<PAGE>

                                  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 ended September 30, 2004

                                       or

[ ]  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                               (I.R.S. Employer
 incorporation or organization)                              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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of November 5, 2004, there were 6,748,675 outstanding shares of the issuers
Common Stock, $.10 par value.




<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES

                           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
Company's actual results and experiences 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, 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, and other factors referred to in the
sections of this Quarterly Report entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

     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




<PAGE>

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

                                      INDEX

<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>       <C>                                                              <C>
PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements

          Consolidated Balance Sheets as of
          September 30, 2004 (unaudited) and
          December 31, 2003                                                 4

          Consolidated Statements of Income
          For The Three and Nine Months Ended
          September 30, 2004 and 2003 (unaudited)                           5

          Consolidated Statement of Stockholders'
          Equity For The Nine Months Ended
          September 30, 2004 (unaudited)                                    6

          Consolidated Statements of Cash Flows
          For The Nine Months Ended September 30,
          2004 and 2003 (unaudited)                                         7

          Notes to Consolidated Financial Statements                        9

Item 2.   Management's Discussion and Analysis
          of Financial Condition and Results
          of Operations                                                    19

Item 3.   Quantitative and Qualitative Disclosure
          About Market Risk                                                25

Item 4.   Controls and Procedures                                          31

PART II OTHER INFORMATION

Item 6.   Exhibits                                                         32

Signature                                                                  33

Index of Exhibits                                                          34
</TABLE>


                                        3




<PAGE>

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

<TABLE>
<CAPTION>
                                                  September 30,   December 31,
                                                      2004            2003
                                                  -------------   ------------
<S>                                                 <C>             <C>
ASSETS
Cash and due from banks                             $  6,383        $  7,478
Interest bearing deposits                              1,204           1,832
Federal funds sold                                     7,600              --
                                                    --------        --------
Total cash and cash equivalents                       15,187           9,310
Investment Securities:
   Available-for-sale                                638,549         569,137
   Held-to-maturity                                      641             711
                                                    --------        --------
Total investment securities                          639,190         569,848
Loans, net of unearned income                        288,221         294,756
   Less: allowance for loan losses                    (2,866)         (2,593)
                                                    --------        --------
Net loans                                            285,355         292,163
Accrued interest receivable                            5,726           5,298
Premises and equipment, net                            8,719           8,665
Other assets                                           5,719           1,836
Goodwill, net                                         18,549          18,549
                                                    --------        --------
Total assets                                        $978,445        $905,669
                                                    ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
   Non-interest bearing                             $ 38,760        $ 38,422
   Interest bearing                                  583,302         565,833
                                                    --------        --------
Total deposits                                       622,062         604,255
Securities sold under agreements to repurchase       142,615         114,391
Long term borrowings                                  86,201          77,745
Subordinated debt                                     15,464              --
Accrued interest payable                               2,723           2,208
Other liabilities                                      2,919           3,580
                                                    --------        --------
Total liabilities                                    871,984         802,179
                                                    --------        --------
Stockholders' equity
   Preferred stock - $.10 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, 2004, 6,733,755 shares
         December 31, 2003,  6,614,094 shares            770             256
Additional paid-in capital                            89,574          89,866
Retained earnings                                     27,284          22,960
Accumulated other comprehensive
   income (loss), net                                 (1,920)            775
   Common stock in treasury - at cost:
   September 30, 2004, 964,530 shares
   December 31, 2003,  1,084,191 shares               (9,247)        (10,367)
                                                    --------        --------
Total stockholders' equity                           106,461         103,490
                                                    --------        --------
                                                    $978,445        $905,669
                                                    ========        ========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        4




<PAGE>

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

<TABLE>
<CAPTION>
                                          For The             For The
                                    Three Months Ended   Nine Months Ended
                                       September 30,       September 30,
                                    ------------------   -----------------
                                       2004     2003       2004      2003
                                     -------   ------    -------   -------
<S>                                  <C>       <C>       <C>       <C>
INTEREST INCOME
Loans                                $ 4,652   $4,786    $14,097   $14,250
Investment securities                  5,601    3,777     15,408    11,145
Federal funds sold and
   interest bearing deposits              23       58         35        84
                                     -------   ------    -------   -------
Total interest income                 10,276    8,621     29,540    25,479
                                     -------   ------    -------   -------
INTEREST EXPENSE
Deposits                               2,448    2,517      7,294     7,712
Short-term borrowings                    641      153      1,720       429
Long-term borrowings                   1,014      662      2,605     1,974
                                     -------   ------    -------   -------
Total interest expense                 4,103    3,332     11,619    10,115
                                     -------   ------    -------   -------
Net interest income                    6,173    5,289     17,921    15,364
PROVISION FOR LOAN LOSSES                 45       45        135       195
                                     -------   ------    -------   -------
Net interest income after
   provision for loan losses           6,128    5,244     17,786    15,169
                                     -------   ------    -------   -------
NON-INTEREST INCOME
Service charges on deposits              139      134        380       489
Investment securities gains              173      183        315     2,302
Other income                             143      163        429       477
                                     -------   ------    -------   -------
Total non-interest income                455      480      1,124     3,268
                                     -------   ------    -------   -------
NON-INTEREST EXPENSE
Salaries and employee benefits         1,670    1,413      4,865     4,139
Net occupancy expense                    453      432      1,129     1,262
Equipment expense                         90       81        258       292
FDIC assessment                           37       21         83        59
Data processing expense                   48       35        126       148
Other                                    828    1,111      2,799     2,632
                                     -------   ------    -------   -------
Total non-interest expense             3,126    3,093      9,260     8,532
                                     -------   ------    -------   -------
Income before provision for taxes      3,457    2,631      9,650     9,905
Provision for income taxes             1,489    1,223      4,250     4,447
                                     -------   ------    -------   -------
Net income                           $ 1,968   $1,408    $ 5,400   $ 5,458
                                     =======   ======    =======   =======
Net income per share:
   Basic                             $   .29   $  .21    $   .81   $   .82
                                     =======   ======    =======   =======
   Diluted                           $   .29   $  .21    $   .79   $   .81
                                     =======   ======    =======   =======
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        5




<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                  For The Nine Months Ended September 30, 2004
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                               Accumulated
                                           Stock  Additional      other                                             Total
                                   Common   Par     paid-in   comprehensive  Retained  Treasury  Comprehensive  stockholders'
                                   Shares  value    capital    (loss), net   earnings   stock        income         equity
                                   ------  -----  ----------  -------------  --------  --------  -------------  -------------
<S>                                 <C>    <C>     <C>           <C>         <C>       <C>          <C>           <C>
Balance at December 31, 2003        2,566  $ 256   $89,866       $   775     $22,960   $(10,367)                  $103,490

Net income                                                                     5,400                  5,400          5,400
Exercise of stock options                              (59)                               1,189                      1,130
Acquisition of treasury shares                                                              (69)                       (69)
Effect of reverse one-for-ten
   stock split                     (2,309)  (230)     (233)                                                           (463)
Effect of thirty-for-one
   stock dividend                   7,441    744                                (744)
Other comprehensive (loss) net
   of reclassification adjustment
   and taxes                                                      (2,695)                            (2,695)        (2,695)
                                                                                                    -------
Comprehensive income                                                                                $ 2,705
                                                                                                    =======
Cash dividends                                                                  (332)                                 (332)
                                    -----  -----   -------       -------     -------   --------                   --------
Balance at September 30, 2004
(Unaudited)                         7,698  $ 770   $89,574       $(1,920)    $27,284   $ (9,247)                  $106,461
                                           =====   =======       =======     =======   ========                   ========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                        6




