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

                                    FORM 10-Q

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES ACT OF 1934

               For the Quarterly period ended: September 30, 2006

|_|   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: 0-28815

                     FIRST LITCHFIELD FINANCIAL CORPORATION
                     --------------------------------------
             (Exact name of Registrant as specified in its Charter)

            Delaware                                            06-1241321
            --------                                            ----------
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation of organization)                            Identification No.)

     13 North Street, Litchfield, CT                              06759
     -------------------------------                              -----
(Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code: (860) 567-8752

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 past 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.

                          Yes |X|         No |_|

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer |_|    Accelerated filer |_|   Non-accelerated filer |X|

Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).

                          Yes |_|         No |X|

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common equity,  as of the latest  practicable  date:  2,151,648 shares of Common
Stock, par value $.01 per share, were outstanding at November 13, 2006.


                                       1
<PAGE>

                     FIRST LITCHFIELD FINANCIAL CORPORATION
                                    FORM 10-Q
                                      INDEX

<TABLE>
<CAPTION>
                                                                                         Page
                                                                                         ----
<S>                                                                                       <C>
Part I - Financial Information

Item 1 - Financial Statements

        Consolidated Balance Sheets - September 30, 2006 and
        December 31, 2005 (unaudited) .................................................    3

        Consolidated Statements of Income - Three and nine months ended
        September 30, 2006 and 2005 (unaudited) .......................................    4

        Consolidated Statements of Comprehensive Income - Nine months ended
        September 30, 2006 and 2005 (unaudited) .......................................    5

        Consolidated Statements of Cash Flows - Nine months ended
        September 30, 2006 and 2005 (unaudited) .......................................    6

        Notes to Consolidated Financial Statements  (unaudited) .......................    7

        Item 2 - Management's Discussion and Analysis of Financial Condition
         and Results of Operations ....................................................   15

        Item 3 - Quantitative and Qualitative Disclosures about Market Risk ...........   26

        Item 4 - Controls and Procedures ..............................................   27

Part II - Other Information

        Item 1 - Legal Proceedings ....................................................   27

        Item 1A - Risk Factors ........................................................   28

        Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ..........   28

        Item 3 - Defaults upon Senior Securities ......................................   28

        Item 4 - Submission of Matters to a Vote of Security Holders ..................   28

        Item 5 - Other Information ....................................................   28

        Item 6 - Exhibits .............................................................   28

Signatures ............................................................................   29
</TABLE>


                                       2
<PAGE>

                         Part 1 - FINANCIAL INFORMATION
                         ------------------------------

Item 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)                                                        September 30,           December 31,
                                                                                                    2006                   2005
                                                                                               -------------          -------------
<S>                                                                                            <C>                    <C>
ASSETS
   Cash and due from banks                                                                     $  17,601,493          $  18,711,537
                                                                                               -------------          -------------

   Securities:
     Available for sale securities, at fair value                                                180,354,646            182,900,358
     Held to maturity securities (fair value $42,720-2006 and $47,933-2005)                           43,353                 49,035
                                                                                               -------------          -------------
                                                       TOTAL SECURITIES                          180,397,999            182,949,393
                                                                                               -------------          -------------

   Federal Home Loan Bank stock, at cost                                                           4,201,200              4,201,200
   Federal Reserve Bank stock, at cost                                                               225,850                225,850
   Other restricted stock, at cost                                                                    80,000                 50,000

   Loans Receivable, net of allowance for loan losses of
                 $2,028,162 -2006, $1,759,611-2005
                                                              NET LOANS                          280,511,257            240,681,739

   Premises and equipment, net                                                                     5,319,342              4,247,328
   Deferred income taxes                                                                           1,682,132              1,812,116
   Accrued interest receivable                                                                     3,015,866              2,349,092
   Cash surrender value of insurance                                                               9,543,073              9,263,737
   Other assets                                                                                    4,349,068              3,068,954
                                                                                               -------------          -------------

                                                           TOTAL ASSETS                        $ 506,927,280          $ 467,560,946
                                                                                               =============          =============
LIABILITIES
   Deposits:
     Noninterest bearing                                                                       $  64,550,101          $  66,907,502
     Interest bearing                                                                            263,645,312            210,962,859
                                                                                               -------------          -------------
                                                         TOTAL DEPOSITS                          328,195,413            277,870,361
                                                                                               -------------          -------------

   Federal Home Loan Bank advances                                                                69,950,000             73,616,000
   Repurchase agreements with financial institutions                                              60,200,000             66,700,000
   Repurchase agreements with customers                                                            8,710,579              9,974,172
   Junior subordinated debt issued by unconsolidated trusts                                       10,104,000              7,011,000
   Due to broker for security purchases                                                                   --              3,675,373
   Accrued expenses and other liabilities                                                          2,639,932              2,744,303
                                                                                               -------------          -------------

                                                      TOTAL LIABILITIES                          479,799,924            441,591,209
                                                                                               -------------          -------------
SHAREHOLDERS' EQUITY
   Preferred stock $.00001 par value; 1,000,000 shares authorized, no shares
     outstanding
   Common stock $.01 par value
     Authorized - 5,000,000 shares
     2006 - Issued - 2,259,679 shares, outstanding - 2,151,648 shares
     2005 - Issued - 2,246,815 shares, outstanding - 2,136,370 shares                                 22,597                 22,468
   Capital surplus                                                                                23,248,385             22,995,010
   Retained earnings                                                                               7,079,967              6,443,479
   Less: Treasury stock at cost- 108,031 shares-2006, 110,445 shares-2005                           (685,756)              (701,061)
   Accumulated other comprehensive loss-net unrealized loss
     on available for sale securities (net of taxes)                                              (2,537,837)            (2,790,159)
                                                                                                                      -------------
                                             TOTAL SHAREHOLDERS' EQUITY                           27,127,356             25,969,737
                                                                                               -------------          -------------

                             TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $ 506,927,280          $ 467,560,946
                                                                                               =============          =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

<TABLE>
<CAPTION>
                                                               Three Months Ended September 30,     Nine Months Ended September 30,
                                                                    2006              2005              2006                2005
                                                                ------------      ------------      ------------       ------------
<S>                                                             <C>               <C>               <C>                <C>
INTEREST AND DIVIDEND INCOME
   Interest and fees on loans                                   $  4,593,334      $  3,782,396      $ 12,499,654       $ 10,541,848

   Interest and dividends on securities:
      Mortgage-backed                                                860,908           806,893         2,552,789          2,798,590
      US Treasury and other                                          768,500           602,667         2,208,251          1,793,384
      State & municipal securities                                   339,953           216,159         1,077,220            608,900
      Corporate bonds & other securities                             187,013            52,001           462,047            152,930
   Other interest income                                              26,016             8,054            37,891             17,157
                                                                ------------      ------------      ------------       ------------
   TOTAL INTEREST AND DIVIDEND INCOME                              6,775,724         5,468,170        18,837,852         15,912,809
                                                                ------------      ------------      ------------       ------------

INTEREST EXPENSE
   Interest on deposits:
      Savings                                                        167,442            28,240           217,078             87,762
      Money market                                                   633,707           233,156         1,295,217            709,486
      Time certificates of deposit in denominations
          of $100,000 or more                                        450,914           214,188           943,658            565,855
      Other time certificates of deposit                             743,088           384,253         1,990,109          1,073,429
                                                                ------------      ------------      ------------       ------------
                     TOTAL INTEREST ON DEPOSITS                    1,995,151           859,837         4,446,062          2,436,532
   Interest on Federal Home Loan Bank advances                       658,756           363,923         1,980,636          1,005,447
   Interest on repurchase agreements                                 741,643           600,269         2,291,254          1,517,165
   Interest on subordinated debt                                     203,195           114,634           481,100            317,058
                                                                ------------      ------------      ------------       ------------
                         TOTAL INTEREST EXPENSE                    3,598,745         1,938,663         9,199,052          5,276,202
                                                                ------------      ------------      ------------       ------------
                            NET INTEREST INCOME                    3,176,979         3,529,507         9,638,800         10,636,607
PROVISION FOR LOAN LOSSES                                            105,000           109,371           315,000            310,617
                                                                ------------      ------------      ------------       ------------
                      NET INTEREST INCOME AFTER
                      PROVISION FOR LOAN LOSSES                    3,071,979         3,420,136         9,323,800         10,325,990
                                                                ------------      ------------      ------------       ------------
NONINTEREST INCOME
   Banking service charges and fees                                  333,691           277,617           892,114            745,778
   Trust                                                             273,944           230,154           815,816            705,640
   Losses on the sales of available
     for sale securities                                                  --                --           (17,633)           (44,076)
   Other                                                             128,129           247,925           417,439            560,085
                                                                ------------      ------------      ------------       ------------
                       TOTAL NONINTEREST INCOME                      735,764           755,696         2,107,736          1,967,427
                                                                ------------      ------------      ------------       ------------
NONINTEREST EXPENSE
   Salaries                                                        1,395,681         1,235,631         3,955,687          3,501,464
   Employee benefits                                                 333,825           309,751         1,063,746          1,022,712
   Computer services                                                 241,925           242,818           717,429            666,939
   Net occupancy                                                     245,627           171,330           701,882            525,550
   Equipment                                                         140,557           115,422           375,637            322,660
   Advertising                                                       163,482           180,289           496,210            357,546
   Commissions, services and fees                                    110,811            82,478           371,962            211,078
   Supplies                                                           46,931            32,489           130,441            115,749
   Postage                                                            35,517            29,336           107,526             94,229
   Legal fees                                                         48,327            32,397           195,169            127,385
   Directors fees                                                     41,025            34,530           115,375            108,295
   Other                                                             427,043           446,406         1,379,468          1,302,068
                                                                ------------      ------------      ------------       ------------
                     TOTAL NONINTEREST EXPENSES                    3,230,751         2,912,877         9,610,532          8,355,675
                                                                ------------      ------------      ------------       ------------
                     INCOME BEFORE INCOME TAXES                      576,992         1,262,955         1,821,004          3,937,742
PROVISION FOR INCOME TAXES                                            76,594           334,654           221,803          1,066,049
                                                                ------------      ------------      ------------       ------------
                                     NET INCOME                 $    500,398      $    928,301      $  1,599,201       $  2,871,693
                                                                ============      ============      ============       ============
INCOME PER SHARE
                     BASIC NET INCOME PER SHARE                 $       0.23      $       0.43      $       0.74       $       1.34
                                                                ============      ============      ============       ============
                   DILUTED NET INCOME PER SHARE                 $       0.23      $       0.43      $       0.74       $       1.33
                                                                ============      ============      ============       ============

   Dividends Per Share                                          $       0.15      $       0.14      $       0.45       $       0.42
                                                                ============      ============      ============       ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       4
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

