UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549


FORM 10-Q

|           |                                                                                          
|---------- | -----------------------------------------------------------------------------------------
|(Mark One)
|           |                                                                                          
|x          | QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the
quarterly period endedSeptember 30, 2008

or

|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO
 SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the
transition   period from
________________ to_________________

Commission
file number: 0-13649

|                                                      
|------------------------------------------------------
|BERKSHIRE BANCORP INC.                                
|                                                      
|(Exact Name of Registrant as Specified in Its Charter)

|                                                                 |  |                                      
|---------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                         |  | 94-2563513                           
|                                                                 |  |                                      
|(State or
 Other Jurisdiction of
 Incorporation or Organization) |  | (I.R.S. Employer
 Identification No.)
|                                                                 |  |                                      
|160 Broadway, New York, New York                                 |  | 10038                                
|                                                                 |  |                                      
|(Address of
 Principal Executive Offices)                        |  | (Zip Code)                           

Registrants Telephone Number, Including Area
Code: (212) 791-5362

|                                                                                   
|-----------------------------------------------------------------------------------
|N/A                                                                                
|                                                                                   
|(Former
 Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
(See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act.):

|                                               |                            
|---------------------------------------------- | ---------------------------
|Large accelerated filer o                      | Accelerated filer o        
|                                               |                            
|Non-accelerated filer o                        | Smaller reporting company x
|(Do not check if a smaller
 reporting company) |                            

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes o No x

As of November 13, 2008, there were 7,054,183 outstanding shares of the issuers
Common Stock, $.10 par value.

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

Forward-Looking Statements.Statements in this
Quarterly Report on Form 10-Q that are not based on historical fact may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as believe, may, will,
expect, estimate, anticipate, continue or similar terms identify
forward-looking statements. A wide variety of factors could cause the actual
results and experiences of Berkshire Bancorp Inc. (the Company) to differ
materially from the results expressed or implied by the Companys
forward-looking statements. Some of the risks and uncertainties that may affect
operations, performance, results of the Companys business, the interest rate
sensitivity of its assets and liabilities, and the adequacy of its loan loss
allowance and the Berkshire Banks ability to continue its status as well
capitalized, include, but are not limited to: (i) deterioration in local,
regional, national or global economic conditions which could result, among
other things, in an increase in loan delinquencies, a decrease in property
values, or a change in the housing turnover rate; (ii) changes in market
interest rates or changes in the speed at which market interest rates change;
(iii) changes in laws and regulations affecting the financial services
industry; (iv) changes in competition; (v) changes in consumer preferences,
(vi) changes in banking technology; (vii) ability to maintain key members of
management, (viii) possible disruptions in the Companys operations at its
banking facilities, (ix) cost of compliance with new corporate governance
requirements, and other factors referred to in this Quarterly Report and in
Item 1A, Risk Factors, of the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.

Certain
information customarily disclosed by financial institutions, such as estimates
of interest rate sensitivity and the adequacy of the loan loss allowance, are
inherently forward-looking statements because, by their nature, they represent
attempts to estimate what will occur in the future.

The
Company cautions readers not to place undue reliance upon any forward-looking
statement contained in this Quarterly Report. Forward-looking statements speak
only as of the date they were made and the Company assumes no obligation to
update or revise any such statements upon any change in applicable
circumstances.

2

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BERKSHIRE BANCORP INC. AND SUBSIDIARIES 
QUARTERLY REPORT ON FORM 10-Q

INDEX

|                   |                        |                                                                                                                    |  |         
|------------------ | ---------------------- | ------------------------------------------------------------------------------------------------------------------ |  | --------
|                   |                        |                                                                                                                    |  | Page No.
|                   |                        |                                                                                                                    |  |         
|PART I.            | FINANCIAL
 INFORMATION |                                                                                                                    | 
|                   |                        |                                                                                                                    |  |         
|Item 1.            |                        | Financial Statements                                                                                               |  |         
|                   |                        |                                                                                                                    |  |         
|                   |                        | Consolidated Balance Sheets as of
September 30, 2008
 (unaudited) and December 31, 2007                            |  | 4       
|                   |                        |                                                                                                                    |  |         
|                   |                        | Consolidated Statements of Income
For The Three and
 Nine Months Ended September 30, 2008 and 2007 (unaudited)     |  | 5       
|                   |                        |                                                                                                                    |  |         
|                   |                        | Consolidated Statements of
Stockholders Equity For
 The Nine Months Ended September 30, 2008 and 2007 (unaudited) |  | 6       
|                   |                        |                                                                                                                    |  |         
|                   |                        | Consolidated Statements of Cash
Flows For The Nine
 Months Ended September 30, 2008 (unaudited)                    |  | 7       
|                   |                        |                                                                                                                    |  |         
|                   |                        | Notes to Consolidated Financial
Statements                                                                         |  | 9       
|                   |                        |                                                                                                                    |  |         
|Item 2.            |                        | Managements Discussion and
Analysis of Financial
 Condition and Results of Operations                             |  | 20      
|                   |                        |                                                                                                                    |  |         
|Item 3.            |                        | Quantitative and Qualitative
Disclosure About Market
 Risk                                                         |  | 29      
|                   |                        |                                                                                                                    |  |         
|Item 4T.           |                        | Controls
 and Procedures                                                                                           |  | 36      
|                   |                        |                                                                                                                    |  |         
|PART II            | OTHER
INFORMATION      |                                                                                                                    | 
|                   |                        |                                                                                                                    |  |         
|Item 6.            |                        | Exhibits                                                                                                           |  | 37      
|                   |                        |                                                                                                                    |  |         
|Signature          |                        |                                                                                                                    |  | 38      
|                   |                        |                                                                                                                    |  |         
|Index of
 Exhibits |                        | 39                                                                                                                

3

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 
(Dollars in Thousands) 
(unaudited)

|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------------ | - | --------- | -
|                                                                                                                                                                                                                          |  | September 30,
 2008 |         | December 31,
 2007 |  
|                                                                                                                                                                                                                          |  |                     |         |                    |  
|ASSETS                                                                                                                                                                                                                    |  |                     |         |                    |   |           |  
|Cash and due from banks                                                                                                                                                                                                   |  | $                   | 6,936   |                    | $ | 8,614     |  
|Interest bearing deposits                                                                                                                                                                                                 |  |                     | 58,061  |                    |   | 7,579     |  
|Federal funds sold                                                                                                                                                                                                        |  |                     | 39,500  |                    |   | 31,000    |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                           |  |                     | 104,497 |                    |   | 47,193    |  
|Investment Securities:                                                                                                                                                                                                    |  |                     |         |                    |   |           |  
|Available-for-sale                                                                                                                                                                                                        |  |                     | 298,563 |                    |   | 598,961   |  
|Held-to-maturity, fair value of
$382 in 2008 and $405 in 2007                                                                                                                                                             |  |                     | 379     |                    |   | 395       |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Total investment securities                                                                                                                                                                                               |  |                     | 298,942 |                    |   | 599,356   |  
|Loans, net of unearned income                                                                                                                                                                                             |  |                     | 476,496 |                    |   | 434,785   |  
|Less: allowance for loan
losses                                                                                                                                                                                           |  |                     | (5,207  | )                  |   | (4,183    | )
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Net loans                                                                                                                                                                                                                 |  |                     | 471,289 |                    |   | 430,602   |  
|Accrued interest receivable                                                                                                                                                                                               |  |                     | 6,645   |                    |   | 8,602     |  
|Premises and equipment, net                                                                                                                                                                                               |  |                     | 8,965   |                    |   | 9,362     |  
|Goodwill, net                                                                                                                                                                                                             |  |                     | 18,549  |                    |   | 18,549    |  
|Other assets                                                                                                                                                                                                              |  |                     | 31,738  |                    |   | 6,854     |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Total assets                                                                                                                                                                                                              |  | $                   | 940,625 |                    | $ | 1,120,518 |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                                                                                                                      |  |                     |         |                    |   |           |  
|Deposits:                                                                                                                                                                                                                 |  |                     |         |                    |   |           |  
|Non-interest bearing                                                                                                                                                                                                      |  | $                   | 48,739  |                    | $ | 53,805    |  
|Interest bearing                                                                                                                                                                                                          |  |                     | 735,956 |                    |   | 799,410   |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Total deposits                                                                                                                                                                                                            |  |                     | 784,695 |                    |   | 853,215   |  
|Securities sold under agreements to
repurchase                                                                                                                                                                            |  |                     | 70,972  |                    |   | 76,842    |  
|Long term borrowings                                                                                                                                                                                                      |  |                     | 47,314  |                    |   | 31,607    |  
|Subordinated debt                                                                                                                                                                                                         |  |                     | 22,681  |                    |   | 22,681    |  
|Accrued interest payable                                                                                                                                                                                                  |  |                     | 4,603   |                    |   | 9,089     |  
|Other liabilities                                                                                                                                                                                                         |  |                     | 3,408   |                    |   | 2,826     |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Total liabilities                                                                                                                                                                                                         |  |                     | 933,673 |                    |   | 996,260   |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Stockholders equity                                                                                                                                                                                                      |  |                     |         |                    |   |           |  
|Preferred stock - $.01 Par
value:                                                                                                                                                                                         |  |                     |        |                    |   |          |  
|2,000,000 shares authorized -
none issued Common stock - $.10 par
 value Authorized  10,000,000 shares Issued  7,698,285 shares Outstanding
  September 30, 2008, 7,054,183 shares December 31, 2007, 7,054,183 shares |  |                     | 770     |                    |   | 770       |  
|Additional paid-in capital                                                                                                                                                                                                |  |                     | 90,986  |                    |   | 90,986    |  
|Retained earnings (accumulated deficit)                                                                                                                                                                                   |  |                     | (41,754 | )                  |   | 42,352    |  
|Accumulated other comprehensive loss,
net                                                                                                                                                                                 |  |                     | (36,639 | )                  |   | (3,439    | )
|Treasury Stock - at cost September 30, 2008,
644,102 shares December
 31, 2007, 644,102 shares                                                                                                                            |  |                     | (6,411  | )                  |   | (6,411    | )
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|Total stockholders equity                                                                                                                                                                                                |  |                     | 6,952   |                    |   | 124,258   |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  
|                                                                                                                                                                                                                          |  | $                   | 940,625 |                    | $ | 1,120,518 |  
|                                                                                                                                                                                                                          |  |                     |         |                    |   |           |  

The accompanying notes are an integral part of these
statements

4

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF INCOME 
(In Thousands, Except Per Share Data) 
(unaudited)

|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|------------------------------------------------------------- |  | ------------------------------------------ | ------- | ----------------------------------------- | - | ------ | - | ---- | ------- | - | - | ------ | 
|                                                              |  | For The
 Three Months Ended
 September 30, |         | For The
 Nine Months Ended
 September 30, |  
|                                                              |  |                                            |         |                                           |  
|                                                              |  | 2008                                       |         | 2007                                      |   | 2008   |   | 2007 |        
|                                                              |  |                                            |         |                                           |   |        |   |      |        
|INTEREST INCOME                                               |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Loans                                                         |  | $                                          | 8,296   |                                           | $ | 7,363  |   | $    | 24,597  |   | $ | 21,841 | 
|Investment securities                                         |  |                                            | 5,793   |                                           |   | 7,086  |   |      | 20,914  |   |   | 19,337 | 
|Federal funds sold and interest bearing
deposits              |  |                                            | 433     |                                           |   | 208    |   |      | 857     |   |   | 1,270  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Total interest income                                         |  |                                            | 14,522  |                                           |   | 14,657 |   |      | 46,368  |   |   | 42,448 | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|INTEREST EXPENSE                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Deposits                                                      |  |                                            | 5,623   |                                           |   | 8,281  |   |      | 19,711  |   |   | 23,550 | 
|Securities sold under agreements to
repurchase                |  |                                            | 636     |                                           |   | 462    |   |      | 1,750   |   |   | 1,328  | 
|Long-term borrowings and subordinated
debt                    |  |                                            | 840     |                                           |   | 939    |   |      | 2,450   |   |   | 2,845  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Total interest expense                                        |  |                                            | 7,099   |                                           |   | 9,682  |   |      | 23,911  |   |   | 27,723 | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Net interest income                                           |  |                                            | 7,423   |                                           |   | 4,975  |   |      | 22,457  |   |   | 14,725 | 
|PROVISION FOR LOAN LOSSES                                     |  |                                            | 150     |                                           |   | 75     |   |      | 954     |   |   | 225    | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Net interest income after provision for loan
losses           |  |                                            | 7,273   |                                           |   | 4,900  |   |      | 21,503  |   |   | 14,500 | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|NON-INTEREST INCOME                                           |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Service charges on deposits                                   |  |                                            | 149     |                                           |   | 148    |   |      | 442     |   |   | 512    | 
|Investment securities gains (losses)                          |  |                                            | (99     | )                                         |   | (39    | ) |      | (21     | ) |   | 86     | 
|Other income                                                  |  |                                            | 217     |                                           |   | 236    |   |      | 689     |   |   | 653    | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Total non-interest income                                     |  |                                            | 267     |                                           |   | 345    |   |      | 1,110   |   |   | 1,251  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|NON-INTEREST EXPENSE                                          |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Salaries and employee benefits                                |  |                                            | 2,395   |                                           |   | 2,211  |   |      | 7,211   |   |   | 6,587  | 
|Net occupancy expense                                         |  |                                            | 521     |                                           |   | 603    |   |      | 1,566   |   |   | 1,519  | 
|Equipment expense                                             |  |                                            | 97      |                                           |   | 97     |   |      | 289     |   |   | 297    | 
|FDIC assessment                                               |  |                                            | 128     |                                           |   | 23     |   |      | 366     |   |   | 63     | 
|Data processing expense                                       |  |                                            | 118     |                                           |   | 111    |   |      | 339     |   |   | 306    | 
|Other than temporary impairment charges on
securities         |  |                                            | 94,346  |                                           |   |       |   |      | 94,346  |   |   |       | 
|Other                                                         |  |                                            | 847     |                                           |   | 519    |   |      | 2,222   |   |   | 1,771  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Total non-interest expense                                    |  |                                            | 98,452  |                                           |   | 3,564  |   |      | 106,339 |   |   | 10,543 | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Income (loss) before provision for
taxes                      |  |                                            | (90,912 | )                                         |   | 1,681  |   |      | (83,726 | ) |   | 5,208  | 
|Provision (benefit) for income taxes                          |  |                                            | (2,218  | )                                         |   | 406    |   |      | (323    | ) |   | 1,813  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Net income (loss)                                             |  | $                                          | (88,694 | )                                         | $ | 1,275  |   | $    | (83,403 | ) | $ | 3,395  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Net income (loss) per share:                                  |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Basic                                                         |  | $                                          | (12.57  | )                                         | $ | .18    |   | $    | (11.82  | ) | $ | .49    | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Diluted                                                       |  |                                            |        |                                           | $ | .18    |   |      |        |   | $ | .49    | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Number of shares used to compute net income
(loss) per share: |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Basic                                                         |  |                                            | 7,054   |                                           |   | 7,051  |   |      | 7,054   |   |   | 6,965  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Diluted                                                       |  |                                            | 7,054   |                                           |   | 7,052  |   |      | 7,054   |   |   | 6,989  | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 
|Dividends per share                                           |  | $                                          |        |                                           | $ |       |   | $    | .10     |   | $ | .09    | 
|                                                              |  |                                            |         |                                           |   |        |   |      |         |   |   |        | 

The accompanying notes are an integral part of these
statements.