<PAGE>

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

<TABLE>
<CAPTION>
                                                        For The Nine Months Ended
                                                              September 30,
                                                        -------------------------
                                                            2004          2003
                                                        -----------   -----------
<S>                                                     <C>           <C>
      Cash flows from operating activities:

Net income                                              $     5,400   $     5,458
Adjustments to reconcile net income to net
   cash provided by operating activities:
Realized gains on investment securities                        (315)       (2,302)
Net amortization of premiums of investment securities         2,064           863
Depreciation and amortization                                   430           465
Provision for loan losses                                       135           195
(Increase) in accrued interest receivable                      (428)       (1,196)
(Increase) in other assets                                   (3,210)       (1,511)
(Decrease) in accrued interest payable
   and other liabilities                                       (146)       (1,406)
                                                        -----------   -----------
   Net cash provided by operating activities                  3,930           566
                                                        -----------   -----------
      Cash flows from investing activities:

Investment securities available for sale
   Purchases                                             (1,290,294)   (1,605,540)
   Sales, maturities and calls                            1,216,438     1,485,877
Investment securities held to maturity
   Maturities                                                    70            97
Net (increase) decrease in loans                              6,673       (18,774)
Purchase of premises and equipment                             (484)         (267)
                                                        -----------   -----------
Net cash (used in) investing activities                     (67,597)     (138,607)
                                                        -----------   -----------
</TABLE>


                                        7




<PAGE>

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

<TABLE>
<CAPTION>
                                                    For The Nine Months Ended
                                                          September 30,
                                                    -------------------------
                                                         2004       2003
                                                       --------   --------
<S>                                                    <C>        <C>
      Cash flows from financing activities:

Net increase in non interest bearing deposits               338      3,460
Net increase in interest bearing deposits                17,469     99,473
Increase in securities sold under agreements
   to repurchase                                         28,224     27,461
Proceeds from long term debt                             22,000      7,831
Repayment of long term debt                             (13,544)        --
Proceeds from issuance of subordinated debentures        14,791         --
Acquisition of treasury stock                               (69)    (1,111)
Proceeds from exercise of common stock options            1,130        129
Cash paid for fractional shares                            (463)        --
Dividends paid                                             (332)      (265)
                                                       --------   --------
Net cash provided by financing activities                69,544    136,978
                                                       --------   --------
      Net increase (decrease) in cash                     5,877     (1,063)
      Cash - beginning of period                          9,310      6,310
                                                       --------   --------
      Cash - end of period                             $ 15,187   $  5,247
                                                       ========   ========
Supplemental cash flow information:
      Cash used to pay interest                        $ 11,104   $ 11,196
      Cash used to pay taxes, net of refunds           $  4,464   $  3,621
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        8




<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           September 30, 2004 and 2003

NOTE 1. General

     Berkshire Bancorp Inc. ("Berkshire" or the "Company" or "we" and similar
pronouns), a Delaware corporation, is a bank holding company registered under
the Bank Holding Company Act of 1956. Berkshire's principal activity is the
ownership and management of its wholly owned subsidiary, The Berkshire Bank (the
"Bank"), a New York State chartered commercial bank.

     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 and Greater American
Finance Group, Inc.

     During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended December 31, 2003 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.

     In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of September 30, 2004 and December 31, 2003 and the
consolidated results of its operations for the three and nine month periods
ended September 30, 2004 and 2003, and its consolidated stockholders' equity for
the nine month period ended September 30, 2004, and its consolidated cash flows
for the nine month periods ended September 30, 2004 and 2003. As discussed in
Note 2 below, all weighted average share and per share information in 2003 has
been retroactively restated to reflect the stock split and stock dividend.

NOTE 2. Stock Split and Stock Dividend

     At the Annual Meeting of Stockholders held on May 18, 2004, the Company's
stockholders approved an amendment to the Company's Certificate of Incorporation
effecting a one-for-ten reverse stock split of the Company's issued and
outstanding Common Stock (the "Reverse Split"). Following the effectiveness of
the Reverse Split, the Company's Board of Directors declared a thirty-for-one
forward stock split in the form of a 3,000% stock dividend in Common Stock (the
"Stock Dividend) which became effective immediately. The Company paid out
approximately $463,000 to purchase fractional shares from stockholders as part
of the Reverse Split. The Company's Common Stock began trading on May 19, 2004
giving effect to these transactions.

NOTE 3. 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 "Debentures") issued by the Company.
The Debentures, the sole assets of BCTI, mature on July 23, 2034 and bear
interest at a floating rate, three month LIBOR plus a margin of 2.70%.


                                        9




<PAGE>

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

NOTE 3. - (continued)

     Based on current interpretations of the banking regulators, 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 under the preferred capital
securities sold by BCTI to investors.

     Management has determined that BCTI qualifies as a variable interest entity
under FASB Interpretation 46 (FIN 46) Consolidation of Variable Interest
Entities, as revised. Subsequent to the issuance of FIN 46 in January 2003, the
FASB issued a revised interpretation, FIN 46(R) Consolidation of Variable
Interest Entities, the provisions of which were to be applied to certain
variable interest entities by March 31, 2004.

     The Company adopted the provisions under the revised interpretation in the
first quarter of 2004. Accordingly, the Company does not consolidate BCTI as of
September 30, 2004. The Company's investment in the common stock of BCTI is
included in other assets as of September 30, 2004. In addition, the income
received on the Company's common stock investment in BCTI is included in other
income. The adoption of FIN 46(R)) did not have a material impact on the
financial position or results of operations of the Company. The Federal Reserve
has issued proposed guidance on the regulatory capital treatment for the
trust-preferred securities issued by BCTI as a result of the adoption of FIN
46(R). The proposed 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, 2007; however, a three 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
the proposed rule and does not anticipate a material impact on its capital
ratios when the proposed rule is finalized.


                                       10




<PAGE>

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

NOTE 4. Earnings Per Share

     Basic earnings 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. The following table
presents the calculation of earnings per share for the periods indicated:

<TABLE>
<CAPTION>
                                                          For The Three Months Ended
                                 ---------------------------------------------------------------------------
                                          September 30, 2004                     September 30, 2003
                                 ------------------------------------   ------------------------------------
                                                                 Per                                    Per
                                    Income         Shares       share      Income         Shares       share
                                 (numerator)   (denominator)   amount   (numerator)   (denominator)   amount
                                 -----------   -------------   ------   -----------   -------------   ------
                                                    (In thousands, except per share data)
<S>                                 <C>            <C>          <C>        <C>            <C>          <C>
Basic earnings per share
   Net income available to
      common stockholders           $1,968         6,688        $.29       $1,408         6,627        $.21
Effect of dilutive securities
   options                              --           132         .--           --           120         .--
                                    ------         -----        ----       ------         -----        ----
Diluted earnings per share
   Net income available to
      common stockholders plus
      assumed conversions           $1,968         6,820        $.29       $1,408         6,747        $.21
                                    ======         =====        ====       ======         =====        ====
</TABLE>

