in fund balances............... (846,655) (1,179,445) 1,137,889 (4,021,693) (5,134,804) Fund balances at beginning of year.... 10,888,644 12,068,089 10,930,200 14,951,893 20,086,697 Fund balances at end of year .............. $10,041,989 $10,888,644 $12,068,089 $10,930,200 $14,951,893 _____________ Source: Office of Finance Director.

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The following table presents an indication of the General Fund trend.

General Fund Statement of Approved Budgets and Actual Operations

(Unaudited)

Approved Approved Actual Budget Estimated Budget Fiscal Year

2006 Fiscal Year

2007 Fiscal Year

2007 Fiscal Year

2008 Revenues Taxes .................................................... $23,245,058 $25,011,400 $25,490,290 $28,190,000 Licenses and permits ............................ 3,111,501 2,881,500 2,436,550 2,905,300 Fines and forfeitures............................. 1,472,700 1,400,000 1,267,500 1,428,700 Money and property ............................. 1,362,781 2,845,000 1,530,100 4,647,290 Intergovernmental ................................ 13,313,752 12,348,070 13,963,230 12,654,600 Current services.................................... 1,930,698 1,830,000 1,977,100 3,094,750

Total revenues............................... 44,436,490 46,315,970 46,664,770 52,920,640 Expenditures General government ............................. 5,944,514 6,946,050 6,761,282 8,375,310 Public safety......................................... 28,336,451 27,493,630 27,695,192 30,362,580 Community services............................. 2,781,799 2,856,210 2,970,883 3,272,380 Public works......................................... 3,050,781 3,377,740 3,370,023 3,832,780 Interfund charges (credits) ................... - (568,050) - (174,000) Debt service:

Principal............................................ 1,733,449 2,259,740 2,259,738 2,056,910 Interest .............................................. 1,104,761 1,084,650 1,055,341 1,004,880

Total expenditures......................... 42,951,755 43,449,970 44,112,459 48,730,840 Excess (deficiency) of revenues over

expenditures ..................................

1,484,735

2,866,000

2,552,311)

4,189,800 Other financing sources (uses) ............. (2,331,390) (2,866,000) (2,899,850) (4,189,800) Net change in fund balances ................ (846,655) - (347,539) - Fund balances at beginning of year...... 10,888,644 10,041,989 10,041,989 9,694,450 Fund balances at end of year................ $10,041,989 $10,041,989 $9,694,450 $9,694,450 _____________ Source: Office of Finance Director. 2008 Budget

The General Fund operating budget for expenditures and transfers for fiscal year 2008 is $52,920,640. This compares with

$46,315,970 for fiscal year 2007 and $43,098,000 for fiscal year 2006. The combined operating budget for expenses of the City’s eight enterprise funds is $22,180,320 for fiscal year 2008 and was $23,045,680 for fiscal year 2007 and $19,112,780 for fiscal year 2006.

The General Fund’s undesignated fund balance was $4,943,401 for fiscal year 2004, $5,026,353 for fiscal year 2005, and

$3,929,395 for fiscal year 2006. The combined retained earnings balance of the City’s eight enterprise funds was $28,455,789 for fiscal year 2004, $30,935,702 for fiscal year 2005, and $26,321,700 for fiscal year 2006.

The capital budget approved by the City for fiscal year 2008 is $39,261,190. Of this amount, $8,623,330 will be funded

from the proceeds of this bond issue and $30,637,860 from a later issue, $10,533,000 will be funded from State grants and other non-City sources, and the remaining $2,793,910 will come from operating revenues.

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Tax Revenues by Source Ad valorem property taxes, the City’s largest source of tax revenues, have averaged 75.56% of total tax revenues for the

fiscal years 2003 through 2007. At the same time, income tax revenues have averaged 14.64% of total tax revenues, while other taxes have averaged 9.79% of total tax revenues. The following table presents the City’s General Fund tax revenues by source for each of the five most recent fiscal years ended June 30.

Tax Revenues by Source

(Unaudited)

Total Taxes

Local Property Taxes(1)

Income Taxes

Other Taxes

2007(2)....................................... $33,700,250 $25,525,150 $5,080,000 $3,095,100 2006 ........................................... 30,596,565 23,245,058 4,444,410 2,907,097 2005 ........................................... 28,513,317 21,862,959 3,845,705 2,804,653 2004 ........................................... 26,917,489 20,248,312 3,998,206 2,670,971 2003 ........................................... 25,751,871 19,048,995 3,934,782 2,768,094 ________________ Note: (1) Includes additions and abatements, interest on taxes, discount on taxes and tax credits for the elderly and disabled. (2) Estimated Source: Office of Finance Director.

Local Property Taxes

The assessment of all real and tangible personal property for purposes of property taxation by the City is the sole responsibility of the Maryland State Department of Assessments and Taxation, an independent State agency.

Real property is assessed at market value (full cash value). The State has a triennial assessment system under which all

real property in the State is physically inspected and its full market value determined once every three years. If an inspected property has increased in market value since its last inspection, the increase is phased into the determination of assessed valuation over the ensuing three years by increasing the property’s “market value” subject to taxation in three equal annual increments.

The City is empowered under State law to exempt from City taxation, real property and certain personal property for

businesses which have recently located or expanded within the City. State law provides a credit against local real property taxes on certain owner-occupied residential property. The tax credit

for each tax year was computed by multiplying the local real property tax rate by the amount by which the current year’s assessment on residential property exceeds 110% of the previous year’s assessment. This tax credit does not apply to the State real property tax.

The State also provides a tax credit based on the ability of homeowners to pay property taxes. The credit is calculated by

use of a scale which indicates a maximum tax liability for various income levels. Tangible personal property is assessed by the State Department of Assessments and Taxation at 100% of current full cash

value, less certain amounts for depreciation but with no allowance for inflation. The City may levy a tax of up to 100% of the value of manufacturing equipment and inventory and commercial inventory and Anne Arundel County may levy a tax on up to 100% of the value of commercial inventory. Neither the County nor the City currently levies any tax on commercial inventory or manufacturing equipment or inventory.

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City, County and State applicable tax rates and the tax levy in each of the five most recent years is set forth below. Assessed values of tax-exempt properties owned by Federal, State, County and City governments (including the United States Naval Academy), churches, schools, fraternal organizations, cemeteries, disabled veterans and the blind, aggregating approximately $1,414,890,350 for the fiscal year 2007, are not included in the table below. Under applicable law, there are no limits on the rates of property taxes which may be charged by the City and Anne Arundel County. The following table sets forth the assessed value of all taxable property in the City for the five most recent fiscal years ended June 30.

Assessed Values, Tax Rates and Tax Levies

(Unaudited)

2007 2006 2005 2004 2003 Assessed Value Real property .................................... $4,307,070,760 $4,001,452,390 $3,566,024,862 $3,082,080,524 $2,635,596,635 Personal property.............................. 147,648,130 149,530,300 143,047,160 142,174,594 151,122,513 Total base ......................................... $4,454,718,890 $4,150,982,690 $3,709,072,022 $3,224,255,118 $2,786,719,148 City tax rate (per $100 assessed value)...............

.530

.560

.580

.600

.624

Total city tax levy (current year) ..................................

$25,525,160

$23,308,799

$21,728,369

$20,405,265

$18,943,247

Anne Arundel County tax rate in City (per $100 assessed value).......

