UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)

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

                 For the fiscal year ended: December 31, 2007

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      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                         (I.R.S. Employer
  of Incorporation or 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

           Securities registered pursuant to Section 12(b) of the Act:

    Title of Each Class               Name of Each Exchange on Which Registered
    -------------------               -----------------------------------------

----------------------------         -------------------------------------------

----------------------------         -------------------------------------------

           Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
--------------------------------------------------------------------------------
                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act.

Yes |_| No |X|

Indicate by check mark  whether the  Registrant  is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.

Yes |_| No |X|

Indicate by check mark whether the  Registrant:  (1) has filed all reports to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.

Yes |X| No |_|

<PAGE>

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K or any  amendments  to
this Form 10-K. Yes |X| No |_|

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

Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_|
Smaller reporting company |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|

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common  equity,  as of
the last business day of the Registrant's most recently  completed second fiscal
quarter $36,247,774.

Note.  If  determining  whether  a  person  is  an  affiliate  will  involve  an
unreasonable  effort and expense,  the issuer may calculate the aggregate market
value of the common  equity held by  non-affiliates  on the basis of  reasonable
assumptions, if the assumptions are stated.

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date. March 27, 2008 - 2,371,700

                       DOCUMENTS INCORPORATED BY REFERENCE

PART III.  Portions of the Definitive  Proxy Statement for the Annual Meeting of
Shareholders to be held on May 21, 2008.

<PAGE>

                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<S>       <C>                                                                                           <C>
PART I
------

          ITEM 1 -    BUSINESS                                                                           1
          ITEM 1A.    RISK FACTORS                                                                      10
          ITEM 1B.    UNRESOLVED STAFF COMMENTS                                                         12
          ITEM 2 -    PROPERTIES                                                                        13
          ITEM 3 -    LEGAL PROCEEDINGS                                                                 13
          ITEM 4 -    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                               13

PART II
-------

          ITEM 5 -    MARKET FOR REGISTRANT'S COMMON EQUITY,
                         RELATED STOCKHOLDER MATTERS AND ISSUER
                         PURCHASES OF EQUITY SECURITIES                                                 14
          ITEM 6 -    SELECTED FINANCIAL DATA                                                           16
          ITEM 7 -    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                         RESULTS OF OPERATIONS                                                          17
          ITEM 7A -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                        28
          ITEM 8 -    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                       30
          ITEM 9 -    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                         FINANCIAL DISCLOSURE                                                           31
          ITEM 9A -   CONTROLS AND PROCEDURES                                                           31
          ITEM 9A(T) - CONTROLS AND PROCEDURES                                                          31
          ITEM 9B -   OTHER INFORMATION                                                                 31

PART III
--------

          ITEM 10 -   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                            32
          ITEM 11 -   EXECUTIVE COMPENSATION                                                            32
          ITEM 12 -   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                         RELATED STOCKHOLDER MATTERS                                                    32
          ITEM 13 -   CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE            32
          ITEM 14 -   PRINCIPAL ACCOUNTANT FEES AND SERVICES                                            32

PART IV
-------

          ITEM 15 -   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                        33

SIGNATURES                                                                                              37
</TABLE>

<PAGE>

PART I

ITEM 1.  BUSINESS

Business of the Company

First Litchfield Financial  Corporation,  a Delaware corporation (the "Company")
is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended.  The Company was formed in 1988 and has one banking subsidiary,  The
First National Bank of Litchfield (the "Bank"),  a national banking  association
organized  under the laws of the United  States.  The Bank and its  predecessors
have been in existence since 1814. The principal executive office of the Company
is located at 13 North Street, Litchfield, CT 06759, and the telephone number is
(860) 567-8752.  The Company owns all of the outstanding shares of the Bank. The
Bank has three subsidiaries, Lincoln Corporation and Litchfield Mortgage Service
Corporation,  which are Connecticut  corporations,  and First Litchfield Leasing
Corporation which is a Delaware corporation. The Bank holds a majority ownership
position  in First  Litchfield  Leasing  Corporation.  The  purpose  of  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. On June 26,
2003, the Company formed First  Litchfield  Statutory Trust I for the purpose of
issuing trust  preferred  securities and investing the proceeds in  subordinated
debentures  issued by the  Company,  and on June 26,  2003,  the first series of
trust preferred  securities were issued.  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.

During the fourth  quarter of 2006,  The Bank formed  First  Litchfield  Leasing
Corporation  for the  purpose  of  providing  equipment  financing  and  leasing
products.  The Company  considers  First  Litchfield  Leasing  Corporation as an
operating segment for reporting business line results.

The Bank engages in a wide range of commercial and personal banking  activities,
including accepting demand deposits (including Money Market Accounts), accepting
savings and time deposit accounts, making secured and unsecured loans and leases
to corporations, individuals, and others, issuing letters of credit, originating
mortgage  loans,  and  providing  personal and  corporate  trust  services.  The
business of the Bank is not significantly affected by seasonal factors.

The Bank's  lending  services  include  commercial,  real  estate,  and consumer
installment  loans and  leases.  Revenues  from the  Bank's  lending  activities
constitute the largest component of the Bank's operating revenues.  The loan and
lease  portfolio  constitutes the major earning asset of the Bank and offers the
best  alternative for maximizing  interest  spread above the cost of funds.  The
Bank's  loan and lease  personnel  have the  authority  to extend  credit  under
guidelines  established  and approved by the Board of  Directors.  Any aggregate
credit which  exceeds the authority of the loan or lease officer is forwarded to
the loan  committee  for  approval.  The loan  committee  is composed of various
experienced  loan and lease officers and Bank directors.  All aggregate  credits
that exceed the loan  committee's  lending  authority  are presented to the full
Board of Directors for ultimate approval or denial.  The loan committee not only
acts as an approval body to ensure consistent application of the Bank's loan and
lease policy,  but also provides  valuable  insight  through  communication  and
pooling of knowledge, judgment, and experience of its members.

The Bank's primary  lending area generally  includes towns located in Litchfield
and Hartford counties.

The  Bank's  Trust and  Wealth  Management  Department  provides a wide range of
personal and corporate trust and trust-related  investment  services,  including
serving as executor of estates,  as trustee under  testamentary  and  intervivos
trusts and various pension and other employee  benefit plans, as guardian of the
estates  of  minors  and  incompetents,   and  as  escrow  agent  under  various
agreements.

The Bank  introduces  new products  and services as permitted by the  regulatory
authorities or desired by the public.  The Bank remains committed to meeting the
challenges that require technology.  In addition to providing its customers with
access to the latest technological  products,  such as telephone banking,  which
allows  customers to handle  routine  transactions  using a standard  touch tone
telephone, the Bank is accessible via a home page on the Internet. The Bank also
offers PC banking and bill paying via the Internet at its Website. The Bank also
offers a cash management product;  e-Business Advantage,  which is geared toward
commercial  businesses,  municipal and nonprofit  customers and provides 24-hour
online account management including real-time account monitoring,  managing cash
flow,  collecting and making  payments  electronically,  as well as transferring
idle cash.

                                        1

<PAGE>

Competition

In Connecticut  generally,  and in the Bank's primary service area specifically,
there is intense  competition in the  commercial  banking  industry.  The Bank's
market area  consists  principally  of towns  located in  Litchfield  County and
Hartford   County,   although  the  Bank  also  competes  with  other  financial
institutions  in surrounding  counties in Connecticut in obtaining  deposits and
providing  many types of  financial  services.  The Bank  competes  with  larger
regional banks for the business of companies  located in the Bank's market area.
The Bank also  competes  with  savings  and loan  associations,  credit  unions,
finance  companies,  personal  loan  companies,  money  market  funds  and other
non-depository  financial  intermediaries.  Many of these financial institutions
have  resources  many times  greater than those of the Bank.  In  addition,  new
financial  intermediaries  such as money-market mutual funds and large retailers
are not subject to the same  regulations  and laws that govern the  operation of
traditional depository institutions.

Changes in federal and state law have  resulted in, and are expected to continue
to result in,  increased  competition.  The  reductions in legal barriers to the
acquisition  of banks by  out-of-state  bank holding  companies  resulting  from
implementation of the Riegle-Neal  Interstate  Banking and Branching  Efficiency
Act of 1994 and other  recent and  proposed  changes are expected to continue to
further  stimulate  competition  in the  markets  in which  the  Bank  operates,
although it is not  possible  to predict the extent or timing of such  increased
competition. [See Risk Factors]

Lending Activities

The  Bank's  lending  policy is  designed  to  correspond  with its  mission  of
remaining  a  community-oriented  bank.  The loan and lease  policy  sets  forth
accountability   for  lending   functions  in  addition  to  standardizing   the
underwriting,  credit and  documentation  procedures.  The Bank's  target market
regarding  lending  is in the  towns  in  which a Bank  office  is  located  and
contiguous  towns. The typical loan and lease customer is an individual or small
business  which has a deposit  relationship  with the Bank.  The Bank strives to
provide an appropriate mix in its loan and lease  portfolio of commercial  loans
leases and loans and leases to individual consumers.

Loan and Lease Portfolio
------------------------

The Bank's loan and lease portfolio at December 31, 2007 - 2003 was comprised of
the following categories:

<TABLE>
<CAPTION>
                                               (Dollar Amounts in Thousands)
                                                         December 31,
                              -------------------------------------------------------------

                                 2007         2006         2005        2004          2003
                              ---------    ---------    ---------   ---------    ----------
<S>                           <C>          <C>          <C>         <C>          <C>
Commercial loans              $  33,642    $  26,950    $  21,151   $  17,911    $   20,754
Commercial leases                 8,634           --           --          --            --
Real Estate
   Construction                  34,809       30,606       28,549      11,597         9,228
   Residential                  189,557      177,082      145,927     148,662       126,317
   Commercial                    55,752       53,318       42,145      33,655        27,022
Installment                       6,520        7,168        4,334       6,315         8,057
Others                               99          172           47          80            86
                              ---------    ---------    ---------   ---------    ----------
   Total Loans and Leases     $ 329,013    $ 295,296    $ 242,153   $ 218,220    $  191,464
                              =========    =========    =========   =========    ==========
</TABLE>

The following table reflects the maturity and  sensitivities  of the Bank's loan
and lease portfolio at December 31, 2007.

<TABLE>
<CAPTION>
                                               (Dollar Amounts in Thousands)
                                             After one
                                One Year    year through    Due after         Total
                                 or less     five years    five years    loans and leases
                               ---------    ------------   ----------    ----------------
<S>                            <C>          <C>            <C>           <C>
Commercial                     $  14,777    $      5,840   $   13,025         $    33,642
Leases                                --           6,943        1,691               8,634
Real Estate
   Construction                   17,271           1,827       15,711              34,809
   Residential                    38,392          37,849      113,316             189,557
   Commercial                      5,538          19,362       30,852              55,752

Installment                        1,106           3,575        1,839               6,520

Others                                99              --           --                  99
                               ---------    ------------   ----------         -----------
   Total Loans and Leases      $  77,183    $     75,396   $  176,434         $   329,013
                               =========    ============   ==========         ===========
</TABLE>

At December 31, 2007,  loans  maturing  after one year  included  approximately:
$165,165,000 in fixed rate loans; and $86,665,000 in variable rate loans.

                                        2

<PAGE>

Investment Securities

The primary  objectives of the Bank's  investment policy are to provide a stable
source of interest income, to provide adequate liquidity necessary to meet short
and  long-term  changes in the mix of its assets and  liabilities,  to provide a
means to achieve goals set forth in the Bank's  interest rate risk policy and to
provide  a  balance  of  quality  and   diversification   to  its  assets.   The
available-for-sale  portion of the  investment  portfolio is expected to provide
funds when demand for acceptable  loans and leases  increases and is expected to
absorb funds when loan and lease demand decreases.

At December 31, 2007 the carrying value of the Bank's  investment  portfolio was
$129,013,733  or 25% of total  assets.  There were no  Federal  Funds Sold as of
December 31, 2007.

The table  below  presents  the  amortized  cost and fair  values of  investment
securities held by the Bank at December 31, 2007 and 2006.

                                            (Dollar Amounts in Thousands)
                                          2007                   2006
                                -----------------------   ----------------------
                                Amortized       Fair       Amortized      Fair
                                   Cost        Value          Cost       Value
                                ----------   ----------   ----------   ---------
Available-for-sale              $  130,145   $  128,980      150,895   $ 147,780

Held-to-maturity                        34           34           41          40
                                ----------   ----------   ----------   ---------
                                $  130,179   $  129,014   $  150,936   $ 147,820
                                ==========   ==========   ==========   =========

The following tables present the maturity  distribution of investment securities
at December 31, 2007, and the weighted  average yields of such  securities.  The
weighted  average  yields  were  calculated  based  on the  amortized  cost  and
tax-effective  yields to maturity of each  security.  The maturity  distribution
shown below will differ from the contractual  maturities because of the borrower
has the ability to prepay or call the security.

Held-to-maturity

<TABLE>
<CAPTION>
                                                           (Dollar Amounts in Thousands)

                                               Over One    Over Five                                     Weighted
                                  One Year     Through      Through    Over Ten      No                   Average
                                   Or Less    Five Years   Ten Years     Years    Maturity     Total       Yield
                                  --------    ----------   ---------   --------   --------   ---------   ---------
<S>                               <C>         <C>          <C>         <C>        <C>        <C>         <C>
Mortgage-Backed Securities        $      7    $       27   $      --         --         --   $      34        7.04%
                                  ========    ==========   =========   ========   ========   =========   =========

Weighted Average Yield                7.22%         6.99%         --         --         --        7.04%
                                  ========    ==========   =========   ========   ========   =========

Available-for-sale (1)

U.S. Treasury Securities          $  2,001    $    2,006   $      --   $     --         --   $   4,007        4.47%
U.S. Government Agency
   Securities                           --         7,000      20,993      3,000         --      30,993        4.60%
State and Municipal Obligations         --            --      31,190         --         --      31,190        4.14%
Corporate & Other Bonds              1,000            --       3,030      4,899      2,000      10,929        6.43%
Mortgage-Backed Securities          12,091        37,026       3,909         --         --      53,026        4.77%
                                  --------    ----------   ---------   --------   --------   ---------   ---------
Total                             $ 15,092    $   46,032   $  59,122   $  7,899      2,000   $ 130,145        4.71%
                                  ========    ==========   =========   ========   ========   =========   =========

Weighted Average Yield                4.60%         4.72%       4.61%      5.78%      4.00%       4.71%
                                  ========    ==========   =========   ========   ========   =========

Total Portfolio                   $ 15,099    $   46,059   $  59,122   $  7,899      2,000   $ 130,179        4.71%
                                  ========    ==========   =========   ========   ========   =========   =========

Total Weighted Average Yield          4.60%         4.72%       4.61%      5.78%      4.00%       4.71%
                                  ========    ==========   =========   ========   ========   =========
</TABLE>

(1) Dollars shown at amortized cost amounts.

                                        3

<PAGE>

Deposits

The following table  summarizes  average deposits and interest rates of the Bank
for the years ended December 31, 2007, 2006 and 2005.

<TABLE>
<CAPTION>
                                                   (Dollar Amounts in Thousands)

                                         2007                  2006                  2005
                                  ------------------   -------------------   --------------------
                                   Average   Average    Average    Average    Average    Average
                                   Balance    Rate      Balance     Rate      Balance      Rate
                                  ---------------------------------------------------------------
<S>                               <C>        <C>       <C>         <C>       <C>         <C>
Non-interest bearing
   demand deposits                $ 68,278        --   $  65,047        --   $  61,375        --

Money market deposits               75,832      2.96%     74,200      2.20%     88,285      1.14%
Savings deposits                    55,026      1.37%     48,141       .67%     55,167       .21%

Time deposits                      136,764      4.59%    115,559      4.05%     84,771      2.73%
                                  ---------------------------------------------------------------
   Total deposits                 $335,900      2.76%  $ 302,947      2.19%  $ 289,598      1.18%
                                  ===============================================================
</TABLE>

Fixed rate  certificates  of deposit in amounts of  $100,000 or more at December
31, 2007 are scheduled to mature as follows:

                        (Dollar Amounts in Thousands)
                        -----------------------------
             Three months or less                       $ 15,986

             Over three, through six months               11,098

             Over six, through twelve months              23,747

             Over twelve months                            1,514
                                                        --------

             Total                                      $ 52,345
                                                        ========

Return on Equity and Assets

The following table summarizes  various  operating ratios of the Company for the
past three years:

<TABLE>
<CAPTION>
                                                                Years ended December 31,
                                                           ---------------------------------
                                                            2007         2006           2005
                                                           -----        -----          -----
<S>                                                        <C>          <C>            <C>
Return on average total
assets (net income divided by average total assets)          .39%         .29%           .91%

Return on average shareholders' equity (net
income divided by average shareholders' equity)             7.25         5.43          15.94

Equity to assets (average shareholders' equity as a
percent of average total assets)                            5.43         5.31           5.74

Dividend payout ratio                                      70.63        92.68          29.21
</TABLE>

Asset/Liability Management

A  principal  objective  of the Bank is to reduce  and manage  the  exposure  of
changes in  interest  rates on its  results of  operations  and to  maintain  an
approximate  balance  between the interest  rate  sensitivity  of its assets and
liabilities within acceptable limits.  While interest-rate risk is a normal part
of the commercial banking activity, the Bank desires to minimize its effect upon
operating results.  Managing the rate sensitivity  embedded in the balance sheet
can be  accomplished  in several ways. By managing the origination of new assets
and  liabilities,  or  the  rollover  of  the  existing  balance  sheet  assets,
incremental  change  towards the desired  sensitivity  position can be achieved.
Hedging  activities,  such as the use of interest rate caps,  can be utilized to
create immediate change in the sensitivity position.