<TABLE>
<CAPTION>
                                                          For The Nine Months Ended
                                 ---------------------------------------------------------------------------
                                          September 30, 2004                     September 30, 2003
                                 ------------------------------------   ------------------------------------
                                                                 Per                                    Per
                                    Income         Shares       share      Income         Shares       share
                                 (numerator)   (denominator)   amount   (numerator)   (denominator)   amount
                                 -----------   -------------   ------   -----------   -------------   ------
                                                    (In thousands, except per share data)
<S>                                 <C>            <C>          <C>        <C>            <C>          <C>
Basic earnings per share
   Net income available to
      common stockholders           $5,400         6,647        $.81       $5,458         6,648        $.82
Effect of dilutive securities
   options                              --           184         .02           --            93         .01
                                    ------         -----        ----       ------         -----        ----
Diluted earnings per share
   Net income available to
      common stockholders plus
      assumed conversions           $5,400         6,831        $.79       $5,458         6,741        $.81
                                    ======         =====        ====       ======         =====        ====
</TABLE>

     Options to purchase 121,125 shares of common stock for $38.00 per share
were outstanding during the nine month periods ended September 30, 2003. These
options were not included in the computation of diluted earnings per share
because the option exercise price was greater than the average market price for
the Company's common stock during this period.


                                       11




<PAGE>

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

NOTE 5. Investment Securities

     The following tables summarize held to maturity and available-for-sale
investment securities as of September 30, 2004 and December 31, 2003:

<TABLE>
<CAPTION>
                                          September 30, 2004
                             -------------------------------------------
                                            Gross        Gross
                             Amortized   unrealized   unrealized    Fair
                                Cost        gains       losses     value
                             ---------   ----------   ----------   -----
                                            (In thousands)
<S>                             <C>          <C>         <C>        <C>
Held To Maturity
Investment Securities

U.S. Government Agencies        $641         $13         $(1)       $653
                                ----         ---         ---        ----
   Totals                       $641         $13         $(1)       $653
                                ====         ===         ===        ====
</TABLE>

<TABLE>
<CAPTION>
                                           December 31, 2003
                             -------------------------------------------
                                            Gross        Gross
                             Amortized   unrealized   unrealized    Fair
                                Cost        gains       losses     value
                             ---------   ----------   ----------   -----
                                            (In thousands)
<S>                             <C>          <C>          <C>       <C>
Held To Maturity
Investment Securities

U.S. Government Agencies        $711         $4           $--       $715
                                ----        ---           ---       ----
   Totals                       $711         $4           $--       $715
                                ====        ===           ===       ====
</TABLE>

<TABLE>
<CAPTION>
                                            September 30, 2004
                             ----------------------------------------------
                                            Gross        Gross
                             Amortized   unrealized   unrealized     Fair
                                Cost        gains       losses       value
                             ---------   ----------   ----------   --------
                                            (In thousands)
<S>                           <C>          <C>         <C>         <C>
Available-For-Sale
Investment Securities

U.S. Treasury and Notes       $ 19,913     $   --      $   (79)    $ 19,834
U.S. Government Agencies       479,100        613       (3,518)     476,195
Mortgage-backed securities     104,982        500         (939)     104,543
Corporate notes                 30,736        588         (676)      30,648
Municipal Securities             1,307         --          (14)       1,293
Marketable equity
   securities and other          5,917        197          (78)       6,036
                              --------     ------      -------     --------
   Totals                     $641,955     $1,898      $(5,304)    $638,549
                              ========     ======      =======     ========
</TABLE>


                                       12




<PAGE>

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

NOTE 5. - (continued)

<TABLE>
<CAPTION>
                                               December 31, 2003
                                ----------------------------------------------
                                               Gross        Gross
                                Amortized   unrealized   unrealized     Fair
                                   Cost        gains       losses       value
                                ---------   ----------   ----------   --------
                                                 (In thousands)
<S>                              <C>          <C>         <C>         <C>
Available-For-Sale
Investment securities

U.S. Treasury and Notes          $ 39,941     $   --      $   (94)    $ 39,847
U.S. Government Agencies          419,175        637       (3,059)     416,753
Mortgage-backed securities         93,875      3,838         (265)      97,448
Corporate Notes                     1,570        214         (122)       1,662
Municipal securities                  991         70           --        1,061
Marketable equity
   securities and other            12,305        177         (116)      12,366
                                 --------     ------      -------     --------
   Totals                        $567,857     $4,936      $(3,656)    $569,137
                                 ========     ======      =======     ========
</TABLE>

NOTE 6. Loan Portfolio

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

<TABLE>
<CAPTION>
                                    September 30, 2004   December 31, 2003
                                    ------------------   -----------------
                                                 % of                % of
                                      Amount    Total     Amount    Total
                                     --------   -----    --------   -----
                                            (Dollars in thousands)
<S>                                  <C>        <C>      <C>        <C>
Commercial and professional loans    $ 16,925     5.8%   $ 22,228     7.5%
Secured by real estate
   1-4 family                         158,531    54.7     169,589    57.4
   Multi family                         7,142     2.5       6,608     2.2
   Non-residential (commercial)       104,933    36.3      94,956    32.1
Consumer                                2,011     0.7       2,239     0.8
                                     --------   -----    --------   -----
Total loans                           289,002   100.0%    295,620   100.0%
                                                =====               =====
Deferred loan fees                       (781)               (864)
Allowance for loan losses              (2,866)             (2,593)
                                     --------            --------
Loans, net                           $285,355            $292,163
                                     ========            ========
</TABLE>


                                       13




<PAGE>

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

NOTE 7. Deposits

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

<TABLE>
<CAPTION>
                       September 30, 2004    December 31, 2003
                       ------------------   ------------------
                        Average   Average    Average   Average
                        Amount     Yield      Amount    Yield
                       --------   -------   --------   -------
                                (Dollars in thousands)
<S>                    <C>         <C>      <C>         <C>
Demand deposits        $ 37,864      --     $ 32,592      --
NOW and money market     47,761    0.65%      58,723    1.02%
Savings deposits        217,473    1.52      143,094    1.95
Time deposits           316,817    1.94      333,112    2.26
                       --------    ----     --------    ----
Total deposits         $619,915    1.57%    $567,521    1.78%
                       ========    ====     ========    ====
</TABLE>

NOTE 8. Comprehensive Income

     The following table presents the components of comprehensive income, based
on the provisions of SFAS No. 130.:

<TABLE>
<CAPTION>
                                                          For The Nine Months Ended
                                  -------------------------------------------------------------------------
                                           September 30, 2004                    September 30, 2003
                                  -----------------------------------   -----------------------------------
                                                  Tax                                   Tax
                                  Before tax   (expense)   Net of tax   Before tax   (expense)   Net of tax
                                    amount      benefit      Amount       amount      benefit      amount
                                  ----------   ---------   ----------   ----------   ---------   ----------
                                                                 (In thousands)
<S>                                <C>          <C>         <C>          <C>           <C>        <C>
Unrealized (losses) gains on
   investment securities:

   Unrealized holding
      gains (losses) arising
      during period                $(4,807)     $1,923      $(2,884)     $(6,167)      $2,467     $(3,700)

   Less reclassification
      adjustment for gains
      realized in net income           315        (126)         189        2,302         (921)      1,381
                                   -------      ------      -------      -------       ------     -------
Other comprehensive (loss), net    $ 4,492)     $1,797      $(2,695)     $(3,865)      $1,546     $(2,319)
                                   =======      ======      =======      =======       ======     =======
</TABLE>