.548

.555

.561

.555

.550

Total County tax............................... $25,625,527 $24,282,794 $22,011,636 $19,507,066 $16,728,295 State tax rate (per $100 assessed value)...............

.112

.132

.132

.132

.084

________________ Source: Office of Finance Director. The tax rate for fiscal year 2008 for the City is $0.53, for Anne Arundel County within Annapolis is $0.531 and for the

State is $0.112 per $100 of full property value. The full property value of all taxable property in the City as of July 1, 2008, is approximately $4,940,521,160.

City taxes are due and payable as of July 1 of each year. Beginning October 1, an interest penalty of 1½% per month on

taxes due is charged for each month or fraction thereof until such taxes are paid. Delinquent taxes are collected, after the sixth month of delinquency, by tax sales conducted by Anne Arundel County. Historically, Anne Arundel County has conducted tax sales on an annual basis.

The City does not levy taxes in excess of actual requirements to provide a margin against delinquencies. In the opinion of the City, the tax rate established by it for each fiscal year when applied to the assessed value of the real

and personal property subject thereto is sufficient to provide revenues to discharge the City’s obligations to pay principal and interest maturing on its issued and outstanding general obligations indebtedness for each such fiscal year.

The following table sets forth certain pertinent information with respect to the City’s tax levies and tax collections for each

of its five most recent fiscal years ended June 30.

Property Tax Levies and Collections (Unaudited)

Total Tax

Current Year Taxes Collected in Year of Levy

Total Taxes Collected

(Current and Delinquent)

Accumulated Delinquent

Accumulated Delinquent Taxes as % of Current Year’s Tax

Levy(1) Amount % Amount % Taxes Levy 2002 .......... $18,059,805 $18,031,377 99.84% $18,044,391 99.91% $300,710 1.67% 2003 .......... 18,943,248 18,903,813 99.79 18,937,431 99.97 147,689 .78 2004 .......... 20,405,265 20,330,889 99.64 20,135,886 98.68 140,371 .69 2005 .......... 21,728,369 21,612,483 99.47 21,797,155 100.32 221,042 1.02 2006 .......... 23,308,799 23,224,757 99.64 23,148,211 99.31 205,343 .88 ________________ Note: (1) Represents original tax levy, less real property tax credits for civic associations, elderly and disabled taxpayers, and other adjustments. Source: Office of Finance Director.

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The following table sets forth the City’s ten largest taxpayers and assessed value of their taxable real and personal property and taxes billed as of June 30, 2006.

City of Annapolis, Maryland

Principal Real and Personal Property Taxpayers Fiscal Year 2006

(Unaudited)

Name of Taxpayer

Assessed Market

Valuation

Taxes Billed Through 6/30/06

% of Total Tax Levy

Verizon – Maryland.................................................................... $71,123,900 $1,180,657 5.07% Baltimore Gas & Electric Company ........................................... 65,009,000 1,079,149 4.63 Baywoods Cooperative Housing................................................. 49,300,000 261,290 1.12 Yacht Basin Company of MD .................................................... 41,259,400 218,675 0.94 Loews Annapolis Hotel Corporation. ......................................... 32,857,800 174,146 0.75 Columbia Realty Venture ........................................................... 31,461,900 166,748 0.72 Fairfield Annapolis LP ............................................................... 26,954,300 142,858 0.61 Annapolis Roads Apartment Co. ................................................ 18,020,900 95,511 0.41 Spa Cove Apartments Investors.................................................. 16,406,200 86,953 0.37 Hollander, Ronald B ................................................................... 15,567,450 82,507 0.35 ________________ Source: Office of Finance Director.

Income Taxes

The State imposes an income tax on the adjusted gross income of individuals as determined for Federal income tax

purposes, subject to certain adjustments. The rate of tax is 2% on the first $1,000 of taxable income, 3% on the second $1,000, 4% on the third $1,000 and 4.75% on taxable income in excess of $3,000. Pursuant to State laws, each county and Baltimore City may levy a local income tax at the rate of at least 20%, but not more than 60%, of the State income tax liability of individuals domiciled in their respective jurisdictions. Anne Arundel County currently levies a local income tax pursuant to the State law at the rate of 50% of the State income tax liability of individuals domiciled in Anne Arundel County. Anne Arundel County does not levy a local income tax on corporations.

By virtue of a law enacted by the General Assembly of Maryland at its 1977 session, the City receives a share of the Anne

Arundel County income tax. The share is equal to .37% of the total State residents’ income tax liability, 8.5% of net State income tax liability of City residents, or 17% of the local tax liability of City residents, whichever computation results in the greater amount being paid to the City. The City received from the State of Maryland $4,444,410 for the fiscal year 2006 and expects to receive approximately $5,336,200 for fiscal year 2007.

Shared Revenue

During fiscal year 2006, the City received from the State of Maryland and Anne Arundel County shared revenues other

than income taxes amounting to $4,758,734 and expects $5,095,620 in fiscal year 2007 for use as operating funds. The City received $1,851,637 in highway taxes and $608,856 in admissions taxes which are levied and collected by the State, during the fiscal year 2006 and projects $1,734,240 and $900,380, respectively for fiscal year 2007. The City received $539,840 in utility taxes, which are levied and collected by the County, during fiscal year 2006 and estimates $570,000 for fiscal year 2007. The City levies and collects a hotel/motel tax within the City that is authorized under County law. In fiscal year 2006 the City collected $1,758,401 and expects to collect $1,891,000 for the fiscal year 2007.

Overlapping Tax Rate

Taxable property in the City is subject to certain Anne Arundel County and State taxes. County tax rates vary for the City

and other areas of the County, based upon services rendered. For the fiscal year 2008, the County and State tax rates for the City are $0.531 and $0.112, respectively, per $100 of full property value.

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Water and Sewer Funds

A Water Fund and a Sewer Fund have been established separate from the General Fund of the City to record revenue and expenses related to these operations.

Water and wastewater user charges and assessment charges are recorded as revenues on the accrual basis. Unpaid water

and wastewater user charges and assessments are a lien on the real property and are collectible in the same manner as real property taxes at tax sale.

The Capital Facility Assessment Charge and the Capital Facility Connection Charge are dedicated to the payment of the

water and sewer funds’ debt service charges. The charges due each year are recorded as non-operating revenue to the extent of related interest expense and the excess, if any, is recorded as an addition to contributed capital. Transfers of these monies to other funds are permitted only to the extent that they exceed debt service liability.

The following schedule lists the water and wastewater utility rates currently effective.