The Bank monitors the relationship  between interest earning assets and interest
bearing liabilities by examining the extent to which such assets and liabilities
are  "interest  rate  sensitive"  and by  monitoring  the Bank's  interest  rate
sensitivity  "gap".  An asset or liability is said to be interest rate sensitive
within a specific  time  period if it will  mature or reprice  within  that time
period.  The interest rate sensitivity gap is defined as the difference  between
the amount of interest-bearing  liabilities maturing or repricing and the amount
of  interest-earning  assets  maturing or repricing for the same period of time.
During a period  of  falling  interest  rates,  a  positive  gap  would  tend to
adversely  affect  net  interest  income,  while a  negative  gap would  tend to
increase  net  interest  income.  During a period of rising  interest  rates,  a
positive gap would tend to increase net  interest  income,  while a negative gap
would tend to adversely affect net interest income.

                                        4

<PAGE>

The  information  presented  in the interest  sensitivity  table is based upon a
combination of maturities,  call provisions,  repricing frequencies,  prepayment
patterns and management  judgment.  The distribution of variable rate assets and
liabilities is based upon the repricing  interval of the instrument.  Management
estimates that less than 20% of savings  products are sensitive to interest rate
changes  based upon  analysis of historic and  industry  data for these types of
accounts.

The following table summarizes the repricing  schedule for the Bank's assets and
liabilities  and provides an analysis of the Bank's  periodic and cumulative GAP
positions.

<TABLE>
<CAPTION>
                                                           (Dollar Amounts in Thousands)
                                                              As of December 31, 2007
                                                                  Repriced Within
                                                   ---------------------------------------------
                                                    Under 3      4 to 12      1 to 5     Over 5
                                                     Months      Months        Years      Years
                                                   ---------   ----------    --------   --------
<S>                                                <C>         <C>           <C>        <C>
Securities available-for-sale                      $  17,657   $   18,389    $ 57,700   $ 36,399
Securities held-to-maturity                                2           20           8          4
Loan and Lease Portfolio                              80,282       71,096     133,642     43,993
Other                                                     --           --          --      5,388
                                                   ---------   ----------    --------   --------
Total interest earning assets                         97,941       89,505     191,350     85,784

Interest-bearing liabilities
   Money Market                                       15,012       38,554      25,173         --
     Savings                                          10,015           --      46,330         --
     Time                                             34,025       91,175       4,770         --
                                                   ---------   ----------    --------   --------
Total interest-bearing deposits                       59,052      129,729      76,273         --

Borrowed funds                                        24,272       21,577      55,038     38,109
                                                   ---------   ----------    --------   --------
Total interest-bearing liabilities                    83,324      151,306     131,311     38,109
Periodic gap                                       $  14,617   $  (61,801)   $ 60,039   $ 47,675
                                                   =========   ==========    ========   ========

Cumulative gap                                     $  14,617   $  (47,184)   $ 12,855   $ 60,530
                                                   =========   ==========    ========   ========

Cumulative gap as a percentage of
   total earning assets                                 3.15%      (10.16)%      2.77%     13.03%
                                                   =========   ==========    ========   ========
</TABLE>

Supervision and Regulation

The  Bank is  chartered  under  the  National  Bank  Act and is  subject  to the
supervision  of, and is regularly  examined by, the Office of the Comptroller of
the Currency (the "OCC") and the Federal Deposit Insurance Corporation ("FDIC").

The Company is a bank  holding  company  within the meaning of the Bank  Holding
Company  Act ("BHC  Act"),  is  registered  as such with and is  subject  to the
supervision  of, and the Bank Holding Company laws, of the Federal Reserve Board
("FRB").  The  Company,  as a bank  holding  company,  is  also  subject  to the
Connecticut  Bank Holding  Company laws.  Certain  legislation  and  regulations
affecting the business of the Company and the Bank are discussed below.

General

As a bank  holding  company,  the Company is subject to the BHC Act. The Company
reports to,  registers  with,  and is examined by the FRB.  The FRB also has the
authority to examine the Company's subsidiaries, which includes the Bank.

The FRB requires the Company to maintain certain levels of capital. See "Capital
Standards"  herein.  The FRB also has the authority to take  enforcement  action
against any bank holding  company  that commits any unsafe or unsound  practice,
violates certain laws, regulations, or conditions imposed in writing by the FRB.
See "Prompt Corrective Action and Other Enforcement Mechanisms" herein.

Under the BHC Act, a company generally must obtain the prior approval of the FRB
before it exercises a  controlling  influence  over,  or  acquires,  directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of, any bank or bank holding  company.  Thus,  the Company is required to obtain
the prior approval of the FRB before it acquires merges or consolidates with any
bank,  or bank  holding  company.  Any  company  seeking  to  acquire,  merge or
consolidate  with the  Company  also  would be  required  to  obtain  the  FRB's
approval.

The FRB generally  prohibits a bank holding  company from  declaring or paying a
cash  dividend  which would impose undue  pressure on the capital of  subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial  position.  The FRB's policy
is that a bank holding  company  should not  continue its existing  rate of cash
dividends on its common stock unless its net income is  sufficient to fully fund
each dividend and its prospective rate of earnings  retention appears consistent
with its capital needs, asset quality and overall financial condition.

                                       5

<PAGE>

Transactions  between the Company,  the Bank and any future  subsidiaries of the
Company are subject to a number of other  restrictions.  FRB policies forbid the
payment by bank  subsidiaries  of management  fees,  which are  unreasonable  in
amount or exceed the fair  market  value of the  services  rendered  (or,  if no
market  exists,  actual costs plus a reasonable  profit).  Additionally,  a bank
holding  company and its  subsidiaries  are prohibited  from engaging in certain
tie-in arrangements in connection with the extension of credit, sale or lease of
property, or furnishing of services. Subject to certain limitations,  depository
institution  subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution,  and the aggregate of such  transactions with all affiliates
may not exceed 20% of the  capital  stock and surplus of such  institution.  The
Company may only borrow from depository institution  subsidiaries if the loan is
secured by marketable  obligations with a value of a designated amount in excess
of the  loan.  Further,  the  Company  may not  sell a  low-quality  asset  to a
depository institution subsidiary.

Capital Standards

The FRB, OCC and other federal banking agencies have adopted  risk-based minimum
capital  adequacy  guidelines  intended to provide a measure of capital adequacy
that  reflects  the  degree of risk  associated  with a  banking  organization's
operations for both  transactions  reported on the balance sheet as assets,  and
transactions,  such as letters of credit and  recourse  arrangements,  which are
reported as  off-balance  sheet items.  Under these  guidelines,  nominal dollar
amounts of assets and credit  equivalent  amounts of off-balance sheet items are
multiplied by one of several risk  adjustment  percentages,  which range from 0%
for assets with low credit risk, such as certain U.S. government securities,  to
100% for assets with relatively higher credit risk, such as business loans.

A banking organization's  risk-based capital ratios are obtained by dividing its
qualifying  capital  by its total  risk-adjusted  assets and  off-balance  sheet
items. The regulators measure  risk-adjusted  assets and off-balance sheet items
against  both total  qualifying  capital  (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings,  noncumulative  perpetual preferred stock and minority
interests in certain  subsidiaries,  less most other  intangible  assets.  Trust
preferred securities are currently considered regulatory capital for purposes of
determining the Company's Tier I capital  ratios.  Tier 2 capital may consist of
limited amounts of the allowance for loan and lease losses,  unrealized gains on
equity  securities and certain other  instruments with some  characteristics  of
equity. The inclusion of elements of Tier 2 capital are subject to certain other
requirements  and  limitations  of the  federal  banking  agencies.  The federal
banking  agencies  require  a  minimum  ratio of  qualifying  total  capital  to
risk-adjusted  assets and off-balance  sheet items of 8%, and a minimum ratio of
Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.

In addition to the risk-based  guidelines,  federal banking  regulators  require
banking  organizations  to maintain a minimum  amount of Tier 1 capital to total
assets,  referred to as the leverage ratio. For a banking  organization rated in
the  highest  of  the  five  categories  used  by  regulators  to  rate  banking
organizations,  the minimum  leverage ratio of Tier 1 capital to total assets is
3%. It is  improbable;  however,  that an  institution  with a 3% leverage ratio
would  receive  the  highest  rating by the  regulators  since a strong  capital
position  is a  significant  part of the  regulators'  rating.  For all  banking
organizations not rated in the highest  category,  the minimum leverage ratio is
at least 100 to 200 basis  points  above the 3%  minimum.  Thus,  the  effective
minimum  leverage ratio,  for all practical  purposes,  is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry,  the regulators have the discretion to set individual
minimum capital  requirements for specific  institutions at rates  significantly
above the minimum guidelines and ratios.

The following  table presents the capital ratios for the Company and the Bank as
of December 31, 2007:

                                                                     Minimum
                                   The Company's    The Bank's      Regulatory
                                       Ratio          Ratio       Capital Level
                                   -------------    ----------    -------------
RISK-BASED CAPITAL RATIO:

   Total Capital                       12.61%          11.65%            8%
   Tier 1 Capital                      11.96%          11.00%            4%

TIER 1 LEVERAGE CAPITAL RATIO:          8.04%           7.36%            4%

Prompt Corrective Action and Other Enforcement Mechanisms

Each  federal  banking  agency is required to take prompt  corrective  action to
resolve  the  problems of insured  depository  institutions,  including  but not
limited to those that fall below one or more of the prescribed  minimum  capital
ratios.  The law requires each federal banking agency to promulgate  regulations
defining  the  following  five   categories  in  which  an  insured   depository
institution  will  be  placed,  based  on  the  level  of  its  capital  ratios:
well-capitalized,   adequately  capitalized,   undercapitalized,   significantly
undercapitalized and critically undercapitalized.

                                        6

<PAGE>

An insured  depository  institution  generally is  classified  in the  following
categories based on capital measures indicated below:

            "Well-Capitalized":

                  Total risk-based capital of 10% or more;
                  Tier 1 risk-based ratio capital of 6% or more; and
                  Leverage ratio of 5% or more.

            "Adequately Capitalized":

                  Total risk-based capital of at least 8%;
                  Tier 1 risk-based capital of at least 4%; and
                  Leverage ratio of at least 4%.

            "Undercapitalized":

                  Total risk-based capital less than 8%
                  Tier 1 risk-based capital less than 4%; or
                  Leverage ratio less than 4%.

            "Significantly Undercapitalized":

                  Total risk-based capital less than 6%
                  Tier 1 risk-based capital less than 3%; or
                  Leverage ratio less than 3%.

            "Critically Undercapitalized":

                  Tangible equity to total assets less than 2%.

The Bank is  classified as  "well-capitalized"  under the above  guidelines.  An
institution   that,   based  upon  its  capital   levels,   is   classified   as
well-capitalized,  adequately capitalized, or undercapitalized may be treated as
though it were in the next lower  capital  category if the  appropriate  federal
banking agency,  after notice and  opportunity  for hearing,  determines that an
unsafe or unsound  condition  or an unsafe or  unsound  practice  warrants  such
treatment.  At each successive  lower capital  category,  an insured  depository
institution  is subject to more  restrictions.  The  federal  banking  agencies,
however,  may not treat an institution as "critically  undercapitalized"  unless
its capital ratio actually  warrants such  treatment.  If an insured  depository
institution is undercapitalized, it will be closely monitored by the appropriate
federal banking agency.  Undercapitalized institutions must submit an acceptable
capital  restoration plan with a guarantee of performance  issued by the holding
company.  Further  restrictions  and  sanctions  are  required  to be imposed on
insured depository institutions that are critically  undercapitalized.  The most
important  additional measure is that the appropriate  federal banking agency is
required  to either  appoint a receiver  for the  institution  within 90 days or
obtain the  concurrence  of the FDIC in another  form of action.  In addition to
measures taken under the prompt corrective action provisions, commercial banking
organizations  may be subject to  potential  enforcement  actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule,  regulation or any condition  imposed in writing by
the agency or any written  agreement  with the agency.  Enforcement  actions may
include  the  imposition  of  a  conservator  or  receiver,  the  issuance  of a
cease-and-desist  order that can be  judicially  enforced,  the  termination  of
insurance of deposits (in the case of a depository institution),  the imposition
of civil money penalties,  the issuance of directives to increase  capital,  the
issuance  of formal  and  informal  agreements,  the  issuance  of  removal  and
prohibition orders against institution-affiliated parties and the enforcement of
such actions through  injunctions or restraining orders based upon a prima facie
showing by the agency that such relief is appropriate.  Additionally,  a holding
company's  inability to serve as a source of strength to its subsidiary  banking
organizations could serve as an additional basis for a regulatory action against
the holding company.

Safety and Soundness Standards

The federal banking agencies have established safety and soundness standards for
insured financial  institutions  covering:  (1) internal  controls,  information
systems and internal audit systems; (2) loan and lease documentation; (3) credit
underwriting;  (4) interest rate exposure;  (5) asset growth;  (6) compensation,
fees and benefits;  (7) asset quality and earnings;  (8) excessive  compensation
for executive officers,  directors or principal shareholders which could lead to
material financial loss; and (9) information  security  standards.  If an agency
determines  that an  institution  fails to meet any standard  established by the
guidelines,  the agency may require the financial  institution  to submit to the
agency  an  acceptable  plan to  achieve  compliance  with the  standard.  These
guidelines also set forth  standards for evaluating and monitoring  earnings and
for  ensuring  that  earnings are  sufficient  for the  maintenance  of adequate
capital and reserves. If the agency requires submission of a compliance plan and
the  institution  fails to timely submit an  acceptable  plan or to implement an
accepted  plan,  the  agency  must  require  the   institution  to  correct  the
deficiency.

Restrictions on Dividends and Other Distributions

The power of the board of  directors  of an insured  depository  institution  to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory  restrictions  which limit the amount  available for
such  distribution  depending  upon the earnings,  financial  condition and cash
needs of the institution,  as well as general business  conditions.  Federal Law
prohibits insured

                                        7

<PAGE>

depository  institutions from paying management fees to any controlling  persons
or, with certain limited  exceptions,  making capital  distributions,  including
dividends,   if,   after   such   transaction,    the   institution   would   be
undercapitalized.

The Company's  ability to pay dividends  depends in large part on the ability of
the  Bank to pay  dividends  to the  Company.  The  ability  of the  Bank to pay
dividends is subject to restrictions  set forth in the National  Banking Act and
regulations  of the OCC.  See  "Market  Price for  Registrant's  Common  Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" herein.

Additionally,  a bank may not  make  any  capital  distribution,  including  the
payment of dividends,  if, after making such distribution,  the bank would be in
any of the  "under-capitalized"  categories  under the OCC's  Prompt  Corrective
Action regulations.

The OCC also has the  authority to prohibit  the Bank from  engaging in business
practices  which the OCC  considers  to be unsafe or  unsound.  It is  possible,
depending upon the financial condition of a bank and other factors, that the OCC
could  assert  that  the  payment  of  dividends  or  other   payments  in  some
circumstances  might be such an unsafe or unsound  practice and thereby prohibit
such payment.

FDIC Insurance

The Bank's  deposits are insured  through the Bank Insurance Fund of the FDIC up
to a maximum of $100,000 per separately  insured  depositor.  Effective April 1,
2006,  the  federal  deposit  insurance  limits on certain  retirement  accounts
increased so that such retirement accounts are separately insured by the FDIC up
to $250,000.

Inter-Company Borrowings

Bank holding  companies  are also  restricted as to the extent to which they and
their  subsidiaries  can borrow or otherwise  obtain  credit from one another or
engage in certain other transactions. The "covered transactions" that an insured
depository  institution  and its  subsidiaries  are  permitted to engage in with
their nondepository  affiliates are limited to the following amounts: (1) in the
case of any one such affiliate,  the aggregate amount of covered transactions of
the insured depository institution and its subsidiaries cannot exceed 10% of the
capital stock and the surplus of the insured depository institution;  and (2) in
the case of all affiliates,  the aggregate amount of covered transactions of the
insured  depository  institution and its  subsidiaries  cannot exceed 20% of the
capital stock and surplus of the insured  depository  institution.  In addition,
extensions of credit that constitute covered transactions must be collateralized
in prescribed amounts.  "Covered transactions" are defined by statute to include
a loan or extension of credit to the affiliate,  a purchase of securities issued
by an  affiliate,  a purchase of assets  from the  affiliate  (unless  otherwise
exempted by the FRB),  the  acceptance of securities  issued by the affiliate as
collateral for a loan and the issuance of a guarantee,  acceptance, or letter of
credit for the benefit of an affiliate.  Further, a bank holding company and its
subsidiaries  are  prohibited  from engaging in certain tie-in  arrangements  in
connection with any extension of credit, lease or sale of property or furnishing
of services.

Effects of Government Policy

Legislation  adopted in recent years has  substantially  increased  the scope of
regulations  applicable  to the Bank and the Company and the scope of regulatory
supervisory authority and enforcement power over the Bank and the Company.

Virtually  every  aspect of the Bank's  business is subject to  regulation  with
respect  to such  matters  as the amount of  reserves  that must be  established
against  various  deposits,  the  establishment  of  branches,  reorganizations,
nonbanking  activities and other operations.  Numerous laws and regulations also
set forth special  restrictions and procedural  requirements with respect to the
extension  of credit,  credit  practices,  the  disclosure  of credit  terms and
discrimination in credit transactions.

The descriptions of the statutory provisions and regulations applicable to banks
and bank  holding  companies  set forth  above do not  purport  to be a complete
description of such statutes and  regulations  and their effects on the Bank and
the Company.  Proposals to change the laws and regulations governing the banking
industry are frequently  introduced in Congress,  in the state  legislatures and
before the various bank  regulatory  agencies.  The likelihood and timing of any
changes and the impact such  changes  might have on the Bank and the Company are
difficult to determine.