5

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For The Nine Months Ended September 30, 2008
and 2007
(In Thousands)
(unaudited)

|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|--------------------------------------------------------------------- |  | ------------ | ----- | ------------- | - | ------------------------ |  | -------------------------------------- | ------ | ---------------- | - | ------------- | - | ----------------- | ------- | ------------------------ | - | ------ | - | - | -------- | - | - | ------- | -
|                                                                      |  | CommonShares |       | StockParvalue |   | Additionalpaid-incapital |  | Accumulatedothercomprehensiveloss, net |        | Retainedearnings |   | Treasurystock |   | Comprehensiveloss |         | Totalstockholdersequity |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |  
|Balance at January 1, 2007                                            |  |              | 7,698 |               | $ | 770                      |  | $                                      | 90,659 |                  | $ | (4,772        | ) | $                 | 37,285  |                          | $ | (8,165 | ) |   |          |   | $ | 115,777 |  
|Adoption of FIN 48                                                    |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   | 965     |                          |   |        |   |   |          |   |   | 965     |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Adjusted balance at January 1, 2007                                   |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   | 38,250  |                          |   |        |   |   |          |   |   | 116,742 |  
|Net income                                                            |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   | 3,395   |                          |   |        |   |   | 3,395    |   |   | 3,395   |  
|Exercise of stock options                                             |  |              |       |               |   |                          |  |                                        | 306    |                  |   |               |   |                   |         |                          |   | 1,754  |   |   |          |   |   | 2,060   |  
|Other comprehensive loss net of reclassification adjustment and
taxes |  |              |       |               |   |                          |  |                                        |        |                  |   | (350          | ) |                   |         |                          |   |        |   |   | (350     | ) |   | (350    | )
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Comprehensive income loss                                             |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   | $ | 3,045    |   |   |         |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Cash dividends                                                        |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   | (620    | )                        |   |        |   |   |          |   |   | (620    | )
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Balance at September 30, 2007                                         |  |              | 7,698 |               | $ | 770                      |  | $                                      | 90,965 |                  | $ | (5,122        | ) | $                 | 41,025  |                          | $ | (6,411 | ) |   |          |   | $ | 121,227 |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Balance at January 1, 2008                                            |  |              | 7,698 |               | $ | 770                      |  | $                                      | 90,986 |                  | $ | (3,439        | ) | $                 | 42,352  |                          | $ | (6,411 | ) |   |          |   | $ | 124,258 |  
|Net (loss)                                                            |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   | (83,403 | )                        |   |        |   |   | (83,403  | ) |   | (83,403 | )
|Other comprehensive loss net of reclassification adjustment and
taxes |  |              |       |               |   |                          |  |                                        |        |                  |   | (33,200       | ) |                   |         |                          |   |        |   |   | (33,200  | ) |   | (33,200 | )
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Comprehensive loss                                                    |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   | $ | (116,603 | ) |   |         |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Cash dividends                                                        |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   | (703    | )                        |   |        |   |   |          |   |   | (703    | )
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  
|Balance at September 30, 2008                                         |  |              | 7,698 |               | $ | 770                      |  | $                                      | 90,986 |                  | $ | (36,639       | ) | $                 | (41,754 | )                        | $ | (6,411 | ) |   |          |   | $ | 6,952   |  
|                                                                      |  |              |       |               |   |                          |  |                                        |        |                  |   |               |   |                   |         |                          |   |        |   |   |          |   |   |         |  

The accompanying notes are an integral part
of this statement.

6

---



|                                       
|---------------------------------------
|BERKSHIRE BANCORP INC. AND SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF CASH FLOWS  
|(in thousands)                         
|(unaudited)                            

|                                                                                                    |  |                                          |            |      |   |            |  
|--------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                                    |  | For The Nine Months Ended
 September 30, |           
|                                                                                                    |  |                                          |           
|                                                                                                    |  | 2008                                     |            | 2007 |  
|                                                                                                    |  |                                          |            |      |  
|Cash flows from operating activities:                                                               |  |                                          |            |      |   |            |  
|Net income (loss)                                                                                   |  | $                                        | (83,403    | )    | $ | 3,395      |  
|Adjustments to reconcile net income (loss)
 to net cash provided by (used in) operating activities: |  |                                          |            |      |   |            |  
|Realized losses (gains) on investment
 securities                                                   |  |                                          | 21         |      |   | (86        | )
|Other than temporary impairment charges on
 securities                                              |  |                                          | 94,346     |      |   |           |  
|Net (accretion) of premiums of investment
 securities                                               |  |                                          | (178       | )    |   | (1,195     | )
|Depreciation and amortization                                                                       |  |                                          | 463        |      |   | 551        |  
|Provision for loan losses                                                                           |  |                                          | 954        |      |   | 225        |  
|Decrease (increase) in accrued interest
 receivable                                                 |  |                                          | 1,957      |      |   | (738       | )
|(Increase) in other assets                                                                          |  |                                          | (24,884    | )    |   | (969       | )
|(Decrease) in accrued interest payable and
 other liabilities                                       |  |                                          | (3,904     | )    |   | (2,000     | )
|                                                                                                    |  |                                          |            |      |   |            |  
|Net cash used in operating activities                                                               |  |                                          | (14,628    | )    |   | (817       | )
|                                                                                                    |  |                                          |            |      |   |            |  
|                                                                                                    |  |                                          |            |      |   |            |  
|Cash flows from investing activities:                                                               |  |                                          |            |      |   |            |  
|Investment securities available for sale                                                            |  |                                          |            |      |   |            |  
|Purchases                                                                                           |  |                                          | (2,910,325 | )    |   | (1,175,702 | )
|Sales, maturities and calls                                                                         |  |                                          | 3,083,334  |      |   | 1,095,769  |  
|Investment securities held to maturity                                                              |  |                                          |            |      |   |            |  
|Maturities                                                                                          |  |                                          | 16         |      |   | 88         |  
|Net increase in loans                                                                               |  |                                          | (41,641    | )    |   | (25,843    | )
|Acquisition of premises and equipment                                                               |  |                                          | (66        | )    |   | (747       | )
|                                                                                                    |  |                                          |            |      |   |            |  
|Net cash provided by (used in) investing
 activities                                                |  |                                          | 131,318    |      |   | (106,435   | )
|                                                                                                    |  |                                          |            |      |   |            |  

7

---



|                                       
|---------------------------------------
|BERKSHIRE BANCORP INC. AND SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF CASH FLOWS  
|(in thousands)                         
|(unaudited)                            

|                                                            |  |                                          |         |      |   |         |  
|----------------------------------------------------------- |  | ---------------------------------------- | ------- | ---- | - | ------- | -
|                                                            |  | For The Nine Months Ended
 September 30, |        
|                                                            |  |                                          |        
|                                                            |  | 2008                                     |         | 2007 |  
|                                                            |  |                                          |         |      |  
|Cash flows from financing activities:                       |  |                                          |         |      |   |         |  
|Net (decrease) increase in non interest
 bearing deposits   |  |                                          | (5,066  | )    |   | 1,126   |  
|Net (decrease) increase in interest bearing
 deposits       |  |                                          | (63,454 | )    |   | 138,900 |  
|Decrease in securities sold under agreements
 to repurchase |  |                                          | (5,870  | )    |   | (20,741 | )
|Proceeds from long term debt                                |  |                                          | 25,000  |      |   | 16,000  |  
|Repayment of long term debt                                 |  |                                          | (9,293  | )    |   | (20,328 | )
|Proceeds from exercise of common stock
 options             |  |                                          |        |      |   | 2,060   |  
|Dividends paid                                              |  |                                          | (703    | )    |   | (620    | )
|                                                            |  |                                          |         |      |   |         |  
|Net cash (used in) provided by financing
 activities        |  |                                          | (59,386 | )    |   | 116,397 |  
|                                                            |  |                                          |         |      |   |         |  
|                                                            |  |                                          |         |      |   |         |  
|Net increase in cash and cash equivalents                   |  |                                          | 57,304  |      |   | 9,145   |  
|Cash and cash equivalents - beginning of
 period            |  |                                          | 47,193  |      |   | 24,311  |  
|                                                            |  |                                          |         |      |   |         |  
|Cash and cash equivalents - end of period                   |  | $                                        | 104,497 |      | $ | 33,456  |  
|                                                            |  |                                          |         |      |   |         |  
|                                                            |  |                                          |         |      |   |         |  
|Supplemental disclosure of cash flow
 information:          |  |                                          |         |      |   |         |  
|Cash used to pay interest                                   |  | $                                        | 28,397  |      | $ | 27,547  |  
|Cash used to pay taxes, net of refunds                      |  | $                                        | 1,790   |      | $ | 2,945   |  

The accompanying notes are an integral part
of these statements.

8

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements 
September 30, 2008 and 2007

NOTE 1. General

Berkshire
Bancorp Inc., a Delaware corporation, is a bank holding company registered
under the Bank Holding Company Act of 1956. References herein to Berkshire,
the Company or we and similar pronouns, shall be deemed to refer to
Berkshire Bancorp Inc. and its consolidated subsidiaries unless the context
otherwise requires. Berkshires principal activity is the ownership and
management of its indirect wholly-owned subsidiary, The Berkshire Bank (the
Bank), a New York State chartered commercial bank. The Bank is owned through
Berkshires wholly-owned subsidiary, Greater American Finance Group, Inc.
(GAFG).

The
accompanying financial statements of Berkshire Bancorp Inc. and subsidiaries
includes the accounts of the parent company, Berkshire Bancorp Inc., and its
wholly-owned subsidiaries: The Berkshire Bank, GAFG and East 39, LLC.

We
have prepared the accompanying financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC) for interim
financial reporting. These consolidated financial statements are unaudited and,
in our opinion, include all adjustments, consisting of normal recurring
adjustments and accruals, necessary for a fair presentation of our consolidated
balance sheets, operating results, and cash flows for the periods presented.
Operating results for the periods presented are not necessarily indicative of
the results that may be expected for the remaining quarter of fiscal 2008 due
to a variety of factors. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP) have been omitted in
accordance with the rules and regulations of the SEC. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in our 2007
Annual Report on Form 10-K.

NOTE 2. Trust Preferred Securities.

As
of May 18 2004, the Company established Berkshire Capital Trust I, a Delaware
statutory trust, (BCTI). The Company owns all the common capital securities
of BCTI. BCTI issued $15.0 million of preferred capital securities to investors
in a private transaction and invested the proceeds, combined with the proceeds
from the sale of BCTIs common capital securities, in the Company through the
purchase of $15.464 million aggregate principal amount of Floating Rate Junior
Subordinated Debentures (the 2004 Debentures) issued by the Company. The 2004
Debentures, the sole assets of BCTI, mature on July 23, 2034 and bear interest
at a floating rate, three month LIBOR plus 2.70%, currently 5.50%.

On
April 1, 2005, the Company established Berkshire Capital Trust II, a Delaware
statutory trust, (BCTII). The Company owns all the common capital securities
of BCTII. BCTII issued $7.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTIIs common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the 2005 Debentures) issued by the
Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating rate, three month LIBOR plus 1.95%, currently
4.76%.

9

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 2. - (continued)

Based
on current interpretations of the banking regulators, the 2004 Debentures and
2005 Debentures (collectively, the Debentures) qualify under the risk-based
capital guidelines of the Federal Reserve as Tier 1 capital, subject to certain
limitations. The Debentures are callable by the Company, subject to any
required regulatory approvals, at par, in whole or in part, at any time after
five years from the date of issuance. The Companys obligations under the
Debentures and related documents, taken together, constitute a full,
irrevocable and unconditional guarantee on a subordinated basis by the Company
of the obligations of BCTI and BCTII under the preferred capital securities
sold by BCTI and BCTII to investors. FIN46(R) precludes consideration of the
call option embedded in the preferred capital securities when determining if
the Company has the right to a majority of BCTI and BCTII expected residual
returns. Accordingly, BCTI and BCTII are not included in the consolidated
balance sheet of the Company.

The
Federal Reserve has issued guidance on the regulatory capital treatment for the
trust-preferred securities issued by BCTI and BCTII. This rule would retain the
current maximum percentage of total capital permitted for Trust Preferred
Securities at 25%, but would enact other changes to the rules governing Trust
Preferred Securities that affect their use as part of the collection of
entities known as restricted core capital elements. The rule would take
effect March 31, 2009; however, a five year transition period starting March
31, 2004 and leading up to that date would allow bank holding companies to
continue to count Trust Preferred Securities as Tier 1 Capital after applying
FIN-46(R). Management has evaluated the effects of this rule and does not
anticipate a material impact on its capital ratios when the proposed rule is
finalized.