<TABLE>
<CAPTION>
Three months ended September 30,                                                         2006                 2005
                                                                                     -----------          -----------
<S>                                                                                  <C>                  <C>
Net income                                                                           $   500,398          $   928,301
Unrealized holding gains (losses) on securities:
   Unrealized holding gains (losses) arising during the period, net of taxes           2,537,453           (1,014,597)
                                                                                     -----------          -----------

Comprehensive income (loss)                                                          $ 3,037,851          $   (86,296)
                                                                                     ===========          ===========

<CAPTION>
Nine months ended September 30,                                                          2006                 2005
                                                                                     -----------          -----------
<S>                                                                                  <C>                  <C>
Net income                                                                           $ 1,599,201          $ 2,871,693
Unrealized holding gains (losses) on securities:
   Unrealized holding gains (losses) arising during the period, net of taxes             252,322             (975,247)
                                                                                     -----------          -----------

Comprehensive income                                                                 $ 1,851,523          $ 1,896,446
                                                                                     ===========          ===========
</TABLE>

See Notes to Consolidated Financial Statements


                                       5
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended September 30,
                                                                                         2006                   2005
                                                                                     ------------           ------------
<S>                                                                                  <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                           $  1,599,201           $  2,871,693
Adjustments to reconcile net income to net cash (used in)
  provided by operating activities:
       Amortization and accretion of premiums and discounts
          on investment securities, net                                                   158,615                294,292
       Provision for loan losses                                                          315,000                310,617
       Depreciation and amortization                                                      353,888                301,565
       Losses on sale of available for sale securities                                     17,633                 44,076
       Gains on sale of loans                                                              (2,620)                    --
       Gain on sale of repossessed assets                                                    (159)                    --
       (Gain) loss on disposals of bank premises and equipment                               (100)                 1,744
       Increase in accrued interest receivable                                           (666,774)              (249,159)
       Increase in other assets                                                        (1,119,936)               (85,983)
       Increase in cash surrender value of insurance                                     (254,586)              (279,252)
       Increase in deferred loan origination costs                                        (36,822)               (72,873)
       (Decrease) increase in amount due to broker for security purchases              (3,675,373)             6,225,933
       (Decrease) increase in accrued expenses and other liabilities                      (37,591)               193,794
                                                                                     ------------           ------------

           Net cash (used in) provided by operating activities                         (3,349,624)             9,556,447
                                                                                     ------------           ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
       Proceeds from maturities and principal payments                                 10,907,294             17,761,950
       Purchases                                                                      (10,862,401)           (25,902,269)
       Proceeds from sales                                                              2,706,878             11,547,754
Held to maturity mortgage-backed securities:
       Proceeds from principal payments                                                     5,682                 20,182
Purchase of Federal Home Loan Bank stock                                                       --               (728,800)
Purchase of restricted stock                                                              (30,000)                    --
Investment in First Litchfield Statutory Trust II                                         (93,000)                    --
Proceeds from the sale of loans                                                           427,620                     --
Net increase in loans                                                                 (37,078,861)           (28,476,337)
Purchase of loans                                                                      (3,472,995)                    --
Proceeds from the sale of repossessed assets                                               15,160                 20,845
Purchase of bank premises and equipment                                                (1,425,902)            (1,406,432)
Proceeds from sale of bank premises and equipment                                             100                     --
Purchases of bank owned life insurance                                                    (24,750)               (24,750)
                                                                                     ------------           ------------

       Net cash used in investing activities                                          (38,925,175)           (27,187,857)
                                                                                     ------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings, money market and
  demand deposits                                                                      (2,045,201)           (15,729,585)
Net increase in certificates of deposit                                                52,370,253                636,757
Proceeds from Federal Home Loan Bank advances                                          24,000,000             10,000,000
Repayments on Federal Home Loan Bank advances                                         (14,500,000)           (20,000,000)
Net (decrease) increase in Federal Home Loan Bank overnight borrowings                (13,166,000)            29,000,000
Net (decrease) increase in repurchase agreements with financial institutions           (6,500,000)             2,300,000
Net (decrease) increase in repurchase agreements with customers                        (1,263,593)            16,613,534
Proceeds from the exercise of stock options                                               138,197                 51,747
Proceeds from issuance of subordinated debt                                             3,093,000                     --
Dividends paid on common stock                                                           (961,901)              (851,617)
                                                                                     ------------           ------------

       Net cash provided by financing activities                                       41,164,755             22,020,836
                                                                                     ------------           ------------

       Net (decrease) increase in cash and due from banks                              (1,110,044)             4,389,426

CASH AND DUE FROM BANKS, at beginning of period                                        18,711,537             12,222,713
                                                                                     ------------           ------------

CASH AND DUE FROM BANKS, at end of period                                            $ 17,601,493           $ 16,612,139
                                                                                     ============           ============
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
       Interest on deposits and borrowings                                           $  9,121,761           $  5,030,970
                                                                                     ============           ============
       Income taxes                                                                  $    900,400           $    850,500
                                                                                     ============           ============
Non-cash investing and financing activities:
       Accrued dividends declared                                                    $    321,268           $    284,394
                                                                                     ============           ============
       Due to broker for securities purchases                                        $         --           $  6,225,933
                                                                                     ============           ============
       Treasury stock contributed to the ESOP                                        $     67,592           $         --
                                                                                     ============           ============
       Transfer of loans to repossessed assets                                       $     19,160           $     31,687
                                                                                     ============           ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.    The consolidated  balance sheet at December 31, 2005 has been derived from
      the audited financial statements at that date, but does not include all of
      the information and footnotes required by accounting  principles generally
      accepted  in  the  United   States  of  America  for  complete   financial
      statements.

2.    The accompanying  unaudited  consolidated financial statements and related
      notes have been  prepared  pursuant  to the rules and  regulations  of the
      Securities and Exchange Commission.  Accordingly,  certain information and
      footnote disclosures normally included in financial statements prepared in
      accordance with  accounting  principles  generally  accepted in the United
      States  of  America  have  been   omitted   pursuant  to  such  rules  and
      regulations.  The  accompanying  financial  statements  and related  notes
      should be read in conjunction with the audited financial statements of the
      Company and notes thereto for the fiscal year ended December 31, 2005.

      These  financial  statements  reflect,  in the opinion of Management,  all
      adjustments,  consisting of only normal recurring  adjustments,  necessary
      for a fair  presentation  of the  Company's  financial  position  and  the
      results of its  operations  and its cash flows for the periods  presented.
      The results of  operations  for the three and nine months ended  September
      30, 2006 are not necessarily  indicative of the results of operations that
      may be expected for all of 2006.

3.    The  Company is  required  to present  basic  income per share and diluted
      income  per share in its  statements  of  income.  Basic  income per share
      amounts are computed by dividing net income by the weighted average number
      of common shares outstanding. Diluted income per share assumes exercise of
      all potential common stock in weighted average shares outstanding,  unless
      the effect is  antidilutive.  The  Company is also  required  to provide a
      reconciliation of the numerator and denominator used in the computation of
      both basic and diluted income per share.

      The following is information about the computation of net income per share
      for the three and nine month  periods  ended  September 30, 2006 and 2005.
      The 2005 information has been restated to give  retroactive  effect to all
      stock dividends for the periods presented.

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                        September 30, 2006
                                                            -------------------------------------------
                                                                Net                           Per Share
                                                              Income          Shares            Amount
                                                              ------          ------            ------
<S>                                                         <C>              <C>              <C>
        Basic Net Income Per Share
          Income available to common shareholders           $ 500,398        2,142,952        $     .23
                                                                                              =========

        Effect of Dilutive Securities
          Options Outstanding                                      --            9,374

        Diluted Net Income Per Share
          Income available to common shareholders           ---------        ---------
          plus assumed conversions                          $ 500,398        2,152,326        $     .23
                                                            =========        =========        =========
</TABLE>


                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                                         September 30, 2005
                                                           ----------------------------------------------
                                                               Net                             Per Share
                                                             Income            Shares            Amount
                                                             ------            ------            ------
<S>                                                        <C>                <C>              <C>
      Basic Net Income Per Share
        Income available to common shareholders            $  928,301         2,131,644        $      .43
                                                                                               ==========

      Effect of Dilutive Securities
        Options Outstanding                                        --            20,589

      Diluted Net Income Per Share
        Income available to common shareholders            ----------        ----------
        plus assumed conversions                           $  928,301         2,152,233        $      .43
                                                           ==========        ==========        ==========

<CAPTION>
                                                                         Nine Months Ended
                                                                         September 30, 2006
                                                           ----------------------------------------------
                                                               Net                             Per Share
                                                             Income            Shares            Amount
                                                             ------            ------            ------
<S>                                                        <C>                <C>              <C>
      Basic Net Income Per Share
        Income available to common shareholders            $1,599,201         2,139,094        $      .74
                                                                                               ==========

      Effect of Dilutive Securities
        Options Outstanding                                        --            10,623

      Diluted Net Income Per Share
        Income available to common shareholders            ----------        ----------
        plus assumed conversions                           $1,599,201         2,149,717        $      .74
                                                           ==========        ==========        ==========

<CAPTION>
                                                                        Nine Months Ended
                                                                        September 30, 2005
                                                           ----------------------------------------------
                                                               Net                             Per Share
                                                             Income            Shares            Amount
                                                             ------            ------            ------
<S>                                                        <C>                <C>              <C>
      Basic Net Income Per Share
        Income available to common shareholders            $2,871,693         2,129,792        $     1.34
                                                                                               ==========

      Effect of Dilutive Securities
        Options Outstanding                                        --            22,953

      Diluted Net Income Per Share
        Income available to common shareholders            ----------        ----------
        plus assumed conversions                           $2,871,693         2,152,745        $     1.33
                                                           ==========        ==========        ==========
</TABLE>

4.    Other  comprehensive  income,  which is comprised  solely of the change in
      unrealized  gains  and  losses on  available  for sale  securities,  is as
      follows:

<TABLE>
<CAPTION>
                                                                                              Three Months Ended
                                                                                              September 30, 2006
                                                                               ------------------------------------------------
                                                                               Before-Tax                            Net-of-Tax
                                                                                 Amount             Taxes              Amount
                                                                               -----------       -----------        -----------
<S>                                                                            <C>               <C>                <C>
Unrealized holding gains arising during the period                             $ 3,826,992       $(1,301,177)       $ 2,525,815
Add: reclassification adjustment for amounts recognized in net income               17,633            (5,995)            11,638
                                                                               -----------       -----------        -----------

Unrealized holding gain on available for sale securities, net of taxes         $ 3,844,625       $(1,307,172)       $ 2,537,453
                                                                               ===========       ===========        ===========
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                             September 30, 2005
                                                                              ------------------------------------------------
                                                                               Before-Tax                          Net-of-Tax
                                                                                 Amount             Taxes             Amount
                                                                              -----------        -----------       -----------
<S>                                                                           <C>                <C>               <C>
Unrealized holding losses arising during the period                           $(1,537,268)       $   522,671       $(1,014,597)
Add: reclassification adjustment for amounts recognized in net income                  --                 --                --
                                                                              -----------        -----------       -----------