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

The  Gramm-Leach-Bliley  Financial  Services  Modernization Act of 1999 provides
bank holding  companies,  banks,  securities  firms,  insurance  companies,  and
investment management firms the option of engaging in a broad range of financial
and related  activities by opting to become a "financial holding company." These
holding  companies  are  subject to  oversight  by the FRB, in addition to other
regulatory  agencies.  Under the financial holding company structure,  financial
institutions   have  the  ability  to  purchase   or   establish   broker/dealer
subsidiaries,   as  well  as  the  option  to  purchase   insurance   companies.
Additionally,   securities  and  insurance   firms  are  permitted  to  purchase
full-service banks.

As a general rule, the individual  entities  within a financial  holding company
structure  are  regulated  according to the type of services  provided  which is
referred to as functional  regulation.  Under this approach, a financial holding
company  with  banking,  securities,  and  insurance  subsidiaries  will have to
interact with several  regulatory  agencies (e.g.,  appropriate  banking agency,
Securities and Exchange Commission ("SEC"), state insurance commissioner).

While the Act facilitates the ability of financial  institutions to offer a wide
range of  financial  services,  large  financial  institutions  appear to be the
primary  beneficiaries  as a result of this Act because many community banks are
less able to devote the capital and management

                                        8

<PAGE>

resources  needed to  facilitate  broad  expansion  of financial  services.  The
Company  has no current  plans to operate  within a  financial  holding  company
structure.

The Sarbanes-Oxley Act of 2002

The purpose of the  Sarbanes-Oxley  Act is to protect investors by improving the
accuracy  and  reliability  of  corporate   disclosures  made  pursuant  to  the
securities laws, and for other purposes.

The Sarbanes-Oxley Act amends the Securities  Exchange Act of 1934 to prohibit a
registered  public accounting firm from performing  specified  nonaudit services
contemporaneously  with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit  committee  of  an  issuer  with   responsibility   for  the  appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services.  It requires each committee member to be a member of the
board  of  directors  of  the  issuer,  and  to be  otherwise  independent.  The
Sarbanes-Oxley  Act  further  requires  the chief  executive  officer  and chief
financial officer of an issuer to make certain  certifications as to each annual
or quarterly report.

In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances.  Specifically, if an issuer is required
to prepare an accounting  restatement due to the material  noncompliance  of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive  officer and chief financial officer of
the issuer shall be required to reimburse  the issuer for (1) any bonus or other
incentive-based  or equity based  compensation  received by that person from the
issuer during the 12-month period  following the first public issuance or filing
with  the SEC of the  financial  document  embodying  such  financial  reporting
requirement;  and (2) any profits  realized  from the sale of  securities of the
issuer during that 12-month period.

Pursuant to the Sarbanes-Oxley Act, the SEC has adopted rules to require:

      o     disclosure  of  all  material  off-balance  sheet  transactions  and
            relationship  that may have a  material  effect  upon the  financial
            status of an issuer; and

      o     the presentation of pro forma financial information in a manner that
            is not  misleading,  and which is  reconcilable  with the  financial
            condition  of  the  issuer  under  generally   accepted   accounting
            principles.

The Sarbanes-Oxley  Act, among other things, also provides for mandated internal
control  report and assessment  with the annual report and an attestation  and a
report  on  such  report  by the  Company's  auditor.  In  accordance  with  the
requirements  of  Section  404,  Management's  report on  internal  controls  is
included  herein at Item 9A(T).  The SEC had delayed  until  fiscal years ending
after December 15, 2008 for the auditors attestation report on internal controls
over financial reporting and has proposed a further one-year delay. The SEC also
requires an issuer to institute a code of ethics for senior  financial  officers
of the Company.

The USA Patriot Act

On  October  26,  2001,   President   Bush  signed  into  law  The  Uniting  and
Strengthening  America by Providing  Appropriate Tools Required to Intercept and
Obstruct  Terrorism  Act of 2001 (the  "Patriot  Act").  On March 10, 2006,  the
President signed  legislation making permanent certain provisions of the Patriot
Act. The  terrorist  attacks in  September,  2001 have  impacted  the  financial
services  industry and led to federal  legislation that addresses certain issues
involving financial  institutions.  Part of the Patriot Act is the International
Money Laundering  Abatement and Financial  Anti-Terrorism  Act of 2001 ("IMLA").
IMLA authorizes the Secretary of the Treasury, in consultation with the heads of
other government  agencies,  to adopt special measures applicable to banks, bank
holding companies, and other financial institutions.  These measures may include
enhanced   recordkeeping  and  reporting   requirements  for  certain  financial
transactions  that  are of  primary  money  laundering  concern,  due  diligence
requirements  concerning the beneficial  ownership of certain types of accounts,
and  restrictions  or  prohibitions  on certain  types of accounts  with foreign
financial institutions.

Among its other  provisions,  IMLA requires each financial  institution  to: (i)
establish  an  anti-money  laundering  program;  (ii)  establish  due  diligence
policies,  procedures and controls with respect to its private banking  accounts
and correspondent  banking accounts  involving  foreign  individuals and certain
foreign banks;  and (iii) avoid  establishing,  maintaining,  administering,  or
managing  correspondent  accounts  in the United  States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging  cooperation among financial institutions,
regulatory   authorities  and  law  enforcement   authorities  with  respect  to
individuals,  entities and organizations  engaged in, or reasonably suspected of
engaging in,  terrorist acts or money  laundering  activities.  IMLA expands the
circumstances  under which funds in a bank account may be forfeited and requires
covered  financial  institutions  to  respond  under  certain  circumstances  to
requests for information  from federal banking  agencies within 120 hours.  IMLA
also  amends the BHCA and the Bank  Merger Act to require  the  federal  banking
agencies to consider the effectiveness of a financial  institution's  anti-money
laundering  activities when reviewing an application  under these acts. The Bank
has  implemented  policies and  procedures  to address the  requirements  of the
Patriot Act and IMLA.

Impact of Monetary Policies

Banking is a business which depends on interest rate differentials.  In general,
the  difference  between the  interest  paid by a bank on its deposits and other
borrowings  and  the  interest  rate  earned  by a bank  on  loans  and  leases,
securities  and other  interest-earning  assets  comprises  the major  source of
banks'  earnings.  Thus,  the  earnings  and growth of banks are  subject to the
influence of economic conditions generally,  both domestic and foreign, and also
to the  monetary  and fiscal  policies  of the United  States and its  agencies,
particularly  the FRB. The FRB  implements  national  monetary  policy,  such as
seeking to curb inflation and combat recession,  by its open-market  dealings in
United States government securities, by adjusting the required level of reserves
for financial institutions subject to reserve requirements and

                                        9

<PAGE>

through adjustments to the discount rate applicable to borrowings by banks which
are  members of the FRB.  The actions of the FRB in these  areas  influence  the
growth of bank  loans and  leases,  investments  and  deposits  and also  affect
interest rates. The nature and timing of any future changes in such policies and
their impact on the Company cannot be predicted.  In addition,  adverse economic
conditions  could make a higher  provision  for loan and lease  losses a prudent
course and could cause higher loan and lease loss  charge-offs,  thus  adversely
affecting the Bank's net earnings.

Employees

The Company,  the Bank and its subsidiaries employ 117 full-time employees and 5
part-time  employees.  Neither  the  Company  nor the  Bank are  parties  to any
collective bargaining agreements, and employee relations are considered good.

Forward Looking Statements

This Form 10-K and future  filings  made by the Company with the SEC, 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,  attraction of new
deposit and loan and lease  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  non-financial  institutions  (d)  the  impact  of  technological
advances;  and (e)  other  risks  detailed  from  time to time in the  Company's
filings with the SEC.

Such  developments  could  have an  adverse  impact on the  Company's  financial
position  and results of  operation.  See Item 1A. Risk  Factors for  additional
information.

Availability of Financial Information

The Company files reports with the SEC. Those reports  include the annual report
on Form 10-K,  quarterly reports on Form 10-Q, current event reports on Form 8-K
and proxy statements, as well as any amendments to those reports. The public may
read and copy any  materials  that the  Company  files with the SEC at the SEC's
Public Reference Room at 100 F Street,  N.E.,  Washington,  DC 20549. The public
may obtain  information on the operation of the Public Reference Room by calling
the SEC at  1-800-SEC-0330.  The SEC  maintains an Internet  site that  contains
quarterly  and  annual  reports,  proxy and  information  statements,  and other
information   regarding  issuers  that  file  electronically  with  the  SEC  at
http://www.sec.gov. The Company's website address is: www.fnbl.com.

ITEM 1A. RISK FACTORS

      In  addition  to the  other  information  contained  in this  report,  the
following risks may affect the Bank. If any of these risks occurs, the Company's
business, financial condition or operating results could be adversely affected.

      Changes  in  economic  conditions  could  materially  hurt  the  Company's
business.

      The  business  of the  Company is  directly  affected  by factors  such as
economic, political and market conditions, broad trends in industry and finance,
legislative and regulatory  changes,  changes in government  monetary and fiscal
policies  and  inflation,  all of which are beyond the  Company's  control.  The
Company  is  particularly  affected  by  economic  conditions  in the  state  of
Connecticut.  Deterioration in economic conditions could result in the following
consequences, any of which could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows:

   o  problem assets and foreclosures may increase;

   o  demand for the Bank's products and services may decline;

   o  low cost or non-interest bearing deposits may decrease; and,

   o  collateral for loans and leases made by the Bank,  especially real estate,
      may decline in value, in turn reducing  customers'  borrowing  power,  and
      reducing  the value of assets and  collateral  associated  with the Bank's
      existing loans and leases.

      In view of the geographic  concentration of the Bank's  operations and the
collateral  securing  the Bank's  loan and lease  portfolio  in  Litchfield  and
Hartford Counties,  Connecticut, the Bank may be particularly susceptible to the
adverse effects of any of these consequences, any of which could have a material
adverse  effect  on  the  Bank's  business,   financial  condition,  results  of
operations and cash flows.

                                       10

<PAGE>

      The Bank is dependent on key personnel.

      Competition for qualified  employees and personnel in the banking industry
is intense and there are a limited  number of qualified  persons with  knowledge
of, and experience in, the Connecticut,  community banking industry.  The Bank's
success  depends to a significant  degree upon the Bank's ability to attract and
retain qualified management,  and personnel and upon the continued contributions
of the Bank's  management and personnel.  In particular,  the Bank's success has
been and  continues  to be highly  dependent  upon the  abilities  of the Bank's
management team members, which has expertise in community banking and experience
in the markets served by the Bank. The loss of the services of the Bank's senior
executive  management team members or other key executives could have a material
adverse  effect  on  the  Bank's  business,   financial  condition,  results  of
operations and cash flows.

      The Bank's  business is subject to interest  rate risk and  variations  in
interest rates may negatively affect the Bank's financial performance.

      A   substantial   portion  of  the  Bank's  income  is  derived  from  the
differential  or  "spread"  between  the  interest  earned on loans and  leases,
securities and other  interest  earning  assets,  and interest paid on deposits,
borrowings and other interest bearing liabilities. Because of the differences in
the  maturities and repricing  characteristics  of the Bank's  interest  earning
assets  and  interest  bearing  liabilities,  changes in  interest  rates do not
produce  equivalent changes in interest income earned on interest earning assets
and interest paid on interest bearing liabilities.  Accordingly, fluctuations in
interest rates could  adversely  affect the Bank's  interest rate spread and, in
turn, the Bank's profitability.  In addition, loan and lease origination volumes
are affected by market interest rates.  Rising  interest rates,  generally,  are
associated  with a lower  volume  of loan and  lease  originations  while  lower
interest rates are usually  associated with higher loan and lease  originations.
Conversely, in rising interest rate environments, loan and lease repayment rates
may decline and in falling interest rate environments,  loan and lease repayment
rates may increase.  Falling  interest rate  environments  may cause  additional
refinancing of commercial real estate and 1-4 family residence loans,  which may
depress the Bank's loan and lease  volumes or cause rates on loans and leases to
decline.  In addition,  an increase in the general level of short-term  interest
rates on  variable  rate loans and leases may  adversely  affect the  ability of
certain  borrowers to pay the interest on and principal of their  obligations or
reduce the amount they wish to borrow.  As  short-term  rates  continue to rise,
retention  of  existing  deposit  customers  and the  attraction  of new deposit
customers  may require the Bank to increase  rates it pays on deposit  accounts.
Changes in levels of market interest rates could materially and adversely affect
the  Bank's net  interest  spread,  asset  quality,  loan and lease  origination
volume, business, financial condition, results of operations and cash flows.

      Certain  types of loans and leases in the Bank's  portfolio  have a higher
degree of risk and a downturn in the Bank's real estate  markets  could hurt the
Bank's business.

      A  downturn  in the  Bank's  real  estate  markets  could  hurt the Bank's
business  because  most of the Bank's  loans are  secured by real  estate.  Real
estate  values and real  estate  markets  are  generally  affected by changes in
national, regional or local economic conditions,  fluctuations in interest rates
and the availability of loans and leases to potential purchasers, changes in tax
laws and other  governmental  statutes,  regulations  and  policies  and acts of
nature.  If real estate  prices  decline,  the value of real  estate  collateral
securing  the Bank's loans and leases  could be reduced.  The Bank's  ability to
recover on defaulted loans and leases by foreclosing and selling the real estate
collateral  would then be diminished and the Bank would be more likely to suffer
losses on  defaulted  loans and leases.  A majority of the Bank's loan and lease
portfolio consisted of loans and leases  collateralized by various types of real
estate.  Substantially  all of the Bank's real estate  collateral  is located in
Connecticut. If there is a significant decline in real estate values, especially
in Connecticut, the collateral for the Bank's loans and leases will provide less
security.  Any such downturn could have a material  adverse effect on the Bank's
business, financial condition, results of operations and cash flows.

      The ability to attract deposits may limit growth.

      The Bank's  ability to increase the Bank's assets depends in large part on
the Bank's ability to attract  additional  deposits at favorable rates. The Bank
anticipates  seeking  additional  deposits by offering deposit products that are
competitive  with those offered by other  financial  institutions  in the Bank's
markets and by establishing personal  relationships with the Bank's customers. A
bank's ability to attract additional  deposits at competitive rates could have a
material effect on a bank's business, financial condition, results of operations
and cash flows.

      In the business of banking,  the allowance for loan and lease losses is an
estimate and may not be adequate to cover all future actual losses.

      A source of risk arises from the possibility that losses could be incurred
because  borrowers,  guarantors,  and  related  parties  may fail to  perform in
accordance with the terms of their loans and leases. The underwriting and credit
monitoring policies and procedures that we have adopted to address this risk may
not prevent  unexpected  losses that could have a material adverse effect on the
Bank's  business,  financial  condition,  results of operations  and cash flows.
Unexpected losses may arise from a wide variety of specific or systemic factors,
many of which are beyond the Bank's ability to predict, influence or control.

      Like all banking  institutions,  the Bank  maintains an allowance for loan
and lease losses to provide for loan and lease defaults and non-performance. The
allowance for loan and lease losses reflects the Bank's estimate of the probable
losses in the Bank's loan and lease  portfolio  at the  relevant  balance  sheet
date.  The  Bank's  allowance  for  loan  and  lease  losses  is  based on prior
experience,  as  well  as an  evaluation  of the  known  risks  in  the  current
portfolio,  composition  and growth of the loan and lease portfolio and economic
factors.  The  determination  of an  appropriate  level of loan and  lease  loss
allowance  is  an  inherently   difficult  process  and  is  based  on  numerous
assumptions.  The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond the Bank's control and these losses may exceed current estimates. Federal
and state regulatory agencies, as an integral part of their examination process,
review the Bank's loans, leases and allowance for loan and lease losses.

                                       11

<PAGE>

      Banks rely on certain third-party service providers.

      The Bank relies on certain  third-party  service providers for much of the
Bank's  communications,  information,  operating and financial  control  systems
technology.  Any failure or  interruption or breach in security of these systems
could result in failures or  interruptions  in the Bank's customer  relationship
management, general ledger, deposit, servicing and/or loan and lease origination
systems. The Bank cannot be certain that such failures or interruptions will not
occur or, if they do occur,  that they will be adequately  addressed by the Bank
or the third parties on which the Bank relies. The occurrence of any failures or
interruptions  could have a  material  adverse  effect on the  Bank's  business,
financial condition,  results of operations and cash flows. If any of the Bank's
third-party service providers experience financial, operational or technological
difficulties,  or if there is any other  disruption in the Bank's  relationships
with  them,  the Bank may be  required  to locate  alternative  sources  of such
services,  and the Bank cannot be certain  that the Bank could  negotiate  terms
that are as  favorable  to the  Bank,  or could  obtain  services  with  similar
functionality as found in the Bank's existing systems without the need to expend
substantial  resources,  if at all.  Any of  these  circumstances  could  have a
material adverse effect on the Bank's business,  financial condition, results of
operations and cash flows.

      The Bank faces strong  competition  from financial  service  companies and
other companies that offer banking services.

      The Bank conducts the Bank's banking operations in Connecticut.  Increased
competition  in the  Bank's  markets  may result in  reduced  loans,  leases and
deposits.  Ultimately,  the Bank may not be able to compete successfully against
current and future competitors. Many competitors offer the banking services that
the Bank offers in its service areas. These competitors  include national banks,
regional banks and other community banks.  The Bank also faces  competition from
many  other  types  of  financial  institutions,   including  savings  and  loan
associations,  finance companies,  brokerage firms, insurance companies,  credit
unions, mortgage banks and other financial  intermediaries.  In particular,  the
Bank's  competitors  include  several major  financial  companies  whose greater
resources may afford them a  marketplace  advantage by enabling them to maintain
numerous  locations and mount extensive  promotional and advertising  campaigns.
Additionally,  banks and other financial institutions with larger capitalization
and financial  intermediaries  not subject to bank regulatory  restrictions  may
have larger lending limits,  which would allow them to serve the credit needs of
larger customers.  Areas of competition include interest rates for loans, leases
and deposits, efforts to obtain loan, lease and deposit customers and a range in
quality of products  and  services  provided,  including  new  technology-driven
products and  services.  Technological  innovation  continues to  contribute  to
greater competition in domestic and international  financial services markets as
technological  advances enable more companies to provide financial services. The
Bank also faces competition from out-of-state financial intermediaries that have
opened loan and lease production  offices or that solicit deposits in the Bank's
market areas. If the Bank is unable to attract and retain banking customers,  it
may be unable to continue  the Bank's  loan,  lease and  deposit  growth and the
Bank's business,  financial condition,  results of operations and cash flows may
be adversely affected.