NOTE 3. Earnings (Loss) Per Share

Basic
earnings (loss) per share is calculated by dividing income available to common
stockholders by the weighted average common shares outstanding, excluding stock
options from the calculation. In calculating diluted earnings per share, the
dilutive effect of stock options is calculated using the average market price
for the Companys common stock during the period. There is no effect for
dilutive shares for the three and nine months ended September 30, 2008 due to
the net loss recognized. The following table presents the calculation of
earnings per share for the periods indicated:

|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------- | --------------------- |  | ------------------ |  | ------------------- | ------ | --------------------- | - | ------------------ |  |  | ----- |  | - | --- | 
|                                                                             |  | For The
 Three Months Ended           |        
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|                                                                             |  | September
 30, 2008                   |         | September
 30, 2007   | 
|                                                                             |  |                                       |         |                       | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|                                                                             |  | Income
 (Loss)
 (numerator)           |         | Shares
 (denominator) |  | Per
 share
 amount |  | Income
 (numerator) |        | Shares
 (denominator) |   | Per
 share
 amount | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    | 
|                                                                             |  | (In thousands, except
per share data) |        
|Basic earnings (loss) per share                                              |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|Net (loss) income available to common stockholders                           |  | $                                     | (88,694 | )                     |  | 7,054              |  | $                   | (12.57 | )                     | $ | 1,275              |  |  | 7,051 |  | $ | .18 | 
|Effect of dilutive securities options                                        |  |                                       |        |                       |  |                   |  |                     | .     |                       |   |                   |  |  |      |  |   | .  | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|Diluted earnings per share                                                   |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|Net (loss) income available to common stockholders plus assumed
 conversions |  |                                       |        |                       |  | 7,054              |  |                     | .     |                       | $ | 1,275              |  |  | 7,051 |  | $ | .18 | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 

10

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 3. - (continued)

|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|---------------------------------------------------------------------------- |  | ------------------------------------- | ------- | --------------------- |  | ------------------ |  | ------------------- | ------ | --------------------- | - | ------------------ |  |  | ----- |  | - | --- | 
|                                                                             |  | For The
 Nine Months Ended            |        
|                                                                             |  |                                       |        
|                                                                             |  | September
 30, 2008                   |         | September
 30, 2007   | 
|                                                                             |  |                                       |         |                      
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    | 
|                                                                             |  | Income
 (Loss)
 (numerator)           |         | Shares
 (denominator) |  | Per
 share
 amount |  | Income
 (numerator) |        | Shares
 (denominator) |   | Per
 share
 amount | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    | 
|                                                                             |  | (In thousands, except
per share data) |        
|Basic earnings (loss) per share                                              |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|Net (loss) income available to common stockholders                           |  | $                                     | (83,403 | )                     |  | 7,054              |  | $                   | (11.82 | )                     | $ | 3,395              |  |  | 6,965 |  | $ | .49 | 
|Effect of dilutive securities options                                        |  |                                       |        |                       |  |                   |  |                     | .     |                       |   |                   |  |  | 24    |  |   | .  | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|Diluted earnings per share                                                   |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 
|Net (loss) income available to common stockholders plus assumed
 conversions |  |                                       |        |                       |  | 7,054              |  |                     | .     |                       | $ | 3,395              |  |  | 6,989 |  | $ | .49 | 
|                                                                             |  |                                       |         |                       |  |                    |  |                     |        |                       |   |                    |  |  |       |  |   |     | 

NOTE 4. Loan Portfolio

The
following table sets forth information concerning the Companys loan portfolio
by type of loan at the dates indicated:

|                                  |  |                        |         |                   |  |        |   |             |         |   |  |       |  
|--------------------------------- |  | ---------------------- | ------- | ----------------- |  | ------ | - | ----------- | ------- | - |  | ----- | -
|                                  |  | September 30, 2008     |         | December 31, 2007 | 
|                                  |  |                        |         |                   | 
|                                  |  | Amount                 |         | % of
 Total       |  | Amount |   | % of
 Total |        
|                                  |  |                        |         |                   |  |        |   |             |        
|                                  |  | (Dollars
in thousands) |        
|Commercial and professional loans |  | $                      | 79,757  |                   |  | 16.7   | % | $           | 76,132  |   |  | 17.4  | %
|Secured by real estate            |  |                        |         |                   |  |        |   |             |         |   |  |       |  
|1-4 family                        |  |                        | 140,700 |                   |  | 29.4   |   |             | 142,140 |   |  | 32.6  |  
|Multi family                      |  |                        | 3,179   |                   |  | 0.7    |   |             | 3,506   |   |  | 0.8   |  
|Non-residential                   |  |                        | 253,634 |                   |  | 53.1   |   |             | 212,850 |   |  | 48.8  |  
|Consumer                          |  |                        | 494     |                   |  | 0.1    |   |             | 1,691   |   |  | 0.4   |  
|                                 
|                                  |  |                        |         |                   |  |        |   |             |         |   |  |       |  
|Total loans                       |  |                        | 477,764 |                   |  | 100.0  | % |             | 436,319 |   |  | 100.0 | %
|                                  |  |                        |         |                   |  |        |   |             |         |   |  |       |  
|Deferred loan fees                |  |                        | (1,268  | )                 |  |        |   |             | (1,534  | ) |  |       |  
|Allowance for loan losses         |  |                        | (5,207  | )                 |  |        |   |             | (4,183  | ) |  |       |  
|                                  |  |                        |         |                   |  |        |   |             |         |   |  |       |  
|Loans, net                        |  | $                      | 471,289 |                   |  |        |   | $           | 430,602 |   |  |       |  
|                                  |  |                        |         |                   |  |        |   |             |         |   |  |       |  

Total
non-performing loan assets, comprised of non-accrual and loans greater than 90
days past due, were $231,000 and $467,000 as of September 30, 2008 and December
31, 2007, respectively. Non-accrual loans totalled $135,000 and $153,000, and
loans contractually past due 90 days or more but still accruing interest were
$96,000 and $314,000 at September 30, 2008 and December 31, 2007, respectively.

11

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 5. Deposits

The
following table summarizes the composition of the average balances of major
deposit categories:

|                      |  |                        |         |                   |  |                 |   |                |         |  |  |      |  
|--------------------- |  | ---------------------- | ------- | ----------------- |  | --------------- | - | -------------- | ------- |  |  | ---- | -
|                      |  | September 30, 2008     |         | December 31, 2007 | 
|                      |  |                        |         |                   | 
|                      |  | Average
 Amount        |         | Average
 Yield    |  | Average
 Amount |   | Average
 Yield |        
|                      |  |                        |         |                   |  |                 |   |                |        
|                      |  | (Dollars
in thousands) |        
|                      |  |                        |         |                   |  |                 |   |                |         |  |  |      |  
|Demand
 deposits      |  | $                      | 54,540  |                   |  |                |   | $              | 50,647  |  |  |     |  
|NOW and
 money market |  |                        | 44,024  |                   |  | 1.68            | % |                | 29,984  |  |  | 0.76 | %
|Savings
 deposits     |  |                        | 262,855 |                   |  | 2.98            |   |                | 261,065 |  |  | 3.83 |  
|Time
 deposits        |  |                        | 454,748 |                   |  | 3.90            |   |                | 449,754 |  |  | 4.83 |  
|                      |  |                        |         |                   |  |                 |   |                |         |  |  |      |  
|Total
 deposits       |  | $                      | 816,167 |                   |  | 3.22            | % | $              | 791,450 |  |  | 4.04 | %
|                      |  |                        |         |                   |  |                 |   |                |         |  |  |      |  

NOTE 6. Comprehensive Income (Loss)

The
Company follows the provisions of Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive
Income which includes net income as well as certain other items
which result in a change to equity during the period. The following table
presents the components of comprehensive income (loss), based on the provisions
of SFAS No. 130.:

|                                                                            |  |                            |         |                         |   |                     |  |                     |         |                         |   |                     |   |   |     |   |   |      |  
|--------------------------------------------------------------------------- |  | -------------------------- | ------- | ----------------------- | - | ------------------- |  | ------------------- | ------- | ----------------------- | - | ------------------- | - | - | --- | - | - | ---- | -
|                                                                            |  | For The
 Nine Months Ended |        
|                                                                            |  |                            |        
|                                                                            |  | September
 30, 2008        |         | September
 30, 2007     |  
|                                                                            |  |                            |         |                         |  
|                                                                            |  | Before
 tax
 amount        |         | Tax
 (expense)
 benefit |   | Net of
 tax
 amount |  | Before
 tax
 amount |         | Tax
 (expense)
 benefit |   | Net of
 tax
 amount |  
|                                                                            |  |                            |         |                         |   |                     |  |                     |         |                         |   |                     |  
|                                                                            |  | (In thousands)             |        
|Unrealized gains (losses) on investment securities:                         |  |                            |         |                         |   |                     |  |                     |         |                         |   |                     |   |   |     |   |   |      |  
|Unrealized holding losses arising during period                             |  | $                          | (55,388 | )                       | $ | 22,155              |  | $                   | (33,233 | )                       | $ | (773                | ) | $ | 300 |   | $ | (473 | )
|Less reclassification adjustment for gains (losses) realized in net
 income |  |                            | (21     | )                       |   | 8                   |  |                     | (13     | )                       |   | 86                  |   |   | (34 | ) |   | 52   |  
|                                                                            |  |                            |         |                         |   |                     |  |                     |         |                         |   |                     |   |   |     |   |   |      |  
|Unrealized loss on investment securities                                    |  |                            | (55,409 | )                       |   | 22,163              |  |                     | (33,246 | )                       |   | (687                | ) |   | 266 |   |   | (421 | )
|Change in minimum pension liability                                         |  |                            | 46      |                         |   |                    |  |                     | 46      |                         |   | 71                  |   |   |    |   |   | 71   |  
|                                                                            |  |                            |         |                         |   |                     |  |                     |         |                         |   |                     |   |   |     |   |   |      |  
|Other comprehensive income (loss), net                                      |  | $                          | (55,363 | )                       | $ | 22,163              |  | $                   | (33,200 | )                       | $ | (616                | ) | $ | 266 |   | $ | (350 | )
|                                                                            |  |                            |         |                         |   |                     |  |                     |         |                         |   |                     |   |   |     |   |   |      |  

12

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 7. Accounting For Stock Based
Compensation

At
September 30, 2008, the Company had one stock-based employee compensation plan.
The Company accounts for the plan in accordance with SFAS No. 123(R), Share
Based Payment. Under the fair value recognition provisions of SFAS 123R,
share-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense over the vesting period.
Determining the fair value of share-based awards at the grant date requires
judgement, including estimating the Companys stock price volatility, employee
stock option exercise behaviors and employee option forfeiture rates.

The
Company did not grant stock options, nor did any stock options vest during the
nine-month periods ended September 30, 2008 and 2007, as a result of which, no
stock based compensation expense was recorded in either of those periods. The
disclosures required under SFAS No. 123(R) are omitted due to materiality.

NOTE 8. Employee Benefit Plans

The
Company has a Retirement Income Plan (the Plan), a noncontributory defined
benefit plan covering substantially all full-time, non-union United States
employees of the Company. The following interim-period information is being
provided in accordance with SFAS No. 132(R), Employers
Disclosures About Pensions and Other Postretirement Benefits - an amendment of
FASB Statements No. 87, 88 and 106.

|                               |  |                                        |         |                                       |   |         |   |      |          |   |   |          |  
|------------------------------ |  | -------------------------------------- | ------- | ------------------------------------- | - | ------- | - | ---- | -------- | - | - | -------- | -
|                               |  | For TheThree Months EndedSeptember 30, |         | For TheNine Months EndedSeptember 30, |  
|                               |  |                                        |         |                                       |  
|                               |  | 2008                                   |         | 2007                                  |   | 2008    |   | 2007 |         
|                               |  |                                        |         |                                       |   |         |   |      |         
|                               |  |                                        |         |                                       |   |         |   |      |          |   |   |          |  
|Service cost                   |  | $                                      | 105,250 |                                       | $ | 90,750  |   | $    | 315,750  |   | $ | 272,250  |  
|Interest cost                  |  |                                        | 54,750  |                                       |   | 43,500  |   |      | 164,250  |   |   | 130,500  |  
|Expected return on plan assets |  |                                        | (62,250 | )                                     |   | (46,000 | ) |      | (186,750 | ) |   | (138,000 | )
|Amortization and Deferral:     |  |                                        |         |                                       |   |         |   |      |          |   |   |          |  
|Prior service cost             |  |                                        | 4,500   |                                       |   | 4,500   |   |      | 13,500   |   |   | 13,500   |  
|Loss                           |  |                                        | 10,750  |                                       |   | 11,750  |   |      | 32,250   |   |   | 35,250   |  
|                               |  |                                        |         |                                       |   |         |   |      |          |   |   |          |  
|Net periodic pension cost      |  | $                                      | 113,000 |                                       | $ | 104,500 |   | $    | 339,000  |   | $ | 313,500  |  
|                               |  |                                        |         |                                       |   |         |   |      |          |   |   |          |  

The
Pension Protection Act of 2006 (the PPA) changes the funding rules for
defined benefit pension plans, beginning in 2008. A key element of the PPA is
the introduction of benefit restrictions on plans that are funded below 80% of
the plans target liabilities. In order to avoid these restrictions, during the
fiscal year ending December 31, 2008, we expect to contribute approximately
$869,000 to the Plan, of which $771,500 has been paid through September 30,
2008. In October 2008, another payment of $97,000 was made. During the first
three quarters of 2007, we contributed approximately $277,000 to the Plan.

NOTE 9. Fair Value Measurements

Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosure about fair value. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability
(an exit price) in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair value. A financial
instruments level within the fair value hierarchy is based on the lowest level
of input significant to the fair value measurement. There have been no material
changes in valuation techniques as a result of the adoption of SFAS No. 157.

13

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 9. - (continued)

Level 1 -
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.

Level 2 -
Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities in active markets; quoted prices in markets that are not
active for identical or similar assets or liabilities; or other inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.

Level 3 -
Unobservable inputs that are supported by little or no market activity and
significant to the fair value of the assets or liabilities that are developed
using the reporting entities estimates and assumptions, which reflect those
that market participants would use.

Assets and Liabilities Measured at Fair Value
on a Recurring Basis

A
description of the valuation methodologies used for financial instruments
measured at fair value on a recurring basis, as well as the classification of
the instruments pursuant to the valuation hierarchy, are as follows:

Securities Available for Sale

Securities
classified as available for sale are reported using Level 1, Level 2 and Level
3 inputs. Level 1 securities generally include equity securities valued based
on quoted market prices in active markets. Level 2 instruments include U.S.
government agency obligations, state and municipal bonds, mortgage-backed
securities, collateralized mortgage obligations and corporate bonds. For these
securities, the Company obtains fair value measurements from an independent
pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bonds terms and conditions, among other things.
Level 3 securities available for sale consist of instruments that are not
readily marketable and may only be redeemed with the issuer at par such as
Federal Home Loan Bank and Federal Reserve Bank stock. These securities are
stated at par value.

Assets
measured at fair value on a recurring basis are summarized below.

|                                          |  |                                                                                 |        |                                                   |   |                                              |  |                              |        |  |   |         | 
|----------------------------------------- |  | ------------------------------------------------------------------------------- | ------ | ------------------------------------------------- | - | -------------------------------------------- |  | ---------------------------- | ------ |  | - | ------- | 
|                                          |  | Fair Value Measurement Using                                                    |       
|                                          |  |                                                                                 |       
|                                          |  | Quoted
 Prices in
 Active Markets
 for Identical
 Assets/Liabilities
 (Level 1) |        | Significant
 Other
 Observable
 Inputs
 (Level 2) |   | Significant
 Unobservable
 Inputs
 (Level 3) |  | Balance
 September 30,
 2008 |       
|                                          |  |                                                                                 |        |                                                   |   |                                              |  |                              |       
|                                          |  | (Dollars
 in thousands)                                                         |       
|                                          |  |                                                                                 |       
|Assets                                    |  |                                                                                 |        |                                                   |   |                                              |  |                              |        |  |   |         | 
|Investment securities
 available for sale |  | $                                                                               | 16,352 |                                                   | $ | 217,886                                      |  | $                            | 64,325 |  | $ | 298,563 | 
|                                          |  |                                                                                 |        |                                                   |   |                                              |  |                              |        |  |   |         | 
|Total assets                              |  | $                                                                               | 16,352 |                                                   | $ | 217,886                                      |  | $                            | 64,325 |  | $ | 298,563 | 
|                                          |  |                                                                                 |        |                                                   |   |                                              |  |                              |        |  |   |         | 

14

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 9. - (continued)

The
above table includes $33.25 million in net unrealized losses on the Companys
available for sale securities. The Company has reviewed its investment
portfolio at September 30, 2008, and has determined that the unrealized losses,
except as discussed in Note 10, are temporary. Such determination was based upon
an evaluation of the creditworthiness of the issuers and/or guarantors, the
underlying collateral, if applicable, as well as the continuing performance of
the securities. Management also evaluates other facts and circumstances that
may be indicative of an other-than-temporary impairment condition. This
includes, but is not limited to, an evaluation of the type of security and
length of time and extent to which the fair value has been less than cost, as
well as certain collateral related characteristics. In addition, management
considers the Companys ability to hold such securities to maturity, if
necessary, thereby recovering its investment.