                                       14




<PAGE>

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

NOTE 9. Accounting For Stock Based Compensation

     SFAS No. 148 "Accounting for Stock Based Compensation-Transition and
Disclosure", which amends the disclosure and certain provisions of SFAS No. 123,
was issued in December 2002. SFAS No. 148 requires all entities with stock based
employee compensation arrangements to provide additional disclosures in their
summary of significant accounting policies note. The Company has one stock-based
employee compensation plan. The Company accounts for that plan under the
recognition and measurement principles of APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation costs are not reflected in net income, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of the grant. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                               For The
                                                         Three Months Ended
                                                            September 30,
                                                         ------------------
                                                            2004     2003
                                                           ------   ------
                                                           (In thousands,
                                                          except per share
                                                              amounts)
<S>                                       <C>              <C>      <C>
Net income                                As Reported:     $1,968   $1,408

Less: Stock based compensation costs
   determined under fair value methods
   for all awards                                              --       --
                                                           ------   ------
                                          Pro Forma:       $1,968   $1,408
                                                           ======   ======

Basic earnings per share                  As Reported:     $  .29   $  .21
                                          Pro Forma:          .29      .21

Diluted earnings per share                As Reported:     $  .29   $  .21
                                          Pro Forma:          .29      .21
</TABLE>

<TABLE>
<CAPTION>
                                                              For The
                                                         Nine Months Ended
                                                           September 30,
                                                         -----------------
                                                           2004     2003
                                                          ------   ------
                                                          (In thousands,
                                                         except per share
                                                              amounts)
<S>                                       <C>             <C>      <C>
Net income                                As Reported:    $5,400   $5,458

Less: Stock based compensation costs
   determined under fair value methods
   for all awards                                             --       --
                                                          ------   ------
                                          Pro Forma:      $5,400   $5,458
                                                          ======   ======

Basic earnings per share                  As Reported:    $  .81   $  .82
                                          Pro Forma:         .81      .82

Diluted earnings per share                As Reported:    $  .79   $  .81
                                          Pro Forma:         .79      .81
</TABLE>

     The Company did not grant options during the three and nine months ended
September 30, 2004 and 2003.


                                       15




<PAGE>

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

NOTE 9. - (continued)

     On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
is currently evaluating this proposed statement and its effects on its results
of operations.

NOTE 10. Employee Benefit Plans

     The Company has a Retirement Income Plan (the "Plan"), a noncontributory
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 FASB Statement 132(R). (The dollar amounts in the following
table are not in thousands.)

<TABLE>
<CAPTION>
                                    For The               For The
                              Three Months Ended     Nine Months Ended
                                 September 30,         September 30,
                             -------------------   --------------------
                               2004       2003        2004       2003
                             --------   --------   ---------   --------
<S>                          <C>        <C>        <C>         <C>
Service cost                 $ 62,640   $ 48,791   $ 181,280   $146,373
Interest cost                  30,750     26,803      90,250     80,409
Expected return on
   plan assets                (37,550)   (30,871)   (112,600)   (92,613)
Amortization and Deferral:
   Transition amount               --         --          --         --
   Prior service cost           4,625      4,593      13,750     13,779
   (Gain)/loss                  5,350      6,210      13,700     18,630
Net periodic pension cost      65,815     55,526     186,380    166,578
</TABLE>

     During the fiscal year ending December 31, 2004, we expect to contribute
approximately $60,000 to the Plan. We are, however, evaluating the impact of the
Pension Funding Equity Act enacted in April 2004 on our projected funding. We
did not make any contributions, required or otherwise, to the Plan in the three
and nine months ended September 30, 2004.


                                       16




<PAGE>

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

NOTE 11. New Accounting Pronouncements

Loan Commitments Accounted for as Derivative Instruments

     The Securities and Exchange Commission staff recently released Staff
Accounting Bulletin (SAB) 105, "Loan Commitments Accounted for as Derivative
Instruments." SAB 105 provides guidance about the measurement of loan
commitments recognized at fair value under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. SAB 105 also requires
companies to disclose their accounting policy for those loan commitments
including methods and assumptions used to estimate fair value and associated
hedging strategies. SAB 105 is effective for all loan commitments accounted for
as derivatives that are entered into after March 31, 2004. The adoption of SAB
105 is not expected to have a material effect on our consolidated financial
statements.

Stock Option

     On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. On October
13, 2004, FASB voted to delay the adoption of this proposed standard by public
companies until their first fiscal quarter beginning after June 15, 2005. The
Company is currently evaluating this proposed statement and its effects on its
results of operations.

Other-Than-Temporary Impairment - EITF 03-1

     In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued
EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure provisions of EITF 03-1 were effective for years ending after
December 15, 2003 and were included in the Company's 2003 Form 10-K. In March
2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of
EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to
investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a
three-step approach for determining whether an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss. In September 2004, the FASB issued a proposed Staff
Position, EITF Issue 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF 03-1. In September
2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No.
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, 'The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments,'
delays the effective date of certain provisions of EITF Issue


                                       17




<PAGE>

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

Note 11. - (continued)

03-1, including steps two and three of the Issue's three-step approach for
determining whether an investment is other-than-temporarily impaired. However,
step one of that approach must still be initially applied for impairment
evaluations in reporting periods beginning after June 15, 2004. The delay of the
effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with
the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance
for the Application of Paragraph 16 of EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
Company is in the process of determining the impact that this EITF will have on
its financial statements.


                                       18




<PAGE>

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. References herein to
"Berkshire", the "Company" or "we" and similar pronouns, shall be deemed to
refer to the Company and its consolidated subsidiaries unless the context
otherwise requires. References to per share amounts refer to diluted shares.
References to per share amounts for the three and nine months ended September
30, 2003 have been revised to reflect the one-for-ten reverse stock split and
thirty-for-one forward stock split in the form of a 3000% stock dividend which
occurred on May 18, 2004 (see Note 2). References to Notes herein are references
to the "Notes to Consolidated Financial Statements" of the Company located in
Item 1 herein.

Critical Accounting Policies, Judgments and Estimates

     The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and the
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 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 each defined reporting unit. 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. As of December 31, 2003, the Company completed its transitional testing,
which determined that no impairment write-offs were 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.


                                       19




<PAGE>

     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.