      Changes in  accounting  standards  could  materially  impact the Company's
financial statements.

      From time to time the  Financial  Accounting  Standards  Board changes the
financial  accounting  and reporting  standards  that govern the  preparation of
financial statements.

      The Bank is subject to extensive government regulation.

      The Bank's  operations  are subject to  extensive  regulation  by federal,
state and local  governmental  authorities  and are subject to various  laws and
judicial and administrative  decisions imposing requirements and restrictions on
part or all of the Bank's  operations.  Such  laws,  rules and  regulations  are
subject to change.  The Bank cannot be certain that these proposed  laws,  rules
and regulations or any other laws,  rules or regulations  will not be adopted in
the future,  which could make  compliance  much more difficult or expensive,  or
otherwise adversely affect the Bank's business,  financial condition, results of
operations or cash flows.

      The Bank is exposed to potential risk of  environmental  liabilities  with
respect to properties to which it takes title.

      In the  course of the Bank's  business,  the Bank may  foreclose  and take
title to real estate,  and could be subject to  environmental  liabilities  with
respect to these properties.

      New litigation or changes in current litigation could adversely affect the
Company's financial condition or results of operation.

      Although there is a currently no material  litigation to which the Company
is the subject,  other than that disclosed in Item 3 herein,  future  litigation
that arises  during the normal  course of business  could be material and have a
negative  impact on the  Company's  earnings.  Future  litigation  or changes in
current  litigation could also adversely impact the reputation of the Company in
the communities that it serves.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not  applicable  as  the  registrant  is  not  an  accelerated  filer  or  large
accelerated filer.

                                       12

<PAGE>

ITEM 2.  PROPERTIES

The  Company  is not the  owner or  lessee  of any  properties.  The  properties
described below are properties owned or leased by the Bank.

The Bank's main office is located at 13 North Street,  Litchfield,  Connecticut.
In addition to the Bank's main office in  Litchfield,  the Bank has  branches in
Marble  Dale,  Washington  Depot,  Goshen,  Canton,  New  Milford,  Roxbury  and
Torrington, Connecticut.

During the year ended  December 31, 2007,  the net rental  expenses  paid by the
Bank for all of its office properties was approximately $242,000. All properties
are  considered to be in good  condition and adequate for the purposes for which
they are used. The following  table outlines all owned or leased property of the
Bank.

<TABLE>
<CAPTION>
                                                     Owned                Lease
     Location                Address                Leased             Expiration
------------------   -----------------------   ----------------   --------------------
<S>                  <C>                       <C>                <C>
Main Office          13 North Street           Owned since 1816
                     Litchfield, CT

Marble Dale          Route 202                 Leased             2008
                     Marble Dale, CT

Washington Depot     Bryan Plaza               Owned since 1959
                     Washington Depot, CT

Goshen               Routes 4 & 63             Owned since 1989
                     Goshen, CT

Roxbury              Route 67                  Leased             2009 with one 5-year
                     Roxbury, CT                                  extension

New Milford          Route 202                 Leased             2011 with one 5-year
                     New Milford, CT                              extension

Torrington           1057 Torringford Street   Leased             2026 with option
                     Torrington, CT                               to purchase

Canton               188 Albany Turnpike       Owned since 2005
                     Canton, CT

Trust Department     40 West Street            Owned since 1996
                     Old Borough Firehouse
                     Litchfield, CT

Torrington, North    397 Main Street           Owned since 2007
                     Torrington, CT

Finance Department   29 West Street            Leased             2009 with one 3-year
                     Litchfield, CT                               extension
</TABLE>

ITEM 3.  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.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During  the  fourth  quarter  of 2007,  no  matter  was  submitted  to a vote of
Shareholders of the Company.

                                       13

<PAGE>

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES

Market Price

The Company's Common Stock is traded on the Over the Counter ("OTC") Bulletin
Board under the symbol FLFL.OB. As of March 12, 2008, there were 2,504,729
shares issued and 2,371,700 shares outstanding, which were held by approximately
420 shareholders.

The following information, provided by Oppenheimer and Co., sets forth
transactions in the Company's Common Stock in each quarter of the two most
recently completed fiscal years:

2006                          High/Low
                         -----------------
First Quarter ......     $ 28.10   $ 23.10
Second Quarter .....       28.10     24.76
Third Quarter ......       25.71     23.81
Fourth Quarter .....       23.31     21.25

2007                          High/Low
                         -----------------
First Quarter ......     $ 21.85   $ 19.10
Second Quarter .....       20.40     18.60
Third Quarter ......       19.00     13.50
Fourth Quarter .....       16.95     14.99

In December 2006, in a single transaction, the Company purchased 5,000 shares of
outstanding  Common  stock.  In  September  2007,  Company's  Board of Directors
approved a stock  repurchase  program to acquire in the next twelve months up to
an  aggregate of 30,000  shares of the  Company's  outstanding  shares of common
stock.  Pursuant  to the  repurchase  program,  in  October  2007,  the  Company
purchased 8,263 shares of the Company's Common stock.

Dividends

All shares of the Company's Common Stock are entitled to participate equally and
ratably in such  dividends as may be declared by the Board of  Directors  out of
funds  legally  available  therefore.  During 2005,  2006 and 2007,  the Company
declared cash  dividends of 57 cents per share,  60 cents per share and 60 cents
per share,  respectively.  During 2005, 2006 and 2007 the Company declared stock
dividends of 5.00%.

The  Company's  ability  to pay  dividends  is limited  by the  prudent  banking
principles  applicable to all bank holding  companies  and by the  provisions of
Delaware  Corporate  law, which  provides that a company may,  unless  otherwise
restricted by its certificate of incorporation,  pay dividends in cash, property
or shares of capital stock out of surplus or, if no surplus  exists,  out of net
profits  for the fiscal  year in which  declared  or out of net  profits for the
preceding  fiscal year (provided that such payment will not reduce the company's
capital  below the amount of capital  represented  by classes of stock  having a
preference upon distributions of assets).

As a practical  matter,  the  Company's  ability to pay  dividends  is generally
limited by the Bank's  ability to dividend  funds to the Company.  As a national
bank, the declaration and payment of dividends by the Bank must be in accordance
with the National Bank Act. More specifically,  applicable law provides that the
Board of Directors may declare  quarterly,  semiannual  and annual  dividends so
long as the Bank  carries at least ten percent  (10%) of its net profits for the
preceding half year in its surplus fund,  and, in the case of annual  dividends,
has carried not less than  one-tenth  of its net  profits of the  preceding  two
consecutive  half year periods in its surplus fund.  National banks are required
to obtain the approval of the Office of the  Comptroller  of the Currency if the
total dividends  declared by it in any calendar year exceed the total of its net
profits for that year  combined  with any retained net profits of the  preceding
two  years  less  any  required   transfers.   In  addition  to  such  statutory
requirements,  the payment of an excessive dividend which would deplete a bank's
capital  base to an  inadequate  level  could be  considered  to be an unsafe or
unsound banking practice and be a basis for supervisory  action by the Office of
the  Comptroller  of  the  Currency.  As of  December  31,  2007,  approximately
$3,417,000  of the  undistributed  net  income  of the  Bank  was  theoretically
available for distribution to the Company as dividends.  However, the ability of
the Bank to declare  and pay such  dividends  would be subject to safe and sound
banking practices.

                                       14

<PAGE>

Recent Sales of Unregistered Securities

In the past three years, there have been no sales of unregistered securities.

Securities Authorized for Issuance under Equity Compensation Plans

The following  schedule provides  information with respect to compensation plans
under which equity  securities  are  authorized  for issuance as of December 31,
2007:

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                        Number of
                                     securities to be
                                        issued upon                                         Number of securities remaining
                                        exercise of                                         available for future issuance
                                        outstanding       Weighted average exercise price     under equity compensation
                                     options, warrants   of outstanding options, warrants    plans (excluding securities
          Plan Category                  and rights                 and rights                 reflected in Column (a))
--------------------------------------------------------------------------------------------------------------------------
                                            (a)                         (b)                               (c)
<S>                                  <C>                 <C>                                <C>
Equity compensation plans approved
         by shareholders                   32,327                     $ 11.64                            25,000
--------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
  approved by shareholders                  N/A                         N/A                               N/A
--------------------------------------------------------------------------------------------------------------------------
              Total                        32,327                     $ 11.64                            25,000
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                          STOCK PRICE PERFORMANCE GRAPH
                          -----------------------------

Set forth below is a line graph with an explanatory  table  comparing the yearly
percentage  change in the cumulative total  shareholder  return on the Company's
Common  Stock,  based on the  market  price of the  Company's  Common  Stock and
assuming  reinvestment of dividends,  with the total return of the S&P 500 Index
and the SNL Bank Index for Banks with total  assets  more than $250  million and
less than $500 million.  The  calculation of total  cumulative  return assumes a
$100  investment in the Company's  Common Stock and each of the other indices on
December 31, 2002.

                         First Litchfield Financial Corp
                            Total Return Performance

[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]

                 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
              AMONG FIRST LITCHFIELD FINANCIAL CORP., S&P 500 INDEX
                       AND THE SNL $250 - $500 BANK INDEX

<TABLE>
<CAPTION>
Period Ending                     12/31/02   12/31/03   12/31/04   12/31/05   12/31/06   12/31/07
                                  --------   --------   --------   --------   --------   --------
<S>                               <C>        <C>        <C>        <C>        <C>        <C>
Index
-----
First Litchfield Financial Corp    100.00     168.50     254.05     242.21     199.42     152.79
S & P 500 Index                    100.00     128.69     142.69     149.69     173.33     182.82
SNL $250-$500M Bank Index          100.00     144.49     163.99     174.11     181.92     147.85
</TABLE>

                                       15

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

The  selected  consolidated  financial  data set forth  below  should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations," the audited  consolidated  financial  statements and
the notes  thereto and the other  information  contained in this Form 10-K.  The
selected  balance sheet data as of December 31, 2007 and 2006,  and the selected
income  statement data for the years ended December 31, 2007, 2006 and 2005, are
derived  from,  and are  qualified  by  reference  to, the audited  consolidated
financial  statements of the Company appearing  elsewhere in this Form 10-K. The
balance sheet data as of December 31, 2005, 2004 and 2003, and income  statement
data for the years ended  December 31, 2004,  and 2003, are derived from audited
consolidated financial statements of the Company not included herein.

<TABLE>
<CAPTION>
                                                                  At or For the Year Ended December 31,

                                                   2007            2006            2005            2004            2003
                                              -------------   -------------   -------------   -------------   -------------
<S>                                           <C>             <C>             <C>             <C>             <C>
Income Statement Data

Interest Income                               $  28,098,261   $  25,805,321   $  21,665,441   $  19,809,236   $  16,609,791
Interest Expense                                 14,885,202      13,114,088       7,594,052       6,216,042       5,788,062
Net Interest Income                              13,213,059      12,691,233      14,071,389      13,593,194      10,821,729
Noninterest Income                                3,431,476       2,272,986       2,899,313       2,432,094       2,643,623
Noninterest Expense                              14,267,491      13,202,841      11,081,440      10,228,091       9,497,832
Income Before Income Taxes                        2,173,044       1,341,378       5,547,234       5,437,197       3,667,520
Income Taxes                                        225,702         (67,525)      1,511,343       1,520,962         881,096
Net Income                                        1,947,342       1,408,903       4,035,891       3,916,235       2,786,424

Balance Sheet Data

Total Loans, Leases and Loans Held for Sale     329,012,939     296,338,181     242,152,589     218,220,157     191,463,609
Allowance for Loan and Lease Losses               2,151,622       2,106,100       1,759,611       1,389,947       1,149,454
Total Investment Securities                     129,013,733     147,820,791     182,949,393     173,864,701     171,164,956
Total Assets                                    507,653,629     501,232,357     467,560,946     424,304,747     393,771,197
Total Deposits                                  335,617,664     333,428,874     277,870,361     300,847,379     303,556,487
Total Borrowings                                140,079,676     137,610,667     157,301,172      96,620,588      66,211,000
Total Liabilities                               479,291,017     474,976,163     441,591,209     399,759,074     371,488,266
Shareholders' Equity                             28,312,612      26,206,194      25,969,737      24,545,673      22,282,931

Selected Ratios and
Per Share Data

Return on Average Assets                                .39%            .29%            .91%            .93%            .80%
Return on Average Equity                               7.25%           5.43%          15.94%          17.33%          13.02%
Basic Net Income Per Share (1)                $         .82   $         .60   $        1.72   $        1.68   $        1.22
Diluted Net Income Per Share (1)                        .82             .59            1.70            1.65            1.19
Price Per Share (1)                                   14.50           21.73           27.25           30.00           20.65
Book Value Per Share (1)                              11.96           11.63           12.16           12.12           11.75
Dividends Declared:
   Cash                                       $         .60   $         .60   $         .57   $         .50   $         .42
   Stock                                               5.00%           5.00%           5.00%           5.00%           5.00%
Cash Dividend Yield                                    4.14%           2.76%           2.09%           1.67%           2.03%
</TABLE>

(1) All per-share data has been adjusted to give retroactive effect to all stock
dividends and splits.

                                       16

<PAGE>

       SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (unaudited)

Selected quarterly data for 2007 and 2006 follows:

<TABLE>
<CAPTION>
                                                  First           Second          Third           Fourth
                                                 Quarter         Quarter         Quarter         Quarter
                                              -------------   -------------   -------------   -------------
<S>                                           <C>             <C>             <C>             <C>
2007:
-----

Interest Income                               $   6,882,582   $   6,995,279   $   7,113,345   $   7,107,055
Interest Expense                                  3,700,632       3,694,001       3,775,752       3,714,817
Net Interest Income                               3,181,950       3,301,278       3,337,593       3,392,238
Noninterest Income                                  794,572         826,799         890,301         919,804
Noninterest Expense                               3,456,906       3,452,099       3,380,685       3,977,801
Income Before Income Taxes                          414,616         675,978         847,209         235,241
Income Taxes                                         11,722          94,212         169,373         (49,605)
Net Income                                          402,894         581,766         677,836         284,846

Basic Net Income Per Share (1)                $         .17   $         .24   $         .29   $         .12

Diluted Net Income Per Share (1)              $         .17   $         .24   $         .29   $         .12

2006:
-----

Interest Income                               $   5,877,209   $   6,184,919   $   6,775,724   $   6,967,469
Interest Expense                                  2,615,402       2,984,905       3,598,745       3,915,036
Net Interest Income                               3,261,807       3,200,014       3,176,979       3,052,433
Noninterest Income                                  667,495         704,477         735,764         165,250
Noninterest Expense                               3,096,249       3,283,532       3,230,751       3,592,309
Income Before Income Taxes                          728,053         515,959         576,992        (479,626)
Income Taxes                                        104,693          40,516          76,594        (289,328)
Net Income                                          623,360         475,443         500,398        (190,298)

Basic Net Income Per Share (1)                $         .27   $         .20   $         .21   $        (.08)

Diluted Net Income Per Share (1)              $         .26   $         .20   $         .21   $        (.08)
</TABLE>

(1) All per-share data has been adjusted to give retroactive effect to all stock
dividends and splits.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

The following is Management's  discussion of financial  condition of the Company
on a  consolidated  basis as of  December  31,  2007 and  2006  and  results  of
operations  and  analysis of the Company on a  consolidated  basis for the three
years  ended  December  31,  2007,  2006 and 2005.  The  consolidated  financial
statements  of  the  Company  include  the  accounts  of  the  Company  and  its
wholly-owned subsidiary,  The First National Bank of Litchfield (the "Bank") and
the  Bank's  wholly  owned  subsidiaries,  Lincoln  Corporation  and  Litchfield
Mortgage Service  Corporation.  Additionally  included in these statements as of
December 31, 2007 and 2006, and for the twelve month periods ending December 31,
2007 and 2006,  are the  accounts of First  Litchfield  Leasing  Corporation;  a
subsidiary in which the Bank owns an majority  interest.  This discussion should
be read in  conjunction  with  the  consolidated  financial  statements  and the
related notes of the Company presented elsewhere herein.

FINANCIAL CONDITION

Total  assets  as of  December  31,  2007  were  $507,653,629,  an  increase  of
$6,421,272, or 1.3% from year-end 2006 total assets of $501,232,357.

The  securities  portfolio  totaled  $129,013,733  as of December  31,  2007,  a
decrease  of 12.7% from the  December  31,  2006  balance of  $147,820,791.  The
decrease in the portfolio is primarily due to a continued  restructuring  of the
balance sheet towards a more  profitable  mix of earning assets which is focused
on loans and leases rather than investments.

The net loan and lease  ("loan")  portfolio  as of  December  31,  2007  totaled
$327,475,371  and increased by 11.4% or $33,575,346,  from the December 31, 2006
balance of  $293,900,025.  The volume of loan growth  during  2007 was  realized
primarily in the  residential  mortgage  portfolio,  as well as in  construction
mortgages and commercial loans and leases.  The residential  mortgage  portfolio
totaled $189,556,668 as of December 31, 2007, increasing by $12,474,525, or 7.0%
during 2007. Growth in residential  mortgages is attributed to the popularity of
the fixed rate thirty year product as well as selected  growth in  interest-only
mortgages.