Unrealized holding loss on available for sale securities, net of taxes        $(1,537,268)       $   522,671       $(1,014,597)
                                                                              ===========        ===========       ===========

<CAPTION>
                                                                                              Nine Months Ended
                                                                                             September 30, 2006
                                                                              ------------------------------------------------
                                                                               Before-Tax                          Net-of-Tax
                                                                                 Amount             Taxes            Amount
                                                                              -----------        -----------       -----------
<S>                                                                           <C>                <C>               <C>
Unrealized holding gains arising during the period                            $   364,673        $  (123,989)      $   240,684
Add: reclassification adjustment for amounts recognized in net income              17,633             (5,995)           11,638
                                                                              -----------        -----------       -----------

Unrealized holding gain on available for sale securities, net of taxes        $   382,306        $  (129,984)      $   252,322
                                                                              ===========        ===========       ===========

<CAPTION>
                                                                                             Nine Months Ended
                                                                                             September 30, 2005
                                                                              ------------------------------------------------
                                                                               Before-Tax                          Net-of-Tax
                                                                                 Amount             Taxes             Amount
                                                                              -----------        -----------       -----------
<S>                                                                           <C>                <C>               <C>
Unrealized holding losses arising during the period                           $(1,521,723)       $   517,386       $(1,004,337)
Add: reclassification adjustment for amounts recognized in net income              44,076            (14,986)           29,090
                                                                              -----------        -----------       -----------

Unrealized holding loss on available for sale securities, net of taxes        $(1,477,647)       $   502,400       $  (975,247)
                                                                              ===========        ===========       ===========
</TABLE>

5.    The Bank has a  noncontributory  defined benefit pension plan (the "Plan")
      that covers  substantially  all employees  who have  completed one year of
      service  and have  attained  age 21.  The  benefits  are based on years of
      service  and the  employee's  compensation  during  the last five years of
      employment.  The Bank's  funding  policy was to contribute  amounts to the
      Plan sufficient to meet the minimum funding  requirements set forth in the
      Employee  Retirement  Income  Security Act of 1974,  plus such  additional
      amounts as the Bank may determine to be appropriate from time to time. The
      actuarial  information has been calculated using the projected unit credit
      method.  During the first  quarter of 2005,  the Bank's  pension  plan was
      curtailed  as the Bank's  Board of  Directors  approved  the  cessation of
      benefit accruals under the Plan effective April 30, 2005.  Because of this
      action,  commencing  with the Plan year  beginning  November 15, 2005,  no
      further contributions will be made by the Bank.

      Components  of net  periodic  benefit  cost  for the  three  months  ended
      September 30:

<TABLE>
<CAPTION>
                                                                                 2006                2005
                                                                               --------            --------
<S>                                                                            <C>                 <C>
      Service cost                                                             $     --            $     --
      Interest cost                                                              48,290              52,516
      Expected return on plan assets                                            (53,715)            (58,310)
      Amortization of unrealized loss                                            17,455              13,222
                                                                               --------            --------
      Net periodic benefit cost                                                $ 12,030            $  7,428
                                                                               ========            ========
</TABLE>


                                       9
<PAGE>

Components of net periodic benefit cost for the nine months ended September 30:

                                                   2006            2005
                                                ---------       ---------
      Service cost                              $      --       $      --
      Interest cost                               144,871         157,548
      Expected return on plan assets             (161,147)       (174,930)
      Amortization of unrealized loss              52,365          39,666
                                                ---------       ---------
      Net periodic benefit cost                 $  36,089       $  22,284
                                                =========       =========

6.    The  Bank is a  member  of the  Federal  Home  Loan  Bank of  Boston  (the
      "FHLBB").  As a member of the FHLBB, the Bank has access to a pre-approved
      line of credit of up to 2% of its total  assets and the capacity to borrow
      up to 30% of its total assets.  In accordance  with an agreement  with the
      FHLBB, the Bank is required to maintain qualified  collateral,  as defined
      in the  FHLBB  Statement  of  Products  Policy,  free and  clear of liens,
      pledges and encumbrances  for the advances.  FHLBB stock and certain loans
      which aggregate  approximately 100% of the outstanding advance are used as
      collateral.  Federal Home Loan Bank  advances as of September 30, 2006 are
      as follows:

                             due 10/01/06       $  3,950,000 @ 5.65%
                             due  7/16/07          4,500,000 @ 2.59%
                             due  8/27/07          5,000,000 @ 3.76%
                             due  7/18/08          4,500,000 @ 3.27%
                             due  8/28/09          7,000,000 @ 5.25%
                             due  6/24/10          5,000,000 @ 4.15%
                             due  5/29/12          5,000,000 @ 4.32%
                             due  9/04/12          5,000,000 @ 4.38%
                             due 12/14/15         20,000,000 @ 3.93%
                             due   5/5/16         10,000,000 @ 4.53%
                                                ------------
                                Total           $ 69,950,000
                                                ============

     As of September 30, 2006, the Bank had borrowings under repurchase
     agreements with financial institutions totaling $60,200,000. This amount
     includes borrowings:

                             due  10/20/06       $ 6,000,000 @ 5.41%
                             due  11/28/06         7,000,000 @ 5.40%
                             due   1/28/07         4,000,000 @ 3.60%
                             due   2/19/07        10,000,000 @ 2.74%
                             due   2/25/07         4,650,000 @ 2.40%
                             due  10/27/07         7,000,000 @ 3.26%
                             due   4/26/08         7,000,000 @ 4.19%
                             due   7/28/08         5,000,000 @ 3.25%
                             due   7/31/08         5,000,000 @ 3.27%
                             due   2/25/09         4,550,000 @ 3.20%
                                                 -----------
                                Total            $60,200,000
                                                 ===========


                                       10
<PAGE>

7.    A  reconciliation  of the  anticipated  income tax  expense  (computed  by
      applying the Federal statutory income tax rate of 34% to the income before
      taxes) to the provision for income taxes as reported in the  statements of
      income is as follows:

<TABLE>
<CAPTION>
                                                                  For the three months ended September 30,
                                                                    2006                                  2005
                                                          ----------------------        ------------------------
<S>                                                       <C>                <C>        <C>                   <C>
Provision for income taxes at statutory Federal rate      $   196,177         34%       $   429,405           34%
Increase (decrease) resulting from:
   Tax exempt income                                         (139,074)       (24)          (105,566)          (8)
   Nondeductible interest expense                              14,307          2              5,544            1
   Other                                                        5,184          1              5,271           --
                                                          ----------------------        ------------------------
Provision for income taxes                                $    76,594         13%       $   334,654           27%
                                                          ======================        ========================

<CAPTION>
                                                                  For the nine months ended September 30,
                                                                    2006                            2005
                                                          ----------------------        ------------------------
<S>                                                       <C>                <C>        <C>                   <C>
Provision for income taxes at statutory Federal rate      $   619,141         34%       $ 1,338,832           34%
Increase (decrease) resulting from:
   Tax exempt income                                         (453,763)       (25)          (303,091)          (8)
   Nondeductible interest expense                              40,532          2             14,494           --
   Other                                                       15,893          1             15,814            1
                                                          ----------------------        ------------------------
Provision for income taxes                                $   221,803         12%       $ 1,066,049           27%
                                                          ======================        ========================
</TABLE>

8.    The amortized cost, gross unrealized  gains,  gross unrealized  losses and
      approximate  fair values of securities  which are  classified as available
      for sale and held to maturity at September  30, 2006 and December 31, 2005
      are as follows:

<TABLE>
<CAPTION>
AVAILABLE FOR SALE                                                  September 30, 2006
                                          ------------------------------------------------------------------------
                                                                 Gross               Gross
                                            Amortized         Unrealized           Unrealized            Fair
                                               Cost              Gains               Losses              Value
                                          -------------      -------------       -------------       -------------
<S>                                       <C>                <C>                 <C>                 <C>
Debt Securities:
   U.S. Treasury securities               $   3,998,866      $          --       $     (21,835)      $   3,977,031
   U.S. Government Agency securities         57,967,908                 --          (1,340,925)         56,626,983
   State and Municipal Obligations           31,193,535            479,804             (18,064)         31,655,275
   Corporate and Other Bonds                 11,272,777             46,897             (33,924)         11,285,750
                                          -------------      -------------       -------------       -------------
                                            104,433,086            526,701          (1,414,748)        103,545,039
                                                             -------------       -------------       -------------

Mortgage-Backed Securities:
   GNMA                                       4,169,887                 --             (68,521)          4,101,366
   FNMA                                      54,819,616             69,200          (2,222,984)         52,665,832
   FHLMC                                     18,777,264                571            (685,006)         18,092,829
                                          -------------      -------------       -------------       -------------
                                             77,766,767             69,771          (2,976,511)         74,860,027
                                          -------------      -------------       -------------       -------------

Marketable Equity Securities                  2,000,000                 --             (50,420)          1,949,580
                                          -------------      -------------       -------------       -------------

Total available for sale securities       $ 184,199,853      $     596,472       $  (4,441,679)      $ 180,354,646
                                          =============      =============       =============       =============
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
AVAILABLE FOR SALE                                                    December 31, 2005
                                          ------------------------------------------------------------------------
                                                                 Gross               Gross
                                            Amortized         Unrealized           Unrealized            Fair
                                              Cost               Gains               Losses              Value
                                          -------------      -------------       -------------       -------------
<S>                                       <C>                <C>                 <C>                 <C>
Debt Securities:
   U.S. Treasury securities               $   4,292,659      $          --       $     (58,746)      $   4,233,913
   U.S. Government Agency securities         57,955,558            125,130          (1,319,233)         56,761,455
   State and Municipal Obligations           34,727,011            255,067            (238,212)         34,743,866
   Corporate and Other Bonds                  5,916,080              7,457             (21,037)          5,902,500
                                          -------------      -------------       -------------       -------------

                                            102,891,308            387,654          (1,637,228)        101,641,734
                                          -------------      -------------       -------------       -------------

Mortgage-Backed Securities:
   GNMA                                       5,142,926                 --            (107,149)          5,035,777
   FNMA                                      58,192,401             26,658          (2,153,239)         56,065,820
   FHLMC                                     18,901,237              3,865            (712,594)         18,192,508
                                          -------------      -------------       -------------       -------------
                                             82,236,564             30,523          (2,972,982)         79,294,105
                                          -------------      -------------       -------------       -------------

Marketable Equity Securities                  2,000,000                 --             (35,481)          1,964,519
                                          -------------      -------------       -------------       -------------