<TABLE>
<CAPTION>
                                                   For The Three Months Ended September 30,
                                    ---------------------------------------------------------------------
                                                  2004                                2003
                                    ---------------------------------   ---------------------------------
                                                Interest                            Interest
                                     Average      and        Average     Average      and        Average
                                     Balance   Dividends   Yield/Rate    Balance   Dividends   Yield/Rate
                                    --------   ---------   ----------   --------   ---------   ----------
                                                            (Dollars in Thousands)
<S>                                 <C>         <C>           <C>       <C>          <C>          <C>
INTEREST-EARNING ASSETS:
Loans (1)                           $289,476    $ 4,652       6.43%     $283,944     $4,786       6.74%
Investment securities                628,530      5,601       3.56       467,063      3,777       3.23
Other (2)(5)                           7,443         23       1.24         2,925         58       7.93
                                    --------    -------       ----       -------     ------       ----
Total interest-earning assets        925,449     10,276       4.44       753,932      8,621       4.57
                                                              ----                                ----
Noninterest-earning assets            43,303                              35,949
                                    --------                            --------
Total Assets                        $968,752                            $789,881
                                    ========                            ========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits            272,840        955       1.40%      206,632        716       1.39%
Time deposits                        309,465      1,493       1.93       326,852      1,801       1.84
Other borrowings                     238,319      1,655       2.78       113,993        815       2.87
                                    --------    -------       ----      --------     ------       ----
Total interest-bearing
   liabilities                       820,624      4,103       2.00       647,477      3,332       2.06
                                                -------       ----                   ------       ----
Demand deposits                       39,048                              31,579
Noninterest-bearing liabilities        7,094                               6,792
Stockholders' equity (5)             101,986                             104,033
                                    --------                            --------
Total liabilities and
   stockholders' equity             $968,752                            $789,881
                                    ========                            ========
Net interest income                               6,173                               5,289
                                                =======                              ======
Interest-rate spread (3)                                      2.44%                               2.51%
                                                              ====                                ====
Net interest margin (4)                                       2.67%                               2.81%
                                                              ====                                ====
Ratio of average interest-earning
   assets to average interest
   bearing liabilities                  1.13                                1.16
                                    ========                            ========
</TABLE>

----------
(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.


                                       20




<PAGE>

<TABLE>
<CAPTION>
                                                   For The Nine Months Ended September 30,
                                    ---------------------------------------------------------------------
                                                   2004                                2003
                                    ---------------------------------   ---------------------------------
                                                Interest                            Interest
                                     Average      and        Average     Average      and        Average
                                     Balance   Dividends   Yield/Rate    Balance   Dividends   Yield/Rate
                                    --------   ---------   ----------   --------   ---------   ----------
                                                            (Dollars in Thousands)
<S>                                 <C>         <C>           <C>       <C>         <C>           <C>
INTEREST-EARNING ASSETS:
Loans (1)                           $292,139    $14,097       6.43%     $278,077    $14,250       6.83%
Investment securities                614,828     15,408       3.34       426,708     11,145       3.48
Other (2)(5)                           4,239         35       1.10         4,558         84       2.49
                                    --------    -------       ----      --------    -------       ----
Total interest-earning assets        911,206     29,540       4.32       709,343     25,479       4.79
                                                              ----                                ----
Noninterest-earning assets            39,465                              36,640
                                    --------                            --------
Total Assets                        $950,671                            $745,983
                                    ========                            ========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits            265,234      2,704       1.36%      177,569      1,833       1.38%
Time deposits                        316,817      4,590       1.93       322,109      5,879       2.43
Other borrowings                     214,077      4,325       2.69       106,445      2,403       3.01
                                    --------    -------       ----      --------    -------       ----
Total interest-bearing
   liabilities                       796,128     11,619       1.95       606,123     10,115       2.23
                                                -------       ----                  -------       ----
Demand deposits                       37,864                              30,737
Noninterest-bearing liabilities       13,007                               8,265
Stockholders' equity (5)             103,672                             100,858
                                    --------                            --------
Total liabilities and
   stockholders' equity             $950,671                            $745,983
                                    ========                            ========
Net interest income                              17,921                              15,364
                                                =======                             =======
Interest-rate spread (3)                                      2.37%                               2.56%
                                                              ====                                ====
Net interest margin (4)                                       2.62%                               2.89%
                                                              ====                                ====
Ratio of average interest-earning
   assets to average interest
   bearing liabilities                  1.14                                1.17
                                    ========                            ========
</TABLE>

----------
(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




<PAGE>

Results of Operations

Results of Operations for the Three and Nine Months Ended September 30, 2004
Compared to the Three and Nine Months Ended September 30, 2003.

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

Net Income. Net income for the three-month period ended September 30, 2004 was
$1.97 million, or $.29 per share, as compared to $1.41 million, or $.21 per
share, for the three-month period ended September 30, 2003. Net income for the
nine-month period ended September 30, 2004 was $5.40 million, or $.79 per share,
as compared to $5.46 million, or $.81 per share, for the nine-month period ended
September 30, 2003.

     Our net income is largely dependent on interest rate levels, the demand for
our loan and deposit products and the strategies we employ to manage the
interest rate risks inherent in the banking business. From June 2003 through
June 2004, interest rates, as measured by the prime rate, remained constant at
4.00%. In July, August and September of 2004, inflation fighting actions taken
by the Federal Reserve Board resulted in three 25 basis point increases in the
prime rate to its current level of 4.75%, the first such increases in more than
four years. During the remaining three months of our fiscal year ending December
31, 2004, we believe that the cost of attracting and retaining deposited funds
will be an increasing expense in the highly competitive banking industry.

Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets such as
loans and investment securities, and interest expense on interest-bearing
liabilities such as deposits and borrowings.

     For the quarter ended September 30, 2004, net interest income increased by
$884,000, or 16.71%, to $6.17 million from $5.29 million for the quarter ended
September 30, 2003. The quarter over quarter increase in net interest income was
the result of the 22.75% growth in average interest-earning assets to $925.45
million from $753.93 million, the difference between the yield on assets
compared to the cost of liabilities, and the $7.47 million, or 23.65% increase
in non interest-bearing demand deposits to $39.05 million from $31.58 million.
Partially offsetting these factors was the 26.74% increase in average
interest-bearing liabilities to $820.62 million in the 2004 quarter from $647.48
million in the 2003 quarter.

     For the quarter ended September 30, 2004, the average yield on the average
balance of total interest-earning assets continued to trend lower, as it has for
the past several years. The yield declined to 4.44% in the 2004 quarter from
4.57% in the 2003 quarter, a decline of 13 basis points or 2.84%. Following a
similar pattern, the average cost of the average balance of interest-bearing
liabilities fell to 2.00% from 2.06%, a decline of 6 basis points, or 2.91%. The
interest rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
which has a direct impact on net interest income, declined by 7 basis points to
2.44% from 2.51%.

     For the nine-month period ended September 30, 2004, net interest income
increased by $2.56 million, or 16.64%, to $17.92 million from $15.36 million for
the nine-month period ended September 30, 2003. The period over period increase
in net interest income was the result of the 28.46% growth in average
interest-earning assets to $911.21 million in the 2004 period from $709.34
million in the 2003 period and the difference between the yield on assets
compared to the cost


                                       22




<PAGE>

of liabilities. In the first nine months of fiscal year 2004, the average yield
on average balances of total interest-earning assets declined by 47 basis
points, or 9.81%, to 4.32% from 4.79% in the first nine months of fiscal year
2003. The average cost of the average balance of interest-bearing liabilities
declined by 28 basis points, or 12.56%, to 1.95% in the 2004 period from 2.23%
in the 2003 period. The interest rate spread declined by 19 basis points to
2.37% in 2004 from 2.56% in 2003. The increase in net interest income in 2004
compared to 2003 was partially offset by the 31.35% growth in the average
balances of interest-bearing liabilities to $796.13 million from $606.12
million.

Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined by 14 basis points to
2.67% in the three months ended September 30, 2004 from 2.81% in the three
months ended September 30, 2003, and declined by 27 basis points to 2.62% in the
nine-month period of 2004 from 2.89% in the nine-month period of 2003. We seek
to secure and retain customer deposits with competitive products and rates, and
to make 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 a prudent mix of loans, investment securities and short-term
interest-earning assets which provided an average yield of 4.44% and 4.32%,
respectively, in the three and nine months ended September 30, 2004, compared to
4.57% and 4.79%, respectively, in the three and nine months ended September 30,
2003.