                                       17

<PAGE>

Construction  mortgages totaled  $34,808,984 as of December 31, 2007 which is an
increase of $4,203,197,  or 13.7% over the year-end 2006 balance.  The growth in
construction  mortgages was related to commercial  properties which increased by
over $9 million during the year and offset the decline in construction loans for
residential properties. The commercial mortgage portfolio totaled $55,752,240 as
of December  31, 2007,  increasing  slightly  over the year-end  2006 balance of
$53,318,351.  Consistent  with  Management's  strategy  to  migrate  to  a  more
profitable  composition  of earning  assets,  and  through  the  acquisition  of
commercial lending  expertise,  expanded markets and the addition of the leasing
subsidiary,  commercial loan and lease growth was strong during 2007. Commercial
loans  totaled  $33,641,679  as of  December  31,  2007 which was an increase of
$6,691,694 or 24.8% from the December 31, 2006 balance of $26,949,985. Growth in
commercial  loans has been in both  lines of credit  and in term  financing  and
continues  to be a  result  of the  sales  development  and  commercial  calling
initiatives  for  traditional  and  contiguous  markets.  As a complement to the
Bank's  commercial  lending product line, First Litchfield  Leasing  Corporation
began offering financing through middle market equipment leasing during 2007. In
its first year of operation  the  subsidiary  funded nearly $13 million of loans
and leases.  Leases were in amounts  ranging from $15,000 to  $2,100,000.  Lease
receivables  were  $8,634,199 at December 31, 2007.  Management  attributes  the
first year success of the subsidiary to Bank cross sales and more importantly to
the depth in experience and knowledge of the subsidiary's management team. As of
December 31, 2007, the installment loan portfolio totaled $6,519,812, a decrease
of 9.0% from the  year-end  2006  balance  of  $7,167,980.  The  decline  in the
portfolio is related to the  amortization of a small pool of consumer auto loans
purchased by the Company during 2006.

Cash and cash equivalents  totaled  $21,497,194,  as of December 31, 2007, which
was a decrease of $7,700,443, or 26.4% compared to the balance of $29,197,637 as
of December 31, 2006.  Much of the decrease is due to lower cash letter activity
and  reserve  balances  as of  year-end  2007  as  compared  to  year-end  2006.
Offsetting some of the decrease however, was a higher level of funds temporarily
invested  in  interest  bearing   correspondent  bank  balances  resulting  from
temporary balance sheet liquidity at year-end 2007.

Net  premises  and  equipment  totaled  $7,758,761  as  of  December  31,  2007,
increasing by $318,445 from the year-end 2006 balance of  $7,440,316.  Increases
in premises and equipment during 2007 were primarily  related to the purchase of
the Bank's downtown  Torrington  branch which had been previously  leased.  Also
included in the increase  were various  equipment  purchases  related the Bank's
core processor  conversion in 2007.  Included in net premises and equipment is a
capital  lease related to the Bank's  Hilltop  Torrington  branch.  During 2007,
depreciation  and  amortization of bank premises and equipment  totaled $751,259
and net purchases totaled $1,074,027.

Deferred tax assets  totaled  $1,327,535  as of December  31,  2007,  which is a
decrease of $845,498, or 38.9% from the December 31, 2006 balance of $2,173,033.
Most of the decrease was associated  with the decrease in the unrealized  losses
on available for sale securities.

Total  liabilities  were  $479,291,017  as of December 31, 2007,  an increase of
$4,314,854 from the December 31, 2006 balance of $474,976,163.

Deposits as of December 31, 2007 were $335,617,664,  increasing  $2,188,790,  or
less than 1%,  from the  December  31,  2006  balance  of  $333,428,874.  Demand
deposits  totaled  $70,564,267 as of December 31, 2007,  which was a 3% increase
from the year-end 2006 balance. Savings deposits totaled $56,344,878,  which was
an increase of $11,040,211,  or 24.4% from the December 31, 2006 balance. Growth
in savings  deposits was related to the Bank's  introduction  of a municipal NOW
account.  Additionally  contributing  to the growth in savings  deposits was the
popularity of the Bank's health savings  accounts  (HSA).  Money market deposits
totaled  $78,738,706,  which was an  increase of  $7,658,771,  or 10.8% from the
December  31,  2006  balance of  $71,079,935.  Much of the  increase  was in the
competitively  priced  "Synergy"  relationship  money market product  introduced
during the previous year.  Also,  increases in money market deposits were due to
higher  balances  held for the Bank's  trust  customers.  Time  certificates  of
deposit totaled  $129,969,813  as of December 31, 2007,  which was a decrease of
12.5%, or $18,572,709 from year-end 2006. Most of this decrease was due to lower
levels  of  brokered  certificates  of  deposit  through  financial  institution
counterparties.  These deposits totaled  $3,000,000 at year-end 2007 compared to
$22,500,000  at  year-end  2006.  While they remain a cost  efficient  source of
funding,  deposit growth in the new markets replaced these deposits.  The growth
in retail time  certificates  of deposit  was in  products  with terms under one
year, primarily in six to nine months maturities.

As of  December  31,  2007,  Federal  Home Loan Bank  (FHLBB)  advances  totaled
$91,500,000  as compared to $67,000,000 as of December 31, 2006. At December 31,
2007, borrowings under repurchase agreements totaled $35,692,773,  a decrease of
$23,713,250  from the year-end 2006 balance of  $59,406,023.  As of December 31,
2007  and  2006,   included  in  repurchase   agreements  was   $14,142,773  and
$12,206,023,  respectively,  of balances  in the  overnight  investment  product
offered to the Bank's  commercial and municipal cash  management  customers.  At
December 31, 2007, total  borrowings under repurchase  agreements with financial
institutions and FHLBB advances totaled $113,050,000  compared to the balance of
$114,200,000 at December 31, 2006. As of December 31, 2007 and 2006, obligations
under  subordinated debt totaled  $10,104,000.  The subordinated debt represents
the  Company's  liability  for junior  subordinated  notes with  regard to First
Litchfield  Statutory  Trust I and II,  which  were  issued  in 2003  and  2006,
respectively.  At year-end 2007 and 2006,  the ratio of borrowed  funds to total
assets remained at similar levels of 27.0% and 27.2%, respectively.

Collateralized  borrowings  totaled  $1,699,336  as of December  31,  2007.  The
borrowings  are related to  participation  agreements for the sale of loans that
include  provisions  for  the  Bank  to  repurchase  the  loans  at  its  future
discretion,  and therefore  disqualifying  the  classification of these loans as
sold.  A  similar  amount  is  recorded  in  loans  receivable.  There  were  no
collateralized borrowings as of December 31, 2006.

                                       18

<PAGE>

RESULTS OF OPERATIONS - 2007 COMPARED TO 2006

Net interest  income is the single largest source of the Company's  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,  leases and investment  securities,  and interest expense due on deposits
and borrowed money.

Net income for the year totaled  $1,947,342  or $.82 basic and diluted  earnings
per  share.   Earnings  increased  38.2%  or  $538,439  from  2006  earnings  of
$1,408,903, or $.60 and $.59 basic and diluted earnings per share, respectively.
The Company's return on average  shareholders' equity totaled 7% for 2007 versus
5% for 2006.

Net Interest Income

Net  interest  income for the year of 2007 totaled  $13,213,059,  an increase of
4.1%  or  $521,826,  from  2006.  See  "Rate/Volume  Analysis"  on page 21 for a
description of the various  factors that impacted net interest  income.  Average
earning  assets,  which  represent  the  Company's  balance  in  loans,  leases,
investment  securities  and Federal  funds sold,  totaled $463 million for 2007,
which was a slight increase over the 2006 average of $458 million. The change in
the composition of earning assets however,  was  significant.  Average loans and
leases increased from  $267,353,000 and 58% of average earning assets in 2006 to
$311,594,000  and 67% of the average  earning assets in 2007. The loan and lease
growth was realized in the commercial  lending,  leasing and mortgage portfolios
and was  funded  primarily  by cash  flows  and the  resultant  decrease  in the
investment portfolio.

The following table presents the Company's average balance sheets (computed on a
daily  basis),  net  interest  income,  and  interest  rates for the years ended
December 31, 2007 and 2006. 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.

                                                     2007             2006
                                                --------------   --------------
Interest and dividend income                    $   28,098,261   $   25,805,321
Tax-equivalent adjustment                              611,559          646,130
Interest expense                                   (14,885,200)     (13,114,088)
                                                --------------   --------------
Net interest income                             $   13,824,620   $   13,337,363
                                                ==============   ==============

As shown below,  the 2007 net interest margin  increased 8 basis points from the
2006 level of 2.91% to 2.99%.  The net interest spread  decreased  slightly from
the  2006  level of 2.46% to  2.43%  primarily  due to a more  expensive  mix of
funding.

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

<TABLE>
<CAPTION>
                                                           2007                                        2006
                                      ------------------------------------------   -------------------------------------------
                                                           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:
Loan and lease receivables            $    311,594,000   $ 21,057,941       6.76%  $  267,353,000   $   17,401,364        6.51%
Securities                                 142,460,000      7,250,336       5.09      188,974,000        8,995,775        4.76
Federal funds sold and other                 9,032,000        401,543       4.45        1,856,000           54,312        2.93
                                      ----------------   ------------              --------------   --------------
Total interest earning assets              463,086,000     28,709,820       6.20      458,183,000       26,451,451        5.77

Allowance for loan and lease losses         (2,130,000)                                (1,935,000)
Cash & due from banks                       12,268,000                                 15,522,000
Premises and equipment                       7,679,000                                  5,106,000
Net unrealized loss on securities           (2,815,000)                                (5,119,000)
Other assets                                17,097,000                                 17,189,000
                                      ----------------                             --------------

Total Average Assets                  $    495,185,000                             $  488,946,000
                                      ================                             ==============

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits                      $     55,026,000   $    752,024       1.37%  $   48,141,000   $      323,492        0.67%
Money market deposits                       75,832,000      2,241,181       2.96       74,200,000        1,631,588        2.20
Time deposits                              136,764,000      6,280,686       4.59      115,559,000        4,676,810        4.05
Borrowed funds                             127,716,000      5,611,309       4.39      158,442,000        6,482,198        4.09
                                      ----------------   ------------              --------------   --------------
Total interest bearing liabilities         395,338,000     14,885,200       3.77      396,342,000       13,114,088        3.31
Demand deposits                             68,278,000                                 65,047,000
Other liabilities                            4,705,000                                  1,598,000
Shareholders' Equity                        26,864,000                                 25,959,000
                                      ----------------                             --------------

Total Liabilities and Equity          $    495,185,000                             $  488,946,000
                                      ================                             ==============
Net interest income                                      $ 13,824,620                               $   13,337,363
                                                         ============                               ==============
Net interest spread                                                         2.43%                                         2.46%
                                                                     ===========                                     =========
Net interest margin                                                         2.99%                                         2.91%
                                                                     ===========                                     =========
</TABLE>

                                       19

<PAGE>

Rate/Volume Analysis

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the year ended  December  31,  2007 when  compared to the year ended
December 31, 2006 in net interest  income arising from changes in interest rates
and from  changes  in  asset  and  liability  volume.  The  change  in  interest
attributable  to both rate and volume has been  allocated  to the changes in the
rate and the volume on a pro rata basis.

<TABLE>
<CAPTION>
                                                         2007 Compared to 2006
                                                         ---------------------
                                                      Increase (Decrease) Due to
                                                      --------------------------
                                                 Volume            Rate         Total
                                             -------------   -------------   ------------
<S>                                          <C>             <C>             <C>
Interest earned on:
Loan and lease receivables                   $   2,969,124   $     687,453   $  3,656,577
Securities                                      (2,333,716)        588,277     (1,745,439)
Federal funds sold and other                       306,119          41,112        347,231
                                             -------------   -------------   ------------
Total interest earning assets                      941,527       1,316,842      2,258,369
                                             -------------   -------------   ------------
Interest paid on:
Deposits                                           896,927       1,745,074      2,642,001
Borrowed funds                                  (1,320,406)        449,517       (870,889)
                                             -------------   -------------   ------------
Total interest bearing liabilities                (423,479)      2,194,591      1,771,112
                                             -------------   -------------   ------------
Increase (decrease) in net interest income   $   1,365,006   $    (877,749)  $    487,257
                                             =============   =============   ============
</TABLE>

Tax  equivalent  net interest  income for 2007  increased  $487,257 or 3.7% over
2006. The increase in net interest income was due to increased  margin resulting
from a more  profitable  mix of earning assets in spite of the flat and inverted
yield curve  experienced  during most of 2007. The 2007 net interest margin (net
interest income divided by average  earning assets)  increased from the previous
year's  level of 2.91% by 8 basis  points to 2.99%.  Interest  income on average
earning assets for 2007 totaled  $28,709,820,  which was an increase of 8.5%, or
$2,258,369  from 2006 interest  income on average earning assets of $26,451,451.
Interest  expense on average earning assets totaled  $14,885,200 for 2007, which
was an increase of $1,771,112  from 2006. As shown in the  Rate/Volume  Analysis
above,  the  increase  in net  interest  income on  average  earning  assets was
significantly impacted by the improved average earning assets resulting from the
changes in the earning  asset mix as well as in the funding  mix.  The change in
earning  asset mix was the main  reason  for the  $941,527  volume  increase  in
interest income. The 2007 yield on average earning assets was 6.20% which was an
increase of 43 basis points from the 2006 yield of 5.77%.  The related  interest
expense from average interest  bearing  liabilities also reflects an improvement
in the mix of liabilities.  Funding through borrowed money averaged $127,716,000
which was a decrease of $30,726,000 or 19.4% from the 2006 average.  These funds
were  replaced  by retail  deposits  which  resulted  in a volume  reduction  of
interest  expense of  approximately  $423,479.  In total, the improvement in the
volume mix of assets and liabilities  contributed  $1,365,006 to  tax-equivalent
net interest income.

Offsetting  some of the  positive  impact  from  the  improvement  in the mix of
average  earning  assets was continued  margin  compression  due to the flat and
sometimes  inverted  yield  curve  experienced  during  2007 and 2006.  Interest
income,  as a result of changes in interest  rates,  increased by  $1,316,842 in
2007.  This increase is reflected in the increased  yields on the loan and lease
portfolio as well as in the investment  portfolio where yields have increased by
25 and 33 basis  points,  respectively.  Unfortunately,  funding  costs for 2007
increased by 46 basis points,  from 3.31% in 2006 to 3.77% in 2007. The increase
in costs is attributed  to the increases in short term rates and intense  market
competition for all retail deposits. Interest expense, as a result of changes in
interest  rates,  increased by $2,194,591  for 2007.  Overall,  the reduction in
tax-equivalent  net  interest  income  due to  margin  compression  approximated
$877,749 for 2007.

                                       20

<PAGE>

Noninterest Income

Non-interest income for 2007 totaled $3,431,476, increasing $1,158,490, or 51.0%
from  2006  non-interest   income  of  $2,272,986.   Much  of  the  increase  in
non-interest  income is due to the 2006 sale of  securities  executed as part of
the balance sheet  restructure.  This sale resulted in a loss totaling $666,702.
There were no similar balance sheet transactions during 2007. However,  sales of
available  for  sale  securities  transacted  for  yield  and  price  volatility
maintenance purposes resulted in gains totaling $19,632 during 2007.

Other  areas of  non-interest  income  contributed  to the  increase  over  2006
results.  Fees from trust services for 2007 totaled  $1,372,999,  an increase of
$237,108, or 20.9% from the previous year's fees of $1,135,891. This increase is
attributed  growth  in  assets  under  management   resulting  from  key  wealth
management  talent,  cross sales,  our reputation  for customer  service and the
value added products this area offers in our market. Banking service charges and
fees  increased   10.8%,   or  $132,597  from  2006,  as  a  result  of  revenue
opportunities from deposit accounts and cash management services.

Noninterest Expenses

Noninterest  expenses  totaled  $14,267,491  in 2007,  an increase  of 8.1%,  or
$1,064,650  from 2006  noninterest  expenses of  $13,202,841.  The  execution of
initiatives begun in 2006 and the full year's costs related to those initiatives
was  responsible  for the increase in  noninterest  expense.  These  initiatives
included  increasing  the  branch  franchise,  adding  key  talent to the wealth
management  and  commercial  lending  areas  and the  formation  of the  leasing
company, and resulted in significantly increased costs in personnel,  occupancy,
equipment, and other noninterest expenses.

Salary and benefits costs totaled $7,930,160,  increasing  $1,077,578,  or 15.7%
from 2007 costs of $6,852,582.  This increase  reflects the staffing for the new
branches,  wealth management,  commercial  lending and the leasing company.  The
increase in these costs,  however was mitigated by cost  containment  strategies
for staffing, overtime and group insurance.

Computer  services  costs  totaled  $860,600  for 2007 which was a  decrease  of
$168,627,  or 16.4% from 2006 costs of  $1,029,227.  During the first quarter of
the year,  the Company  completed its  conversion to a new core  processor.  The
benefits of the  conversion  are  enhanced  product  and  service  capabilities,
operational  efficiencies  and decreased  costs related to core  processing  and
ancillary  services.  The decrease in computer services expense is the result of
the lower  processing  costs as well as to vendor  credits  which were  utilized
during the year. Net occupancy and equipment costs totaled $1,784,649, which was
an  increase of  $297,184  or 20.0%  above 2006  costs.  Depreciation,  building
maintenance, property taxes and utilities expenses, especially as they relate to
a full  year's  cost of the new branch  facilities,  caused  increases  in these
expenses.  Advertising  fees totaled  $469,385  which was a decrease of $209,055
over 2006 costs.  This  decrease was mostly  related to the 2006 branch  opening
promotions  and related  direct mail  campaigns.  Commission,  services and fees
expenses totaled $505,412,  decreasing $15,421,  from 2006. The majority of this
expense for 2007 was advice and  consulting  relating to corporate  initiatives,
investment and interest rate risk, lending,  trust, retail and personnel.  Other
noninterest  expenses  totaled  $1,916,616  and  increased  2.1%  over  the 2006
expenses.  This  expense  includes  costs  for  telephone,   software,   travel,
contributions, exam and audit, regulatory assessments and insurance.