Total available for sale securities       $ 187,127,872      $     418,177       $  (4,645,691)      $ 182,900,358
                                          =============      =============       =============       =============

<CAPTION>
HELD TO MATURITY                                                     September 30, 2006
                                          ------------------------------------------------------------------------
                                                                 Gross               Gross
                                            Amortized         Unrealized           Unrealized            Fair
                                              Cost               Gains               Losses              Value
                                          -------------      -------------       -------------       -------------
<S>                                       <C>                <C>                 <C>                 <C>
Mortgage-Backed Securities:
GNMA                                      $      43,353      $          --       $        (633)      $      42,720
                                          =============      =============       =============       =============

<CAPTION>
HELD TO MATURITY                                                     December 31, 2005
                                          ------------------------------------------------------------------------
                                                                 Gross               Gross
                                            Amortized         Unrealized           Unrealized            Fair
                                              Cost               Gains               Losses              Value
                                          -------------      -------------       -------------       -------------
<S>                                       <C>                <C>                 <C>                 <C>
Mortgage-Backed Securities:
GNMA                                      $      49,035      $          --       $      (1,102)      $      47,933
                                          =============      =============       =============       =============
</TABLE>

      At September 30, 2006,  gross  unrealized  holding losses on available for
      sale and held to maturity securities totaled $4,442,312. Of the securities
      with unrealized losses,  there were fifty-eight  securities that have been
      in a continuous  unrealized loss position for a period of twelve months or
      more.  The unrealized  losses on these  securities  totaled  $4,266,890 at
      September 30, 2006. Management does not believe that any of the unrealized
      losses are other  than  temporary  as they  relate  primarily  to debt and
      mortgage-backed  securities issued by U.S.  Government and U.S. Government
      sponsored  agencies,   and  are  due  to  changes  in  the  interest  rate
      environment. The Company has both the intent and the ability to hold these
      securities  until  maturity  or until the fair value  fully  recovers.  In
      addition,  management  considers  the  issuers  of  the  securities  to be
      financially  sound  and that the  Company  will  receive  all  contractual
      principal  and  interest  related  to  these  investments.  As  a  result,
      management  believes that these unrealized losses will not have a negative
      impact on future  earnings  or a  permanent  effect on  capital.  However,
      management  periodically  evaluates  investment  alternatives  to properly
      manage the overall balance sheet. The timing of sales and reinvestments is
      based on various factors,  including  management's  evaluation of interest
      rate risks and liquidity needs.


                                       12
<PAGE>

9.    A summary of the Bank's loan  portfolio at September 30, 2006 and December
      31, 2005 is as follows:

<TABLE>
<CAPTION>
                                                             2006                2005
                                                         ------------       ------------
<S>                                                      <C>                <C>
            Real estate--residential mortgage            $172,336,674       $145,927,290
            Real estate--commercial mortgage               51,812,640         42,144,448
            Real estate--construction                      32,040,665         28,549,180
            Commercial                                     18,699,497         21,150,306
            Installment                                     7,254,549          4,334,274
            Other                                              69,811             47,091
                                                         ------------       ------------
                     TOTAL LOANS                          282,213,836        242,152,589
            Net deferred loan origination costs               325,583            288,761
            Allowance for loan losses                      (2,028,162)        (1,759,611)
                                                         ------------       ------------
                     NET LOANS                           $280,511,257       $240,681,739
                                                         ============       ============
</TABLE>

10.   A summary of the Bank's  deposits at  September  30, 2006 and December 31,
      2005 is as follows:

<TABLE>
<CAPTION>
                                                              2006               2005
                                                          ------------------------------
<S>                                                       <C>               <C>
            Noninterest bearing:
                Demand                                    $ 64,550,101      $ 66,907,502
                                                          ------------      ------------
            Interest bearing:
                Savings                                     52,988,927        48,502,205
                Money market                                75,067,474        79,241,996
                Time certificates of deposit in
                  denominations of $100,000 or more         64,054,228        27,134,125
                Other time certificates of deposit          71,534,683        56,084,533
                                                          ------------      ------------
                     Total Interest bearing deposits       263,645,312       210,962,859
                                                          ------------      ------------
                             TOTAL DEPOSITS               $328,195,413      $277,870,361
                                                          ============      ============
</TABLE>

      Included in deposits as of  September  30, 2006 and  December 31, 2005 are
      approximately  $21,132,000  and  $3,073,000,   respectively,  of  brokered
      deposits  which have varying  maturities  through  September  2008 and May
      2007, respectively.

11.   At  September  30, 2006,  the Company had one fixed option plan,  which is
      described  below.  Effective  January 1, 2006,  the Company  adopted  SFAS
      No.123  (revised),  "Share-Based  Payment"  (SFAS  123(R))  utilizing  the
      modified prospective  approach.  Prior to the adoption of SFAS 123(R), the
      Company  accounted for stock option grants in accordance  with APB Opinion
      No. 25,  "Accounting  for Stock Issued to Employees"  (the intrinsic value
      method),  and  accordingly,  recognized no compensation  expense for stock
      option  grants.  Because  there  were no  unvested  share-based  awards at
      January 1, 2006,  the adoption of this  statement had no initial effect on
      the Company's financial statements.

      A stock option plan for officers and outside directors was approved by the
      shareholders during 1994. The price and number of options in the plan have
      been adjusted for all stock dividends and splits.

      The stock option plan for directors automatically granted each director an
      initial  option of 3,376 shares of the Company's  common stock.  Automatic
      annual grants of an additional 573 shares for each director were given for
      each of the four following years.

      The stock option plan for officers  granted  options based upon individual
      officer performance.


                                       13
<PAGE>

      Under both the  director  and  officer  plans,  the price per share of the
      option is the fair market value of the Company's  stock at the date of the
      grant.  No option may be exercised  until 12 months after it is granted at
      which time options fully vest. Options are exercisable for a period of ten
      years from the grant thereof.

      Activity in the option plan for  officers  and outside  directors  for the
      nine months ended  September  30, 2006 and 2005 is  summarized as follows:
      (The  number of shares  and price  per share  have been  adjusted  to give
      retroactive effect to all stock dividends and splits.)

<TABLE>
<CAPTION>
                                                             2006                              2005
                                                -------------------------------   -----------------------------
                                                                   Weighted                         Weighted
                                                 Number of     Average Exercise    Number of   Average Exercise
                                                  Shares       Price Per Share       Shares     Price Per Share
                                                -------------------------------   -----------------------------
<S>                                                  <C>         <C>                   <C>         <C>
Options outstanding at the
    beginning of the year                            28,965      $     10.74           38,608      $      9.96
       Granted                                           --               --               --               --
       Exercised                                     12,864            10.74            7,018             7.37
       Cancelled                                         --               --               --               --
                                                -----------      -----------      -----------      -----------
Options outstanding and exercisable at the
    end of the year                                  16,101      $     10.73           31,590      $     10.54
                                                ===========      ===========      ===========      ===========
</TABLE>

      The intrinsic  value of options  outstanding  and exercisable at September
      30, 2006 and 2005 is $216,563 and  $456,797,  respectively.  The intrinsic
      value of options exercised during the nine months ended September 30, 2006
      and 2005 was $172,855 and $123,697, respectively.

      There are no pro forma disclosures  required for the three and nine months
      ended  September  30, 2005 because there was no  share-based  compensation
      attributed  to those  periods,  as no awards were granted or vested during
      those periods.

12.   Recent Accounting Pronouncements

      In September 2006, the Financial  Accounting  Standards Board (the "FASB")
      issued FASB  Statement No. 158 ("FASB 158"),  "Employers'  Accounting  for
      Defined  Benefit Pension and Other  Postretirement  Plans, an amendment of
      FASB Statements No. 87, 88, 106, and 132(R)," which requires  companies to
      recognize a net  liability  or asset to report the funded  status of their
      defined  benefit pension and other  postretirement  benefit plans on their
      balance  sheets.   FASB  158  does  not  change  how  pensions  and  other
      postretirement  benefits  are  accounted  for and  reported  in the income
      statement.  The required  transition  method of adoption is a  prospective
      application and recognizing the funded status of a company's benefit plans
      will require an offsetting  adjustment to accumulated other  comprehensive
      income in shareholders equity. The Company's non-contributory pension plan
      was frozen in May of 2005.  Management  has not yet  determined the effect
      the  adoption  of this  pronouncement  will  have on  other  comprehensive
      income.  FASB 158 is effective for fiscal years ending after  December 15,
      2006.

      In September  2006,  the FASB issued FASB  Statement No. 157 ("FASB 157"),
      "Fair Value  Measurements,"  which addresses how companies  should measure
      fair  value  when  they  are  required  to use a fair  value  measure  for
      recognition or disclosure  purposes under  generally  accepted  accounting
      principles.  As a result of FASB 157, there is now a common  definition of
      fair value to be used  throughout  GAAP.  The FASB  believes  that the new
      standard  will make the  measurement  of fair  value more  consistent  and
      comparable  and  improve  disclosures  about those  measures.  FASB 157 is
      effective for fiscal years  beginning after November 15, 2007. The Company
      does not believe the  adoption of FASB 157 will have a material  impact on
      its financial condition or results of operations.


                                       14
<PAGE>

      In July 2006,  the FASB  issued  FASB  Interpretation  No. 48 ("FIN  48"),
      "Accounting  for Uncertainty in Income Taxes,  an  interpretation  of FASB
      Statement  No. 109." FIN 48 clarifies the  accounting  for income taxes by
      prescribing the minimum  recognition  threshold a tax position is required
      to meet before being recognized in the financial  statements.  FIN 48 also
      provides guidance on derecognition,  measurement, classification, interest
      and penalties,  accounting in interim periods,  disclosure and transition.
      FIN 48 applies to all tax  positions  related to income  taxes  subject to
      FASB Statement No. 109,  "Accounting for Income Taxes"("FASB No 109"). FIN
      48 is  effective  for fiscal  years  beginning  after  December  15, 2006.
      Differences  between the amounts recognized in the statements of financial
      position  prior to the adoption of FIN 48 and the amounts  reported  after
      adoption  should  be  accounted  for  as  a  cumulative-effect  adjustment
      recorded to the beginning  balance of retained  earnings.  The Company has
      not yet  completed  the process of  evaluating  what  effect,  if any, the
      adoption of FIN 48 will have on its consolidated  results of operations or
      financial position.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

First Litchfield Financial  Corporation (the "Company"),  a Delaware corporation
formed in 1988, is the one-bank  holding  company for The First National Bank of
Litchfield  (the "Bank"),  a national bank supervised and examined by the Office
of the  Comptroller  of the  Currency  (the  "OCC").  The Bank is the  Company's
primary  subsidiary and source of income. The Bank has three  subsidiaries,  The
Lincoln  Corporation  and Litchfield  Mortgage  Service  Corporation,  which are
Connecticut  corporations.  The  purpose of The Lincoln  Corporation  is to hold
property such as real estate,  personal property,  securities,  or other assets,
acquired by the Bank through  foreclosure  or otherwise to compromise a doubtful
claim or  collect  a debt  previously  contracted.  The  purpose  of  Litchfield
Mortgage Service  Corporation is to operate as a passive  investment  company in
accordance  with  Connecticut  law.  In October  2006,  the Bank  formed a third
subsidiary, First Litchfield Leasing Corporation. The subsidiary, which the Bank
holds majority ownership  position,  is a Delaware  corporation.  The purpose of
First Litchfield  Leasing  Corporation is to provide  commercial  credit through
lease  financed  transactions.  Management  believes  that the  addition  of the
subsidiary  will  complement  the  array  of  lending   products  to  commercial
customers.  It is anticipated  that the subsidiary will be fully  operational by
2007.