Assets and Liabilities Measured at Fair Value
on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The
following table presents a reconciliation for assets measured at fair value on
a recurring basis for which the Company has utilized significant unobservable
inputs (Level 3).

|                                                                                                                                                                                      |  |                                             |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | -
|(Dollars in
 thousands)                                                                                                                                                               |  | Investment
 Securities
 Available
 for Sale |        
|                                                                                                                                                                                      |  |                                             |        
|                                                                                                                                                                                     
|Balance, January 1, 2008                                                                                                                                                              |  | $                                           | 184,597 |  
|Total gains/losses (realized/unrealized)                                                                                                                                              |  |                                             |         |  
|Included in earnings                                                                                                                                                                  |  |                                             |        |  
|Included in other comprehensive income                                                                                                                                                |  |                                             | (36,778 | )
|Purchases, Sales, Issuances and Settlements                                                                                                                                           |  |                                             | 13,128  |  
|Redemptions                                                                                                                                                                           |  |                                             | (16,450 | )
|Interest                                                                                                                                                                              |  |                                             |        |  
|Other than temporary impairment expense                                                                                                                                               |  |                                             | (80,172 | )
|Capital deductions for operating expenses                                                                                                                                             |  |                                             |        |  
|                                                                                                                                                                                      |  |                                             |         |  
|Balance, September 30, 2008                                                                                                                                                           |  | $                                           | 64,325  |  
|                                                                                                                                                                                      |  |                                             |         |  
|                                                                                                                                                                                      |  |                                             |         |  
|The amount of total gains (losses) for the period included in earnings
 attributable to the change in unrealized gains or losses relating to assets
 still held at September 30, 2008 |  | $                                           |        |  

15

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 10. Material Impairments

On
September 7, 2008, the United States Department of the Treasury(US Treasury)
and the Federal Housing Finance Agency (FHFA) announced a plan to place the
Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) into conservatorship under the authority
of the FHFA, a plan which eliminated dividends on Fannie Mae and Freddie Mac
common and preferred stock for the foreseeable future.

As
previously disclosed by the Company, as of June 30, 2008, the Bank held auction
rate securities with a cost basis of $86.3 million, including securities which
were collateralized by Fannie Mae or Freddie Mac preferred shares. The Bank
also held preferred shares of Fannie Mae and Freddie Mac with a cost basis of
$8.7 million, and a $6.9 million corporate note from Lehman Brothers which
filed for bankruptcy protection on September 15, 2008. Due to the U.S. Treasury
actions and the failure of Lehman Brothers, we determined that these securities
were other than temporarily impaired and recognized a pre-tax charge totaling
$94.35 million, consisting of $80.15 million related to the auction rate
securities; $8.10 million related to the Fannie Mae and Freddie Mac preferred
shares and $6.10 million charge for the Lehman Brothers corporate note.

At
September 30, 2008, the other than temporary impairment (OTTI) charge
related to the Lehman Brothers corporate note was considered an ordinary loss
under the current federal tax code. Therefore, we recognized a deferred tax asset,
and related tax benefit, related to this ordinary loss of $6.10 million. The
other than temporary charge related to the Fannie Mae and Freddie Mac preferred
shares, both direct investments and through the auction rate securities, were
considered capital losses under the federal tax code. As such, we recognized
a tax benefit of $760,000 relating to $1.735 million of previously recognized
capital gains. A valuation allowance was recorded on the remaining deferred tax
asset.

In
October 2008, the U.S. Congress passed the Emergency Economic Stabilization Act
(the EESA) which changed the characteristics of direct and indirect
ownership of the Fannie Mae and Freddie Mac capital losses to ordinary losses.
Due to this change in the tax law, we are currently evaluating the effects of
a potential tax benefit in the fourth quarter of 2008. In addition to this change
in the nature of the losses, the EESA also provided for financial institutions
to apply for funds under the Troubled Asset Repurchase Program which will provide
capital from the US Treasury in the form of Preferred Shares. We have applied
to participate in this program and initial indications are that we will be approved.
Upon such approval, management will review the terms of the transaction and determine
if it is in the best interest of the Company to accept the funds.

As
a result of this OTTI charge, the Bank no longer met the definition of a well
capitalized institution. In order to restore our well capitalized position,
in October 2008, the Companys Chairman of the Board and majority stockholder,
and two non-affiliated investors, purchased an aggregate of 60,000 shares of
our 8% Non-Cumulative Mandatorily Convertible Perpetual Series A Preferred
Stock (the Preferred Shares) at $1,000 per share, or $60 million in the
aggregate. Each Preferred Share is convertible into 123.153 shares of our
Common Stock and redeemable at the option of the Company between April 15, 2009
and October 15, 2010 at a redemption price of $1,100. The transaction was
consummated on October 31, 2008. After the sale of the Preferred Shares, we met
the definition of well capitalized as disclosed in Note 11.

16

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 11. Capital Adequacy

Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-weighted assets, and
Tier I capital to average assets. As of September 30, 2008, for the reasons
discussed in Note 10, the Bank did not meet the capital adequacy requirements
to which it is subject.

The
following table sets forth the actual and required regulatory capital amounts
and ratios of the Company and the Bank as of September 30, 2008 (dollars in
thousands):

|                                          |  |        |        |                                |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|----------------------------------------- |  | ------ | ------ | ------------------------------ |  | ------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                          |  | Actual |        | For Capital
 Adequacy Purposes |  | To be well
 capitalized under
 prompt corrective
 action provisions |  
|                                          |  |        |        |                                |  |                                                                     |  
|                                          |  | Amount |        | Ratio                          |  | Amount                                                              |   | Ratio |        | Amount |  | Ratio |  
|                                          |  |        |        |                                |  |                                                                     |   |       |        |        |  |       |  
|                                         
|September
30, 2008                        |  |        |        |                                |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Total
 Capital (to Risk-Weighted Assets)  |  |        |        |                                |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Company                                   |  | $      | 36,510 |                                |  | 5.5                                                                 | % | $     | 52,888 |        |  | 38.0  | % | $ |       |  |  | N/A   |  
|Bank                                      |  |        | 21,921 |                                |  | 3.4                                                                 | % |       | 51,454 |        |  | 38.0  | % |   | 64,317 |  |  | 310.0 | %
|Tier
 I Capital (to Risk-Weighted Assets) |  |        |        |                                |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Company                                   |  |        | 31,303 |                                |  | 4.7                                                                 | % |       | 26,444 |        |  | 34.0  | % |   |       |  |  | N/A   |  
|Bank                                      |  |        | 16,714 |                                |  | 2.6                                                                 | % |       | 25,727 |        |  | 34.0  | % |   | 38,590 |  |  | 36.0  | %
|Tier
 I Capital (to Average Assets)       |  |        |        |                                |  |                                                                     |   |       |        |        |  |       |   |   |        |  |  |       |  
|Company                                   |  |        | 31,303 |                                |  | 2.9                                                                 | % |       | 42,853 |        |  | 34.0  | % |   |       |  |  | N/A   |  
|Bank                                      |  |        | 16,714 |                                |  | 1.6                                                                 | % |       | 40,857 |        |  | 34.0  | % |   | 51,072 |  |  | 35.0  | %

The
pro forma impact of the capital infusion, included in the normal 20% risk
weighted category, on the Banks capital ratios as discussed in Note 10 as of
September 30, 2008 is as follows:

|                                       |  |                                 |     |                                                |  |                                                |   |                                                       |      |   |  |     |  
|-------------------------------------- |  | ------------------------------- | --- | ---------------------------------------------- |  | ---------------------------------------------- | - | ----------------------------------------------------- | ---- | - |  | --- | -
|                                       |  | As Reported
 September 30, 2008 |     | Pro Forma to
 Give Effect to
 Capital Infusion |  | Regulatory
 Threshold
 for Well
 Capitalized |   | Regulatory
 Threshold
 for
 Adequately
 Capitalized |     
|                                       |  |                                 |     |                                                |  |                                                |   |                                                       |     
|                                      
|Total Capital to Risk-Weighted Assets  |  |                                 | 3.4 | %                                              |  | 12.5                                           | % |                                                       | 10.0 | % |  | 8.0 | %
|Tier 1 Capital to Risk-Weighted Assets |  |                                 | 2.6 | %                                              |  | 11.7                                           | % |                                                       | 6.0  | % |  | 4.0 | %
|Tier 1 Capital to Average Assets       |  |                                 | 1.6 | %                                              |  | 7.5                                            | % |                                                       | 5.0  | % |  | 4.0 | %

17

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 12. New Accounting Pronouncements

Accounting For Fair Value Measurement

In
September 2006, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 is
effective for all financial statements issued for fiscal years beginning after
November 15, 2007, or January 1, 2008 as to the Company. The Statement defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The adoption of SFAS No. 157
did not have a material impact on the Companys results of operations or
financial condition.

Fair Value Option For Financial Assets and
Liabilities

In
February 2007, the FASB issued Statement 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). The objective of
SFAS No. 159 is to provide companies with the option to recognize most
financial assets and liabilities and certain other items at fair value.
Statement 159 allows companies the opportunity to mitigate earnings volatility
caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting. Unrealized gains and losses on items for
which the fair value option has been elected should be reported in earnings.
The fair value option election is applied on an instrument by instrument basis
(with some exceptions), is irrevocable, and is applied to an entire instrument.
The election may be made as of the date of initial adoption for existing
eligible items. Subsequent to initial adoption, the Company may elect the fair
value option at initial recognition of eligible items or on entering into an
eligible firm commitment. The Company can only elect the fair value option
after initial recognition in limited circumstances.

SFAS
No. 159 requires similar assets and liabilities for which the Company has
elected the fair value option to be displayed on the face of the balance sheet
either (a) together with financial instruments measured using other measurement
attributes with parenthetical disclosure of the amount measured at fair value
or (b) in separate line items. In addition, SFAS No. 159 requires additional
disclosures to allow financial statement users to compare similar assets and
liabilities measured differently either within the financial statements of the
Company or between financial statements of different companies.

SFAS
No. 159 was adopted by the Company on January 1, 2008, concurrent with the
adoption of SFAS No. 157. At September 30, 2008, the Company has not elected
the fair value measurement option for any of its assets or liabilities.

Accounting For Business Combinations

In
December 2007, the FASB issued SFAS 141(R), Accounting for Business
Combinations. This Statement replaces FASB Statement No. 141, Business
Combinations and is effective as of the beginning of the fiscal year beginning
on or after December 15, 2008, or January 1, 2009 as to the Company. SFAS
141(R) establishes principles and requirements for how the acquirer of a
business (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and (iii)
determines the

18

---



BERKSHIRE BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)

NOTE 12. - (continued)

information to
disclose in its financial statements with respect to the nature and financial
effects of the business combination. The adoption of SFAS 141(R) is not
expected to have a material impact on the Companys results of operations or
financial condition.

Disclosures about Derivative Instruments and
Hedging Activities

In
March 2008, the FASB issued Statement 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161). The objective of SFAS 161 is to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows beyond the disclosure requirements of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 161 also improves
transparency with respect to the location and amounts of derivative instruments
in an entitys financial statements and with respect to how derivative
instruments and related hedged items affect its financial position, financial
performance, and cash flows. The disclosures required by SFAS 161, clarified by
FASB Staff Position No. 133-1 and FIN 45-4 issued on September 12, 2008, should
be provided for any reporting period (annual or quarterly interim) beginning
after November 15, 2008, or March 31, 2009 as to the Company, with early
application encouraged. The adoption of SFAS 161 is not expected to have a
material impact on the Companys results of operations or financial condition.

Internal Control Over Financial Reporting

The
objective of the Companys Internal Control Program is to allow the Bank and
management to comply with Part 363 of the FDICs regulations (FDICIA) and to
allow the Company to comply with Section 302 of the Sarbanes-Oxley Act of 2002
(the Act). In November 2005, the FDIC amended Part 363 of its regulations by
raising the asset-size threshold from $500 million to $1 billion for internal
control assessments by management and external auditors. The final rule was
effective December 28, 2005.

Section
302 of the Act requires the CEOs and CFOs of the Company to (i) certify that
the annual and quarterly reports filed with the SEC are accurate and (ii)
acknowledge that they are responsible for establishing, maintaining and
periodically evaluating the effectiveness of the disclosure controls and
procedures. Section 404 of the Act requires management to (i) report on
internal control over financial reporting, (ii) assess the effectiveness of
such internal controls, and, in a later phase of the effectiveness of Section
404, (iii) obtain an external auditors report on managements assessment of
its internal control. The Company is not an accelerated filer as defined in
Rule 12b-2 of the Securities Exchange Act of 1934. Therefore, the Company was
first required to comply with the portions of Section 404 described in (i) and
(ii) above for the fiscal year ended December 31, 2007.

The
Committee of Sponsoring Organizations (COSO) methodology may be used to
document and test the internal controls pertaining to the accuracy of Company
issued financial statements and related disclosures. COSO requires a review of
the control environment (including anti-fraud and audit committee
effectiveness), risk assessment, control activities, information and
communication, and ongoing monitoring.

19

---



|         |                                                                                        
|-------- | ---------------------------------------------------------------------------------------
|ITEM 2 - | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS.

The
following discussion and analysis is intended to provide a better understanding
of the consolidated financial condition and results of operations of Berkshire
Bancorp Inc., a Delaware corporation, and its subsidiaries. All references to
earnings per share, unless stated otherwise, refer to earnings per basic shares
for the 2008 periods and diluted shares for the 2007 periods. References to
Notes herein are references to the Notes to Consolidated Financial Statements
of the Company located in Item 1 herein.

The
accompanying financial statements of Berkshire Bancorp Inc. and subsidiaries
includes the accounts of the parent company, Berkshire Bancorp Inc., and its
wholly-owned subsidiaries: The Berkshire Bank, Greater American Finance Group,
Inc. and East 39, LLC.

Critical Accounting Policies, Judgments and
Estimates

The
accounting and reporting policies of the Company conform with US GAAP and
general practices within the financial services industry. The preparation of
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.

The
Company considers that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than any of its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Managements determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective
as it requires material estimates, including, among others, expected default
probabilities, loss given default, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical
loss experience. The process also considers economic conditions, uncertainties
in estimating losses and inherent risks in the loan portfolio. All of these
factors may be susceptible to significant change. To the extent actual outcomes
differ from management estimates, additional provisions for loan losses may be
required that would adversely impact earnings in future periods.