Water and Wastewater Utility Rate Schedule Present Rates

Capital Facility

Assessment Charge: Water........................................................ $50 per year per residential unit for 30 years Sewer........................................................ $50 per year per residential unit for 30 years

Capital Facility Charge: Water........................................................ $800 per residential unit Sewer........................................................ $1,600 per residential unit

User Connection Charges: Water........................................................ $1,350 for a meter up to a maximum of $8,200 for a 6 inch line Sewer $1,700 for a 6 inch line or less up to a maximum of $4,400 for a

12 inch line Water User Charge:

5,000 gallons or less (minimum charge) .. $12.60 each three months billing period 5,001 gallons to 35,000 gallons ............... $1.95 per 1,000 gallons each three months billing period All over 35,000 gallons............................ $2.28 per 1,000 gallons each three months billing period

Wastewater User Charge: 5,000 gallons or less (minimum charge) .. $18.19 each three months billing period 5,001 gallons to 35,000 gallons ............... $2.82 per 1,000 gallons each three months billing period All over 35,000 gallons............................ $3.29 per 1,000 gallons each three months billing period

________________ Source: Office of Finance Director.

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The following table indicates the results of operations for the Water Fund for each of the five most recent fiscal years ended June 30:

Water Fund

Summary of Revenues and Expenditures (Unaudited)

Fiscal Years Ended June 30, 2006 2005 2004 2003 2002

Operating Revenues Charges for services................... $3,460,289 $3,952,528 $3,119,444 $3,617,642 $3,349,760 Other .......................................... 37,777 1,124,857 6,704 70,962 36,490

Total operating revenues ...... 3,498,066 5,077,385 3,126,148 3,688,604 3,386,700 Operating Expenses Salaries....................................... 1,581,698 1,462,256 1,473,815 1,457,675 1,310,128 Utilities....................................... 274,061 250,,995 219,911 211,680 189,064 Repairs and maintenance ........... 488,248 476,844 412,893 449,067 509,611 Materials and supplies ............... 329,826 170,142 211,187 185,067 135,147 Contractual services................... 57,121 51,847 32,818 13,819 11,440 Administrative charge (credit) 892,284 970,530 908591 624,126 615,937 Depreciation............................... 549,707 558,361 492,209 451,372 417,150 Other .......................................... 18,500 - - - -

Total operating expenses .... 4,191,445 3,940,975 3,751,424 3,392,806 3,188,477 Operating income (loss) ..... (693,379) 1,136,410 (625,276) 295,798 198,223

Non-Operating Revenues (Expenses)

Interest income........................... - - 3,166 57,701 - Interest expense ......................... (256,046) (257,125) (209,188) (220,704) (218,362)

Total non-operating revenues (expenses), net..... (256,046) (257,125) (206,022) (163,003)

(218,362)

Income (loss) before contributions and operating transfers....................................

(949,425)

879,285

(831,298)

132,795

(20,139) Capital contributions.................. 490,123 1,033,859 351,628 588,783 857,234 Change in net assets ............. (459,302) 1,913,144 $(479,670) $721,578 $837,095 ________________ Source: Office of Finance Director.

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The following table presents an indication of the Water Fund trends:

Water Fund Statement of Approved Budgets and Actual Operations

(Unaudited)

Approved Estimated Approved Actual Budget Actual Budget Fiscal Year

2006 Fiscal

Year 2007 Fiscal Year

2007 Fiscal Year

2008 Operating Revenues Charges for services.......................... $3,460,289 $3,680,000 $3,290,500 $3,500,000 Other ................................................. 37,777 4,470 39,990 633,280

Total operating revenues ............... 3,498,066 3,684,470 3,330,490 4,133,280 Operating Expenses Salaries.............................................. 1,581,698 1,668,120 1,668,120 1,816,050 Utilities.............................................. 274,061 214,150 214,150 356,300 Repairs and maintenance .................. 488,248 443,360 443,360 443,360 Materials and supplies....................... 329,826 234,130 234,130 305,130 Contractual services .......................... 57,121 63,270 63,270 143,270 Administrative charge 892,284 790,990 871,563 836,000 Depreciation...................................... 549,707 542,140 543,269 552,140 Other ................................................. 18,500 - - -

Total operating expenses ............... 4,191,445 3,956,160 4,037,862 4,452,250 Operating income (loss) ................ (693,379) (271,690) (707,372) (318,970)

Non-Operating Revenues (Expenses)

Non-operating income ...................... - - - - Interest expense................................. (256,046) (208,310) (192,607) (181,030)

Total non-operating revenues (expenses), net ............................. (256,046) (208,310) (192,607) (181,030)

Income (loss) before contributions and operating transfers....................

(949,425)

(480,000)

(899,979)

(500,000)

Capital contributions......................... 490,123 480,000 462,500 500,000 Change in net assets ...................... $(459,302) - (437,479) -

________________ Source: Office of Finance Director.

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The following table indicates the results of operations for the Sewer Fund for each of the five most recent fiscal years ended June 30:

Sewer Fund

Summary of Revenues and Expenditures (Unaudited)

Fiscal Years Ended June 30, 2006 2005 2004 2003 2002

Operating Revenues Charges for services................... $4,986,327 $4,970,739 $4,539,791 $5,108,421 $3,389,917 Other.......................................... 50,659 60,161 ___71,299 ___50,296 -

Total operating revenues ..... 5,036,986 5,030,900 4,611,090 5,158,717 3,389,917 Operating Expenses Salaries....................................... 634,529 626,327 559,099 571,010 538,780 Utilities....................................... 147,354 149,034 136,985 118,741 114,642 Repairs and maintenance ........... 279,553 344,819 277,395 275,973 271,417 Materials and supplies ............... 51,320 49,700 33,188 31,394 31,816 Contractual services................... 3,743,175 3,258,433 2,757,956 2,250,365 2,191,196 Administrative charge (credit) 466,358 580,333 357,948 539,275 356,353 Depreciation............................... 666,652 724,985 663,701 658,490 433,010 Other .......................................... - 40,211 5,233 5,233 6,493

Total operating expenses ... 5,988,941 5,773,842 4,791,505 4,450,481 3,943,707 Operating income (loss)..... (951,955) (742,942) (180,415) 708,236 (553,790)

Non-Operating Revenues (Expenses)

Interest income........................... - - - 36,679 - Interest expense ......................... (180,110) (215,508) (242,804) (232,360) (221,977)

Total non-operating revenues (expenses), net.... (180,110) (215,508)

(242,804) (195,681

(221,977)

Income (loss) before contributions and operating transfers....................................

(1,132,065)

(958,450)

(423,219)

512,555

(775,767) Capital contributions ................. 810,681 1,765,147 458,250 550,459 2,354,092

Change in net assets ............ $(321,384) $806,697 $ 35,031 $1,063,014 $1,578,325 ________________ Source: Office of Finance Director.

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The following table presents an indication of the Sewer Fund trends:

Sewer Fund Statement of Approved Budgets and Actual Operations

(Unaudited)

Approved Estimated Approved Actual Budget Actual Budget Fiscal Year

2006 Fiscal Year

2007 Fiscal Year

2007 Fiscal Year

2008 Operating Revenues Charges for services ......................... $4,986,327 $4,980,000 $4,524,000 $4,900,000 Other................................................. 50,659 60,340 78,650 296,470

Total operating revenues............... 5,036,986 5,040,340 4,602,650 5,196,470 Operating Expenses........................ Salaries ............................................ 634,529 601,600 630,127 640,750 Utilities ............................................. 147,354 120,000 174,554 188,700 Repairs and maintenance .................. 279,553 288,840 286,005 288,840 Materials and supplies ...................... 51,320 49,380 48,191 59,980 Contractual services.......................... 3,743,175 3,290,990 3,367,550 3,340,990 Administrative charge (credit) 466,358 339,510 304,366 444,980 Depreciation ..................................... 666,652 666,650 578,002 666,650 Other................................................. - 110,000 39516 -

Total operating expenses............... 5,988,941 5,466,970 5,428,311 5,630,890 Operating income (loss) ................ (951,955) (426,630) (825,661) (434,420)

Non-Operating Revenues (Expenses)

Interest income ................................. - - - - Interest expense ................................ (180,110) (153,370) (154,143) (145,580)

Total non-operating revenues (expenses), net ............................ (180,110) (153,370) (154,143) (145,580)

Income (loss) before contributions and operating transfers ...................