Both the Company and the Bank are headquartered in Litchfield,  Connecticut. The
Bank is a full-service  commercial bank serving both  individuals and businesses
generally within Northwestern  Connecticut.  Deposits are insured up to specific
limits of the Federal Deposit Insurance Act by the Deposit Insurance Fund, which
is administered by the Federal Deposit Insurance Corporation. The Bank's lending
activities include loans secured by residential and commercial mortgages.  Other
loan products  include  consumer and business  installment  lending,  as well as
other  secured  and  nonsecured  lending.  The Bank has nine  banking  locations
located in the towns of Canton, Torrington, Litchfield, Washington, Marble Dale,
Goshen and Roxbury,  Connecticut.  The newest banking  facility,  located in New
Milford, Connecticut, opened in July of 2006. On July 14, 2006, the OCC approved
the Bank's application to change the location of the Torrington Fair Supermarket
branch to open a full  service  branch in  Torrington,  Connecticut.  The office
opened in November, 2006. In 1975, the Bank was granted Trust powers by the OCC.
The  Bank's  Trust   Department   provides  trust  and  fiduciary   services  to
individuals, nonprofit organizations and commercial customers. Additionally, the
Bank  offers  non-deposit  retail  investment  products  such as  mutual  funds,
annuities and insurance through its relationship with Infinex Investments, Inc.


                                       15
<PAGE>

During the second quarter of 2003, the Company formed a statutory  trust,  First
Litchfield Statutory Trust I. The Company owns 100% of the Trust's common stock.
The Trust  has no  independent  assets or  operations  and  exists  for the sole
purpose of issuing trust  securities and investing the proceeds in  subordinated
debentures  issued by the Company.  On June 26, 2003, the Trust issued its first
series of trust  preferred  securities.  During the second  quarter of 2006, the
Company formed a second  statutory trust,  First  Litchfield  Statutory Trust II
("Trust II"). The Company owns 100% of Trust II's common stock.  Trust II exists
for the sole purpose of issuing trust  securities  and investing the proceeds in
subordinated  debentures  issued by the Company.  In June, 2006, Trust II issued
its first series of trust preferred securities.

As of September 30, 2006,  the Company had total assets of  $506,927,280,  which
was an increase of approximately  $39.4 million or 8.4% from year-end 2005 total
assets of  $467,560,946.  The increase in assets  resulted from increases in the
loan  portfolio.  The  increase  in assets was  funded  primarily  by  increased
deposits.

The following  discussion and analysis of the Company's  consolidated  financial
condition  and  results of  operations  should be read in  conjunction  with the
consolidated  financial  statements  and  notes  to the  consolidated  financial
statements.

FINANCIAL CONDITION

Total  assets  as of  September  30,  2006 were  $506,927,280,  an  increase  of
$39,366,334 or 8.4% from year-end 2005 total assets of $467,560,946.

Net loans as of September 30, 2006 were $280,511,257,  reflecting an increase of
$39,829,518  or 16.5%,  as compared to the year-end 2005 level of  $240,681,739.
Loan  growth  during  2006 was  realized in the  residential,  construction  and
commercial mortgage portfolios as well as in the consumer loan portfolio.

At  September  30,  2006,  the  residential   mortgage  loan  portfolio  totaled
$172,336,674, which was an increase of 18.1% from year-end 2005. Growth in these
mortgage  products was primarily in fixed rate fifteen and thirty year products.
Commercial  mortgage  loans totaled  $51,812,640,  which is an increase of 22.9%
from the  year-end  balance.  The growth in  commercial  mortgage  products is a
result of preference of the  commercial  customer  towards  longer term mortgage
financing  as well as to the Bank's  emphasis on  commercial  lending in its new
markets.  During  the first nine  months of 2006,  construction  mortgage  loans
increased by $3,491,485,  or 12.2%.  The increase in the  construction  mortgage
portfolio was primarily in residential  real estate loans.  The commercial  loan
portfolio decreased $2,450,809 or 11.6% from its year-end 2005 balance. Customer
preference  favoring  longer term secured  financing  alternatives as opposed to
lines of credit is causing this decrease.  At September 30, 2006, consumer loans
totaled  $7,254,549  and increased  $2,920,275  from year end. This increase was
caused by the second  quarter 2006 purchase of a portfolio of consumer  loans in
the   secondary   market.   The  reason  for  the   acquisition   was  portfolio
diversification  as well the  opportunity  to increase  yield while  maintaining
acceptable levels of credit risk.

As of September 30, 2006, the securities portfolio totaled  $180,397,999,  which
is a 1.4% decrease from the year-end 2005 balance. The decrease in the portfolio
resulted   primarily  from  principal   payments  received  on   mortgage-backed
securities  as well as  called  state  and  municipal  securities.  Management's
strategy  is to utilize  the cash flows from these  securities  to fund the loan
portfolio  growth.  The  goal is to shift  the mix of  earning  assets  from the
investment portfolio into the loan portfolio.


                                       16
<PAGE>

Cash and cash equivalents  totaled  $17,601,493 which is a decrease of 5.9% from
year-end 2005. Variations in cash letter activity as of the end of the reporting
periods is the cause of this decrease. As of September 30, 2006 and December 31,
2005, there were no Federal Funds Sold.

Total  liabilities  as of  September  30, 2006 were  $479,799,924,  which was an
increase of $38,208,715  from total  liabilities of  $441,591,209 as of year-end
2005.  Deposits  totaled  $328,195,413  as of  September  30,  2006,  increasing
$50,325,052,  or 18.1%,  as compared to their year-end  levels.  Demand deposits
decreased 3.5% or $2,357,401.  Interest bearing deposits  however,  increased by
$52,682,453,  or 25.0%.  Growth in deposits is due primarily to the introduction
of new deposit products as well as to the Bank's new branch facilities in nearby
markets. Additionally, growth has been experienced in commercial deposits due to
the  focus  on  meeting  the  banking  needs  of  commercial  businesses.  Also,
innovative deposit products and relationship  money market deposits  contributed
to the growth in  deposits  as well as the Bank's  success  in  retaining  those
deposits   which  might  have  migrated  to  non-bank   investments.   Decreases
experienced  in both  savings  and  money  market  deposits  were the  result of
customers shifting into higher yielding certificates of deposit. Included in the
increase of interest bearing deposits are $18.5 million in brokered certificates
of deposit through  financial  institution  counterparties.  These deposits have
remaining  maturities  of  between  three and six months  and  represent  a cost
efficient source of funding for meeting  liquidity needs while deposit growth in
new markets is being developed.

As  of  September  30,  2006,   repurchase  agreements  with  customers  totaled
$8,710,579,  which was a decrease of $1,263,593  from the year-end 2005 balance.
These accounts represent overnight  investments by commercial and municipal cash
management  customers.  Advances  under  Federal Home Loan Bank  borrowings  and
repurchase  agreements with financial  institutions  decreased by $3,666,000 and
$6,500,000  respectively.  Management  considers interest rate levels, the yield
curve,  the market  availability  and pricing of retail  deposits as well as the
Company's  current  and  future  liquidity  needs  in  determining  the  funding
structures utilized by the Bank.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005

Summary

Net interest  income is the single  largest  source of the Company's net income.
Net  interest  income is  determined  by several  factors  and is defined as the
difference  between interest and dividend income from earning assets,  primarily
loans and investment  securities,  and interest expense on deposits and borrowed
money.   Although  there  are  certain   factors  which  can  be  controlled  by
management's  policies and actions,  certain  other factors  exist,  such as the
general level of credit  demand,  Federal  Reserve Board  monetary  policy,  and
changes in tax law that are beyond the control of management.

Net income for the third calendar quarter of 2006 totaled  $500,398,  which is a
decrease of  $427,903 or 46.1% from third  quarter  2005  earnings of  $928,301.
Quarterly  basic and diluted net income per share for the third  quarter of 2006
were $.23 per share,  compared to $.43 per basic and diluted  share for the same
period in 2005.


                                       17
<PAGE>

Net Interest Income

Net interest  income is comprised  of the  following  for the three months ended
September 30,

                                                    2006              2005
                                                -----------       -----------

Interest and dividend income                    $ 6,775,724       $ 5,468,170
Tax-equivalent adjustments                          153,926           103,595
Interest expense                                 (3,598,745)       (1,938,663)
                                                -----------       -----------

Net interest income (tax equivalent basis)      $ 3,330,905       $ 3,633,102
                                                ===========       ===========

The following table presents the Company's average balance sheets (computed on a
daily basis), net interest income, and interest rates for the three months ended
September  30, 2006 and 2005.  Average  loans  outstanding  include  nonaccruing
loans.  Interest income is presented on a tax-equivalent  basis which reflects a
federal tax rate of 34% for all periods presented.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                           Three months ended September 30, 2006      Three months ended September 30, 2005
                                          --------------------------------------    ----------------------------------------
                                                           Interest                                     Interest
                                             Average        Earned/       Yield/       Average           Earned/      Yield/
                                             Balance         Paid          Rate        Balance            Paid         Rate
                                          ------------    ----------      ------    ------------        ---------     ------
<S>                                       <C>             <C>              <C>      <C>                 <C>            <C>
Assets
Interest Earning Assets:
Loans                                     $277,853,000    $4,593,675       6.61%    $242,011,000        3,782,989      6.25%
Investment Securities                      190,844,000     2,309,959       4.84%     165,396,000        1,780,722      4.31%
Other interest earning assets                2,957,000        26,016       3.52%       1,367,000            8,054      2.36%
                                          ------------    ----------                ------------        ---------

Total interest earning assets              471,654,000     6,929,650       5.88%     408,774,000        5,571,765      5.45%
                                                          ----------       ----                         ---------      ----