RESULTS OF OPERATIONS - 2006 COMPARED TO 2005

Net interest  income is the single largest source of the Company's  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,  leases and investment  securities,  and interest expense due on deposits
and borrowed money.

Net income for the year  totaled  $1,408,903  or $.59 and $.60 diluted and basic
earnings per share,  respectively.  Earnings  decreased 65.1% or $2,626,988 from
2005 earnings of  $4,035,891,  or $1.70 and $1.72 diluted and basic earnings per
share. The Company's return on average  shareholders' equity totaled 5% for 2006
versus 16% for 2005.

The decline in earnings  resulted  primarily from decreased net interest income,
increased non-interest expenses and the loss on the sale of securities.

Net Interest Income

Net interest income for the year of 2006 totaled $12,691,233, a decrease of 9.8%
or $1,380,156,  from 2005. See "Rate/Volume Analysis" on p. 23 for a description
of the various  factors  that  impacted  net interest  income.  Average  earning
assets,  which represent the Company's  balance in loans and leases,  investment
securities and Federal funds sold, totaled $458 million for 2006, an increase of
$46 million from 2005 average  earning  assets of $412 million.  This growth was
realized in the  commercial  lending and mortgage  portfolios  as well as in the
investment  portfolio and was funded primarily from increases in borrowed funds,
certificates  of  deposit  and demand  deposits.  As shown  below,  the 2006 net
interest margin decreased 61 basis points from the 2005 level of 3.52% to 2.91%.
The net  interest  spread  decreased  from  the  2005  level  of  3.21% to 2.46%
primarily due to increased  funding costs,  and a lower  proportionate  share of
demand deposit growth during 2006.

                                                      2006             2005
                                                 --------------   -------------
Interest and dividend income                     $   25,805,321   $  21,665,441
Tax-equivalent adjustment                               646,130         428,367
Interest expense                                    (13,114,088)     (7,594,052)
                                                 --------------   -------------
Net interest income                              $   13,337,363   $  14,499,756
                                                 ==============   =============

                                       21

<PAGE>

The following table presents the Company's average balance sheets (computed on a
daily  basis),  net  interest  income,  and  interest  rates for the years ended
December 31, 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>
                                                         2006                                    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 receivable                        $ 267,353,000   $ 17,401,364     6.51%  $ 237,399,000   $ 14,449,159     6.09%
Securities                                188,974,000      8,995,775     4.76     173,223,000      7,625,982     4.40
Federal funds sold and other                1,856,000         54,312     2.93       1,292,000         18,667     1.44
                                        -------------   ------------            -------------   ------------
Total interest earning assets             458,183,000     26,451,451     5.77     411,914,000     22,093,808     5.36

Allowance for loan losses                  (1,935,000)                             (1,574,000)
Cash & due from banks                      15,522,000                              14,860,000
Premises and equipment                      5,106,000                               3,593,000
Net unrealized loss on securities          (5,119,000)                             (2,891,000)
Other assets                               17,189,000                              15,399,000
                                        -------------                           -------------

Total Average Assets                    $ 488,946,000                           $ 441,301,000
                                        =============                           =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Savings deposits                        $  48,141,000   $    323,492     0.67%  $  55,167,000   $    115,448     0.21%
Money market deposits                      74,200,000      1,631,588     2.20      88,285,000      1,002,312     1.14
Time deposits                             115,559,000      4,676,810     4.05      84,771,000      2,312,234     2.73
Borrowed funds                            158,442,000      6,482,198     4.09     124,558,000      4,164,058     3.34
                                        -------------   ------------            -------------   ------------
Total interest bearing liabilities        396,342,000     13,114,088     3.31     352,781,000      7,594,052     2.15
Demand deposits                            65,047,000                              61,375,000
Other liabilities                           1,598,000                               1,819,000
Shareholders' Equity                       25,959,000                              25,326,000
                                        -------------                           -------------

Total Liabilities and Equity            $ 488,946,000                           $ 441,301,000
                                        =============                           =============
Net interest income                                     $ 13,337,363                            $ 14,499,756
                                                        ============                            ============
Net interest spread                                                      2.46%                                   3.21%
                                                                       ======                                  ======
Net interest margin                                                      2.91%                                   3.52%
                                                                       ======                                  ======
</TABLE>

Rate/Volume Analysis

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the year ended  December 31, 2006,  when  compared to the year ended
December 31, 2005 in net interest  income arising from changes in interest rates
and from asset and liability volume mix. The change in interest  attributable to
both rate and  volume  has been  allocated  to the  changes  in the rate and the
volume on a pro rata basis.

<TABLE>
<CAPTION>
                                                           2006 Compared to 2005
                                                           ---------------------
                                                        Increase (Decrease) Due to
                                                        --------------------------
                                                   Volume         Rate           Total
                                                -----------   ------------   ------------
<S>                                             <C>           <C>            <C>
Interest earned on:
Loan and lease receivables                      $ 1,904,751   $  1,047,454   $  2,952,205
Securities                                          723,187        646,606      1,369,793
Federal funds sold and other                         10,644         25,001         35,645
                                                -----------   ------------   ------------
Total interest earning assets                     2,638,582      1,719,061      4,357,643
                                                -----------   ------------   ------------
Interest paid on:
Deposits                                            151,312      3,050,584      3,201,896
Borrowed funds                                    1,271,849      1,046,291      2,318,140
                                                -----------   ------------   ------------
Total interest bearing liabilities                1,423,161      4,096,875      5,520,036
                                                -----------   ------------   ------------
Increase (decrease) in net interest income      $ 1,215,421   $ (2,377,814)  $ (1,162,393)
                                                ===========   ============   ============
</TABLE>

                                       22

<PAGE>

Tax equivalent  net interest  income for 2006 was $1,162,393 or 8.0% below 2005.
The decrease in net interest income was due to margin compression resulting from
the flat and inverted yield curve experienced during 2006. The 2006 net interest
margin (net interest income divided by average  earning  assets)  decreased from
the previous year's level of 3.52% by 61 basis points to 2.91%.  Interest income
on average earning assets for 2006 totaled $26,451,451, which was an increase of
19.7% or $4,357,643 from 2005 interest income of $22,093,808.  Interest expense,
however,  totaled $13,114,088 for 2006, which was an increase of $5,520,036 from
2005. As shown in the Rate/Volume  Analysis above,  the decrease in net interest
income was  significantly  impacted by the  increased  cost of interest  bearing
liabilities  which was on average,  116 basis  points  higher than in 2005.  The
related interest income from earning assets only increased by $4,357,643,  or 41
basis points,  resulting in the overall net decrease in net interest income. The
2006 yield on earning assets was 5.77%, which was an increase of 41 basis points
from the 2005 yield of 5.36%.  Increases in short-term rates during 2006 as well
as a continuing  goal to attain a more  profitable  mix of earning assets within
the loan and lease portfolio,  from residential  mortgages to commercial  loans,
leases and mortgages,  contributed  to the increase in yield.  Funding costs for
2006 were 3.31%  which was an  increase of 116 basis  points.  This  increase is
attributed to the increases in short term rates,  intense market competition for
time deposits, as well as the increased reliance on non-core funding.

Offsetting the negative impact of margin compression on 2006 net interest income
was increased net interest  income due to earning asset growth,  which more than
offset the impact on net interest income of liability volume increases.  Average
earning  assets grew by $46 million or 11% during 2006 and, net of the effect of
liability  volume  increases,  resulted  in  increased  net  interest  income of
$1,215,421.  Loans and leases, on average,  increased nearly $30 million,  while
investment securities increased by $16 million.

The  $1,162,393  decrease  in net  interest  income is  primarily  the result of
increases  in rates.  Increases  in rates  impacted  funding  costs to a greater
extent  than  earning  asset  income  and  decreased  net  interest   income  by
$2,377,814.  This  decrease in net interest  income was  mitigated  from the net
effect of  increased  volume of average  interest  earning  assets and  interest
bearing liabilities which increased net interest income by $1,215,421.

Noninterest Income

Non-interest income for 2006 totaled $2,272,986,  decreasing $626,327,  or 21.6%
from 2005 non-interest income of $2,899,313.  The decline in non-interest income
is due mainly to the loss on sale of securities totaling $666,702.  This loss is
primarily the result of the balance sheet  restructuring  which  occurred in the
fourth  quarter,  whereby $32 million of  low-yielding  securities  were sold to
enable management to reduce its level of expensive wholesale funding. Management
believes this transaction will proactively add shareholder value as it positions
greater  profitability  in future  earnings.  There was no similar balance sheet
transaction  during  2005  however,  sales  of  available  for  sale  securities
transacted for yield and price volatility maintenance purposes resulted in gains
totaling $78,949 during 2005.

Other  areas of  non-interest  income had strong 2006  results.  Fees from trust
services for 2006 totaled $1,135,891, an increase of $160,086, or 16.4% from the
previous  year.  This  growth is  attributed  to key  wealth  management  talent
acquired  during 2006 and to the customer  service and value added products this
area offers in our market.  Banking service charges and fees increased 20.7%, or
$210,737 from 2005, as a result of revenue  opportunities  from deposit accounts
and cash management services.

During the fourth  quarter of 2005, the Bank sold  approximately  $17 million of
residential  mortgages  in the  secondary  market.  The sale  resulted in a gain
totaling $82,858,  which is included in other noninterest income for 2005. There
were no similar transactions in 2006.

Noninterest Expenses

Noninterest  expenses  totaled  $13,202,841  in 2006,  an increase of 19.1%,  or
$2,121,401  from 2005  noninterest  expenses  of  $11,081,440.  Increased  costs
related to the growth of the branch  franchise ,as well as to the development of
the wealth  management  area and the  formation of the leasing  company were the
significant  reasons for the increased costs.  These  initiatives  significantly
increased  costs  in  personnel,   marketing,  occupancy,  equipment  and  legal
expenses.  During 2006,  the Bank expanded its market  footprint by opening full
service  branches in Canton and New Milford,  Connecticut.  Also recognizing the
need and  potential  for  full  service  facilities,  management  converted  the
Torrington  supermarket  branch to a full  service  branch.  The  Bank's  wealth
management  division has strengthened its market potential through the hiring of
key management talent as well as through improved product and service offerings.

Salary and benefits costs totaled $6,852,582, increasing $859,788, or 14.3% from
2005 costs of  $5,992,794.  This  increase  reflects  the  staffing  for the new
branches,  compliance  and wealth  management.  The increase in benefits  costs,
however was mitigated by lower  incentive and ESOP costs due to the reduced 2006
earnings.  As of  December  31,  2006,  the number of  employees  on a full-time
equivalent basis totaled 126 compared to 105 as of December 31, 2005.

Computer  services  costs totaled  $1,029,227  for 2006 which was an increase of
$128,846,  or 14.3% from 2005.  Increased costs resulting from a higher customer
dependence on e-banking, debit cards, ATMs and cash management products resulted
in this increase.  Net occupancy and equipment costs totaled  $1,487,465,  which
was an increase of  $352,111 or 31.0% above 2005 costs.  Depreciation,  building
maintenance, property taxes and utilities expenses, especially as they relate to
the new offices, caused increases in these expenses.  Advertising fees increased
by $231,629 over 2005 costs.  This increase was mostly related to branch opening
promotions  and related  direct mail  campaigns.  Commission,  services and fees
expenses totaled $520,833, increasing $193,956, or 59.3% from 2005. The majority
of this increase  relates to sales  training,  compliance and core processor due
diligence advice.  During 2006 the Company  contracted to change core processors
and began the conversion  process for a new core  processing  system,  which was
substantially

                                       23

<PAGE>

completed in early 2007. This new system will  significantly  increase  customer
service   capabilities   and  will  also  contribute   significant   operational
efficiencies.

Non-accrual, Past Due, Restructured Loans and Leases and Other Real Estate Owned

The Bank's  non-accrual  loans and leases  ("loans"),  other real  estate  owned
("OREO")  and loans and leases  past due in excess of ninety  days and  accruing
interest at December 31, 2003 through 2007 are presented below.

<TABLE>
<CAPTION>
                                                                       December 31,
                                                2007          2006          2005         2004          2003
                                            -----------   ------------   ---------   -----------   -----------
<S>                                         <C>           <C>            <C>         <C>           <C>
Non-accrual loans and leases                $ 2,959,074   $  1,504,551   $ 273,330   $ 1,634,999   $ 1,424,097
Other real estate owned ("OREO")                     --             --          --            --       300,000
                                            -----------   ------------   ---------   -----------   -----------
Total non-performing assets                 $ 2,959,074   $  1,504,551   $ 273,330   $ 1,634,999   $ 1,724,097
                                            ===========   ============   =========   ===========   ===========
Loans and leases past due in excess of
   ninety days and accruing interest        $     3,111   $        343   $   4,884   $        --   $        --
                                            ===========   ============   =========   ===========   ===========
</TABLE>

The accrual of interest  income is generally  discontinued  when a loan or lease
becomes 90 days past due as to principal or interest,  or when,  in the judgment
of  management,  collectibility  of the  loan,  lease  or loan  interest  become
uncertain.  When  accrual of  interest  is  discontinued,  any  unpaid  interest
previously  accrued is reversed from income.  Subsequent  recognition  of income
occurs  only  to the  extent  payments  are  received  subject  to  management's
assessment of the  collectibility of the remaining  principal and interest.  The
accrual  of  interest  on loans and leases  past due 90 days or more,  including
impaired  loans and  leases,  may be  continued  when the value of the loan's or
lease's  collateral  is believed to be sufficient to discharge all principal and
accrued  interest  income due on the loan or lease,  and the loan or lease is in
the process of  collection.  A non-accrual  loan or lease is restored to accrual
status  when it is no longer  delinquent  and  collectibility  of  interest  and
principal is no longer in doubt. A loan or lease is classified as a restructured
loan  or  lease  when  certain  concessions  have  been  made  to  the  original
contractual  terms,  such as reduction of interest rates or deferral of interest
or  principal  payments,  due to the  borrower's  financial  condition.  OREO is
comprised of properties acquired through foreclosure  proceedings and acceptance
of a deed in lieu of foreclosure.  These  properties are carried at the lower of
cost or  fair  value  less  estimated  costs  of  disposal.  At the  time  these
properties  are  obtained,  they are recorded at fair value with any  difference
between  carrying value and fair value  reflected as a direct charge against the
allowance  for loan and lease losses  which  establishes  a new cost basis.  Any
subsequent  declines  in  value  are  charged  to  income  with a  corresponding
adjustment to the allowance for foreclosed real estate. Revenue and expense from
the operation of foreclosed  real estate and changes in the valuation  allowance
are included in operations. Costs relating to the development and improvement of
the  property  are  capitalized,  subject  to the  limit  of  fair  value.  Upon
disposition,  gains and  losses,  to the extent  they  exceed the  corresponding
valuation allowance, are reflected in the statement of income.

Restructured  loans and leases on  non-accrual  status are included in the table
above.  As of December  31,  2007,  there were no  restructured  loans or leases
considered performing.

Had the non-accrual loans and leases performed in accordance with their original
terms,  gross interest  income for the years ended  December 31, 2007,  2006 and
2005  would  have  increased  by  approximately  $88,000,  $64,000  and  $9,000,
respectively.

The Bank considers all non-accrual loans and leases, other loans and leases past
due 90 days or more  based on  contractual  terms,  and  restructured  loans and
leases  to be  impaired.  A loan or  lease  is  considered  impaired  when it is
probable that the Bank will be unable to collect amounts due, both principal and
interest,  according to the  contractual  terms of the loan or lease  agreement.
When a loan or lease is impaired,  impairment is measured  using (1) the present
value of expected future cash flows of the impaired loan or lease  discounted at
the loan's or lease's  original  effective  interest  rate;  (2) the  observable
market  price  of the  impaired  loan or  lease;  or (3) the  fair  value of the
collateral  of a  collateral-dependent  loan or lease.  When a loan or lease has
been deemed to have  impairment,  a valuation  allowance is established  for the
amount of impairment.

Critical Accounting Policy

In the ordinary course of business,  the Bank has made a number of estimates and
assumptions  relating  to the  reported  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 utilizes a loan and lease review and rating  process  which  classifies
loans and leases according to the Bank's uniform  classification system in order
to identify  potential  problem  loans and leases at an early  stage,  alleviate
weaknesses in the Bank's lending policies, oversee the individual loan and lease
rating system and ensure compliance with the Bank's underwriting, documentation,
compliance  and  administrative  policies.  Loans and  leases  included  in this
process  are  considered  by  management  as being in need of special  attention
because of some deficiency related to the credit or documentation, but which are
still considered  collectable and performing.  Such attention is intended to act
as a preventative measure and thereby avoid more serious problems in the future.

The  allowance  for loan and lease  losses  consists  of  specific,  general and
unallocated components.  The specific component relates to loans and leases that
are  classified as either  doubtful,  substandard or special  mention.  For such
loans and leases that are also classified

                                       24

<PAGE>

as impaired,  an allowance is  established  when the  discounted  cash flows (or
collateral  value or  observable  market price) of the impaired loan or lease is
lower  than the  carrying  value of that loan or lease.  The  general  component
covers  non-classified  loans  and  leases  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.

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

There were no material changes in loan and lease concentration or loan and lease
quality that had a significant effect on the allowance for loan and lease losses
calculation at December 31, 2007. In addition, there were no material changes in
the estimation methods and assumptions used in the Company's  allowance for loan
and lease losses  calculation,  and there were no material  reallocations of the
allowance among different parts of the loan and lease portfolio.

The following table  summarizes the Bank's OREO, past due and non-accrual  loans
and leases, and non-performing assets as of December 31, 2007, 2006 and 2005.