(1,132,065)

(580,000)

(979,804)

(580,000)

Capital contributions ........................ 810,681 580,000 615,100 580,000 Change in net assets ...................... (321,384) - (364,704) -

________________ Source: Office of Finance Director.

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SELECTED DEMOGRAPHIC AND ECONOMIC FACTORS Population

After rapid growth in the decade between 1960 and 1970, the population of Annapolis has stabilized in the past decade

with moderate growth. The 2000 count by the U.S. Census Bureau shows the 2000 population of Annapolis to be 35,838.

Population

Annapolis

Anne Arundel County

Maryland

1960.............................. 23,385 206,634 3,101,390 1970.............................. 30,095 298,042 3,923,897 1980.............................. 31,740 370,775 4,193,378 1990.............................. 33,178 427,239 4,781,468 2000.............................. 35,838 489,656 5,296,486 ________ Source: U.S. Census Bureau, U.S. Department of Commerce.

Selected Population Characteristics

Median Age.............................................................................. 35.7 Percent School Age (5-17)....................................................... 17.5% Percent 65 or Older .................................................................. 11.9% Number of Persons/Household ................................................ 2.29 Percent 25 or older with 4 or more years of college ................ 38.7% ________ Source: 2000 Census, U.S. Census Bureau, U.S. Department of Commerce.

Employment

Employment figures are compiled by the State at the County level only. The following is a summary comparing annual

averages for Anne Arundel County, the Baltimore Metropolitan area and the State of Maryland for the past ten years and an five month average for 2007.

Employment and Unemployment Rate by Place of Residence

Anne Arundel County Baltimore

Metropolitan Area(1)

Maryland

Employment Unemployment

Rate

Employment Unemployment

Rate

Employment Unemployment

Rate 2007(2) .. 272,225 3.2% 1,342,831 4.0% 2,843,657 3.8% 2006 ....... 273,652 3.3 1,365,654 4.1 2,923,702 3.9 2005 ...... 260,600 3.8 1,276,662 4.8 2,758,553 4.5 2004 ....... 258,119 3.0 1,290,365 4.2 2,819,259 3.7 2003 ....... 256,388 3.2 1,285,181 4.6 2,787,983 4.1 2002 ....... 259,878 3.0 1,300,604 4.1 2,770,357 3.8 2001 ....... 253,765 3.2 1,270,007 4.6 2,721,724 4.1 2000 ....... 250,903 2.9 1,255,686 4.4 2,696,543 3.9 1999 ....... 250,364 2.8 1,252,988 4.0 2,676,488 3.5 1998 ....... 244,431 3.5 1,231,234 5.1 2,627,956 4.6 1997 ....... 245,402 3.9 1,243,712 5.6 2,640,878 5.1 ____________ (1) The Baltimore Metropolitan Area includes: Anne Arundel County, Baltimore City, Baltimore County, Carroll County, Harford County, Howard

County and Queen Anne’s County. (2) Average for January –May 2007. Source: Civilian Labor Force, Employment and Unemployment by Place of Residence. Department of Labor, Licensing and Regulation, Office of Labor

Market Analysis and Information.

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The diversity in employment of the City and the Greater Annapolis area is shown in the following table of the top 20 major employers for 2005.

Employer

Number of Employees

Anne Arundel County Public Schools .......... 14,310 State of Maryland.......................................... 8,616 Anne Arundel County Government .............. 4,200 U.S. Naval Academy..................................... 2,052 Anne Arundel Health System, Inc. ............... 2,025 ARINC .......................................................... 1,300 Home Depot .................................................. 1,129 Verizon Communications Maryland ............. 844 City of Annapolis Government ..................... 602 Baltimore Gas & Electric .............................. 500 Windermere Group LLC............................... 400 USinternetworking, Inc. ................................ 365 Capital Gazette Communications Inc............ 330 Nordstrom ..................................................... 300 Science Applications International Corp…... 288 Macys Inc...................................................... 260 ARC of Anne Arundel Co. Inc. (The)........... 250 Ginger Cove ................................................. 250 TeleCommunication Systems, Inc................. 250 United States Post Office ............................. 231

------------- Source: City of Annapolis

Income

The following table provides the most recently published data on per capita income:

Anne Arundel County, Maryland And U.S. Per Capita Personal Income

Calendar Year

Anne Arundel County

Maryland

U.S.

2005....................................... $45,648 $41,972 $34,586 2004....................................... 43,230 39,725 33,050 2003....................................... 40,463 37,446 31,472 2002....................................... 39,437 36,557 30,804 2001....................................... 38,441 35,628 30,575 2000....................................... 33,908 33,482 29,469 1999....................................... 32,210 31,641 27,843 1998....................................... 30,957 30,455 26,893 1997....................................... 29,282 28,857 25,412 Percent Change 1997-2005.... 55.9% 45.4% 36.1% __________ Source: Maryland Department of Planning, Planning Data Services, from U.S. Bureau of Economic Analysis, April 2007.

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Household Income

Income after taxes indicates the disposable income for each household. The median disposable income, also known as the effective buying income (“EBI”), for the City of Annapolis, surrounding counties and the State of Maryland is set forth below.

Median Household Effective Buying Income

1999 2004 % Change Annapolis................................. $37,814 $42,116 11.4% Anne Arundel County.............. 47,605 52,722 10.7 Baltimore City ......................... 27,277 27,042 (0.86) Baltimore County .................... 42,757 43,170 0.97 Carroll County ......................... 44,941 51,356 14.3 Harford County........................ 44,531 48,636 9.2 Howard County ....................... 58,288 61,413 5.4 Queen Anne’s County ............. 42,193 46,673 10.6 State of Maryland .................... 43,627 45,879 5.2 ________________ Source: Sales and Marketing Management, Survey of Buying Power and Media Markets for years 1999 and 2004. (A VNU Publication.) Copyrighted.

Statistics comparing the distribution of household EBI for the City of Annapolis, Anne Arundel County, the State of

Maryland and the United States in 2004 are as follows:

Percentage Distribution of Household Effective Buying Income, 2004

Income Group Annapolis Anne

Arundel Maryland U.S.A.

$ 0-19,999 .................... 20.3% 10.9% 16.7% 22.4% 20,000-34,999 .................... 20.7 16.7 19.8 23.2 35,000-49,999 .................... 18.4 19.2 18.8 19.0 50,000+ .............................. 40.6 53.2 44.7 35.4

________________ Source: Sales and Marketing Management, 2004 Survey of Buying Power and Media Market (A VNU Publication: September 2004). Copyrighted.

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A comparison of Anne Arundel County and Maryland personal income is presented in the following table:

Calendar

Personal Income (000’s)

Percent Increase From Previous Year

Year Anne Arundel County State Anne Arundel County State 2005.................................. $23,253,043 $234,609,327 5.9% 6.3% 2004.................................. 21,949,274 220,603,188 7.3 6.8 2003.................................. 20,442,037 206,411,852 3.2 3.7 2002.................................. 19,800,327 198,925,918 3.6 3.8 2001.................................. 10,102,867 191,656,697 14.6 7.8 ________________ Source: Maryland Department of Planning, Planning Data Services, from U.S. Bureau of Economic Analysis, April 2007.