Allowance for loan losses                   (1,977,000)                               (1,631,000)
Cash and due from banks                     16,955,000                                16,444,000
Bank premises and equipment                  5,129,000                                 3,807,000
Net unrealized loss on
  securities                                (6,261,000)                               (2,427,000)
Other assets                                17,716,000                                15,387,000
                                          ------------                              ------------

Total Average Assets                      $503,216,000                              $440,354,000
                                          ============                              ============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                          $ 55,708,000       167,442       1.20%    $ 54,984,000           28,240      0.21%
Money Market deposits                       77,004,000       633,707       3.29%      82,990,000          233,156      1.12%
Time deposits                              124,308,000     1,194,002       3.84%      83,003,000          598,441      2.88%
Borrowed funds                             154,159,000     1,603,594       4.16%     126,574,000        1,078,826      3.41%
                                          ------------    ----------                ------------        ---------

Total interest bearing liabilities         411,179,000     3,598,745       3.50%     347,551,000        1,938,663      2.23%
                                                          ----------       ----                         ---------      ----
Demand deposits                             65,267,000                                64,792,000
Other liabilities                            1,488,000                                 2,048,000
Shareholders' Equity                        25,282,000                                25,963,000
                                          ------------                              ------------

Total liabilities and equity              $503,216,000                              $440,354,000
                                          ============                              ============

Net interest income                                       $3,330,905                                 $  3,633,102
                                                          ==========                                 ============
Net interest spread                                                        2.38%                                       3.22%
Net interest margin                                                        2.82%                                       3.56%
</TABLE>


                                       18
<PAGE>

RATE/VOLUME ANALYSIS

<TABLE>
<CAPTION>
                                                              Three months ended
                                                         9/30/06 Compared to 9/30/05
                                                          Increase (Decrease) Due to
                                                ----------------------------------------------
                                                   Volume           Rate              Total
                                                -----------      -----------       -----------
<S>                                             <C>              <C>               <C>
Interest earned on
Loans                                           $   583,515      $   227,171       $   810,686
Investment securities                               292,815          236,422           529,237
Other interest income                                12,613            5,349            17,962
                                                -----------      -----------       -----------
Total interest earning assets                       884,943          468,942         1,357,885
                                                -----------      -----------       -----------

Interest paid on:
Deposits                                            159,899          975,415         1,135,314
Borrowed money                                      260,881          263,887           524,768
                                                -----------      -----------       -----------
Total interest bearing liabilities                  420,780        1,239,302         1,660,082
                                                -----------      -----------       -----------

Increase (decrease) in net interest income      $   468,163      $  (770,360)      $  (302,197)
                                                ===========      ===========       ===========
</TABLE>

Tax-equivalent  net  interest  income for the third  quarter  of 2006  decreased
$302,197  or 8.3% from the third  quarter of 2005.  Of the  decrease  in the net
interest  income,  $770,360  was due to  decreased  income  attributable  to the
increased costs of interest bearing  liabilities which were significantly  above
the increased  earnings from higher yields on earning  assets.  Higher levels of
earning  assets  resulted in increased net interest  income  totaling  $468,163,
which  offset some of the lower net  interest  income due to  increased  funding
costs.

Average  earning  assets for the third quarter of 2006 totaled $472 million,  an
overall  increase of $63 million from the third  quarter of 2005.  Average loans
increased by $36 million or 14.8%.  The increase in earning  assets  resulted in
additional  tax  equivalent  interest  income of  $884,943.  The funding of this
growth was through  borrowed  money,  time deposits as well as demand  deposits.
This funding,  which also offset decreases in savings and money market deposits,
increased interest expense by $420,780.

The net interest  margin for the third quarter of 2006 was 2.82%,  a decrease of
74 basis points from the third  quarter of 2005.  The third quarter net interest
margin  decreased by 18 basis  points from the second  quarter of 2006 margin of
3.00%.  In  both  comparisons,  the  decrease  in the  net  interest  margin  is
attributable to the increased cost of funds which rose at a faster rate than the
yield on earning  assets.  Additionally,  the shift in funding  from savings and
money market deposits into more expensive time  certificates  and borrowed money
contributed to the decrease in margin. Funding costs totaled 3.50% for the third
quarter of 2006,  an  increase of 39 basis  points from the funding  cost of the
second  quarter of 2006.  Additionally,  funding  costs were up 127 basis points
compared to funding costs of 2.23% for the third quarter of 2005. In comparison,
the yield on earning assets for the third quarter of 2006 totaled  5.88%,  which
was an  increase of only 22 basis  points  over the earning  asset yield for the
second  quarter  of 2006,  and an  increase  of 43 basis  points  from the third
quarter of 2005. The flattened and inverted yield curve experienced  during 2006
continues to challenge the profitability of the net interest margin.

Provisions for Loan Losses

The provision  for loan losses for the third  quarter of 2006 totaled  $105,000,
which is a slight decrease over the $109,371  provision for the third quarter of
2005.  The provision for loan losses is determined  quarterly and assessed along
with the adequacy of the allowance for loan losses. The Company's expansion into
new markets as well as a focus in  commercial  lending is the rationale for this
level of  provision.  (See page 24 for a discussion  of the  Allowance  for Loan
Losses.)

During the third  quarter of 2006,  the  Company  recorded  net  charge-offs  of
$46,815  compared to net  charge-offs of $6,567 for the same period in 2005. The
increased level of charge-offs in the third


                                       19
<PAGE>

quarter  of 2006  was  the  result  of  losses  related  to two  consumer  loans
originated by the Company. Generally,  recovery and charge-off activity continue
to be associated with consumer lending.

Noninterest Income

Noninterest income for the third quarter of 2006 totaled $735,764, a decrease of
$19,932 or 2.6% from the $755,696 earned for the third quarter of 2005.  Banking
service  charges and fees for the third  quarter of 2006  totaled  $333,691,  an
increase  of $56,074 or 20.2%  from fees  earned for the third  quarter of 2005.
This  increase was due to increased  activity from deposit  overdrafts,  ATM and
cash  management  services.  Trust fees totaled  $273,944,  which was $43,790 or
19.0% above the third  quarter 2005 level.  The increase in trust fees is due to
higher levels of investment management income.

Noninterest Expense

For the three  months ended  September  30, 2006,  noninterest  expense  totaled
$3,230,751,  an increase  of $317,874 or 10.9% from the similar  period in 2005.
Salary and employee benefit costs increased by $184,124 due mostly to additional
staffing for the new branches in Canton and New Milford, Connecticut.

Occupancy and equipment  expense totaled $386,184,  increasing  $99,432 or 34.7%
from the third quarter of 2005 of $286,752.  Increases in utility,  depreciation
and  maintenance  expenses  throughout the Company  contributed to the increase.
Rental  expense  for the New  Milford and  full-service  Torrington  branch also
caused much of the  increase.  Legal fees for the third  quarter of 2006 totaled
$48,327 which was an increase of $15,930 from the third  quarter of 2005.  Legal
advice  related to new products and corporate  activities are the primary reason
for the increased  expense.  Advertising  expense totaled $163,482,  which was a
decrease of $16,807 or 9.3% from third  quarter 2005 costs.  Although  costs for
new branch  promotions  were included in third quarter 2006 costs,  nonrecurring
direct mail promotions occurring during the third quarter of 2005 resulted in an
overall decrease. Commissions, services and fees expenses totaled $110,811 which
is an increase of $28,333 or 34.4% from the third quarter of 2005.  The increase
relates to sales  training,  compliance,  loan  servicing and core processor due
diligence advice.  Other  noninterest  expense totaled $427,043 for the quarter,
which was $19,363 or 4.3% below 2005 costs.  This decrease is related  mostly to
reduced   correspondent   banking   fees  and   decreased   director   incentive
compensation.

Income Taxes

For the three month period ended  September  30, 2006,  the provision for income
taxes  totaled  $76,594,  which is a decrease  of 77.1% from the same  period in
2005. This decrease is due to the level of pretax income which was down by 54.3%
from the third  quarter of 2005.  Additionally,  due to a higher  proportion  of
tax-exempt  income  (primarily  in the form of  non-taxable  state and municipal
interest),  to pretax  income,  the  effective tax rate for the third quarter of
2006 was 13%, as compared to the second quarter 2005 effective tax rate of 27%.

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2005

Summary

Net income for the Company for the nine months ended  September 30, 2006 totaled
$1,599,201,  decreasing  $1,272,492 or 44.3% from 2005  earnings of  $2,871,693.
Basic and diluted net income per


                                       20
<PAGE>

share for the nine month  period  were $.74 per share.  These  results are below
2005  levels of $1.34 and $1.33 for basic and  diluted  net  income  per  share,
respectively.

Net Interest Income

Net  interest  income is comprised  of the  following  for the nine months ended
September 30,

<TABLE>
<CAPTION>
                                                          2006               2005
                                                      ------------       ------------
<S>                                                   <C>                <C>
      Interest and dividend income                    $ 18,837,852       $ 15,912,809
      Tax-equivalent adjustments                           494,956            293,410
      Interest expense                                  (9,199,052)        (5,276,202)
                                                      ------------       ------------

      Net interest income (tax equivalent basis)      $ 10,133,756       $ 10,930,017
                                                      ============       ============
</TABLE>

The following table presents the Company's average balance sheets (computed on a
daily basis),  net interest income, and interest rates for the nine months ended
September  30, 2006 and 2005.  Average  loans  outstanding  include  nonaccruing
loans.  Interest income is presented on a tax-equivalent  basis which reflects a
federal tax rate of 34% for all periods presented.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                             Nine months ended September 30, 2006          Nine months ended September 30, 2005
                                          ----------------------------------------      -----------------------------------------
                                                             Interest                                      Interest
                                             Average         Earned/        Yield/        Average          Earned/         Yield/
                                             Balance          Paid           Rate         Balance           Paid            Rate
                                          ------------     -----------      ------      ------------     -----------       ------
<S>                                       <C>              <C>               <C>        <C>              <C>                <C>
Assets
Interest Earning Assets:
Loans                                     $259,127,000     $12,500,751       6.43%      $233,447,000     $10,543,314        6.02%
Investment Securities                      190,902,000       6,794,166       4.75%       171,960,000       5,645,748        4.38%
Other interest earning assets                1,767,000          37,891       2.86%         1,583,000          17,157        1.45%
                                          ------------     -----------                  ------------     -----------

Total interest earning assets              451,796,000      19,332,808       5.71%       406,990,000      16,206,219        5.31%
                                                           -----------       ----                        -----------        ----
Allowance for loan losses                   (1,895,000)                                   (1,529,000)
Cash and due from banks                     15,015,000                                    15,042,000
Bank premises and equipment                  4,765,000                                     3,435,000
Net unrealized loss on
  securities                                (5,721,000)                                   (2,403,000)
Foreclosed real estate                              --                                                                        --
Other assets                                16,998,000                                    15,129,000
                                          ------------                                  ------------