     For the three months ended September 30, 2004, total average
interest-earnings assets were $925.45 million compared to $753.93 million for
the three months ended September 30, 2003. In the third quarter of 2004, the
average amounts of loans and investment securities increased by $5.53 million
and $161.47 million, respectively, to $289.48 million and $628.53 million,
respectively, from $283.94 million and $467.06 million, respectively, in the
third quarter of 2003. The average yield on loans declined to 6.43% from 6.74%,
and the average yield on investment securities increased to 3.56% in 2004 from
3.23% in 2003.

     For the nine months ended September 30, 2004, total average
interest-earning assets were $911.21 million compared to $709.34 million for the
nine months ended September 30, 2003. The average amounts of loans and
investment securities increased by $14.06 million and $188.12 million,
respectively, to $292.14 million and $614.83 million, respectively. The average
yield on loans and investment securities declined to 6.43% and 3.34%,
respectively, during the 2004 period from 6.83% and 3.48%, respectively, during
the 2003 period.

Interest Income. Total interest income for the quarter ended September 30, 2004
increased by $1.66 million, or 19.20%, to $10.28 million from $8.62 million for
the quarter ended September 30, 2003. The increase was primarily due to higher
average balances and yields on investments securities, offset by the declining
yields on the loan portfolio. The loan portfolio yielded 6.43% and contributed
$4.65 million, or 45.27% of total interest income in the 2004 quarter, compared
to a yield of 6.74% on loans in the year ago quarter and interest income of
$4.79 million, or 55.52% of total interest income in the 2003 quarter.
Investment securities yielded 3.56% and contributed $5.60 million, or 54.51% of
total interest income in the 2004 quarter, compared to a yield of 3.23% on
investment securities and interest income of $3.78 million, or 43.81% of total
interest income in the 2003 quarter.

     Total interest income for the nine-month period ended September 30, 2004
increased by $4.06 million, or 15.94%, to $29.54 million from $25.48 million for
the nine-month period ended September 30, 2003. The increase was due to higher
average balances of loans and investments securities, offset by the declining
yields on such interest-earning assets. The loan portfolio yielded 6.43% and
contributed $14.10 million, or 47.72% of total interest income during the nine-
month period of 2004, compared to a yield of 6.83% on loans in the year ago nine
months and interest income of $14.25 million, or 55.93% of total interest
income. Investment securities yielded 3.34% and contributed $15.41 million, or
52.16% of


                                       23




<PAGE>

total interest income during the nine-month period ended September 30, 2004,
compared to a yield of 3.48% on investment securities and interest income of
$11.15 million, or 43.74% of total interest income during the nine-month period
ended September 30, 2003.

     Loans, which are inherently risky and therefore command a higher return
than our conservative portfolio of investment securities, have declined as a
percentage of total average interest-earning assets. During the first nine
months of fiscal year 2004, the average balances of the Company's loan portfolio
and investment securities represented 32.06% and 67.47%, respectively, of total
average interest-earning assets, compared to 39.20% and 60.16%, respectively,
during the first nine months of fiscal year 2003.

Interest Expense. Total interest expense for the quarter ended September 30,
2004 increased by $771,000, or 23.14%, to $4.10 million from $3.33 million for
the quarter ended September 30, 2003. The increase in total interest expense was
primarily due to the $173.15 million, or 26.74%, increase in the average balance
of total interest-bearing liabilities, partially offset by the decline in the
average rate paid on such balance, 2.00% in 2004 compared to 2.06% in 2003. The
average amount of interest-bearing deposits, excluding time deposits, increased
by $66.21 million. Time deposits decreased by $17.39 million and borrowed funds
increased by $124.33 million.

     Total interest expense for the nine-month period ended September 30, 2004
increased by $1.50 million, or 14.87%, to $11.62 million in the 2004 period from
$10.12 million in the 2003 period. The increase in total interest expense was
due to the 31.35% increase in average interest-bearing liabilities to $796.13
million from $606.12 million, substantially offset by the 12.56% decline in the
average rates paid on such liabilities, 1.95% and 2.23%, respectively in 2004
and 2003. If interest rates trend higher, as is widely expected, our cost to
attract and retain deposits, and our cost of borrowed funds will increase as
well.

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, 2004, total non-interest income decreased to $455,000
and $1.12 million, respectively, from $480,000 and $3.27 million for the three
and six months ended September 30, 2003, respectively. In 2003, we recorded nine
month gains of $2.30 million on the sales and issuer redemptions of investment
securities. In 2004, such gains amounted to $315,000. Service charges on deposit
accounts declined to $380,000 in the nine months of 2004 from $489,000 in the
nine months of 2003. The decline is primarily due marketing efforts introducing
new deposit products, which includes the waiver of such fees for a period of
time to attract new customers.

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, 2004 was $3.13 million and $9.26 million, respectively, compared
to $3.09 million and $8.53 million, respectively, for the same periods in 2003.
In July 2004, we settled a cancelled lease agreement for the Bank's former
headquarters in an amount which was less than the full amount remaining on the
lease, but $175,000 more than we had accrued. This additional amount was
recorded in other non-interest expense as of June 30, 2004 to reflect the amount
paid.

     Salaries and employee benefits increased by $726,000, or 17.54%, to $4.87
million in the nine months ended September 30, 2004 from $4.14 million in the
nine months ended September 30, 2003. The increase is due to the additional
staffing of our two new Brooklyn branches which opened in April and June of 2003
and the addition of personnel in our internal control and compliance
departments.


                                       24




<PAGE>

Provision for Income Tax. During the three and nine-month periods ended
September 30, 2004, the Company recorded income tax expense of $1.49 million and
$4.25 million, respectively, compared to $1.34 million and $4.32 million,
respectively, for the three and nine-month periods ended September 30, 2003. The
tax provisions for federal, state and local taxes recorded for the first nine
months of 2004 and 2003 represent effective tax rates of 44.04% and 44.90%,
respectively.

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 December 31, 2003, the Company has purchased a total of 1,844,646
shares of its Common Stock. At September 30, 2004, there were 551,091 shares of
Common Stock which may yet be purchased under our stock repurchase plan. The
following table sets forth information with respect to such purchases during the
periods indicated.

Fiscal Year 2004

<TABLE>
<CAPTION>
                   Number of     Average Price
                     Shares         Paid Per
                   Purchased         Share
                   ---------   ------------------
<S>                  <C>             <C>
January              4,263           $16.33
February - March        --               --
April - June            --               --
July - September        --               --
</TABLE>

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 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.

     As additional interest rate management strategy, the Bank borrows funds
from the Federal Home Loan Bank, approximately $86.2 million at September 30,
2004, at fixed rates for a period of one to five years.


                                       25




<PAGE>

     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.