With
the adoption of SFAS No. 142 Goodwill and
Other Intangible Assets on January 1, 2002, the Company
discontinued the amortization of goodwill resulting from acquisitions. Goodwill
is now subject to impairment testing at least annually to determine whether
write-downs of the recorded balances are necessary. The Company tests for
impairment based on the goodwill maintained at the Bank. A fair value is
determined for each reporting unit based on at least one of three various
market valuation methodologies. If the fair values of the reporting units
exceed their book values, no write-down of recorded goodwill is necessary. If
the fair value of the reporting unit is less, an expense may be required on the
Companys books to write down the related goodwill to the proper carrying
value. The goodwill was evaluated for impairment as of September 30, 2008 with
no recognition of impairment considered necessary.

The
Company recognizes deferred tax assets and liabilities for the future tax
effects of temporary differences, net operating loss carryforwards and tax
credits. Deferred tax assets are subject to managements judgment based upon
available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense
may be required to reduce the recorded value of the net deferred tax asset to
the expected realizable amount.

20

---



The
following table presents the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed in both
dollars and rates.

|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|--------------------------------------------------------------------------------- |  | ----------------------------------------- | --------- | ------------------------ | - | ------------------- |  | ---------------- | ---- | ------------------------ | - | ------------------- |  | - | ------ |  |  | ---- | -
|                                                                                  |  | For The
 Three Months Ended September 30, |          
|                                                                                  |  |                                           |          
|                                                                                  |  | 2008                                      |           | 2007                     |  
|                                                                                  |  |                                           |           |                          |  
|                                                                                  |  | Average
 
 Balance                        |           | Interest
 and
 Dividends |   | Average
 Yield/Rate |  | Average
 Balance |      | Interest
 and
 Dividends |   | Average
 Yield/Rate | 
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     | 
|                                                                                  |  | (Dollars in Thousands)                    |          
|INTEREST-EARNING ASSETS:                                                          |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Loans (1)                                                                         |  | $                                         | 471,103   |                          | $ | 8,296               |  |                  | 7.04 | %                        | $ | 385,425             |  | $ | 7,363  |  |  | 7.64 | %
|Investment securities                                                             |  |                                           | 472,086   |                          |   | 5,793               |  |                  | 4.91 |                          |   | 581,577             |  |   | 7,086  |  |  | 4.87 |  
|Other (2)(5)                                                                      |  |                                           | 68,764    |                          |   | 433                 |  |                  | 2.52 |                          |   | 18,386              |  |   | 208    |  |  | 4.53 |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total interest-earning assets                                                     |  |                                           | 1,011,953 |                          |   | 14,522              |  |                  | 5.74 |                          |   | 985,388             |  |   | 14,657 |  |  | 5.95 |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Noninterest-earning assets                                                        |  |                                           | 52,130    |                          |   |                     |  |                  |      |                          |   | 47,250              |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total Assets                                                                      |  | $                                         | 1,064,083 |                          |   |                     |  |                  |      |                          | $ | 1,032,638           |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|INTEREST-BEARING LIABILITIES:                                                     |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Interest bearing deposits                                                         |  |                                           | 298,931   |                          |   | 1,838               |  |                  | 2.46 | %                        |   | 291,919             |  |   | 2,631  |  |  | 3.61 | %
|Time deposits                                                                     |  |                                           | 450,342   |                          |   | 3,785               |  |                  | 3.36 |                          |   | 461,936             |  |   | 5,650  |  |  | 4.89 |  
|Other borrowings                                                                  |  |                                           | 139,042   |                          |   | 1,476               |  |                  | 4.25 |                          |   | 98,123              |  |   | 1,401  |  |  | 5.71 |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total interest-bearing liabilities                                                |  |                                           | 888,315   |                          |   | 7,099               |  |                  | 3.20 |                          |   | 851,978             |  |   | 9,682  |  |  | 4.55 |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Demand deposits                                                                   |  |                                           | 54,259    |                          |   |                     |  |                  |      |                          |   | 51,525              |  |   |        |  |  |      |  
|Noninterest-bearing liabilities                                                   |  |                                           | 9,217     |                          |   |                     |  |                  |      |                          |   | 9,979               |  |   |        |  |  |      |  
|Stockholders equity (5)                                                          |  |                                           | 112,292   |                          |   |                     |  |                  |      |                          |   | 119,156             |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total liabilities and stockholders equity                                        |  | $                                         | 1,064,083 |                          |   |                     |  |                  |      |                          | $ | 1,032,638           |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Net interest income                                                               |  |                                           |           |                          | $ | 7,423               |  |                  |      |                          |   |                     |  | $ | 4,975  |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Interest-rate spread (3)                                                          |  |                                           |           |                          |   |                     |  |                  | 2.54 | %                        |   |                     |  |   |        |  |  | 1.40 | %
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Net interest margin (4)                                                           |  |                                           |           |                          |   |                     |  |                  | 2.93 | %                        |   |                     |  |   |        |  |  | 2.02 | %
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Ratio of average interest-earning assets to average interest bearing
 liabilities |  |                                           | 1.14      |                          |   |                     |  |                  |      |                          |   | 1.16                |  |   |        |  |  |      |  
|                                                                                  |  |                                           |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  

|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Includes nonaccrual loans.                                                                                                                                 
|    |                                                                                                                                                            
|(2) | Includes interest-bearing deposits, federal funds
 sold and securities purchased under agreements to resell.                                               
|    |                                                                                                                                                            
|(3) | Interest-rate spread represents the difference
 between the average yield on interest-earning assets and the average cost of
 interest bearing liabilities.
|    |                                                                                                                                                            
|(4) | Net interest margin is net interest income as a
 percentage of average interest-earning assets.                                                            
|    |                                                                                                                                                            
|(5) | Average balances are daily average balances except
 for the parent company which have been calculated on a monthly basis.                                  

21

---



|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|--------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | ------------------------ | - | ------------------- |  | ---------------- | ---- | ------------------------ | - | ------------------- |  | - | ------ |  |  | ---- | -
|                                                                                  |  | For The
 Nine Months Ended September 30, |          
|                                                                                  |  |                                          |          
|                                                                                  |  | 2008                                     |           | 2007                     |  
|                                                                                  |  |                                          |           |                          |  
|                                                                                  |  | Average
 
 Balance                       |           | Interest
 and
 Dividends |   | Average
 Yield/Rate |  | Average
 Balance |      | Interest
 and
 Dividends |   | Average
 Yield/Rate | 
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     | 
|                                                                                  |  | (Dollars in Thousands)                   |          
|INTEREST-EARNING ASSETS:                                                          |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Loans (1)                                                                         |  | $                                        | 458,166   |                          | $ | 24,597              |  |                  | 7.16 | %                        | $ | 380,628             |  | $ | 21,841 |  |  | 7.65 | %
|Investment securities                                                             |  |                                          | 520,606   |                          |   | 20,914              |  |                  | 5.36 |                          |   | 547,809             |  |   | 19,337 |  |  | 4.71 |  
|Other (2)(5)                                                                      |  |                                          | 43,958    |                          |   | 857                 |  |                  | 2.60 |                          |   | 34,146              |  |   | 1,270  |  |  | 4.96 |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total interest-earning assets                                                     |  |                                          | 1,022,730 |                          |   | 46,368              |  |                  | 6.04 |                          |   | 962,583             |  |   | 42,448 |  |  | 5.88 |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Noninterest-earning assets                                                        |  |                                          | 48,594    |                          |   |                     |  |                  |      |                          |   | 45,988              |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total Assets                                                                      |  | $                                        | 1,071,324 |                          |   |                     |  |                  |      |                          | $ | 1,008,571           |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|INTEREST-BEARING LIABILITIES:                                                     |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Interest bearing deposits                                                         |  |                                          | 306,879   |                          |   | 6,408               |  |                  | 2.78 | %                        |   | 285,232             |  |   | 7,492  |  |  | 3.50 | %
|Time deposits                                                                     |  |                                          | 454,748   |                          |   | 13,303              |  |                  | 3.90 |                          |   | 442,395             |  |   | 16,058 |  |  | 4.84 |  
|Other borrowings                                                                  |  |                                          | 126,598   |                          |   | 4,200               |  |                  | 4.42 |                          |   | 100,516             |  |   | 4,173  |  |  | 5.54 |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total interest-bearing liabilities                                                |  |                                          | 888,225   |                          |   | 23,911              |  |                  | 3.59 |                          |   | 828,143             |  |   | 27,723 |  |  | 4.46 |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Demand deposits                                                                   |  |                                          | 54,540    |                          |   |                     |  |                  |      |                          |   | 50,088              |  |   |        |  |  |      |  
|Noninterest-bearing liabilities                                                   |  |                                          | 10,100    |                          |   |                     |  |                  |      |                          |   | 11,892              |  |   |        |  |  |      |  
|Stockholders equity (5)                                                          |  |                                          | 118,459   |                          |   |                     |  |                  |      |                          |   | 118,448             |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Total liabilities and stockholders equity                                        |  | $                                        | 1,071,324 |                          |   |                     |  |                  |      |                          | $ | 1,008,571           |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Net interest income                                                               |  |                                          |           |                          | $ | 22,457              |  |                  |      |                          |   |                     |  | $ | 14,725 |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Interest-rate spread (3)                                                          |  |                                          |           |                          |   |                     |  |                  | 2.45 | %                        |   |                     |  |   |        |  |  | 1.42 | %
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Net interest margin (4)                                                           |  |                                          |           |                          |   |                     |  |                  | 2.93 | %                        |   |                     |  |   |        |  |  | 2.04 | %
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  
|Ratio of average interest-earning assets to average interest bearing
 liabilities |  |                                          | 1.15      |                          |   |                     |  |                  |      |                          |   | 1.16                |  |   |        |  |  |      |  
|                                                                                  |  |                                          |           |                          |   |                     |  |                  |      |                          |   |                     |  |   |        |  |  |      |  

|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Includes nonaccrual loans.                                                                                                                                 
|    |                                                                                                                                                            
|(2) | Includes interest-bearing deposits, federal funds
 sold and securities purchased under agreements to resell.                                               
|    |                                                                                                                                                            
|(3) | Interest-rate spread represents the difference between
 the average yield on interest-earning assets and the average cost of interest
 bearing liabilities.
|    |                                                                                                                                                            
|(4) | Net interest margin is net interest income as a
 percentage of average interest-earning assets.                                                            
|    |                                                                                                                                                            
|(5) | Average balances are daily
 average balances except for the parent company which have been calculated on
 a monthly basis.                                 

22

---





Results
of Operations

Results
of Operations for the Three and Nine Months Ended September 30, 2008 Compared
to the Three and Nine Months Ended September 30, 2007.

General.
Berkshire Bancorp Inc., a bank holding company registered under the Bank
Holding Company Act of 1956, has one indirect wholly-owned banking subsidiary,
The Berkshire Bank, a New York State chartered commercial bank. The Bank is
headquartered in Manhattan and has twelve branch locations; seven branches in
New York City, four branches in Orange and Sullivan counties New York, and one
branch in Ridgefield, New Jersey.

Net
Income (Loss). Net loss for the three-month period ended
September 30, 2008 was $88.69 million, or $12.57 per share, as compared to net
income of $1.28 million, or $.18 per share, for the three-month period ended
September 30, 2007. Net loss for the nine-month period ended September 30, 2008
was $83.40 million, or $11.82 per share, as compared to net income of $3.40
million, or $.49 per share, for the nine-month period ended September 30, 2007.
The net loss for the three and nine months periods ended September 30, 2008 was
due to the other than temporary impairment charges on securities of $94.35
million, or $13.37 per share.

The
Companys net income is largely dependent on interest rate levels, the demand
for the Companys loan and deposit products and the strategies employed to
manage the interest rate and other risks inherent in the banking business.

Net
Interest Income. The Companys primary source of revenue is net
interest income, or the difference between interest income earned on earning
assets, such as loans and investment securities, and interest expense on
interest-bearing liabilities such as deposits and borrowings. The amount of
interest income is dependent upon many factors including: (i) the amount of
interest-earning assets that the Company can maintain based upon its funding
sources; (ii) the relative amounts of interest-earning assets versus
interest-bearing liabilities; and (iii) the difference between the yields
earned on those assets and the rates paid on those liabilities. Non-performing
loans adversely affect net interest income because they must still be funded by
interest-bearing liabilities, but they do not provide interest income.
Furthermore, when we designate an asset as non- performing, all interest which
has been accrued but not actually received is deducted from current period
income, further reducing net interest income.

For
the quarter ended September 30, 2008, net interest income increased by $2.45
million to $7.42 million from $4.98 million for the quarter ended September 30,
2007. The quarter over quarter increase in net interest income was due to the
$26.57 million increase in the average amount of interest-earning assets and
the 135 basis point decrease in the average rates paid on the average amount of
interest-bearing liabilities to 3.20% from 4.55% for the three months ended
September 30, 2008 and 2007, respectively. The Companys interest-rate spread,
the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities, increased by 114 basis points to
2.54% during the quarter ended September 30, 2008 from 1.40% in the comparable
2007 quarter.

For
the nine-month period ended September 30, 2008, net interest income increased
by $7.73 million to $22.46 million from $14.73 million for the nine-month
period ended September 30, 2007. The period over period increase in net
interest income was due to the $60.15 million increase in the average amount of
interest-earning assets and the 87 basis point decrease in the average rates
paid on the average amount of interest-bearing liabilities to 3.59% from 4.46%
for the nine month periods ended September 30, 2008 and 2007, respectively. The
Companys interest-rate spread increased by 103 basis points to 2.45% in the
2008 nine- month period from 1.42% in the 2007 nine-month period.

23

---



Net
Interest Margin. Net interest margin, or annualized net
interest income as a percentage of average interest-earning assets, increased
by 91 basis points to 2.93% in the quarter ended September 30, 2008 from 2.02%
in the quarter ended September 30, 2007. Net interest margin increased by 89
basis points to 2.93% for the nine-month period ended September 30, 2008 from
2.04% for the nine-month period ended September 30, 2007. We seek to secure and
retain customer deposits with competitive products and rates, while making
strategic use of the prevailing interest rate environment to borrow funds at what
we believe to be attractive rates. We invest such deposits and borrowed funds
in what we believe to be a prudent mix of fixed and adjustable rate loans,
investment securities and short-term interest-earning assets. The increase in
net interest margin during fiscal 2008 is primarily due to the increase in net
interest income discussed above and by the increase in the average amount of
higher yielding loans as a percentage of our total mix of interest-earning
assets.

The
average amount of loans in our loan portfolio increased by $85.68 million and
$77.54 million during the three and nine month periods ended September 30,
2008, respectively, to $471.10 million and $458.17 million, respectively, from
$385.43 million and $380.63 million during the three and nine months ended
September 30, 2007, respectively. The average amount of investment securities
in our securities portfolio decreased by $109.49 million and $27.20 million
during the three and nine months ended September 30, 2008, respectively, to $472.09
million and $520.61 million, respectively, from $581.58 million and $547.81
million during the three and nine months ended September 30, 2007,
respectively. The average yields earned on investment securities increased to
4.91% and 5.36% during the three and nine months ended September 30, 2008,
respectively, from 4.87% and 4.71% during the three and nine months ended
September 30, 2007, respectively.