Information regarding the value of building permits issued in the fiscal years 2002 through 2006 is presented in the

following table:

Value of City Building Permits

Year

Residential Construction

Permits

Other Permits

Total 2006.................... $59,901,509 $30,133,958 $90,035,467 2005.................... 76,137,639 101,125,015 177,262,654 2004.................... 39,180,383 87,819,105 126,999,488 2003.................... 42,498,578 30,470,365 72,968,943 2002.................... 42,532,887 13,727,071 56,259,958 ________________ Source: Department of Neighborhood and Environmental Programs.

Tourism Industry

The tourism industry has evolved as an important, dynamic component of the Annapolis area economy. The industry

consists of the following segments:

Tourists attracted to the Historic District, Naval Academy, State House, waterfront, special events, and sporting events;

Commercial visitors doing business with the Navy, maritime firms, government offices, the General Assembly, research firms and other local businesses; and

Group activity participants including exhibitors and attendees involved in reunions, conventions, conferences and trade

shows including the sail, power, and used boat shows. The sail and power boat shows are the largest in-water shows in the world.

The number of visitors to the Annapolis area in 2006 was estimated to be in excess of five million. A count of the total

number of persons who stay overnight in or near Annapolis because of an attraction that is located in or occurring in the City does not exist. The following data are known, however:

Naval Academy officials estimate that the facility attracts about 2.5 million visitors a year; and Nearly 1,200,000 persons toured the State House in 2006.

At present, 2,200 rooms are contained in hotel/motels, inns and bed and breakfast facilities located within a ten minute

drive of the State House. Annapolis’ ability to effectively capture the visitor market was significantly enhanced with the addition of 1,130 hotel rooms in the immediate area within the past ten years. The accommodation of larger numbers of people overnight in the City and nearby area provides additional support to the visitor industry component of the local economy.

36

LITIGATION

The City is currently a defendant in a number of tort suits and suits alleging violations of individual civil rights. All suits against the City are being defended by the City’s legal counsel. In the opinion of the City Attorney, after considering all relevant facts, such litigation will not have a material adverse effect on the financial position of the City.

SALE AT COMPETITIVE BIDDING

The Bonds were offered by the City at a competitive bidding on August 21, 2007 in accordance with the Official Notice of Sale (the form of which is attached as Appendix C). The interest rates shown on the cover page of this Official Statement are the interest rates to the City resulting from the award of the Bonds at the competitive bidding. The yields or prices shown on the cover page of this Official Statement were furnished by the successful bidders for the Bonds. All other information concerning the nature and terms of any reoffering should be obtained from the successful bidders for the Bonds and not from the City.

FINANCIAL ADVISOR

Davenport & Company LLC has rendered financial advice to the City in the preparation of this Official Statement.

INDEPENDENT AUDITORS

The general purpose financial statements of the City of Annapolis, Maryland included in Appendix A to this Official Statement have been audited by SB and Company, LLC, independent certified public accountants, to the extent and for the period indicated in their report thereon appearing herein. Such general purpose financial statements have been included in reliance upon the report of SB and Company, LLC.

CONTINUING DISCLOSURE

In order to enable participating underwriters (as defined in SEC Rule 15c2-12) to comply with the requirements of paragraph (b)(5) of SEC Rule 15c2-12, the City will execute and deliver a continuing disclosure agreement (the “Continuing Disclosure Agreement”) on or before the date of issuance and delivery of the Bonds. Pursuant to the Continuing Disclosure Agreement, among other things, the City will agree to provide, directly or through an intermediary (i) to each nationally recognized municipal securities information repository (“NRMSIR”) and to the state information depository, if any, established for Maryland (the “SID”), (A) annual financial information and operating data regarding (i) Statement of Revenues, Expenditures, and Changes in Fund Balance; (ii) Assessed Values, Tax Rates and Tax Levies; (iii) Property Tax Rates and Collections; and (iv) Bonded Debt to Assessed Value; such information to be made available within 275 days after the end of the City’s fiscal year, and (B) annual audited financial statements for the City, such information to be made available within 275 days after the end of the City’s fiscal year, unless the audited financial statements are not available on or before such date, in which event unaudited financial statements will be provided by such date and audited financial statements will be provided promptly when and if available; (ii) in a timely manner, to each NRMSIR or to the Municipal Securities Rulemaking Board (“MSRB”) and to the SID, if any, directly or through an intermediary, notice of the occurrence with respect to the Bonds of any of the Reportable Events (described below); and (iii) in a timely manner, to each NRMSIR or to the MSRB and to the SID, if any, notice of a failure by the City to provide the required annual financial information and operating data within the applicable time periods specified in clauses (i)(A) and (i)(B) above. Reportable Events shall be defined as (i) principal and interest payment delinquencies; (ii) non-payment related defaults; (iii) unscheduled draws on debt service reserves reflecting financial difficulties; (iv) unscheduled draws on credit enhancements reflecting financial difficulties; (v) substitution of credit or liquidity providers, or their failure to perform; (vi) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (vii) modifications to rights of bond holders; (viii) bond calls; (ix) defeasances; (x) release, substitution, or sale of property securing repayment of the Bonds; and (xi) rating changes. The definition of Reportable Events is intended to completely restate the events specified in SEC Rule 15c2-12(b)(5). It is noted that certain Reportable Events are expected to have no applicability to the Bonds, such as the possibility of unscheduled draws on debt service reserves and matters affecting collateral for the Bonds.

37

The City reserves the right to terminate its obligation to provide annual financial information and notices of Reportable Events, as set forth above, if and when the City no longer remains an obligated person with respect to the Bonds within the meaning of SEC Rule 15c2-12. The Continuing Disclosure Agreement will provide that the City may provide further or additional assurances that will become part of the City’s obligations under the Continuing Disclosure Agreement. In addition, the Continuing Disclosure Agreement may be amended by the City in its discretion provided that (i)(A) the amendment may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the City as the obligated person with respect to the Bonds, or type of business conducted; (B) the Continuing Disclosure Agreement, as amended, would, in the opinion of nationally recognized bond counsel selected by the City, have complied with the requirements of SEC Rule 15c2-12(b)(5) at the time of the issuance of the Bonds, after taking into account any amendments or interpretations of this rule, as well as any change in circumstances; and (C) the amendment does not materially impair the interests of holders of the Bonds, as determined either by nationally recognized bond counsel selected by the City, or by an approving vote of the holders of at least 25% of the outstanding aggregate principal amount of Bond, or (ii) the City receives an opinion of nationally recognized bond counsel selected by the City to the effect that such amendment is permitted or required by SEC Rule 15c2-12. . The reasons for the City agreeing to provide any further or additional assurances or for any amendment and the impact of the change in the type of operating data or financial information being provided will be explained in information provided with the annual financial information containing the additional or amended operating data or financial information.

The Continuing Disclosure Agreement, and any claim made with respect to the performance by the City of its obligations

thereunder, shall be governed by, subject to, and construed according to the laws of the State of Maryland. The City shall be given written notice at the address set forth below of any claimed failure by the City to perform its obligations under the Continuing Disclosure Agreement, and the City shall be given 45 days to remedy any such claimed failure. Any suit or other proceeding seeking further redress with regard to any such claimed failure by the City must be filed in the Circuit Court of Anne Arundel County, Maryland, and any party maintaining such suit or other proceeding shall be limited to specific performance as the adequate and exclusive remedy available in connection with such action. Written notice to the City shall be given to the office of the Finance Director of Annapolis, Municipal Building, 160 Duke of Gloucester Street, Annapolis, Maryland 21401, 410-269-5410. The Continuing Disclosure Agreement constitutes an undertaking by the City that is independent of the City’s obligations with respect to the Bonds; any breach or default by the City under the Continuing Disclosure Agreement shall not constitute or give rise to a breach or default under the Bonds.