     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:

<TABLE>
<CAPTION>
                                                        Berkshire Bancorp Inc.
                                          Interest Rate Sensitivity Gap at September 30, 2004
                                                (in thousands, except for percentages)
                                       --------------------------------------------------------
                                       3 Months    3 Through    1 Through      Over
                                        or Less    12 Months     3 Years     3 Years     Total
                                       --------    ---------    ---------    -------    -------
<S>                           <C>      <C>          <C>          <C>         <C>        <C>
Federal funds sold                        7,600           --           --         --      7,600
                              (Rate)       1.77%                                           1.77
Interest bearing deposits
   in banks                               1,204           --           --         --      1,204
                              (Rate)       0.81%                                           0.81%
Loans (1)(2)
Adjustable rate loans                    46,522       17,895        7,924     16,474     88,815
                              (Rate)       6.16%        4.17%        7.18%      6.59%      5.93%
Fixed rate loans                          5,273        4,052       11,592    179,270    200,187
                              (Rate)       7.33%        5.62%        6.67%      6.31%      6.34%
                                       --------     --------     --------    -------    -------
Total loans                              51,795       21,947       19,516    195,744    289,002
Investments (3)(4)                       34,100       16,051      182,989    406,050    639,190
                              (Rate)       2.76%        2.30%        2.86%      4.30%      3.76%
                                       --------     --------     --------    -------    -------
Total rate-sensitive assets              87,099       37,998      202,505    601,794    929,396
                                       --------     --------     --------    -------    -------
Deposit accounts (5)
Savings and NOW                         254,786           --           --         --    254,786
                              (Rate)       1.51%                                           1.51%
Money market                             25,740           --           --         --     25,740
                              (Rate)       0.67%                                           0.67%
Time Deposits                           129,215      133,489       37,992      2,080    302,776
                              (Rate)       1.74%        1.91%        2.61%      1.97%      1.93%
                                       --------     --------     --------    -------    -------
Total deposit accounts                  409,741      133,489       37,992      2,080    583,302
Repurchase Agreements                    72,790       31,825       38,000         --    142,615
                              (Rate)       1.54%        1.84%        2.82%                 1.95%
Other borrowings                             --        1,000       37,260     63,405    101,665
                              (Rate)                    5.90%        3.64%      3.97%      3.82%
                                       --------     --------     --------    -------    -------
Total rate-sensitive
   liabilities                          482,531      166,314      113,252     65,485    827,582
                                       --------     --------     --------    -------    -------
Interest rate caps                       25,000       (5,000)      (5,000)   (15,000)
Gap (repricing differences)            (420,432)    (123,316)      94,253    551,309    101,814
                                       ========     ========     ========    =======    =======
Cumulative Gap                         (420,432)    (543,748)    (449,495)   101,814
                                       ========     ========     ========    =======
Cumulative Gap to Total
   Rate Sensitive Assets                 (45.24)%     (58.51)%     (48.36)%    10.95%
                                       ========     ========     ========    =======
</TABLE>

----------
(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.


                                       26




<PAGE>

Provision for Loan Losses. The Company maintains an allowance for loan losses at
a level deemed sufficient to absorb losses, which are inherent in the loan
portfolio at each balance sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the provision for loan
losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management's assessment of
probable estimated losses. The Company's methodology for assessing the
appropriateness of the allowance for loan losses consists of several key
elements. These elements include a specific allowance for loan watch list
classified loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated portion. The Company
consistently applies the following comprehensive methodology.

     The allowance for loan watch list classified loans addresses those loans
maintained on the Company's loan watch list, which are assigned a rating of
substandard, doubtful, or loss. Substandard loans are those with a well-defined
weakness or a weakness, which jeopardizes the repayment of the debt. A loan may
be classified as substandard as a result of impairment of the borrower's
financial condition and repayment capacity. Loans for which repayment plans have
not been met or collateral equity margins do not protect the Company may also be
classified as substandard. Doubtful loans have the characteristics of
substandard loans with the added characteristic that collection or liquidation
in full, on the basis of presently existing facts and conditions, is highly
improbable. Although the possibility of loss is extremely high for doubtful
loans, the classification of loss is deferred until pending factors, which might
improve the loan, have been determined. Loans rated as doubtful in whole or in
part are placed in nonaccrual status. Loans, which are classified as loss, are
considered uncollectible and are charged to the allowance for loan losses.

     For the three and nine months ended September 30, 2004, the Company did not
charge-off any loans, compared to charge-offs amounting to $13,000 and $15,000,
respectively, for the three and nine months ended September 30, 2003.

     Loans on the loan watch list may also be impaired loans, which are defined
as nonaccrual loans or troubled debt restructurings, which are not in compliance
with their restructured terms. Each of the classified loans on the loan watch
list is individually analyzed to determine the level of the potential loss in
the loan under the current circumstances. The specific reserve established for
these criticized and impaired loans is based on careful analysis of the loan's
performance, the related collateral value, cash flow considerations and the
financial capability of any guarantor. The allowance for loan watch list
classified loans is equal to the total amount of potential unconfirmed losses
for the individual classified loans on the watch list. Loan watch list loans are
managed and monitored by assigned Senior Management.

     The allowance based on historical trends uses charge-off experience of the
Company to estimate potential unconfirmed losses in the balances of the loan and
lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.

     The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.


                                       27




<PAGE>

     Since all identified losses are immediately charged off, no portion of the
allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.

     A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.

     At September 30, 2004, the Company had a total of $537,000 of non-accrual
or non-performing loans, and no loans past due more than 90 days and still
accruing interest. At September 30, 2003, the Company had a total of $59,000 of
non-accrual or non-performing loans, and no loans past due more than 90 days and
still accruing interest. Based upon management's evaluations of the overall
analysis of the Bank's allowance for loan losses, economic factors and the
change in total loans to $288.22 million from $295.02 million, the provision for
the nine months ended September 30, 2004 was increased to $2.87 million from
$2.50 million in the year ago period.

     Management believes that the allowance for loan losses and nonperforming
loans remains safely within acceptable levels.

     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):

<TABLE>
<CAPTION>
                                         Three Months Ended    Nine Months Ended
                                           September 30,         September 30,
                                        -------------------   -------------------
                                          2004       2003       2004       2003
                                        --------   --------   --------   --------
<S>                                     <C>        <C>        <C>        <C>
Average loans outstanding               $289,476   $283,944   $292,139   $278,077
                                        ========   ========   ========   ========
Allowance at beginning of period           2,709      2,468      2,593      2,315
Charge-offs:
   Commercial and other loans                 --         --          1          2
   Real estate loans                          --         13         --         13
                                        --------   --------   --------   --------
      Total loans charged-off                 --         13          1         15
                                        --------   --------   --------   --------
Recoveries:
   Commercial and other loans                112          3        139          8
   Real estate loans                          --         --         --         --
                                        --------   --------   --------   --------
      Total loans recovered                  112          3        139          8
                                        --------   --------   --------   --------
      Net recoveries (charge-offs)           112        (10)       139         (7)
                                        --------   --------   --------   --------
Provision for loan losses
   charged to operating expenses              45         45        135        195
                                        --------   --------   --------   --------
Allowance at end of period                 2,866      2,503      2,866      2,503
                                        --------   --------   --------   --------
Ratio of net recoveries (charge-offs)
   to average loans outstanding             0.00%      0.00%      0.00%      0.00%
                                        ========   ========   ========   ========
Allowance as a percent of total loans       0.99%      0.85%      0.99%      0.85%
                                        ========   ========   ========   ========
Total loans at end of period            $288,221   $295,019   $288,221   $295,019
                                        ========   ========   ========   ========
</TABLE>


                                       28




<PAGE>

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 commercial loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made. At September 30, 2004, the Company had total gross loans of
$282.89 million and an allowance for loan losses of $2.87 million. From time to
time, the Bank may originate residential mortgage loans and then sell them on
the secondary market, normally recognizing fee income in connection with the
sale. For the three and nine-month periods ended September 30, 2004, the Company
sold approximately $579,000 and $4.21 million, respectively, of such loans and
recorded in other income, gains of $12,000 and $81,000, respectively, on such
sales.