Interest
Income. Total interest income for the quarter ended September
30, 2008 decreased by $135,000 to $14.52 million from $14.66 million for the
quarter ended September 30, 2007. Total interest income for the nine months
ended September 30, 2008 increased by $3.92 million to $46.37 million from
$42.45 million for the nine months ended September 30, 2007.

The
following tables present the composition of interest income for the indicated
periods:

|                      |  |                                    |        |             |  |                  |   |             |        |  |  |        |  
|--------------------- |  | ---------------------------------- | ------ | ----------- |  | ---------------- | - | ----------- | ------ |  |  | ------ | -
|                      |  | Three Months Ended September 30,   |       
|                      |  |                                    |       
|                      |  | 2008                               |        | 2007        | 
|                      |  |                                    |        |             | 
|                      |  | Interest
 Income                   |        | % of
 Total |  | Interest
 Income |   | % of
 Total |       
|                      |  | (In
thousands, except percentages) |       
|Loans                 |  | $                                  | 8,296  |             |  | 57.13            | % | $           | 7,363  |  |  | 50.23  | %
|Investment Securities |  |                                    | 5,793  |             |  | 39.89            |   |             | 7,086  |  |  | 48.35  |  
|Other                 |  |                                    | 433    |             |  | 2.98             |   |             | 208    |  |  | 1.42   |  
|                      |  |                                    |        |             |  |                  |   |             |        |  |  |        |  
|Total Interest Income |  | $                                  | 14,522 |             |  | 100.00           | % | $           | 14,657 |  |  | 100.00 | %
|                      |  |                                    |        |             |  |                  |   |             |        |  |  |        |  

24

---



|                      |  |                                    |        |             |  |                  |   |             |        |  |  |        |  
|--------------------- |  | ---------------------------------- | ------ | ----------- |  | ---------------- | - | ----------- | ------ |  |  | ------ | -
|                      |  | Nine Months Ended September 30,    |       
|                      |  |                                    |       
|                      |  | 2008                               |        | 2007        | 
|                      |  |                                    |        |             | 
|                      |  | Interest
 Income                   |        | % of
 Total |  | Interest
 Income |   | % of
 Total |       
|                      |  | (In
thousands, except percentages) |       
|Loans                 |  | $                                  | 24,597 |             |  | 53.05            | % | $           | 21,841 |  |  | 51.46  | %
|Investment Securities |  |                                    | 20,914 |             |  | 45.10            |   |             | 19,337 |  |  | 45.55  |  
|Other                 |  |                                    | 857    |             |  | 1.85             |   |             | 1,270  |  |  | 2.99   |  
|                      |  |                                    |        |             |  |                  |   |             |        |  |  |        |  
|Total Interest Income |  | $                                  | 46,368 |             |  | 100.00           | % | $           | 42,448 |  |  | 100.00 | %
|                      |  |                                    |        |             |  |                  |   |             |        |  |  |        |  

Loans,
which are inherently risky and therefore command a higher return than our
portfolio of investment securities and other interest-earning assets, increased
to 46.55% and 44.80% of total average interest-earning assets during the three
and nine months ended September 30, 2008, respectively, from 39.11% and 39.54%
of total interest-earning assets during the three and nine months ended
September 30, 2007, respectively. The average amount of investment securities
have decreased to 46.65% and 50.90% of total average interest-earning assets
during the three and nine months ended September 30, 2008, respectively, from
59.02% and 56.91% of total interest-earning assets during the three and
nine-month periods of fiscal year 2007, respectively. While we actively seek to
originate new loans with qualified borrowers who meet the Banks underwriting
standards, our strategy has been to maintain those standards, sacrificing some
current income to avoid possible large future losses in the loan portfolio.

At
September 30, 2008, our investment portfolio consisted of $86.3 million of
gross auction rate securities for which the underlying security was either
Fannie Mae or Freddie Mac Preferred Shares, as well as $8.7 million of
preferred shares of Fannie Mae and Freddie Mac. In addition, the Company held
    a $6.9 million corporate note from Lehman Brothers who failed on September
    15, 2008. Due to the U.S. Treasury actions in the quarter ended September
    30, 2008, suspending the dividends on Fannie Mae and Freddie Mac Preferred
    Shares, and the bankruptcy of Lehman Brothers, we determined that these securities
    were other than temporarily impaired and recognized a pre-tax charge totaling
    $94.35 million. The possibility of the reinstatement of Fannie Mae and Freddie
    Mac dividends, along with the continuation of interest payments on other
    auction rate securities and the Lehman Brothers corporate note in our investment
portfolio is uncertain.

We
are currently negotiating a potential settlement of claims we believe we have
with the issuing financial institutions of the auction rate securities in our
investment portfolio pursuant to the agreement these financial institutions
have reached with the SEC and the attorney general for the State of New York.
The outcome of these negotiations and the amount we may recover in a settlement
agreement, if any, is uncertain at this time.

Interest
Expense. Total interest expense for the quarter ended
September 30, 2008 decreased by $2.58 million to $7.10 million from $9.68
million for the quarter ended September 30, 2007. The decrease in interest
expense was primarily due to the 135 basis point decrease in the average rates
paid on the average amount of interest-bearing liabilities to 3.20% in the 2008
quarter from 4.55% in the 2007 quarter. The decrease was partially offset by
the increase in the average amount of interest-bearing liabilities to $888.32
million from $851.98 million for the quarters ended September 30, 2008 and
2007, respectively.

25

---



Total
interest expense for the nine-month period ended September 30, 2008 decreased
by $3.81 million to $23.91 million from $27.72 million for the nine-month
period ended September 30, 2007. The decrease in interest expense was primarily
due to the 87 basis point decrease in the average rates paid on the average
amount of interest-bearing liabilities to 3.59% in the 2008 nine-month period
from 4.46% in the 2007 nine-month period. The decrease was partially offset by
the increase in the average amount of interest-bearing liabilities to $888.23
million from $828.14 million for the nine-month periods ended September 30,
2008 and 2007, respectively.

The
following tables present the components of interest expense as of the dates
indicated:

|                          |  |                                    |       |             |  |                   |   |             |       |  |  |        |  
|------------------------- |  | ---------------------------------- | ----- | ----------- |  | ----------------- | - | ----------- | ----- |  |  | ------ | -
|                          |  | Three Months Ended September 30,   |      
|                          |  |                                    |      
|                          |  | 2008                               |       | 2007        | 
|                          |  |                                    |       |             | 
|                          |  | Interest
 Expense                  |       | % of
 Total |  | Interest
 Expense |   | % of
 Total |      
|                          |  | (In
thousands, except percentages) |      
|Interest-Bearing Deposits |  | $                                  | 1,838 |             |  | 25.89             | % | $           | 2,631 |  |  | 27.17  | %
|Time Deposits             |  |                                    | 3,785 |             |  | 53.32             |   |             | 5,650 |  |  | 58.36  |  
|Other Borrowings          |  |                                    | 1,476 |             |  | 20.79             |   |             | 1,401 |  |  | 14.47  |  
|                          |  |                                    |       |             |  |                   |   |             |       |  |  |        |  
|Total Interest Expense    |  | $                                  | 7,099 |             |  | 100.00            | % | $           | 9,682 |  |  | 100.00 | %
|                          |  |                                    |       |             |  |                   |   |             |       |  |  |        |  

|                          |  |                                    |        |             |  |                   |   |             |        |  |  |        |  
|------------------------- |  | ---------------------------------- | ------ | ----------- |  | ----------------- | - | ----------- | ------ |  |  | ------ | -
|                          |  | Nine Months Ended September 30,    |       
|                          |  |                                    |       
|                          |  | 2008                               |        | 2007        | 
|                          |  |                                    |        |             | 
|                          |  | Interest
 Expense                  |        | % of
 Total |  | Interest
 Expense |   | % of
 Total |       
|                          |  | (In
thousands, except percentages) |       
|Interest-Bearing Deposits |  | $                                  | 6,408  |             |  | 26.80             | % | $           | 7,492  |  |  | 27.02  | %
|Time Deposits             |  |                                    | 13,303 |             |  | 55.63             |   |             | 16,058 |  |  | 57.93  |  
|Other Borrowings          |  |                                    | 4,200  |             |  | 17.57             |   |             | 4,173  |  |  | 15.05  |  
|                          |  |                                    |        |             |  |                   |   |             |        |  |  |        |  
|Total Interest Expense    |  | $                                  | 23,911 |             |  | 100.00            | % | $           | 27,723 |  |  | 100.00 | %
|                          |  |                                    |        |             |  |                   |   |             |        |  |  |        |  

Non-Interest
Income. Non-interest income consists primarily of realized
gains on sales of marketable securities and service fee income. For the three
and nine months ended September 30, 2008, non-interest income amounted to
$267,000 and $1.11 million, respectively, compared to non-interest income of
$345,000 and $1.25 million for the three and nine months ended September 30,
2007, respectively.

Non-Interest
Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three and nine-month periods ended
September 30, 2008, including other than temporary impairment charges on
securities of $94.35 million, was $98.45 million and $106.34 million,
respectively. Excluding the other than temporary impairment charges, total
non-interest expense for the three and nine-month periods ended September 30,
2008 was $4.11 million and $11.99 million, respectively, compared to $3.56
million and $10.54 million for the three and nine month-periods ended September
30, 2007, respectively.

26

---



The
following tables present the components of non-interest expenses as of the
dates indicated:

|                                                       |  |                                    |        |             |  |                       |   |             |       |  |  |        |  
|------------------------------------------------------ |  | ---------------------------------- | ------ | ----------- |  | --------------------- | - | ----------- | ----- |  |  | ------ | -
|                                                       |  | Three Months Ended September 30,   |       
|                                                       |  |                                    |       
|                                                       |  | 2008                               |        | 2007        | 
|                                                       |  |                                    |        |             | 
|                                                       |  | Non-Interest
 Expense              |        | % of
 Total |  | Non-Interest
 Expense |   | % of
 Total |      
|                                                       |  | (In
thousands, except percentages) |       
|Salaries and Employee
 Benefits                        |  | $                                  | 2,395  |             |  | 2.43                  | % | $           | 2,211 |  |  | 62.04  | %
|Net Occupancy Expense                                  |  |                                    | 521    |             |  | 0.53                  |   |             | 603   |  |  | 16.92  |  
|Equipment Expense                                      |  |                                    | 97     |             |  | 0.10                  |   |             | 97    |  |  | 2.72   |  
|FDIC Assessment                                        |  |                                    | 128    |             |  | 0.13                  |   |             | 23    |  |  | 0.65   |  
|Data Processing Expense                                |  |                                    | 118    |             |  | 0.12                  |   |             | 111   |  |  | 3.11   |  
|Other than temporary
 impairment charges on securities |  |                                    | 94,346 |             |  | 95.83                 |   |             |      |  |  |       |  
|Other                                                  |  |                                    | 847    |             |  | 0.86                  |   |             | 519   |  |  | 14.56  |  
|                                                       |  |                                    |        |             |  |                       |   |             |       |  |  |        |  
|Total Non-Interest Expense                             |  | $                                  | 98,452 |             |  | 100.00                | % | $           | 3,564 |  |  | 100.00 | %
|                                                       |  |                                    |        |             |  |                       |   |             |       |  |  |        |  

|                                                       |  |                                    |         |             |  |                       |   |             |        |  |  |        |  
|------------------------------------------------------ |  | ---------------------------------- | ------- | ----------- |  | --------------------- | - | ----------- | ------ |  |  | ------ | -
|                                                       |  | Nine Months Ended September 30,    |        
|                                                       |  |                                    |        
|                                                       |  | 2008                               |         | 2007        | 
|                                                       |  |                                    |         |             | 
|                                                       |  | Non-Interest
 Expense              |         | % of
 Total |  | Non-Interest
 Expense |   | % of
 Total |       
|                                                       |  | (In
thousands, except percentages) |        
|Salaries and Employee
 Benefits                        |  | $                                  | 7,211   |             |  | 6.78                  | % | $           | 6,587  |  |  | 62.47  | %
|Net Occupancy Expense                                  |  |                                    | 1,566   |             |  | 1.47                  |   |             | 1,519  |  |  | 14.41  |  
|Equipment Expense                                      |  |                                    | 289     |             |  | 0.27                  |   |             | 297    |  |  | 2.82   |  
|FDIC Assessment                                        |  |                                    | 366     |             |  | 0.34                  |   |             | 63     |  |  | 0.60   |  
|Data Processing Expense                                |  |                                    | 339     |             |  | 0.32                  |   |             | 306    |  |  | 2.90   |  
|Other than temporary
 impairment charges on securities |  |                                    | 94,346  |             |  | 88.73                 |   |             |       |  |  |       |  
|Other                                                  |  |                                    | 2,222   |             |  | 2.09                  |   |             | 1,771  |  |  | 16.80  |  
|                                                       |  |                                    |         |             |  |                       |   |             |        |  |  |        |  
|Total Non-Interest Expense                             |  | $                                  | 106,339 |             |  | 100.00                | % | $           | 10,543 |  |  | 100.00 | %
|                                                       |  |                                    |         |             |  |                       |   |             |        |  |  |        |  

27

---



The
following tables present the components of non-interest expenses, excluding the
other than temporary impairment charges on securities, as of the dates
indicated:

|                                |  |                                    |       |             |  |                       |   |             |       |  |  |        |  
|------------------------------- |  | ---------------------------------- | ----- | ----------- |  | --------------------- | - | ----------- | ----- |  |  | ------ | -
|                                |  | Three Months Ended September 30,   |      
|                                |  |                                    |      
|                                |  | 2008                               |       | 2007        | 
|                                |  |                                    |       |             | 
|                                |  | Non-Interest
 Expense              |       | % of
 Total |  | Non-Interest
 Expense |   | % of
 Total |      
|                                |  | (In
thousands, except percentages) |      
|Salaries and Employee
 Benefits |  | $                                  | 2,395 |             |  | 58.33                 | % | $           | 2,211 |  |  | 62.04  | %
|Net Occupancy Expense           |  |                                    | 521   |             |  | 12.69                 |   |             | 603   |  |  | 16.92  |  
|Equipment Expense               |  |                                    | 97    |             |  | 2.36                  |   |             | 97    |  |  | 2.72   |  
|FDIC Assessment                 |  |                                    | 128   |             |  | 3.12                  |   |             | 23    |  |  | 0.65   |  
|Data Processing Expense         |  |                                    | 118   |             |  | 2.87                  |   |             | 111   |  |  | 3.11   |  
|Other                           |  |                                    | 847   |             |  | 20.63                 |   |             | 519   |  |  | 14.56  |  
|                                |  |                                    |       |             |  |                       |   |             |       |  |  |        |  
|Total Non-Interest Expense      |  | $                                  | 4,106 |             |  | 100.00                | % | $           | 3,564 |  |  | 100.00 | %
|                                |  |                                    |       |             |  |                       |   |             |       |  |  |        |  

|                                |  |                                    |        |             |  |                       |   |             |        |  |  |        |  
|------------------------------- |  | ---------------------------------- | ------ | ----------- |  | --------------------- | - | ----------- | ------ |  |  | ------ | -
|                                |  | Nine Months Ended September 30,    |       
|                                |  |                                    |       
|                                |  | 2008                               |        | 2007        | 
|                                |  |                                    |        |             | 
|                                |  | Non-Interest
 Expense              |        | % of
 Total |  | Non-Interest
 Expense |   | % of
 Total |       
|                                |  | (In
thousands, except percentages) |       
|Salaries and Employee
 Benefits |  | $                                  | 7,211  |             |  | 60.12                 | % | $           | 6,587  |  |  | 62.47  | %
|Net Occupancy Expense           |  |                                    | 1,566  |             |  | 13.06                 |   |             | 1,519  |  |  | 14.41  |  
|Equipment Expense               |  |                                    | 289    |             |  | 2.41                  |   |             | 297    |  |  | 2.82   |  
|FDIC Assessment                 |  |                                    | 366    |             |  | 3.05                  |   |             | 63     |  |  | 0.60   |  
|Data Processing Expense         |  |                                    | 339    |             |  | 2.83                  |   |             | 306    |  |  | 2.90   |  
|Other                           |  |                                    | 2,222  |             |  | 18.53                 |   |             | 1,771  |  |  | 16.80  |  
|                                |  |                                    |        |             |  |                       |   |             |        |  |  |        |  
|Total Non-Interest Expense      |  | $                                  | 11,993 |             |  | 100.00                | % | $           | 10,543 |  |  | 100.00 | %
|                                |  |                                    |        |             |  |                       |   |             |        |  |  |        |  