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                          2007         2006        2005        2004         2003
                                                                      -----------  -----------  ---------  -----------  -----------
<S>                                                                   <C>          <C>          <C>        <C>          <C>
Non-accrual loans and leases                                          $ 2,959,074  $ 1,504,551  $ 273,330  $ 1,634,999  $ 1,424,097
Other real estate owned                                                        --           --         --           --      300,000
                                                                      -----------  -----------  ---------  -----------  -----------
Total non-performing assets                                           $ 2,959,074  $ 1,504,551  $ 273,330  $ 1,634,999  $ 1,724,097
                                                                      ===========  ===========  =========  ===========  ===========
Loans and leases past due in excess of ninety days and
   accruing interest                                                  $     3,111  $       343  $   4.884  $        --  $        --
                                                                      ===========  ===========  =========  ===========  ===========
Ratio of non-performing assets to total loans, leases and OREO                .90%         .51%       .11%         .75%         .90%
Ratio of non-performing assets and loans and leases past due
   in excess of ninety days accruing interest to total loans,
   leases and OREO                                                            .90%         .51%       .11%         .75%         .90%
Ratio of allowance for loan and lease losses to total loans
   and leases                                                                 .65%         .71%       .73%         .64%         .60%
Ratio of allowance for loan and lease losses to non-performing
   assets and loans and leases in excess of ninety days past
   due and accruing interest                                                72.64%      139.95%    632.47%       85.01%       66.67%
Ratio of non-performing assets, loans and leases in excess of ninety
   days past due and accruing interest to total shareholders' equity        10.46%        5.74%      1.07%        6.66%        7.74%
</TABLE>

Total non-performing assets increased by $1,454,523, or 96.67%, to $2,959,074 at
December  31,  2007,  from  $1,504,551  at December  31,  2006.  The increase in
non-performing  assets  from  year-end  2006 is due mostly to the  addition of a
small number of mid-size  mortgages and commercial loans and leases during 2007.
Additionally,  as of  December  31,  2007 there was  approximately  $320,000  in
purchased  sub-prime consumer loans included in nonperforming total which was an
increase of $73,000 from  December  31, 2006.  As of December 31, 2007 and 2006,
loans and leases past due in excess of ninety days and accruing interest totaled
$3,111 and $343, respectively.

Total  non-performing  assets represented .90% of total loans,  leases and other
real estate  owned at year-end  December  31, 2007  compared to .51% at year-end
2006.  The  allowance for loan and lease losses as of December 31, 2007 was .65%
of total  loans and  leases.  This is  similar  to the level  from 2006 when the
allowance was  approximately  .71% of total loans and leases.  The allowance for
loan and lease  losses  provided  coverage  for 72.4% of  non-accrual  loans and
leases at December  31, 2007,  as compared to 139.95% at December 31, 2006.  The
decrease in the coverage ratio is a result of increased level of  non-performing
assets at year end  2007;  however,  such  loans and  leases  did not  require a
commensurate level of specific reserves due to strong levels of collateral.

Potential Problem Loans and Leases

As of December 31, 2007,  there were no potential  problem  loans and leases not
disclosed above which cause  Management to have serious doubts as to the ability
of such borrowers to comply with their present loan and lease repayment terms.

                                       25

<PAGE>

Allowance for Loan and Lease Losses

The following table  summarizes the activity in the allowance for loan and lease
losses for the years ended  December 31, 2003  through  2007.  The  allowance is
maintained at a level  consistent  with the  identified  loss  potential and the
perceived risk in the portfolio.

<TABLE>
<CAPTION>
                                                                           (Dollar Amounts in Thousands)
                                                                                     December 31,
                                                                    -----------------------------------------------
                                                                      2007      2006      2005      2004      2003
                                                                    -------   -------   -------   -------   -------
<S>                                                                 <C>       <C>       <C>       <C>       <C>
Balance, at beginning of period                                     $ 2,106   $ 1,760   $ 1,390   $ 1,149   $ 1,011
Loans and Leases charged-off:
   Commercial and financial                                              16        --        37        80        30
   Real estate                                                           --        --        --        --        --
   Installment loans to individuals                                     160        96        60       104       279
                                                                    -------   -------   -------   -------   -------
                                                                        176        96        97       184       309
                                                                    -------   -------   -------   -------   -------
Recoveries on loans and leases charged-off:
   Commercial and financial                                              --         1        81        --        --
   Real estate                                                           --        --        --        --        --
   Installment loans to individuals                                      18        21        44        65       147
                                                                    -------   -------   -------   -------   -------
                                                                         18        22       125        65       147
                                                                    -------   -------   -------   -------   -------
Net loan charge-offs/(recoveries)                                       158        74       (28)      119       162
                                                                    -------   -------   -------   -------   -------
Provisions charged to operations                                        204       420       342       360       300
                                                                    -------   -------   -------   -------   -------
Balance, at end of period                                           $ 2,152   $ 2,106   $ 1,760   $ 1,390   $ 1,149
                                                                    =======   =======   =======   =======   =======
Ratio of net charge-offs/(recoveries) during the period
   to average loans and leases outstanding during the period            .05%      .03%     (.01%)     .06%      .09%
                                                                    =======   =======   =======   =======   =======

Ratio of allowance for loan and lease losses
   to total loans and leases                                            .65%      .71%      .73%      .64%      .60%
                                                                    =======   =======   =======   =======   =======
</TABLE>

During 2007, net charge-offs  totaled $158,000,  which is an increase of $84,000
from 2006 net chargeoffs of $74,000.  The increase in net charge-offs was due to
a higher level of net charge-offs in the installment  loan and lease  portfolio.
During  2007 the Bank  experienced  higher  levels of  charge-offs,  which  were
primarily  related to a pool of subprime  consumer auto loans the Bank purchased
during 2006. Net charge-offs  totaled $142,000 from installment loans and leases
in 2007 increasing  $67,000 from 2006. The increased level of net charge-offs is
related to losses on loans and leases  whereby  the  collateral  asset value was
considerably less than loan or lease amount.

The following table reflects the allowance for loan and lease losses as of
December 31, 2007, 2006, 2005, 2004 and 2003.

                 Analysis of Allowance for Loan and Lease Losses
                             (Amounts in thousands)
                                  December 31,

<TABLE>
<CAPTION>
Loans and
Leases by Type             2007                   2006                   2005                   2004                   2003
------------------------------------------------------------------------------------------------------------------------------------
                  Allocation Percentage  Allocation Percentage  Allocation Percentage  Allocation Percentage  Allocation Percentage
                          of   of Loans          of   of Loans          of   of Loans          of   of Loans          of   of Loans
                   Allowance    in Each   Allowance    in Each   Allowance    in Each   Allowance    in Each   Allowance    in Each
                    for Loan   Category    for Loan   Category    for Loan   Category    for Loan   Category    for Loan   Category
                   and Lease   to Total   and Lease   to Total   and Lease   to Total   and Lease   to Total   and Lease   to Total
                      Losses      Loans      Losses      Loans      Losses      Loans      Losses      Loans      Losses      Loans
<S>               <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
Commercial        $      317      10.23% $      204       9.13% $      357       8.73% $      261       8.21% $      224      10.84%
Real Estate
   Construction          231      10.58         480      10.36         224      11.79          82       5.31          48       4.82
   Residential           863      57.61         769      59.97         411      60.26         550      68.13         314      65.97
   Commercial            465      16.94         401      18.05         518      17.40         379      15.42         367      14.11
Installment              180       1.98         181       2.43          54       1.79          58       2.89         170       4.21
Other                     16       0.03          17       0.06          38       0.03          39       0.04          --       0.05
Commercial
   Leases                 80       2.63          --         --          --         --          --         --          --         --
Unallocated               --         --          54         --         158         --          21         --          26         --

                  ------------------------------------------------------------------------------------------------------------------
Total             $    2,152     100.00% $    2,106     100.00% $    1,760     100.00% $    1,390     100.00% $    1,149     100.00%
                  ==================================================================================================================
</TABLE>

The  unallocated  portion of the  allowance  reflects  Management's  estimate of
probable but unconfirmed  losses  inherent in the portfolio.  Such estimates are
influenced  by  uncertainties  in  economic  conditions,   delays  in  obtaining
information,  including  unfavorable  information  about a borrower's  financial
condition,  difficulty in identifying triggering events that correlate perfectly
to  subsequent  loss  rates,  and risk  factors  that  have  not yet  manifested
themselves in loss allocation factors.

                                       26

<PAGE>

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 and lease 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,  lease and  deposit  products.  Management  believes  that the
liquidity is adequate to meet the Company's future needs.

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,  borrowings through repurchase  agreements,  federal funds and the
sale of mortgage loans in the secondary  market are available to fund short-term
cash needs.

SHORT-TERM BORROWINGS

The following  information  relates to the Bank's  short-term  borrowings at the
Federal Home Loan Bank for the years ended December 31:

                                         2007           2006           2005
                                     ------------   ------------   ------------
Balance at December 31,              $         --   $  1,000,000   $ 17,116,000
Maximum Month-End Borrowings           17,307,000     16,346,000     32,354,000
Average Balance                         3,090,000      6,463,000     13,573,000
Average Rate at Year-End                       --           5.57%          4.19%
Average Rate during the Period               3.99%          5.83%          4.05%

The following information relates to the Bank's short-term repurchase agreements
with customers for the years ended December 31:

                                         2007           2006           2005
                                     ------------   ------------   ------------
Balance at December 31,              $ 14,142,773   $ 12,206,023   $  9,974,172
Maximum Month-End Borrowings           15,324,920     24,544,352     19,083,821
Average Balance                        10,259,208     13,649,712      7,815,990
Average Rate at Year-End                     3.34%          2.74%          2.48%
Average Rate during the Period               3.47%          3.19%          2.44%

CONTRACTUAL COMMITMENTS

In the normal  course of business the Company  enters into  certain  contractual
obligations.  Such  obligations  include  obligations to make future payments on
debt and lease  arrangements.  See Notes G, H and I of the Notes to Consolidated
Financial  Statements.  The following table summarizes the Company's significant
contractual obligations at December 31, 2007.

<TABLE>
<CAPTION>
                                                        Payments due by period
                                                        (Amounts in thousands)
                                    ---------------------------------------------------------------
More than                                                                    Less than
                                       Total        1 year      1-3 years    3-5 years     5 years
                                    -----------   ----------   ----------   ----------   ----------
<S>                                 <C>           <C>          <C>          <C>          <C>
Time Deposit Maturities             $   129,970   $  125,199   $    4,048   $      723   $       --
Short-term Borrowings                    14,143       14,143           --           --           --
Long-term Debt                          123,154       21,500       30,550       12,000       59,104
Capital lease obligations                 1,794           75          150          162        1,407
Collateralized borrowings                 1,699          102          227          261        1,109
Computer processing obligations       2,605,565      615,086    1,277,998      712,481           --
Operating lease obligations               1,083          175          260          227          421
                                    -----------   ----------   ----------   ----------   ----------
   Total                            $ 2,877,408   $  776,280   $1,313,233   $  725,854   $   62,041
                                    ===========   ==========   ==========   ==========   ==========
</TABLE>

OFF-BALANCE SHEET ARRANGEMENTS

See  Note O on  page  F-28  of the  consolidated  financial  statements  for the
disclosure of off-balance sheet arrangements.

                                       27

<PAGE>

CAPITAL

At December 31, 2007,  total  shareholders'  equity was $28,312,612  compared to
$26,206,194  at December 31, 2006.  From a  regulatory  perspective,  the Bank's
capital  ratios  place  the  Bank  in  the  well-capitalized   categories  under
applicable  regulations.  The various capital ratios of the Company and the Bank
are as follows as of December 31, 2007:

                                           Minimum
                                         Regulatory
                                        Capital Level   The Company   The Bank
                                        -------------   -----------   --------

      Tier 1 leverage capital ratio                 4%         8.04%      7.36%

      Tier 1 risk-based capital ratio               4%        11.96%     11.00%

      Total risk-based capital ratio                8%        12.61%     11.65%

Included in the Company's capital used to determine these ratios at December 31,
2007 and December 31, 2006 is $9.8 million  related to the Company's  investment
in First Litchfield  Statutory Trust I and First Litchfield  Statutory Trust II,
which is  recorded  as  subordinated  debt in the  Company's  balance  sheets at
December  31,  2007 and  2006,  respectively.  Trust  preferred  securities  are
currently  considered   regulatory  capital  for  purposes  of  determining  the
Company's Tier I capital ratios. On March 1, 2005, the Board of Governors of the
Federal Reserve System, which is the Company's banking regulator, approved final
rules that allow for the  continued  inclusion of  outstanding  and  prospective
issuances of trust  preferred  securities in regulatory  capital subject to new,
more  strict  limitations.  The Company has until March 31, 2009 to meet the new
limitations.  Management  does  not  believe  these  final  rules  will  have  a
significant impact on the Company.

INCOME TAXES

The income tax expense for 2007  totaled  $225,702 in  comparison  to income tax
benefit of $67,525 in 2006 and income tax  expense of  $1,511,343  in 2005.  The
increase in income tax  expense  between  2007 and 2006 is due to  significantly
higher levels of pretax income in 2007, both due to higher overall pretax income
as  well  as a  much  higher  proportionate  share  of  tax-exempt  income  from
investments in state and municipal  securities and bank-owned  life insurance in
2006.  The  decrease  in  income  tax  expense  between  2006 and 2005 is due to
significantly  lower levels of taxable income in 2006, both due to lower overall
pretax income as well as a much higher  proportionate share of tax-exempt income
from  investments  in  state  and  municipal   securities  and  bank-owned  life
insurance.  The  effective  tax rates for 2007,  2006 and 2005 were 10%, -5% and
27%, respectively.  Also, in all years, provisions for income taxes included the
tax  benefit  related to income  associated  with  Litchfield  Mortgage  Service
Corporation ("LMSC"), which was formed by the Bank in 2000. The income from LMSC
is considered passive investment income pursuant to Connecticut law, under which
LMSC was formed  and is  operating,  and is not  subject  to state  taxes  which
resulted in no state tax expense for all years.

IMPACT OF INFLATION AND CHANGING PRICES

The  Consolidated  Financial  Statements  and related  notes  thereto  presented
elsewhere  herein have been prepared in accordance  with  accounting  principles
generally  accepted  in  the  United  States  of  America,   which  require  the
measurement of financial  position and operating  results in terms of historical
dollars without considering changes in the relative value of money over time due
to inflation. Unlike many industrial companies, most of the assets and virtually
all of the  liabilities  of the  Company are  monetary  in nature.  As a result,
interest rates have a more significant impact on the Company's  performance than
the general level of inflation.  Over short periods of time,  interest rates may
not  necessarily  move  in the  same  direction  or in  the  same  magnitude  as
inflation.

ITEM 7A. 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's  common stock is
traded  on the  Over  the  Counter  ("OTC")  Bulletin  Board  under  the  symbol
"FLFL.OB".  As a result,  the value of its common stock may fluctuate or respond
to  price  movements  relating  to the  banking  industry  or other  indicia  of
investment.

The  Company  manages  interest  rate risk and  liquidity  risk  through an ALCO
Committee  comprised  of  directors,   senior  management  and  other  officers.
Additionally,  the Company has engaged  asset/liability  advisors to analyze and
forecast the interest rate risk and recommend  balance sheet  strategies for the
Company.  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. The rate-shock simulation
projects  the  impact of  instantaneous  parallel  shifts  in the  yield  curve.
Management  utilizes  different  rate  scenarios  in its  simulations  as deemed
appropriate to the current interest rate environment.

At December  31,  2007,  an  instantaneous  rate  increase  of 200 basis  points
indicates  a  negative  change of $86,000 or a 0.62%  decrease  in net  interest
income.  An  instantaneous  decrease  in rates of 200 basis  points  indicates a
negative  change of $314,000 or a 2.24% increase in net interest  income.  As of
year end 2007,  management  felt that  shocks of plus or minus 200 basis  points
were most relevant. In

                                       28

<PAGE>

comparison to the December 31, 2006 projections, the Company's 2007 net interest
income  projections  have been positively  impacted by a more  normalized  yield
curve as opposed to the  previous  year's  flat  inverted  yield  curve.  In the
current years  projection of a rising rate  environment  net interest  decreases
slightly as the benefit of rising asset yields are mitigated by assumed  deposit
pricing increases.  Negatively  impacting the current year's projection of a 200
basis point decrease in rates is that within this  scenario,  funding costs will
reach their implicit  floors while  accelerated  cash flows from  mortgage-based
assets will  continue to drive asset yields lower,  resulting in ongoing  margin
compression and a downward trend in net interest income levels.

The table below (dollars in thousands)  sets forth the estimated  changes in the
Company's  net interest  income  which would  result from various  instantaneous
changes in the yield curve.

                                       Net Interest Income
                                 -------------------------------
   Change in Interest Rates      Estimated   Amount of   Percent
         (basis points)            Value      Change     Change
------------------------------   ---------   ---------   -------
+200                             $  13,913   $     (86)    (0.62%)
Base                                13,999
-200                                13,686        (314)    (2.24%)

At December  31,  2006,  an  instantaneous  rate  increase  of 200 basis  points
indicates a negative  change of $1,816,000 or a 14.42 % decrease in net interest
income.  An  instantaneous  decrease  in rates of 200 basis  points  indicates a
positive  change of $548,000 or a 4.35%  increase in net  interest  income.  The
Company's 2006 net interest income  projections have been adversely  impacted by
the inverted and/ flat yield curve. Should the curve return to a more normalized
slope, the impact of the instantaneous upward shocks would not be as dramatic.

The table below (dollars in thousands)  sets forth the estimated  changes in the
Company's  net interest  income  which would  result from various  instantaneous
changes in the yield  curve.  The  Company's  interest  rate risk and  liquidity
position have been positively  impacted by the fourth quarter 2006 de-leveraging
strategy. Lower yielding,  longer term investments were sold in order to pay off
short-term expensive funding.