The foregoing is a summary of certain provisions of the Continuing Disclosure Agreement. It is not a complete recital of

the terms of the Continuing Disclosure Agreement, and reference should be made to the Continuing Disclosure Agreement for a complete statement of its terms.

The City is currently in compliance with its obligations under the terms of existing continuing disclosure agreements.

MISCELLANEOUS

Any statements made in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are set forth as such and not as representations of fact, and no representation is made that any estimates will be realized. Neither this Official Statement nor any statement which may have been made verbally or in writing is to be construed as a contract with the holders of any of the Bonds. The execution of this Official Statement and its delivery have been approved by the Mayor and Aldermen of the City of Annapolis, Maryland.

CITY OF ANNAPOLIS By: ELLEN O. MOYER

Ellen O. Moyer Mayor and

By: TIMOTHY E. ELLIOTT Timothy E. Elliott Finance Director

B-1

APPENDIX B

DRAFT APPROVING OPINION OF BOND COUNSEL

(Letterhead of McGuireWoods LLP)

(Closing Date) City of Annapolis Annapolis, Maryland Dear Mayor and Aldermen:

We have acted as bond counsel in connection with the issuance by City of Annapolis, a municipal corporation of the State of Maryland (the “City”), of its $28,900,000 Public Improvements Bonds, 2007 Series (the “Bonds”), which are described as follows:

Dated August 15, 2007, interest payable on February 1, 2008, August 1, 2008, and semiannually thereafter on February 1 and August 1 of each year until maturity or prior redemption; fully registered in form in the denomination of $5,000 each or any integral multiple thereof; issued under the provisions of Sections 31 through 37, inclusive, of Article 23A of the Annotated Code of Maryland (the “Enabling Act”), Article VII, Section 11 of the Charter of the City of Annapolis (the “Charter”) and Ordinance No. O-34-07 of the City (the “Ordinance”); and maturing, subject to prior redemption, on August 1 in each of the years 2008 to 2022, inclusive, in such amounts, and bearing interest at such rates, as set forth in the Bonds.

We have examined the law and such certified proceedings and other papers as we deem necessary to render this opinion. The scope of our engagement as bond counsel extends solely to an examination of the facts and law incident to rendering the opinions specifically expressed herein.

As to questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us, without undertaking to verify the same by independent investigation.

We have assumed the accuracy and truthfulness of all public records and of all certifications, documents and other proceedings examined by us that have been executed or certified by public officials acting within the scope of their official capacities, and we have not independently verified the accuracy or truthfulness thereof. We have also assumed the genuineness of the signatures appearing upon such public records, certifications, documents and proceedings.

We have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures, the conformity to original documents of all documents submitted to us as certified or photocopies and the authenticity of the originals of such latter documents.

We are qualified to practice law in the State of Maryland, and we do not purport to be experts on, or to express any opinion herein concerning, any law other than the law of the State of Maryland and the federal law of the United States of America.

With respect to an executed and authenticated Bond which we have examined and Bonds similarly executed and authenticated, it is our opinion under existing law that:

(a) The City is a validly created and existing municipal corporation of the State of Maryland, possessing the authority under the Enabling Act, the Charter and the Ordinance to issue the Bonds.

(b) The Bonds have been duly authorized and legally issued in accordance with the Constitution and Public Laws of the State of Maryland, including the Enabling Act, the Charter and the Ordinance.

(c) The Bonds are valid and legally binding general obligations of the City to which its full faith and credit are pledged, payable as to both principal and interest from ad valorem taxes which the City is empowered to levy, without limitation of rate

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or amount, upon all real and tangible personal property within its corporate limits subject to assessment for unlimited municipal taxation.

(d) To provide for the payment of the principal of and interest on the Bonds, the City, by the adoption of the Ordinance, has covenanted to levy said ad valorem taxes in rate and amount sufficient for such purpose in each fiscal year in which provision must be made for the payment of such principal and interest.

(e) Under existing law, the interest on the Bonds (i) is excludable from gross income of the owners thereof for Federal income tax purposes, and (ii) is not an enumerated item of tax preference or adjustment for purposes of the Federal alternative minimum tax imposed on individuals and corporations; however, such interest will be taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on corporations, and may be subject to the branch profits tax imposed on foreign corporations engaged in a trade or business in the United States.

In rendering the opinion expressed above in paragraph (e), we have assumed continuing compliance with the covenants and agreements set forth in the Tax Certificate and Compliance Agreement of even date herewith executed and delivered by the City (the “Tax Agreement”), which covenants and agreements are designed to satisfy the requirements of Section 103 and Sections 141 through 150, inclusive, of the Internal Revenue Code of 1986, as amended (the “Code”), and the income tax regulations issued thereunder. Failure by the City to comply with such covenants and agreements could cause interest on the Bonds to become includable in gross income for federal income tax purposes retroactively to their issue date.

(f) By the terms of the Enabling Act, the principal of and interest on the Bonds is exempt from taxation of any kind or nature whatsoever by the State of Maryland and by any county, municipal corporation or other political subdivision thereof; however, the law of the State of Maryland does not expressly refer to, and no opinion is expressed concerning, estate or inheritance taxes, or any other taxes not levied directly on the Bonds or the interest thereon.

This opinion is given as of its date and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur.

It is to be understood that the rights of any holder of the Bonds and the enforceability of Bonds may be subject to (a) any applicable bankruptcy, insolvency (including, without limitation, laws relating to preferences and fraudulent transfers or conveyances), reorganization, moratorium and other similar laws affecting creditors’ rights generally, (b) the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and (c) the valid exercise of constitutional powers of the United States of America and of the sovereign police and taxing powers of the State of Maryland or other governmental units having jurisdiction.

Very truly yours,

McGuireWoods LLP

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APPENDIX C

NOTICE OF SALE

$28,900,000 CITY OF ANNAPOLIS, MARYLAND PUBLIC IMPROVEMENTS BONDS

2007 SERIES

(Dated August 15, 2007)

Electronic bids via PARITY will be received until 11 o'clock A.M., local Baltimore, Maryland time, on

Tuesday, August 21, 2007 Electronic bids via PARITY will be received at the Offices of City of Annapolis, located at the Municipal Building, 160 Duke of Gloucester Street, Annapolis, Maryland 21401, for the purchase of the above-described bonds aggregating $28,900,000 (the “Bonds”). The Bonds will be dated August 15, 2007, and bear interest payable semi-annually on February 1, 2008 (five and one-half months), August 1, 2008, and thereafter on the first day of February and August until maturity or redemption. The Bonds will be issued under the authority of Sections 31 to 37, inclusive, of Article 23A of the Annotated Code of Maryland (2005 Replacement Volume) and Article VII, Section 11 of the Charter of the City of Annapolis, and by virtue of due proceedings had and taken by the City of Annapolis, particularly an Ordinance adopted on July 9, 2007 (the “Ordinance”). Terms of the Bonds The Bonds will mature, subject to prior redemption as herein stated, on the first day of August in the following years and aggregate amounts:

Year of Maturity

Principal Amount

Year of

Maturity

Principal Amount 2008 $1,880,000 2016 $1,930,000 2009 1,885,000 2017 1,935,000 2010 1,890,000 2018 1,945,000 2011 1,900,000 2019 1,955,000 2012 1,905,000 2020 1,965,000 2013 1,910,000 2021 1,975,000 2014 1,920,000 2022 1,985,000 2015 1,920,000

The proceeds of the Bonds will be used to finance a portion of the costs of (i) the construction, renovation, installation, improvement, redevelopment, replacement and repair of the water system, public safety buildings, public garage facilities, educational and recreational facilities, public vehicles and certain roads, public works and other general governmental projects, and (ii) architectural, financial, legal, planning and engineering services related thereto.