Total Average Assets                      $480,958,000                                  $436,664,000
                                          ============                                  ============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                          $ 49,338,000         217,078       0.59%      $ 56,642,000          87,762        0.21%
Money Market deposits                       75,070,000       1,295,217       2.30%        90,654,000         709,486        1.04%
Time deposits                              107,322,000       2,933,767       3.64%        84,269,000       1,639,284        2.59%
Borrowed funds                             157,961,000       4,752,990       4.01%       117,198,000       2,839,670        3.23%
                                          ------------     -----------                  ------------     -----------

Total interest bearing liabilities         389,691,000       9,199,052       3.15%       348,763,000       5,276,202        2.02%
                                                           -----------       ----                        -----------        ----
Demand deposits                             64,073,000                                    60,664,000
Other liabilities                            1,756,000                                     1,896,000
Shareholders' Equity                        25,438,000                                    25,341,000
                                          ------------                                  ------------

Total liabilities and equity              $480,958,000                                  $436,664,000
                                          ============                                  ============

Net interest income                                        $10,133,756                                   $10,930,017
                                                           ===========                                   ===========
Net interest spread                                                          2.56%                                          3.29%
Net interest margin                                                          2.99%                                          3.58%
</TABLE>


                                       21
<PAGE>

RATE/VOLUME ANALYSIS

<TABLE>
<CAPTION>
                                                       Nine months ended
                                                  9/30/06 Compared to 9/30/05
                                                  Increase (Decrease) Due to
                                        ----------------------------------------------
                                           Volume            Rate              Total
                                        -----------      -----------       -----------
<S>                                     <C>              <C>               <C>
Interest earned on:
Loans                                   $ 1,208,609      $   748,828       $ 1,957,437
Investment securities                       651,538          496,880         1,148,418
Other interest income                         2,200           18,534            20,734
                                        -----------      -----------       -----------
Total interest earning assets             1,862,347        1,264,242         3,126,589
                                        -----------      -----------       -----------

Interest paid on:
Deposits                                      1,737        2,007,793         2,009,530
Borrowed money                            1,128,572          784,748         1,913,320
                                        -----------      -----------       -----------
Total interest bearing liabilities        1,130,309        2,792,541         3,922,850
                                        -----------      -----------       -----------
Increase in net interest income         $   732,038      $(1,528,299)      $  (796,261)
                                        ===========      ===========       ===========
</TABLE>

The $796,261  decrease in net interest income is reflective of decreased  income
of $1,528,299 resulting from the decrease in net interest spread. Mitigating the
severity of the decrease was  increased  net interest  income of $732,038  which
resulted from the  increased  volume of earning  assets,  net of the increase in
volume of interest bearing liabilities.

Tax  equivalent  net  interest  income for the first nine months of 2006 totaled
$10,133,756,  which was a decrease  of  $796,261 or 7.3% from the same period in
2005.  Average  earning  assets for the first nine months of 2006  increased  by
nearly  $45  million,  or  11.0%.  Earning  asset  growth  was in the  loan  and
investment  portfolios  which each  increased by 11% over the previous year. The
increase in earning assets was funded by time deposits and borrowed money.

The decline in net interest income  continues to be reflective of the erosion of
the net interest margin. The net interest margin (net interest income divided by
average earning assets) was 2.99% for the nine-month  period ended September 30,
2006. The net interest margin decreased 59 basis points from the margin of 3.58%
for the nine months ended  September 30, 2005. The flat and inverted yield curve
experienced during 2006 is the cause of the decline in net interest margin. Over
the past year,  funding costs have  increased  113 basis  points,  from 2.02% to
3.15%. The tax-equivalent  yield on earning assets,  however, has only increased
40 basis  points for the same  period.  Continued  emphasis  on  deposit  growth
through promotions and achieving market share with the new branches is predicted
to help alleviate further margin erosion.

Provisions for Loan Losses

The  provision  for loan  losses  for the  first  nine  months  of 2006  totaled
$315,000,  which was a slight  increase  over the  provision  for the first nine
months of 2005.  The  provision  for loan  losses is  determined  quarterly  and
assessed along with the adequacy of the allowance for loan losses. The growth in
the  loan  portfolio,  an  increased  emphasis  in  commercial  lending,  larger
individual  loan  exposures  and  expansion  into  contiguous  markets  bringing
increased  `new client' risk resulted in this level of  provision.  (See Page 24
for a discussion of the Allowance for Loan Losses).

During the first nine months of 2006,  the Company  recorded net  charge-offs of
$46,449 compared to net charge-offs of $9,011 for the first nine months of 2005.
Charge-offs  for 2006  include  losses  related  to two  larger  consumer  loans
originated by the Company.  Generally,  charge-offs continue to relate to losses
in consumer installment loans and in overdrafts.


                                       22
<PAGE>

Noninterest Income

Year to date noninterest income as of September 30, 2006 totaled $2,107,736,  up
$140,309, or 7.1%, from noninterest income from the same period in 2005. Banking
service charges and fees totaled $892,114,  increasing $146,336,  or 19.6%, from
the  previous  year due to higher  levels of fee income from  deposit  overdraft
fees, cash management services, credit card interchange income and loan referral
fees. Trust fee income totaled $815,816  increasing of $110,176,  or 15.6%, from
the first nine months of 2005.  This  increase  resulted  from the growth of fee
income from  investment  management  services.  Our wealth  management  approach
affords  clients  the  benefit  of local,  personalized  service,  comprehensive
financial solutions and access to investment management services.

During the first nine months of 2006 and 2005,  the Bank recorded  losses on the
sales of available  for sale  securities  of $17,633 and $44,076,  respectively.
These sales were made for the purpose of  positioning  the  portfolio for future
income and reducing interest rate risk.

Noninterest Expense

Nine-month  noninterest  expense as of September  30, 2006  totaled  $9,610,532,
which was an increase  of  $1,254,857,  or 15.0%,  from the same period of 2005.
Costs incurred for the openings of the Canton,  Hilltop and New Milford branches
this year were the  primary  causes for the  increases  in salary,  advertising,
legal, postage,  equipment and occupancy expenses.  Also, commissions,  services
and fees expenses totaled $371,962, which is an increase of 76.2% from the first
three quarters of 2005. The majority of this increase relates to sales training,
compliance and core processor due diligence advice.

Other noninterest  expenses totaled  $1,379,468 which was an increase of $77,400
from the first nine months of 2005.  Increased  costs for computer  software and
consulting and exam and audit expense,  reflect the Company's  expansion as well
as the costs of compliance in the current regulatory environment.

Income Taxes

The  provision  for  income  taxes for the  first  nine  months of 2006  totaled
$221,803,  a decrease  of 79.2% from the same  period in 2005.  The  decrease in
income  tax  expense  is due to lower  taxable  income  levels due both to lower
pretax  earnings as well as to a higher  proportion  of  non-taxable  to taxable
income.  The  effective  tax  rate for the  first  nine  months  of 2006 was 12%
compared to 27% for the first nine months of 2005.

LIQUIDITY

Management's  objective  is to ensure  continuous  ability to meet cash needs as
they arise.  Such needs may occur from time to time as a result of  fluctuations
in loan  demand  and the level of total  deposits.  Accordingly,  the Bank has a
liquidity  policy that provides  flexibility  to meet cash needs.  The liquidity
objective is achieved through the maintenance of readily  marketable  investment
securities as well as a balanced flow of asset maturities and prudent pricing on
loan and deposit products.

The Bank is a member of the Federal Home Loan Bank system which provides  credit
to its  member  banks.  This  enhances  the  liquidity  position  of the Bank by
providing a source of  available  overnight  as well as  short-term  borrowings.
Additionally, federal funds, borrowings through the use of repurchase agreements
and the sale of mortgage  loans in the  secondary  market are  available to fund
short term cash needs. (See note 6 to the Consolidated  Financial Statements for
information on Federal Home Loan Bank Borrowings and repurchase agreements.)


                                       23
<PAGE>

As of September 30, 2006, the Company had  $84,173,933 in loan  commitments  and
credit lines outstanding.  Since some commitments are expected to expire without
being drawn upon, the total  commitment  amount  therefore does not  necessarily
represent all future cash  requirements.  The funding of these  commitments  are
anticipated  to  be  through  deposits,  loan  and  security  amortizations  and
maturities.  Management  believes  liquidity is adequate to meet its present and
foreseeable needs.

CAPITAL

At September 30, 2006, total  shareholders'  equity was $27,127,356  compared to
$25,969,737  at December 31, 2005.  From a regulatory  perspective,  the capital
ratios of the Company  and the Bank place each entity in the  "well-capitalized"
categories  under  applicable  regulations.  The various  capital  ratios of the
Company and the Bank are as follows as of September 30, 2006:

<TABLE>
<CAPTION>
                                             Minimum
                                          Regulatory
                                      Capital Levels           The Company              The Bank
                                      --------------           -----------              --------
<S>                                               <C>               <C>                   <C>
TIER 1:
  Leverage capital ratio                          4%                 7.83%                 7.16%

  Risk-based capital ratio                        4%                13.27%                12.14%

  Total risk-based capital ratio                  8%                13.95%                12.83%
</TABLE>

ALLOWANCE FOR LOAN LOSSES AND CRITICAL ACCOUNTING POLICIES

In the ordinary course of business,  the Bank has made a number of estimates and
assumptions  relating  to the  reporting  results of  operations  and  financial
condition in preparing its financial  statements in conformity  with  accounting
principles  generally  accepted in the United States of America.  Actual results
could differ significantly from those estimates under different  assumptions and
conditions.  The Company believes the following  discussion addresses the Bank's
only critical  accounting policy,  which is the policy that is most important to
the portrayal of the Bank's  financial  results and requires  management's  most
difficult,  subjective and complex  judgments,  often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.

The Bank makes  provisions for loan losses on a quarterly basis as determined by
a continuing  assessment of the adequacy of the  allowance for loan losses.  The
Bank performs an ongoing review of loans in accordance  with an individual  loan
rating system to determine  the required  allowance for loan losses at any given
date. The review of loans is performed to estimate potential exposure to losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective  and is  based  on an  evaluation  of the  known  and  inherent  risk
characteristics  and size of the loan  portfolios,  the  assessment  of  current
economic and real estate  market  conditions,  estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination  reports and  evaluations  of  impaired  loans,  and other  relevant
factors.  Loans, including impaired loans, are charged against the allowance for
loan losses when management  believes that the  uncollectibility of principal is
confirmed.  Any  subsequent  recoveries  are credited to the  allowance for loan
losses when received.  In connection with the determination of the allowance for
loan losses and the  valuation of  foreclosed  real estate,  management  obtains
independent appraisals for significant properties, when considered necessary.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component  relates to loans that are  classified  as either  doubtful,
substandard  or special  mention.  For such loans  that are also  classified  as
impaired,  an  allowance  is  established  when the  discounted  cash  flows (or
collateral value or


                                       24
<PAGE>

observable  market price) of the impaired loan is lower than the carrying  value
of that loan. The general component covers  non-classified loans and is based on
historical loss  experience  adjusted for  qualitative  factors.  An unallocated
component is maintained to cover  uncertainties  that could affect  management's
estimate or probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions.