Provision
for Income Tax. During the three and nine-month periods ended
September 30, 2008, the Company recorded an income tax benefit of $2.22 million
and $323,000, respectively, as compared to income tax expense of $406,000 and
$1.81 million for the three and nine-month periods ended September 30, 2007,
respectively. The tax benefit recorded for the three and nine-month periods
ended September 30, 2008 relates to the 2008 OTTI charge. As previously
discussed, the OTTI charge related to the Lehman Brothers corporate note was
treated as an ordinary loss. The OTTI charge related to the investment in
Fannie Mae and Freddie Mac securities and the related auction rate securities
was characterized as a capital loss as of September 30, 2008. A valuation allowance
was recorded on the amount of capital losses in excess of available capital gains.
With the passage of the EESA in October 2008, the nature of the Fannie Mae and
Freddie Mac losses were characterized to ordinary losses. We are currently evaluating
the effects of the ordinary loss on our results of operations.

The
tax provisions for federal, state and local taxes recorded for the three and
nine-month periods ended September 30, 2007 represent effective tax rates of
24.15% and 34.81%, respectively. The effective tax rates reflect the tax-free
income earned on certain of the auction rate securities in our investment
portfolio.

28

---



Common Stock Repurchases

On
May 15, 2003, The Companys Board of Directors authorized the purchase of up to
an additional 450,000 shares of its Common Stock in the open market, from time
to time, depending upon prevailing market conditions, thereby increasing the
maximum number of shares which may be purchased by the Company from 1,950,000
shares of Common Stock to 2,400,000 shares of Common Stock. Since 1990 through
September 30, 2008, the Company has purchased a total of 1,898,909 shares of its
Common Stock. We did not repurchase shares of the Companys Common Stock during
the first three quarters of 2008. At September 30, 2008, there were 501,091
shares of Common Stock which may yet be purchased under our stock repurchase
plan.

|         |                                                          
|-------- | ---------------------------------------------------------
|ITEM 3 - | QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk. Fluctuations in market interest rates can have a material effect on the
Companys net interest income because the yields earned on loans and
investments may not adjust to market rates of interest with the same frequency,
or with the same speed, as the rates paid by the Bank on its deposits.

Most
of the Banks deposits are either interest-bearing demand deposits or short
term certificates of deposit and other interest-bearing deposits with interest
rates that fluctuate as market rates change. Management of the Bank seeks to
reduce the risk of interest rate fluctuations by concentrating on loans and
securities investments with either short terms to maturity or with adjustable rates
or other features that cause yields to adjust based upon interest rate
fluctuations. In addition, to cushion itself against the potential adverse
effects of a substantial and sustained increase in market interest rates, the
Bank has from time to time purchased off balance sheet interest rate cap
contracts which generally provide that the Bank will be entitled to receive
payments from the other party to the contract if interest rates exceed
specified levels. These contracts are entered into with major financial
institutions.

The
Company seeks to maximize its net interest margin within an acceptable level of
interest rate risk. Interest rate risk can be defined as the amount of the
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities.

29

---



In
the banking industry, a traditional measure of interest rate sensitivity is
known as gap analysis, which measures the cumulative differences between the
amounts of assets and liabilities maturing or repricing at various time
intervals. The following table sets forth the Companys interest rate repricing
gaps for selected maturity periods:

|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- | ----- | ----------------- |  | -------------------- | --- | ------------------ | -------- | ------------- |  | -------- | --- |  | ------- | - |  | ------- | -
|                                   |  | Berkshire Bancorp Inc.
 Interest Rate Sensitivity Gap at September 30, 2008
 (in thousands, except for percentages) |      
|                                   |  |                                                                                                                     |       |                   |  |                     
|                                   |  |                                                                                                                     |       | 3 Months
 or Less |  | 3 Through
 12 Months |     | 1 Through
 3 Years |          | Over
 3 Years |  | Total    |    
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |    
|Federal funds sold                 |  |                                                                                                                     |       |                   |  | 34,500               |     |                    | 5,000    |               |  |         |     |  |        |   |  | 39,500  |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 1.25                 | %   |                    | 3.0      | %             |  |          |     |  |         |   |  | 5.35    | %
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Interest bearing deposits in banks |  |                                                                                                                     |       |                   |  | 43,061               |     |                    | 15,000   |               |  |         |     |  |        |   |  | 58,061  |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 2.47                 | %   |                    | 3.60     |               |  |          |     |  |         |   |  | 4.17    | %
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Loans (1)(2)                       |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Adjustable rate loans              |  |                                                                                                                     |       |                   |  | 132,277              |     |                    | 11,612   |               |  | 27,414   |     |  | 41,588  |   |  | 212,891 |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 6.81                 | %   |                    | 5.96     | %             |  | 6.91     | %   |  | 7.14    | % |  | 7.92    | %
|Fixed rate loans                   |  |                                                                                                                     |       |                   |  | 16,603               |     |                    | 8,010    |               |  | 42,020   |     |  | 198,240 |   |  | 264,873 |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 7.74                 | %   |                    | 6.86     | %             |  | 8.30     | %   |  | 6.44    | % |  | 6.80    | %
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Total loans                        |  |                                                                                                                     |       |                   |  | 148,880              |     |                    | 19,622   |               |  | 69,434   |     |  | 239,828 |   |  | 477,764 |  
|Investments (3)(4)                 |  |                                                                                                                     |       |                   |  | 144,600              |     |                    | 14,384   |               |  | 37,356   |     |  | 161,690 |   |  | 358,030 |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 4.83                 | %   |                    | 4.92     | %             |  | 4.25     | %   |  | 5.36    | % |  | 4.85    | %
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Total rate-sensitive assets        |  |                                                                                                                     |       |                   |  | 371,041              |     |                    | 49,006   |               |  | 106,790  |     |  | 401,518 |   |  | 928,355 |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Deposit accounts (5)               |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Savings and NOW                    |  |                                                                                                                     |       |                   |  | 252,036              |     |                    |         |               |  |         |     |  |        |   |  | 252,036 |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 2.45                 | %   |                    |          |               |  |          |     |  |         |   |  | 3.71    | %
|Money market                       |  |                                                                                                                     |       |                   |  | 27,732               |     |                    |         |               |  |         |     |  |        |   |  | 27,732  |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 1.88                 | %   |                    |          |               |  |          |     |  |         |   |  | 0.68    | %
|Time Deposits                      |  |                                                                                                                     |       |                   |  | 123,615              |     |                    | 329,122  |               |  | 1,255    |     |  | 2,196   |   |  | 456,188 |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 3.27                 | %   |                    | 3.44     | %             |  | 2.55     | %   |  | 1.80    | % |  | 4.81    | %
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Total deposit accounts             |  |                                                                                                                     |       |                   |  | 403,383              |     |                    | 329,122  |               |  | 1,255    |     |  | 2,196   |   |  | 735,956 |  
|Repurchase Agreements              |  |                                                                                                                     |       |                   |  | 13,972               |     |                    |         |               |  |         |     |  | 57,000  |   |  | 70,972  |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 1.97                 | %   |                    |          |               |  |          |     |  | 4.10    | % |  | 4.86    | %
|Other borrowings                   |  |                                                                                                                     |       |                   |  | 177                  |     |                    | 6,253    |               |  | 20,678   |     |  | 42,887  |   |  | 69,995  |  
|                                   |  |                                                                                                                     | (Rate | )                 |  | 2.60                 | %   |                    | 2.90     | %             |  | 5.53     | %   |  | 4.60    | % |  | 5.86    | %
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Total rate-sensitive liabilities   |  |                                                                                                                     |       |                   |  | 417,532              |     |                    | 335,375  |               |  | 21,933   |     |  | 102,083 |   |  | 876,923 |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Interest rate caps                 |  |                                                                                                                     |       |                   |  | 40,000               |     |                    |         |               |  |         |     |  | (40,000 | ) |  |         |  
|Gap (repricing differences)        |  |                                                                                                                     |       |                   |  | (86,491              | )   |                    | (286,369 | )             |  | 84,857   |     |  | 339,435 |   |  | 51,432  |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Cumulative Gap                     |  |                                                                                                                     |       |                   |  | (86,491              | )   |                    | (372,860 | )             |  | (288,003 | )   |  | 51,432  |   |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Cumulative Gap to Total Rate       |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  
|Sensitive Assets                   |  |                                                                                                                     |       |                   |  | (9.32                | ) % |                    | (40.16   | ) %           |  | (31.02   | ) % |  | 5.54    | % |  |         |  
|                                   |  |                                                                                                                     |       |                   |  |                      |     |                    |          |               |  |          |     |  |         |   |  |         |  

|    |                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Adjustable-rate loans are
 included in the period in which the interest rates are next scheduled to
 adjust rather than in the period in which the loans mature. Fixed-rate loans
 are scheduled according to their maturity dates.                                                                                        
|    |                                                                                                                                                                                                                                                                                                                            
|(2) | Includes nonaccrual loans.                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                            
|(3) | Investments are scheduled
 according to their respective repricing (variable rate loans) and maturity
 (fixed rate securities) dates.                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                            
|(4) | Investments are stated at
 book value.                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                            
|(5) | NOW accounts and savings
 accounts are regarded as readily accessible withdrawal accounts. The balances
 in such accounts have been allocated among maturity/repricing periods based
 upon The Berkshire Banks historical experience. All other time accounts are
 scheduled according to their respective maturity dates.

30

---



Provision for Loan Losses.
The allowance for loan losses is the estimated amount considered necessary to
cover credit losses inherent in the loan portfolio at the balance sheet date.
The allowance is established through the provision for loan losses that is
charged against income. In determining the allowance for loan losses,
management makes significant estimates and therefore has identified the
allowance as a critical accounting policy. The methodology for determining the
allowance for loan losses is considered a critical accounting policy by
management due to the high degree of judgment involved, the subjectivity of the
assumptions utilized, and the potential for changes in the economic environment
that could result in changes to the amount of the recorded allowance for loan
losses.

The
allowance for loan losses has been determined in accordance with U.S. GAAP,
principally SFAS No. 5, Accounting for Contingencies and SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, an amendment to FASB
Statements No. 5 and 15, as amended. Under the above accounting principles, we
are required to maintain an allowance for probable losses at the balance sheet
date. We are responsible for the timely and periodic determination of the
amount of the allowance required. Management believes that the allowance for
loan losses is adequate to cover specifically identifiable losses, as well as
estimated losses inherent in our portfolio for which certain losses are
probable but not specifically identifiable.

Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses. The analysis of the allowance for loan losses has two components:
specific and general allocations. Specific allocations are made for loans
determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, as a practical expedient for
collateral-dependent loans, the fair value of the collateral adjusted for
market conditions and selling expenses. The Bank considers its investment in
one-to-four family real estate loans and consumer loans to be smaller balance
homogeneous loans and therefore excluded from separate identification for
evaluation of impairment. These homogeneous loan groups are evaluated for
impairment on a collective basis under SFAS No. 114.

The
general allocation is determined by segregating the remaining loans by type of
loan, risk weighting (if applicable) and payment history. Management also
analyzes historical loss experience, delinquency trends, general economic
conditions, geographic concentrations, and industry and peer comparisons. This
analysis establishes factors that are applied to the loan segments to determine
the amount of the general allocations. This evaluation is inherently subjective
as it requires material estimates that may be susceptible to significant
revisions based upon changes in economic and real estate market conditions.
Actual loan losses may be significantly more than the allowance for loan losses
management has established which could have a material negative effect on the
Companys financial results.

On
a quarterly basis, the Banks management committee reviews the current status
of various loan assets in order to evaluate the adequacy of the allowance for
loan losses. In this evaluation process, specific loans are analyzed to
determine their potential risk of loss. This process includes all loans,
concentrating on non-accrual and classified loans. Each non-accrual or
classified loan is evaluated for potential loss exposure. Any shortfall results
in a recommendation of a specific allowance if the likelihood of loss is
evaluated as probable. To determine the adequacy of collateral on a particular loan,
an estimate of the fair market value of the collateral is based on the most
current appraised value available. This appraised value is then reduced to
reflect estimated liquidation expenses.

31

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As
a substantial amount of our loan portfolio is collateralized by real estate,
appraisals of the underlying value of property securing loans are critical in
determining the amount of the allowance required for specific loans.
Assumptions for appraisal valuations are instrumental in determining the value
of properties. Overly optimistic assumptions or negative changes to assumptions
could significantly impact the valuation of a property securing a loan and the
related allowance determined. The assumptions supporting such appraisals are
carefully reviewed by management to determine that the resulting values
reasonably reflect amounts realizable on the related loans. Based on the
composition of our loan portfolio, management believes the primary risks are
increases in interest rates, a decline in the economy, generally, and a decline
in real estate market values in the New York metropolitan area. Any one or
combination of these events may adversely affect our loan portfolio resulting
in increased delinquencies, loan losses and future levels of loan loss
provisions. Management believes the allowance for loan losses reflects the
inherent credit risk in our portfolio, the level of our non-performing loans
and our charge-off experience. Based upon our analysis, we added $954,000 to
the allowance for loan losses for the nine months ended September 30, 2008.

Although
management believes that we have established and maintained the allowance for
loan losses at adequate levels, additions may be necessary if future economic
and other conditions differ substantially from the current operating
environment. Although management uses the best information available, the level
of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change. In addition, the Federal Deposit
Insurance Corporation, New York State Banking Department, and other regulatory
bodies, as an integral part of their examination process, will periodically
review our allowance for loan losses. Such agencies may require us to recognize
adjustments to the allowance based on its judgments about information available
to them at the time of their examination.