The Bonds will constitute an irrevocable pledge of the full faith and credit and unlimited taxing power of the City. The Bonds shall be issued only in fully registered book-entry form without coupons and The Depository Trust

Company, New York, New York (“DTC”) will act as securities depository for the Bonds. One Bond representing each maturity will be issued to and registered in the name of Cede & Co., as nominee of DTC, as registered owner of the Bonds and each such Bond shall be immobilized in the custody of DTC or with the Bond Registrar to be held under DTC’s “FAST” system. Individual purchases will be made in book-entry form only, in the principal amount of $5,000 or any integral multiple thereof. Purchasers will not receive physical delivery of certificates representing their interest in the Bonds purchased. The

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winning bidder, as a condition to delivery of the Bonds, will be required to deposit the bond certificates representing each maturity with DTC. Interest on the Bonds will be payable when due and principal or redemption price of the Bonds will be payable at maturity or upon earlier redemption to DTC or its nominee as registered owner of the Bonds. Transfer of principal and interest payments to beneficial owners of the Bonds by participants of DTC (“Participants”) will be the responsibility of Participants and other nominees of beneficial owners. The City will not be responsible or liable for such transfers of payments or for maintaining, supervising or reviewing the records maintained by DTC Participants or persons acting through Participants.

The Bonds maturing on August 1, 2018 and thereafter are subject to redemption prior to their respective maturities,

at the option of the City, either as a whole or in part at any time on or after August 1, 2017, in any order of maturities, at par plus accrued interest thereon to the date fixed for redemption.

If less than all of the Bonds of any maturity shall be called for redemption, the particular Bonds or portions of Bonds to be redeemed shall be selected by lot by the Bond Registrar in such manner as, in its discretion, it shall determine, except that so long as DTC or its nominee is the sole registered owner of the Bonds, the particular Bonds or portion to be redeemed shall be selected by lot by DTC, in such manner as DTC shall determine. Each $5,000 portion of a Bond shall be treated as a separate Bond in the selection by lot of Bonds to be redeemed.

Electronic Bids

Electronic bids will be received via PARITY, in the manner described below, until 11:00 a.m. local Baltimore, Maryland time, on August 21, 2007.

Bids may be submitted electronically via PARITY pursuant to this Notice of Sale until 11:00 a.m., local Baltimore, Maryland time, but no bid will be received after the time for receiving bids specified above. To the extent any instructions or directions set forth in PARITY conflict with this Notice of Sale, the terms of this Notice of Sale shall control. For further information about PARITY, potential bidders may contact PARITY at Dalcomp (212) 849-5021.

Disclaimer

Each prospective bidder shall be solely responsible to register to bid via PARITY as described above. Each prospective bidder shall be solely responsible to make necessary arrangements to access PARITY for the purposes of submitting its bid in a timely manner and in compliance with the requirements of this Notice of Sale. Neither the City nor PARITY, shall have any duty or obligation to provide or assure access to PARITY to any prospective bidder, and neither the City nor PARITY shall be responsible for a bidder’s failure to register to bid or for proper operation of, or have any liability for any delays or interruptions of, or any damages caused by, PARITY. The City is using PARITY as a communication mechanism, and not as the City’s agent, to conduct the electronic bidding for the Bonds. The City is not bound by any advice and determination of PARITY to the effect that any particular bid complies with the terms of this Notice of Sale and in particular the “Bid Specifications” hereinafter set forth. All costs and expenses incurred by prospective bidders in connection with their registration and submission of bids via PARITY are the sole responsibility of the bidders, and the City is not responsible, directly or indirectly, for any of such costs or expenses. If a prospective bidder encounters any difficulty in submitting, modifying or withdrawing a bid for the Bonds, it should telephone PARITY at Dalcomp (212) 849-5021 and notify the City’s Financial Advisor A. Samuel Ketterman at Davenport & Company LLC by facsimile at (410) 296-8517.

Electronic Bidding Procedures

Electronic bids must be submitted for the purchase of the Bonds (all or none) via PARITY. Bids will be communicated electronically to the City at 11:00 a.m., local Baltimore, Maryland time, on August 21, 2007. Prior to that time on the sale date, a prospective bidder may (1) submit the proposed terms of its bid via PARITY, (2) modify the proposed terms of its bid, in which event the proposed terms as last modified will (unless the bid is withdrawn as described herein) constitute its bid for the Bonds, or (3) withdraw its proposed bid. Once the bids are communicated electronically via PARITY to the City, each bid will constitute an irrevocable offer to purchase the Bonds on the terms therein provided. For purposes of the electronic bidding process, the time as maintained on PARITY shall constitute the official time.

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Bid Specifications

The City will not accept and will reject any bid for less than all of the above described Bonds. The right is reserved to reject any and all bids.

Each bid must specify the amount bid for the Bonds, which shall be not less than 100% of par or more than 110% of par, plus accrued interest from August 15, 2007 to the date of delivery of the Bonds. Each bid must specify in multiples of one-eighth (1/8) or one-twentieth (1/20) of one percent (1%) the rate or rates of interest per annum which the Bonds are to bear but shall not specify (a) more than one interest rate for any Bonds having the same maturity, (b) a zero rate of interest, (c) any interest rate for any Bonds which exceeds the interest rate stated in such bid for any other Bonds by more than 3% or (d) any interest rate that exceeds 5.25%. The Bonds will be awarded to the bidder naming the lowest true interest cost for all Bonds in any legally acceptable bid. The lowest true interest cost will be determined by doubling the semiannual interest rate, compounded semiannually, necessary to discount the debt service payments from the payment dates to the date of the Bonds and to the amount bid, not including interest accrued to the date of delivery. The true interest cost shall be as determined by the financial advisor to the City based on the terms of this Notice of Sale and all amendments thereto and on each bid as submitted. If two or more bidders offer to purchase the Bonds at the same lowest true interest cost, then such award will be made to the bidder offering the highest premium. If two or more bidders offer to purchase the Bonds at the same lowest true interest cost, with the same premium, the Bonds will be awarded by lot to one of such bidders. The right is reserved to the City to reject any or all bids and to waive any irregularity or informality in any bid. The City’s judgment shall be final and binding upon all bidders with respect to the form and adequacy of any bid received and as to its conformity to the terms of this Notice of Sale. Any award of the Bonds may be made as late as 2:00 p.m. on the sale date. All bids remain firm until an award is made.

Good Faith Deposit

Each bid shall be accompanied by a good faith deposit in the form of a financial surety bond (a "Surety Bond") from an insurance company acceptable to the City and licensed to issue such a bond in the State of Maryland, in the amount of $578,000 (the "Deposit"). The Surety Bond must be submitted to the City prior to the opening of the bids and must be in form and substance acceptable to the City, including (without limitation) identifying the bidders whose Deposits are guaranteed by such Surety Bond. The successful bidder is required to submit its Deposit to the City in the form of a wire transfer not later than 12:00 P.M. local Baltimore, Maryland time on the next business day following the award. If such Deposit is not received by that time, the Surety Bond may be drawn by the City to satisfy the Deposit requirement. The Deposit of the successful bidder will be collected and the proceeds thereof retained by the City to be applied in part payment for the Bonds, and no interest will be allowed or paid upon the amount thereof, but in the event the successful bidder shall fail to comply with the terms of his bid, the proceeds thereof will be retained as and for full liquidated damages. .