There were no material changes in loan  concentration or loan quality that had a
significant effect on the allowance for loan losses calculation at September 30,
2006. In addition,  there were no material changes in the estimation methods and
assumptions  used in the Company's  allowance for loan losses  calculation,  and
there were no material  reallocations  of the allowance among different parts of
the loan portfolio.

At September 30, 2006,  the allowance for loan losses was  equivalent to 213% of
total non-performing assets as compared with 632% of total non-performing assets
at December 31, 2005.  Although the asset quality of the loan portfolio  remains
excellent,  nonperforming assets as of September 30, 2006 totaled $952,641 which
was an increase  of $674,427  since year end.  This  increase  was due mainly to
three mortgages  classified as  nonperforming  during the year. Both comparisons
are favorably  impacted by the excellent asset quality of the loan portfolio and
extremely  low  level  of  non-performing  assets.  As of  September  30,  2006,
non-performing  assets  were  .34% of total  loans.  As of  December  31,  2005,
non-performing  assets  totaled .11% of total loans.  The ratio of the allowance
for loan losses to total loans at September  30, 2006 was .72%,  remaining  near
the year end 2005 level of .73%.

Changes in the  allowance  for loan losses for the periods  ended  September 30,
2006 and 2005 are as shown below:

<TABLE>
<CAPTION>
                                                                      Nine months ended September 30,
                                                                        2006                  2005
                                                                     -----------          -----------
<S>                                                                  <C>                  <C>
Balance at beginning of the year                                     $ 1,759,611          $ 1,389,947
Provision for loan losses                                                315,000              310,617
Loans charged off                                                        (67,339)             (43,444)
Recoveries of loans previously charged off                                20,890               34,433
                                                                     -----------          -----------

Balance at end of period                                             $ 2,028,162          $ 1,691,553
                                                                     ===========          ===========
</TABLE>

The following table  summarizes the Bank's other real estate owned (OREO),  past
due and nonaccrual loans, and nonperforming  assets as of September 30, 2006 and
December 31, 2005.

<TABLE>
<CAPTION>
                                                             September 30, 2006     December 31, 2005
                                                             ------------------     -----------------
<S>                                                                 <C>                   <C>
Nonaccrual loans                                                    $   819,513           $   273,330

Other real estate owned                                                      --                    --
                                                                    -----------           -----------

Total nonperforming assets                                          $   819,513           $   273,330
                                                                    ===========           ===========

Loans past due in excess of 90 days and
  accruing interest                                                 $   133,128           $     4,884
                                                                    ===========           ===========
</TABLE>

POTENTIAL PROBLEM LOANS

As of September  30, 2006,  there were no potential  problem loans not disclosed
above,  which cause  management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms.


                                       25
<PAGE>

OFF BALANCE SHEET ARRANGEMENTS

The Company is a party to financial  instruments with off-balance  sheet risk in
the normal course of business to meet the financing  needs of its customers such
as letters of credit.  In the opinion of  management,  these  off-balance  sheet
arrangements are not likely to have a material effect on the Company's financial
condition, results of operation, or liquidity.

At September 30, 2006,  there have been no significant  changes in the Company's
off-balance sheet arrangements from December 31, 2005.

FORWARD-LOOKING STATEMENTS

This Quarterly Report and future filings made by the Company with the Securities
and Exchange  Commission,  as well as other filings,  reports and press releases
made or  issued  by the  Company  and the  Bank,  and  oral  statements  made by
executive  officers  of  the  Company  and  Bank,  may  include  forward-looking
statements  relating  to  such  matters  as (a)  assumptions  concerning  future
economic and business  conditions and their effect on the economy in general and
on the  markets  in  which  the  Company  and  the  Bank  do  business,  and (b)
expectations  for  increased  revenues  and  earnings  for the  Company and Bank
through growth resulting from acquisitions,  attractions of new deposit and loan
customers   and  the   introduction   of  new   products  and   services.   Such
forward-looking  statements are based on assumptions  rather than  historical or
current facts and, therefore,  are inherently uncertain and subject to risk. For
those  statements,  the  Company  claims the  protection  of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.

The Company  notes that a variety of factors  could cause the actual  results or
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations described or implied by such forward-looking  statements. The risks
and uncertainties that may affect the operations,  performance,  development and
results of the Company's and Bank's business include the following: (a) the risk
of adverse changes in business  conditions in the banking industry generally and
in the  specific  markets  in  which  the  Bank  operates;  (b)  changes  in the
legislative and regulatory  environment  that negatively  impact the Company and
Bank through increased operating expenses;  (c) increased competition from other
financial  and  nonfinancial  institutions;  (d)  the  impact  of  technological
advances;  and (e)  other  risks  detailed  from  time to time in the  Company's
filings with the Securities and Exchange  Commission.  Such  developments  could
have an adverse  impact on the Company  and the Bank's  financial  position  and
results of operation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main components of market risk for the Company are equity price risk, credit
risk, interest rate risk and liquidity risk.

The  Company  manages  interest  rate risk and  liquidity  risk  through an ALCO
Committee  comprised of senior  management  and other  officers.  The  committee
monitors  compliance  with the  Bank's  Asset/Liability  Policy  which  provides
guidelines to analyze and manage gap, which is the difference between the amount
of assets and the amounts of liabilities which mature or reprice during specific
time frames. The Company manages its interest-rate risk sensitivity  through the
use of a simulation  model that projects the impact of rate shocks,  rate cycles
and rate forecast estimates on net interest income.  These simulations take into
consideration factors such as maturities, reinvestment rates, prepayment speeds,
repricing  limits  and other  factors.  The  results  of these  simulations  are
compared to earnings  tolerance  limits set forth in the Bank's  Asset/Liability
Policy.


                                       26
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

The Company  maintains  disclosure  controls and procedures that are designed to
ensure that information  required to be disclosed in the Company's  Exchange Act
report is recorded,  processed,  summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and  communicated  to the Company's  management,  including its Chief  Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure  based closely on the  definition of "disclosure
controls and  procedures"  in Rule  13a-15(e).  In designing and  evaluating the
disclosure controls and procedures,  management recognized that any controls and
procedures,  no  matter  how  well  designed  and  operated,  can  provide  only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit of
possible controls and procedures.

As of the end of the period covered by this report,  the Company  carried out an
evaluation,  under the supervision and with the  participation  of the Company's
management,  including the Company's Chief  Executive  Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's  disclosure  controls  and  procedures.  Based on the  foregoing,  the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.

There are no changes in the Company's internal control over financial  reporting
that occurred during the third quarter of 2006 that has materially affected,  or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.

                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor the Bank (or any of their properties) are the subject of
any material  pending legal  proceedings  other than routine  litigation that is
incidental  to their  business  with the  possible  exception  of the  following
matter.

On September  9, 2003,  the Bank  commenced an action in Superior  Court for the
Judicial  District of Litchfield,  Connecticut in a matter  captioned "The First
National   Bank  of   Litchfield   v.  Theresa   Sullivan  and  John   Sullivan:
CV-03-0091476-S"  in an effort to collect principal and past due interest due on
two (2) loans,  which the Bank extended several years earlier and upon which the
Borrowers defaulted.  The aggregate principal balance outstanding on the two (2)
loans was approximately $135,000. The Borrowers  counterclaimed against the Bank
alleging that the Bank, through current and former employees, engaged in conduct
in violation of covenants of good faith and fair dealing pursuant to both common
law and Connecticut statutes and that the Bank's conduct constitutes a violation
of the Connecticut  Uniform Trade Practices Act. The Borrowers seek a variety of
unspecified  damages including money damages,  interest,  punitive damages,  and
"such other and further relief as the Court deems fair and just."

The Bank is conducting  discovery  with respect to the merits of the  underlying
action and counterclaim.  While the outcome of such litigation is unresolved, it
is not  expected  to  have  any  material  adverse  effect  upon  the  financial
statements of the Company.


                                       27
<PAGE>

Item 1A. Risk Factors.  There have been no significant  changes in the Company's
Risk  Factors  disclosed  in its  Annual  Report on Form 10K for the year  ended
December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
        Not applicable

Item 3. Defaults Upon Senior Securities. Not applicable

Item 4. Submission of Matters to a Vote of Security Holders. None

Item 5. Other Information - Not applicable

Item 6. Exhibits

                                  EXHIBIT INDEX

Exhibit
  No.        Exhibit
-------      -------

3.1         Certificate  of   Incorporation   of  First   Litchfield   Financial
            Corporation,  as amended.  Exhibit is  incorporated  by reference to
            Exhibit 3.1 set forth in the  Company's  Registration  Statement  on
            Form 10-SB as filed with the Securities  and Exchange  Commission on
            January 7, 2000.

3.2         Bylaws  of  First  Litchfield  Financial  Corporation,  as  amended.
            Exhibit is incorporated by reference to Exhibit 3.2 set forth in the
            Company's  Registration  Statement  on Form  10-SB as filed with the
            Securities and Exchange Commission on January 7, 2000.

4.          Specimen  Common  Stock  Certificate.  Exhibit  is  incorporated  by
            reference  to  Exhibit  4. set forth in the  Company's  Registration
            Statement  on Form 10-SB as filed with the  Securities  and Exchange
            Commission on January 7, 2000.

21.         List of  Subsidiaries  of First  Litchfield  Financial  Corporation.
            Exhibit is  incorporated by reference to Exhibit 21 set forth in the
            Company's  10-K for the year ended  December  31, 2005 as filed with
            the Securities and Exchange Commission on March 31, 2006.

31.1        Rule 13a-14(a)/15-14(a) Certification of the Chief Executive Officer
            of the Company.

31.2        Rule 13a-14(a)/15-14(a) Certification of the Chief Financial Officer
            of the Company.

32.0        Certification of the Chief Executive Officer and the Chief Financial
            Officer of the Company,  pursuant to 18 U.S.C.  ss.1350,  as adopted
            pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


                                       28
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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.

Dated: November 14, 2006                      FIRST LITCHFIELD FINANCIAL
                                              CORPORATION


                                              By: /s/ Joseph J. Greco
                                                 -------------------------------
                                                  Joseph J. Greco, President and
                                                  Chief Executive Officer


Dated: November 14, 2006                      By: /s/ Carroll A. Pereira
                                                 -------------------------------
                                                  Carroll A. Pereira
                                                  Principal Financial and
                                                  Accounting Officer


                                       29