     The following tables set forth information concerning the Company's loan
portfolio by type of loan at the dates indicated:

<TABLE>
<CAPTION>
                                    September 30,   December 31,
                                         2004           2003
                                    -------------   ------------
                                        Amount         Amount
                                    -------------   ------------
                                           (in thousands)
<S>                                   <C>             <C>
Commercial and professional loans     $ 16,925        $ 22,228
Secured by real estate
   1-4 family                          158,531         169,589
   Multi family                          7,142           6,608
   Non-residential (commercial)        104,393          94,956
Consumer                                 2,011           2,239
                                      --------        --------
Total loans                            282,885         295,620
Less:
   Deferred loan fees                     (781)           (864)
   Allowance for loan losses            (2,866)         (2,593)
                                      --------        --------
Loans, net                            $285,355        $292,163
                                      ========        ========
</TABLE>

     It is the Bank's policy to discontinue accruing interest on a loan when it
is 90 days past due or if management believes that continued interest accruals
are unjustified. The Bank may continue interest accruals if a loan is more than
90 days past due if the Bank determines that the nature of the delinquency and
the collateral are such that collection of the principal and interest on the
loan in full is reasonably assured. When the accrual of interest is
discontinued, all accrued but unpaid interest is charged against current period
income. Once the accrual of interest is discontinued, the Bank records interest
as and when received until the loan is restored to accruing status. If the Bank
determines that collection of the loan in full is in reasonable doubt, then
amounts received are recorded as a reduction of principal until the loan is
returned to accruing status. At September 30, 2004 and 2003, the Company had no
loans past due more than 90 days and still accruing interest.


                                       29




<PAGE>

Capital Adequacy

     Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and Tier I capital (as defined) to average assets (as defined). As of
September 30, 2004, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain certain
Total risk-based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since the notification that management believes have
changed the Bank's category.

     The following tables set forth the actual and required regulatory capital
amounts and ratios of the Company and the Bank as of September 30, 2004 and
December 31, 2003 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                     To be well
                                                                                 capitalized under
                                                                For capital      prompt corrective
                                                Actual       adequacy purposes   action provisions
                                           ---------------   -----------------   -----------------
                                            Amount   Ratio    Amount    Ratio     Amount    Ratio
                                           -------   -----    ------   -------    ------   ------
<S>                                        <C>       <C>      <C>       <C>       <C>      <C>
September 30, 2004

Total Capital (to Risk-Weighted Assets)
   Company                                 108,162    29.0%   29,817    >=8.0%        --     N/A
   Bank                                     81,165   23.04    28,177    >=8.0%    35,221   >=10.0%
Tier I Capital (to Risk-Weighted Assets)
   Company                                 105,296    28.3%   14,908    >=4.0%        --     N/A
   Bank                                     78,299    22.2%   14,089    >=4.0%    21,133    >=6.0%
Tier I Capital (to Average Assets)
   Company                                 105,296    11.1%   37,285    >=4.0%        --     N/A
   Bank                                     78,299     8.4%   37,118    >=4.0%    46,397    >=5.0%
</TABLE>

<TABLE>
<CAPTION>
                                                                                     To be well
                                                                                 capitalized under
                                                                For capital      prompt corrective
                                                Actual       adequacy purposes   action provisions
                                           ---------------   -----------------   -----------------
                                            Amount   Ratio    Amount    Ratio     Amount    Ratio
                                           -------   -----   -------   -------    ------   ------
<S>                                        <C>        <C>    <C>        <C>       <C>      <C>
December 31, 2003

Total Capital (to Risk-Weighted Assets)
   Company                                 $86,759    26.1%  $26,630    >=8.0%        --     N/A
   Bank                                     60,675    19.1%   25,417    >=8.0%    31,772   >=10.0%
Tier I Capital (to Risk-Weighted Assets)
   Company                                  84,166    25.3%   13,315    >=4.0%        --     N/A
   Bank                                     58,082    18.3%   12,709    >=4.0%    19,063    >=6.0%
Tier I Capital (to Average Assets)
   Company                                  84,166    10.7%   31,410    >=4.0%        --     N/A
   Bank                                     58,082     7.0%   33,391    >=4.0%    41,739    >=5.0%
</TABLE>


                                       30




<PAGE>

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.

     For the Company, liquidity means having cash available to fund operating
expenses, to pay shareholder dividends, when and if declared by the Company's
Board of Directors and to pay the interest on the Debentures issued in May 2004.
The ability of the Company to meet all of its obligations, including the payment
of dividends, is not dependent upon the receipt of dividends from the Bank. At
September 30, 2004, the Company, excluding the Bank, had cash and cash
equivalents of $7.57 million and investment securities available for sale of
$7.78 million.

     The Company 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 include commitments to extend credit and stand-by
letters of credit.

     At September 30, 2004, the Company had outstanding commitments of
approximately $16.59 million. These commitments include $10.70 million that
mature or renew within one year, $3.62 million that mature or renew after one
year and within three years, $278,000 that mature or renew after three years and
within five years and $1.99 million that mature or renew after five years.

     The Company currently has one unconsolidated subsidiary, Berkshire Capital
Trust I, which was established in May 2004.

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.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of the Company's Disclosure Controls and Internal Control. 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").


                                       31




<PAGE>

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.

Conclusions. Based upon the Controls Evaluation, the CEO/CFO has concluded that,
subject to the limitations noted above, 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 Securities and Exchange Commission's rules and
forms. In accordance with SEC requirements, the CEO/CFO notes that during the
fiscal quarter ended September 30, 2004, no changes in Internal Control have
occurred that have materially affected or are reasonably likely to materially
affect Internal Control.

PART II. OTHER INFORMATION

Item 6. Exhibits

a.   Exhibits

<TABLE>
<CAPTION>
Exhibit
Number    Description
-------   -----------
<S>            <C>
31        Certification of Principal Executive and Financial Officer pursuant to
          Section 302 Of The Sarbanes-Oxley Act of 2002.

32        Certification of Principal Executive and Financial Officer pursuant to
          Section 906 Of The Sarbanes-Oxley Act of 2002.
</TABLE>


                                       32




<PAGE>

                                   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 8, 2004                       By: /s/ Steven Rosenberg
                                                 -------------------------------
                                                 Steven Rosenberg
                                                 President and Chief
                                                 Financial Officer


                                       33




<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit                                                               Sequential
 Number   Description                                                Page Number
-------   -----------                                                -----------
<S>       <C>                                                             <C>
31        Certification of Principal Executive and Financial              35
          Officer pursuant to Section 302 Of The Sarbanes-Oxley
          Act of 2002.

32        Certification of Principal Executive and Financial              36
          Officer pursuant to Section 906 Of The Sarbanes-Oxley
          Act of 2002.
</TABLE>


                                       34



                          STATEMENT OF DIFFERENCE

The greater-than-or-equal-to sign shall be expressed as..................     >=