Postponement of Sale

The City reserves the right to postpone, from time to time, the date established for the receipt of bids. Any such postponement will be announced by TM3 News Service (“TM3”) by notice given not later than 1:00 p.m., local Baltimore, Maryland time, on the last business day prior to any announced date for receipt of bids. If any date fixed for the receipt of bids and the sale of the Bonds is postponed, any alternative sale date will be announced via TM3 at least 48 hours prior to such alternative sale date. In addition, the City reserves the right, on the date established for the receipt of bids, to reject all bids and establish a subsequent alternative sale date. If all bids are rejected and an alternative sale date for receipt of bids established, notice of the alternative sale date will be announced via TM3 not less than 48 hours prior to such alternative sale date. On any such alternative sale date, any bidder may submit an electronic bid via PARITY for the purchase of the Bonds in conformity in all respects with the provisions of this Notice of Sale except for the date of sale and except for any changes announced by TM3 at the time the sale date and time are announced.

Approving Legal Opinion; Closing Papers

The Bonds will be issued and sold subject to approval as to legality by McGuireWoods LLP, Baltimore, Maryland, Bond Counsel, whose approving opinion substantially in the form included in the Preliminary Official Statement referred to below will be delivered, upon request, to the successful bidder for the Bonds, without charge.

In order to assist bidders in complying with SEC Rule 15c2-12(b)(5), the City will execute and deliver a continuing disclosure agreement on or before the date of issuance of the Bonds pursuant to which it will undertake to provide certain information annually and notices of certain events. A description of this agreement is set forth in the Preliminary Official Statement and will also be set forth in the Official Statement.

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The Bonds will be accompanied by the customary closing documents, including a no-litigation certificate, effective as of the date of delivery, stating that there is no litigation pending affecting the validity of any of the Bonds. It shall be a condition to the obligation of the successful bidder to accept delivery of and pay for the Bonds that, simultaneously with or before delivery and payment for the Bonds, the successful bidder shall be furnished a certificate or certificates of the Mayor and Finance Director to the effect that, to the best of their knowledge and belief, the Official Statement (and any amendment or supplement thereto) (except for the Reoffering Information (defined below) provided by the successful bidder and information regarding DTC and DTC's book-entry system provided by DTC, as to which no view will be expressed) as of the date of sale and as of the date of delivery of the Bonds does not contain any untrue statement of a material fact and does not omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and that between the date of sale and the date of delivery of the Bonds there has been no material adverse change in the financial position or revenues of the City, except as reflected or contemplated in the Official Statement (and any amendment or supplement thereto).

Preliminary Official Statement; Official Statement

Not later than seven (7) business days after the award of the Bonds to the successful bidder on the day of sale, the City will authorize an Official Statement, which is expected to be substantially in the form of the Preliminary Official Statement referred to below. If so requested by the successful bidder at or before the close of business on the date of the sale, the City will include in the Official Statement such pricing and other information with respect to the terms of the reoffering of the Bonds by the successful bidder (“Reoffering Information”), if any, as may be specified and furnished in writing by such bidder. If no Reoffering Information is specified and furnished by the successful bidder, the Official Statement will include the interest rates on the Bonds resulting from the bid of the successful bidder and the other statements with respect to reoffering contained in the Preliminary Official Statement. The successful bidder shall be responsible to the City and its officials for the Reoffering Information, and for all decisions made by such bidder with respect to the use or omission of the Reoffering Information in any reoffering of the Bonds, including the presentation or exclusion of any Reoffering Information in any documents, including the Official Statement.

In the event that all or any part of the Bonds are initially reoffered with bond insurance secured by the successful bidder, the successful bidder shall be required to notify promptly the Finance Director of the City at the time of sale of such event and shall provide the Finance Director with any information he reasonably requests regarding such bond insurance including the amounts paid for such insurance. The City will, at the request and expense of the successful bidder, include customary language in the Official Statement and the form of Bond regarding the insurance policy upon receipt of such opinions or certificates as the City reasonably may request regarding the accuracy of any information to be included in the Official Statement and the binding nature of the obligations contained in the insurance policy with respect to the Bonds. The City shall have no obligation to provide the successful bidder or the bond insurance company with any other documents or opinions relating to the Bonds.

The successful bidder will also be furnished, without cost, with up to 300 copies of the Official Statement (and any amendments or supplements thereto).

Delivery

When delivered, the Bonds shall be duly executed and authenticated and registered in the name of Cede & Co., as nominee of DTC, as registered owner of the Bonds. Delivery of the Bonds, without expense, will be made by the City on or about September 6, 2007, or as soon as practicable thereafter, for the account of the successful bidder through the facilities of DTC, and, thereupon, the successful bidder will be required to accept delivery of the Bonds and pay, in Federal funds, the balance of the purchase price due.

It is anticipated that CUSIP identification numbers will be printed on the Bonds, but neither the failure to print such number on any Bond nor any error with respect thereto shall constitute cause for failure or refusal by the successful bidder to accept delivery of and pay for the Bonds in accordance with the terms of this Notice of Sale.

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Miscellaneous

As a condition to the award of the Bonds, the successful bidder shall be required to communicate to the City the initial offering prices at which a bona fide offering of the Bonds has been made to the public, which prices are to be shown on the cover of the Official Statement (the “Initial Offering Prices”). Furthermore, as a condition to the delivery of the Bonds, the successful bidder shall be required to furnish to the City a written certificate acceptable to the City’s bond counsel to the effect that the successful bidder has made a bona fide public offering of the Bonds at the Initial Offering Prices and that a substantial portion of each maturity of the Bonds has been sold to the public (excluding bond houses, brokers and other intermediaries) at the respective Initial Offering Prices. Such certifications shall be made based on actual facts known to the successful bidder as of the sale date. For purposes of the successful bidder’s certificate, a substantial portion of the Bonds is at least 10% in par amount of each maturity of the Bonds. If the successful bidder cannot deliver the certificate as described above, the City’s bond counsel will be required to evaluate the facts and circumstances of the offering and sale of the Bonds to confirm compliance with statutory requirements of avoiding the establishment of an artificial price for the Bonds.

NOTE: The City may revise this Notice of Sale by written notice available to prospective bidders by publishing notice of any revisions on TM3 at or before the time for submission of bids. Any bid submitted shall be in accordance with, and incorporate by reference, this Notice of Sale including any revisions made pursuant to this paragraph.

The Preliminary Official Statement, together with this Notice of Sale, may be obtained from the Finance Director, Municipal Building, 160 Duke of Gloucester Street, Annapolis, Maryland 21401, or from Davenport & Company LLC, Suite 324, 8600 LaSalle Road, Towson, Maryland, 21286 (410) 296-9426. Such Preliminary Official Statement is deemed final by the City as of its date for purposes of SEC Rule 15c2-12 but is subject to revision, amendment and completion in the Official Statement referred to above.

CITY OF ANNAPOLIS

By: Ellen O. Moyer, Mayor