The
following table sets forth information with respect to activity in the Companys
allowance for loan losses during the periods indicated (in thousands, except
percentages):

|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|------------------------------------------------------------------ |  | --------------------------------- | ------- | -------------------------------- | - | ------- | -- | ---- | ------- | - | - | ------- | --
|                                                                   |  | Three Months Ended
 September 30, |         | Nine Months Ended
 September 30, |  
|                                                                   |  |                                   |         |                                  |  
|                                                                   |  | 2008                              |         | 2007                             |   | 2008    |    | 2007 |        
|                                                                   |  |                                   |         |                                  |   |         |    |      |        
|                                                                   |  |                                   |         |                                  |   |         |    |      |        
|Average loans outstanding                                          |  | $                                 | 471,103 |                                  | $ | 385,425 |    | $    | 458,166 |   | $ | 380,628 |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Allowance at beginning of period                                   |  |                                   | 5,052   |                                  |   | 3,928   |    |      | 4,183   |   |   | 3,771   |   
|Charge-offs:                                                       |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Commercial and other loans                                         |  |                                   |        |                                  |   |        |    |      | 1       |   |   |        |   
|Real estate loans                                                  |  |                                   |        |                                  |   |        |    |      |        |   |   |        |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Total loans charged-off                                            |  |                                   |        |                                  |   |        |    |      | 1       |   |   |        |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Recoveries:                                                        |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Commercial and other loans                                         |  |                                   | 5       |                                  |   | 3       |    |      | 71      |   |   | 10      |   
|Real estate loans                                                  |  |                                   |        |                                  |   |        |    |      |        |   |   |        |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Total loans recovered                                              |  |                                   | 5       |                                  |   | 3       |    |      | 71      |   |   | 10      |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Net recoveries (charge-offs)                                       |  |                                   | 5       |                                  |   | 3       |    |      | 70      |   |   | 10      |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Provision for loan losses charged to operating expenses            |  |                                   | 150     |                                  |   | 75      |    |      | 954     |   |   | 225     |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Allowance at end of period                                         |  |                                   | 5,207   |                                  |   | 4,006   |    |      | 5,207   |   |   | 4,006   |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Ratio of net recoveries (charge-offs) to average loans
outstanding |  |                                   | 0.00    | %                                |   | (0.00   | )% |      | 0.02    | % |   | (0.00   | )%
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Allowance as a percent of total loans                              |  |                                   | 1.09    | %                                |   | 1.01    | %  |      | 1.09    | % |   | 1.01    | % 
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   
|Total loans at end of period                                       |  | $                                 | 476,496 |                                  | $ | 398,131 |    | $    | 476,496 |   | $ | 398,131 |   
|                                                                   |  |                                   |         |                                  |   |         |    |      |         |   |   |         |   

32

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Loan Portfolio.

Loan Portfolio Composition. The Companys
loans consist primarily of mortgage loans secured by residential and
non-residential properties as well as commercial loans which are either
unsecured or secured by personal property collateral. Most of the Companys
loans are either made to individuals or personally guaranteed by the principals
of the business to which the loan is made. At September 30, 2008 and December
31, 2007, the Company had loans, net of unearned income, of $476.50 million and
$434.79 million, respectively, and allowances for loan losses of $5.21 million
and $4.18 million, respectively. From time to time, the Bank may originate
residential mortgage loans, sell them on the secondary market, normally
recognizing fee income in connection with the sale.

Interest
rates on loans are affected by the demand for loans, the supply of money
available for lending, credit risks, the rates offered by competitors and other
conditions. These factors are in turn affected by, among other things, economic
conditions, monetary policies of the federal government, and legislative tax
policies.

In
order to manage interest rate risk, the Bank focuses its efforts on loans with
interest rates that adjust based upon changes in the prime rate or changes in
United States Treasury or similar indices. Generally, credit risks on
adjustable-rate loans are somewhat greater than on fixed-rate loans primarily
because, as interest rates rise, so do borrowers payments, increasing the
potential for default. The Bank seeks to impose appropriate loan underwriting
standards in order to protect against these and other credit related risks associated
with its lending operations.

In
addition to analyzing the income and assets of its borrowers when underwriting
a loan, the Bank obtains independent appraisals on all material real estate in
which the Bank takes a mortgage. The Bank generally obtains title insurance in
order to protect against title defects on mortgaged property.

Commercial and Mortgage Loans. The Bank
originates commercial mortgage loans secured by office buildings, retail
establishments, multi-family residential real estate and other types of
commercial property. Substantially all of the properties are located in the New
York City metropolitan area.

The
Bank generally makes commercial mortgage loans with loan to value ratios not to
exceed 75% and with terms to maturity that do not exceed 15 years. Loans
secured by commercial properties generally involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on such
loans are often dependent on successful operation or management of the
properties, repayment may be subject, to a greater extent, to adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks through its underwriting policies. The Bank evaluates the
qualifications and financial condition of the borrower, including credit
history, profitability and expertise, as well as the value and condition of the
underlying property. The factors considered by the Bank include net operating
income; the debt coverage ratio (the ratio of cash net income to debt service);
and the loan to value ratio. When evaluating the borrower, the Bank considers
the financial resources and income level of the borrower, the borrowers
experience in owning or managing similar property and the Banks lending
experience with the borrower. The Banks policy requires borrowers to present
evidence of the ability to repay the loan without having to resort to the sale
of the mortgaged property. The Bank also seeks to focus its commercial mortgage
loans on loans to companies with operating businesses, rather than passive real
estate investors.

Commercial Loans. The Bank makes commercial
loans to businesses for inventory financing, working capital, machinery and
equipment purchases, expansion, and other business purposes. These loans
generally have higher yields than mortgages loans, with maturities of one year,
after which the borrowers financial condition and the terms of the loan are
re-evaluated. At September 30, 2008 and 2007, approximately $79.76 million and
$66.41 million, respectively, or 16.7% and 16.7%, respectively, of the
Companys total loan portfolio consisted of such loans.

33

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Commercial
loans tend to present greater risks than mortgage loans because the collateral,
if any, tends to be rapidly depreciable, difficult to sell at full value and is
often easier to conceal. In order to limit these risks, the Bank evaluates
these loans based upon the borrowers ability to repay the loan from ongoing
operations. The Bank considers the business history of the borrower and
perceived stability of the business as important factors when considering
applications for such loans. Occasionally, the borrower provides commercial or
residential real estate collateral for such loans, in which case the value of
the collateral may be a significant factor in the loan approval process.

Residential Mortgage Loans (1 to 4 family loans).
The Bank makes residential mortgage loans secured by first liens on one-to-four
family owner-occupied or rental residential real estate. At September 30, 2008
and 2007, approximately $143.88 million and $137.68 million, respectively, or
30.1% and 34.6%, respectively, of the Companys total loan portfolio consisted
of such loans. The Bank offers both adjustable rate mortgages (ARMS) and
fixed-rate mortgage loans. The relative proportion of fixed-rate loans versus
ARMs originated by the Bank depends principally upon current customer
preference, which is generally driven by economic and interest rate conditions
and the pricing offered by the Banks competitors. At September 30, 2008 and
2007, approximately 9.7% and 15.7%, respectively, of the Banks residential
one-to-four family owner-occupied first mortgage portfolio were ARMs and
approximately 90.3% and 84.3%, respectively, were fixed-rate loans. The
percentage represented by fixed-rate loans tends to increase during periods of
low interest rates. The ARMs generally carry annual caps and life-of-loan
ceilings, which limit interest rate adjustments.

The
Banks residential loan underwriting criteria are generally comparable to those
required by the Federal National Mortgage Association (FNMA) and other major
secondary market loan purchasers. Generally, ARM credit risks are somewhat
greater than fixed-rate loans primarily because, as interest rates rise, the
borrowers payments rise, increasing the potential for default. The Banks
teaser rate ARMs (ARMs with low initial interest rates that are not based upon
the index plus the margin for determining future rate adjustments) were
underwritten based on the payment due at the fully-indexed rate.

In
addition to verifying income and assets of borrowers, the Bank obtains
independent appraisals on all residential first mortgage loans and title
insurance is required at closing. Private mortgage insurance is required on all
loans with a loan-to-value ratio in excess of 80% and the Bank requires real
estate tax escrows on such loans. Real estate tax escrows are voluntary on
residential mortgage loans with loan-to-value ratios of 80% or less.

Fixed-rate
residential mortgage loans are generally originated by the Bank for terms of 15
to 30 years. Although 30 year fixed-rate mortgage loans may adversely affect
our net interest income in periods of rising interest rates, the Bank
originates such loans to satisfy customer demand. Such loans are generally
originated at initial interest rates which exceed the fully indexed rate on
ARMs offered at the same time. Fixed-rate residential mortgage loans originated
by the Bank generally include due-on-sale clauses, which permit the Bank to
demand payment in full if the borrower sells the property without the Banks
consent.

Due-on-sale
clauses are an important means of adjusting the rates on the Banks fixed-rate
mortgage loan portfolio, and the Bank will generally exercise its rights under
these clauses if necessary to maintain market yields.

ARMs
originated in recent years have interest rates that adjust annually based upon
the movement of the one year treasury bill constant maturity index, plus a
margin of 2.00% to 2.75%. These loans generally have a maximum interest rate
adjustment of 2% per year, with a lifetime maximum interest rate adjustment,
measured from the initial interest rate, of 5.5% or 6.0%.

34

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The
Bank offers a variety of other loan products including residential single
family construction loans to persons who intend to occupy the property upon
completion of construction, home equity loans secured by junior mortgages on
one-to-four family owner-occupied residences, and short-term fixed-rate
consumer loans either unsecured or secured by monetary assets such as bank
deposits and marketable securities or personal property. At September 30, 2008
and 2007, the Companys loan portfolio was comprised of $261.98 million and
$202.28 million, respectively, or 54.8% and 50.8%, respectively, of other loan
products.

Liquidity

The
management of the Companys liquidity focuses on ensuring that sufficient funds
are available to meet loan funding commitments, withdrawals from deposit
accounts, the repayment of borrowed funds, and ensuring that the Bank and the
Company comply with regulatory liquidity requirements. Liquidity needs of the
Bank have historically been met by deposits, investments in federal funds sold,
principal and interest payments on loans, and maturities of investment
securities. In order to maintain liquidity requirements, the Bank may borrow
from the Federal Home Loan Bank of New York and obtain funding from other
sources.

For
the parent company, Berkshire Bancorp Inc., liquidity means having cash
available to fund its operating expenses and to pay stockholder dividends on
its common stock, when and if declared by the Companys Board of Directors. The
ability of the Company to meet these obligations, including the payment of
dividends on its common stock, is not dependent upon the receipt of dividends
from the Bank. At September 30, 2008, the Company had cash of approximately
$11.6 million and investment securities with a fair market value of $6.5
million. Debt service on the Companys Trust Preferred Securities (see Note 2)
has historically been met with dividends from the Bank. We expect that debt
service on the newly issued Preferred Shares (see Note 10) will be similarly
met with dividends from the Bank.

The
Bank maintains financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These
financial instruments, approximately $36.50 million at September 30, 2008,
include commitments to extend credit, stand-by letters of credit and loan
commitments. The Bank also had interest rate caps with a notional amount of
$40.0 million.

At
September 30, 2008, the Bank had outstanding contractual commitments of
approximately $507.53 million; including $47.31 million of long-term debt,
$4.03 million of operating leases, and $456.19 million of time deposits. These
commitments include $460.14 million that mature or renew within one year,
$23.48 million that mature or renew after one year and within three years,
$23.46 million that mature or renew after three years and within five years and
$457,000 that mature or renew after five years.

Impact of Inflation and Changing Prices

The
Companys financial statements measure financial position and operating results
in terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increasing cost of the Companys operations. The assets and
liabilities of the Company are largely monetary. As a result, interest rates
have a greater impact on the Companys performance than do the effects of
general levels of inflation. In addition, interest rates do not necessarily
move in the direction, or to the same extent as the price of goods and
services. However, in general, high inflation rates are accompanied by higher
interest rates, and vice versa.

35

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ITEM 4T -    CONTROLS AND
PROCEDURES

Disclosure Controls and Procedures.

As of the end
of the period covered by this Quarterly Report on Form 10-Q, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934 (Disclosure Controls). This evaluation (Controls
Evaluation) was done under the supervision and with the participation of the
Companys management, including the Chief Executive Officer (CEO), who is
also the Chief Financial Officer (CFO). Based upon the Controls Evaluation,
the CEO/CFO has concluded that the Disclosure Controls are effective in
reaching a reasonable level of assurance that information required to be
disclosed by the Company is recorded, processed, summarized and reported within
the time period specified in the SECs rules and forms and that any material
information relating to the Company is accumulated and communicated with
management, including its principal executive/financial officer to allow timely
decisions regarding required disclosure.

Changes in Internal Control over Financial
Reporting.

In accordance
with SEC requirements, the CEO/CFO notes that during the fiscal quarter ended
September 30, 2008, no changes in the Companys Internal Control (as defined
below) have occurred that have materially affected or are reasonably likely to
materially affect the Companys Internal Control.

Limitations on the Effectiveness of Controls.

The Companys
management, including the CEO/CFO, does not expect that its Disclosure Controls
and/or its internal control over financial reporting as defined in Rule
13(a)-15(f) of the Securities Exchange Act of 1934 (Internal Control) will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.

Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

36

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PART II. OTHER INFORMATION

Item 6.     Exhibits

|                |  |                                                                                                                               
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description                                                                                                                   
|                |  |                                                                                                                               
|                |  |                                                                                                                               
|31              |  | Certification
 of Principal Executive Officer and Financial Officer pursuant to Section 302
 of The Sarbanes-Oxley Act of 2002
|               
|32              |  | Certification
 of Principal Executive Officer and Financial Officer pursuant to Section 906
 of The Sarbanes-Oxley Act of 2002

37

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SIGNATURES

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

|      |                    |     |                        | 
|----- | ------------------ | --- | ---------------------- | 
|      |                    |     | BERKSHIRE BANCORP INC. | 
|      |                    |     | (Registrant)           | 
|      |                    |     |                       
|      |                    |     |                       
|Date: | November 13,
 2008 | By: | /s/ Steven
 Rosenberg 
|      |                    |     |                       
|      |                    |     | Steven Rosenberg      
|      |                    |     | President and Chief   
|      |                    |     | Financial Officer     

38

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EXHIBIT INDEX

|                |  |                                                                                                                               
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description                                                                                                                   
|                |  |                                                                                                                               
|                |  |                                                                                                                               
|31              |  | Certification
 of Principal Executive Officer and Financial Officer pursuant to Section 302
 of The Sarbanes-Oxley Act of 2002
|                |  |                                                                                                                               
|32              |  | Certification
 of Principal Executive Officer and Financial Officer pursuant to Section 906
 of The Sarbanes-Oxley Act of 2002

39

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