                                       Net Interest Income
                                 -------------------------------
   Change in Interest Rates      Estimated   Amount of   Percent
         (basis points)            Value      Change     Change
------------------------------   ---------   ---------   -------

+200                             $  10,778   $  (1,816)   (14.42%)
+100                                11,573      (1,022)    (8.11%)
Base                                12,594
-100                                13,113         519      4.12%
-200                                13,143         548      4.35%

A  discussion  of  credit  risk  can be found in  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations" in this Form 10-K.

                                       29

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Annual Financial Information
----------------------------

Report of Independent Registered Public Accounting Firm                      F-1

Consolidated Balance Sheets at December 31, 2007 and 2006                    F-2

Consolidated Statements of Income for the Years Ended
   December 31, 2007, 2006 and 2005                                          F-3

Consolidated Statements of Changes in Shareholders' Equity for the
   Years Ended December 31, 2007, 2006 and 2005                       F-4 to F-5

Consolidated Statements of Cash Flows for the Years
   Ended December 31, 2007, 2006 and 2005                             F-6 to F-7

Notes to Consolidated Financial Statements                           F-8 to F-34

                                       30

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
First Litchfield Financial Corporation and Subsidiary

We have audited the accompanying consolidated balance sheets of First Litchfield
Financial Corporation and Subsidiary (the "Company") as of December 31, 2007 and
2006,   and  the  related   consolidated   statements  of  income,   changes  in
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2007. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of First Litchfield
Financial  Corporation  and Subsidiary as of December 31, 2007 and 2006, and the
results of their  operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with U.S.  generally  accepted
accounting principles.

As described in Note A to the consolidated financial statements, during 2006 the
Company  adopted  SFAS No.  123(R),  "Share-Based  Payment,"  and SFAS No.  158,
"Employers'  Accounting  for Defined  Benefit  Pension and Other  Postretirement
Plans."

We were not engaged to examine management's assertion about the effectiveness of
First Litchfield  Financial  Corporation and Subsidiary's  internal control over
financial  reporting  as of  December  31,  2007  included  in the  accompanying
Management's   Report  on  Internal   Control  Over  Financial   Reporting  and,
accordingly, we do not express an opinion thereon.

/s/ McGladrey & Pullen, LLP

New Haven, Connecticut
March 31, 2008

                                       F-1

<PAGE>

CONSOLIDATED BALANCE SHEETS
As of December 31,

<TABLE>
<CAPTION>
                                                                                                     2007                2006
                                                                                               ----------------   ----------------
<S>                                                                                            <C>                <C>
ASSETS
Cash and due from banks (Note B)                                                               $     10,876,445   $     21,501,240
Interest -bearing and due from banks                                                                 10,620,749          7,696,397
                                                                                               ----------------   ----------------
                                                                   CASH AND CASH EQUIVALENTS         21,497,194         29,197,637
                                                                                               ----------------   ----------------
Securities (Note C):
   Available for sale securities, at fair value                                                     128,979,548        147,780,275
   Held to maturity securities (fair value $33,712-2007; $39,974-2006)                                   34,185             40,516
                                                                                               ----------------   ----------------
                                                                            TOTAL SECURITIES        129,013,733        147,820,791
                                                                                               ----------------   ----------------
Federal Home Loan Bank stock, at cost (Note I)                                                        5,067,400          4,443,400
Federal Reserve Bank stock, at cost                                                                     225,850            225,850
Other restricted stock, at cost                                                                          95,000             80,000

Loans held for sale                                                                                          --          1,042,183

Loans and Leases Receivable, net of allowance for loan and lease losses of
   $2,151,622-2007, $2,106,100-2006 (Notes D and E)                                                 327,475,371        293,900,025

Premises and equipment, net (Note F)                                                                  7,758,761          7,440,316
Deferred income taxes (Note J)                                                                        1,327,535          2,173,033
Accrued interest receivable                                                                           2,609,606          2,598,726
Cash surrender value of insurance (Note K)                                                           10,020,540          9,636,461
Other assets (Notes I and K)                                                                          2,562,638          2,673,935
                                                                                               ----------------   ----------------
                                                                                TOTAL ASSETS   $    507,653,629   $    501,232,357
                                                                                               ================   ================
LIABILITIES
Deposits (Note H):
   Noninterest-bearing                                                                         $     70,564,267   $     68,501,750
   Interest-bearing                                                                                 265,053,397        264,927,124
                                                                                               ----------------   ----------------
   Total deposits                                                                                   335,617,664        333,428,874
Federal Home Loan Bank advances (Note I)                                                             91,500,000         67,000,000
Repurchase agreements with financial institutions (Note I)                                           21,550,000         47,200,000
Repurchase agreements with customers                                                                 14,142,773         12,206,023
Junior subordinated debt issued by unconsolidated trusts (Note I)                                    10,104,000         10,104,000
Collateralized borrowings                                                                             1,699,336                 --
Capital lease obligation (Note G)                                                                     1,083,567          1,100,644
Accrued expenses and other liabilities (Note K)                                                       3,593,677          3,936,622
                                                                                               ----------------   ----------------
                                                                           TOTAL LIABILITIES        479,291,017        474,976,163
                                                                                               ----------------   ----------------
Minority interest                                                                                        50,000             50,000
Commitments and contingencies (Notes G, I, K and M)                                                          --                 --

SHAREHOLDERS' EQUITY (Notes L, M, N, and Q)
Preferred stock $.00001 par value; 1,000,000 shares authorized, no shares outstanding                        --                 --
Common stock $.01 par value
   Authorized--5,000,000 shares
   Issued--2,501,229 shares, outstanding--2,368,200 shares--2007 and
   Issued--2,491,055 shares, outstanding--2,366,702 shares--2006                                         25,012             23,724
Additional paid-in capital                                                                           27,858,841         25,840,623
Retained earnings                                                                                     2,623,110          3,953,216
Less treasury stock at cost--133,029 shares--2007, 124,353 shares--2006                                (926,964)          (794,756)
Accumulated other comprehensive loss, net of taxes (Note S)                                          (1,267,387)        (2,816,613)
                                                                                               ----------------   ----------------
                                                                  TOTAL SHAREHOLDERS' EQUITY         28,312,612         26,206,194
                                                                                               ----------------   ----------------
                                                    TOTAL LIABILITIES & SHAREHOLDERS' EQUITY   $    507,653,629   $    501,232,357
                                                                                               ================   ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-2

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,

<TABLE>
<CAPTION>
                                                                         2007            2006           2005
                                                                    -------------   -------------   ------------
<S>                                                                 <C>             <C>             <C>
INTEREST INCOME
Interest and fees on loans and leases                               $  21,053,610   $  17,399,787   $ 14,447,701
Interest on:
   Mortgage-backed securities                                           2,564,052       3,367,077      3,593,937

   U.S. Treasury and agency securities                                  2,129,407       2,919,332      2,501,379
   State and municipal securities-tax exempt                            1,355,523       1,416,669        894,149
   Corporate bonds and other securities                                   594,126         648,144        209,608
   Federal funds sold and other interest income                           401,543          54,312         18,667
                                                                    -------------   -------------   ------------
                                          TOTAL INTEREST INCOME        28,098,261      25,805,321     21,665,441
                                                                    -------------   -------------   ------------
INTEREST EXPENSE
Interest on deposits:
   Savings                                                                752,024         323,492        115,448
   Money market                                                         2,241,181       1,631,588      1,002,312
   Time certificates of deposit in denominations
     of $100,000 or more                                                2,618,965       1,284,364        813,775

   Other time certificates of deposit                                   3,661,721       3,392,446      1,498,459
                                                                    -------------   -------------   ------------
                                     TOTAL INTEREST ON DEPOSITS         9,273,891       6,631,890      3,429,994

Interest on Federal Home Loan Bank advances                             3,270,980       2,783,674      1,610,527
Interest on repurchase agreements                                       1,395,488       3,011,053      2,112,536
Interest on subordinated debt                                             791,523         682,604        440,995
Interest on collateralized borrowings                                      95,395              --             --
Interest on capital lease obligation                                       57,923           4,867             --
                                                                    -------------   -------------   ------------

                                         TOTAL INTEREST EXPENSE        14,885,202      13,114,088      7,594,052
                                                                    -------------   -------------   ------------

                                            NET INTEREST INCOME        13,213,059      12,691,233     14,071,389

PROVISION FOR LOAN AND LEASE LOSSES (Note E)                              204,000         420,000        342,028
                                                                    -------------   -------------   ------------

   NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES       13,009,059      12,271,233     13,729,361
                                                                    -------------   -------------   ------------
NONINTEREST INCOME
Banking service charges and fees                                        1,362,758       1,230,161      1,019,424
Trust income                                                            1,372,999       1,135,891        975,805
Gains (losses) on sales of available for sale securities (Note C)          19,632        (666,702)        78,949
Increase in cash surrender value of insurance                             384,079         347,975        332,579
Other                                                                     292,008         225,661        492,556
                                                                    -------------   -------------   ------------

                                       TOTAL NONINTEREST INCOME         3,431,476       2,272,986      2,899,313
                                                                    -------------   -------------   ------------
NONINTEREST EXPENSES
Salaries                                                                6,351,946       5,457,435      4,673,028
Employee benefits                                                       1,578,214       1,395,147      1,319,766
Computer services                                                         860,600       1,029,227        900,381
Net occupancy                                                           1,157,703         954,325        705,569
Equipment                                                                 626,946         533,140        429,785
Advertising                                                               469,385         678,440        446,811
Commissions, services and fees                                            505,412         520,833        326,877
Supplies                                                                  202,381         187,114        168,050
Postage                                                                   143,070         135,441        124,992
Legal fees                                                                246,815         257,553        176,708
Director fees                                                             208,403         177,700        145,150
Other                                                                   1,916,616       1,876,486      1,664,323
                                                                    -------------   -------------   ------------

                                     TOTAL NONINTEREST EXPENSES        14,267,491      13,202,841     11,081,440
                                                                    -------------   -------------   ------------
                                     INCOME BEFORE INCOME TAXES         2,173,044       1,341,378      5,547,234

PROVISION (BENEFIT) FOR INCOME TAXES (Note J)                             225,702         (67,525)     1,511,343
                                                                    -------------   -------------   ------------
                                                     NET INCOME     $   1,947,342   $   1,408,903   $  4,035,891
                                                                    =============   =============   ============

EARNINGS PER SHARE (Note L)
                                     BASIC NET INCOME PER SHARE     $         .82   $         .60   $       1.72
                                                                    =============   =============   ============

                                   DILUTED NET INCOME PER SHARE     $         .82   $         .59   $       1.70
                                                                    =============   =============   ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-3

<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2007, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                 Additional                                Other          Total
                                                       Common      Paid-In      Retained    Treasury   Comprehensive  Shareholders'
                                                        Stock      Capital      Earning      Stock         Loss           Equity
                                                      --------  ------------  -----------  ----------  -------------  -------------
<S>                                                   <C>       <C>           <C>          <C>         <C>            <C>
BALANCE, DECEMBER 31, 2004                              21,308    19,892,870    6,555,092    (701,061)    (1,222,536)    24,545,673
                                                                                                                      -------------
Comprehensive Income:
   Net income                                               --            --    4,035,891          --             --      4,035,891
   Other comprehensive income, net of taxes
      Net, unrealized holding loss on
         available for sale securities (Note S)                                                           (1,567,623)    (1,567,623)
------------------------------------------------------------------------------------------------------------------------------------
   Total other comprehensive loss                           --            --           --          --                    (1,567,623)
------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive income                                                                                                2,468,268
                                                                                                                      -------------
Cash dividends declared $.57 per share                      --            --   (1,172,874)         --             --     (1,172,874)
5% stock dividend declared
   November 17, 2005--106,787 shares
   including 5,259 treasury shares                       1,068     2,967,610   (2,968,678)         --             --             --
Fractional shares paid in cash                              --            --       (5,952)         --             --         (5,952)
Stock options exercised-9,185 shares                        92        73,655           --          --             --         73,747
Tax benefit on stock options
   exercised (Note M)                                       --        60,875           --          --             --         60,875
                                                      --------  ------------  -----------  ----------  -------------  -------------
BALANCE, DECEMBER 31, 2005                              22,468    22,995,010    6,443,479    (701,061)    (2,790,159)    25,969,737
                                                                                                                      -------------
Comprehensive Income:
   Net income                                               --            --    1,408,903          --             --      1,408,903
   Other comprehensive income, net of taxes
      Net unrealized holding gain on available
         for sale securities (Note S)                       --            --           --          --        734,250        734,250
------------------------------------------------------------------------------------------------------------------------------------
   Total other comprehensive income                                                                                         734,250
------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive income                                                                                                2,143,153
                                                                                                                      -------------
Cash dividends declared $.60 per share                      --            --   (1,300,535)         --             --     (1,300,535)
5% stock dividend declared
   November 30, 2006--112,755 shares
   including 5,401 treasury shares                       1,127     2,592,238   (2,593,365)         --             --             --
Fractional shares paid in cash                                                     (5,266)                                   (5,266)
Purchase of treasury shares - 5,000 shares                  --            --           --    (109,000)            --       (109,000)
Contribution of treasury shares
   to ESOP - 2,414 shares (Note K)                                    52,287           --      15,305                        67,592
Stock options exercised-12,864 shares                      129       138,068           --          --             --        138,197
Tax benefit on stock options
   exercised (Note M)                                       --        63,020           --          --             --         63,020
Adoption of SFAS No. 158
   as of December 31, 2006                                  --            --           --          --       (760,704)      (760,704)
                                                      --------  ------------  -----------  ----------  -------------  -------------
BALANCE, DECEMBER 31, 2006                            $ 23,724  $ 25,840,623  $ 3,953,216  $ (794,756) $  (2,816,613) $  26,206,194
</TABLE>

                                       F-4

<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, Cont.

<TABLE>
<S>                                                   <C>       <C>           <C>          <C>          <C>           <C>
Comprehensive Income:
   Net income                                               --            --    1,947,342          --             --      1,947,342
   Other comprehensive income, net of taxes (Note S)
      Net unrealized holding gain on available
         for sale securities                                --            --           --          --      1,286,413      1,286,413
      Net actuarial gain for pension
         benefits                                                                                            262,813        262,813
------------------------------------------------------------------------------------------------------------------------------------
   Total other comprehensive income                                                                                       1,549,226
------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income                                                                                                3,496,568
                                                                                                                      -------------
Cash dividends declared $.60 per share                      --            --   (1,371,563)         --             --     (1,371,563)
5% stock dividend declared
   November 29, 2007--118,873 shares
   including 6,334 treasury shares                       1,189     1,900,779   (1,901,968)         --             --             --
Fractional shares paid in cash                                                     (3,917)                                   (3,917)
Purchase of treasury shares - 8,263 shares                  --            --           --    (132,208)            --       (132,208)
Stock options exercised-9,922 shares                        99        87,388           --          --             --         87,487
Tax benefit on stock options
   exercised (Note M)                                       --        30,051           --          --             --         30,051
                                                      --------  ------------  -----------  ----------  -------------  -------------

BALANCE, DECEMBER 31, 2007                            $ 25,012  $ 27,858,841  $ 2,623,110  $ (926,964) $  (1,267,387) $  28,312,612
                                                      ========  ============  ===========  ==========  =============  =============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-5

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,

<TABLE>
<CAPTION>
                                                                                 2007           2006           2005
                                                                             ------------   ------------   ------------
<S>                                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                   $  1,947,342   $  1,408,903   $  4,035,891
Adjustments to reconcile net income to net cash provided
  by operating activities:
   Amortization and accretion of premiums and discounts on investment
     securities, net                                                              177,406        207,376        381,201
   Provision for loan and lease losses                                            204,000        420,000        342,028
   Depreciation and amortization                                                  751,259        498,680        401,740
   Deferred income taxes                                                           47,413       (347,290)       (96,531)
   (Gains) losses on sales of available for sale securities                       (19,632)       666,702        (78,949)
   Gain on the sales of loans receivable                                               --             --        (82,858)
   Loans originated for sale                                                   (4,015,817)    (2,656,004)            --
   Proceeds from sales of loans held for sale                                   5,093,056      1,625,210             --
   Gains on sales of loans held for sale                                          (35,056)       (11,389)            --
   Gains on sale of repossessed assets                                                 --           (159)          (549)
   (Gains) losses on disposals of bank premises and equipment                     (17,677)          (100)         1,867
   Increase in accrued interest receivable                                        (10,880)      (249,634)      (344,028)
   Decrease (increase) in other assets                                            182,315       (190,789)        82,397
   Increase in cash surrender value of insurance                                 (384,079)      (347,974)      (332,579)
   Increase in deferred loan origination costs                                    (70,494)       (86,416)       (90,220)
   Increase in accrued expenses and other liabilities                              38,125        772,654        416,333
                                                                             ------------   ------------   ------------
      Net cash provided by operating activities                                 3,887,281      1,709,770      4,635,743
                                                                             ------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
   Proceeds from principal payments                                            10,224,784     17,584,308     26,220,847
   Purchases                                                                   (5,928,540)   (15,850,960)   (44,016,696)
   Proceeds from sales                                                         16,295,820     33,625,157      9,687,181
   Decrease in due to broker for security purchases                                    --     (3,675,373)            --
Held to maturity securities:
   Proceeds from maturities and principal payments                                  6,331          8,519         21,911
Purchase of restricted stock                                                      (15,000)       (30,000)            --
Investment in First Litchfield Statutory Trust II(Note I)                              --        (93,000)            --
Purchase of Federal Home Loan Bank stock                                         (634,500)      (242,200)    (1,018,300)
Redemption of Federal Home Loan Bank stock                                         10,500             --             --
Proceeds from the sale of loans                                                        --             --     17,101,552
Net increase in loans and leases                                              (33,779,870)   (53,571,030)   (40,955,177)
Proceeds from sales of repossessed assets                                              --         15,159         21,395
Purchases of premises and equipment                                            (1,074,027)    (2,589,641)    (1,881,108)
Proceeds from sale of premises and equipment                                       22,000            100             --
Purchase of life insurance policies                                                    --        (24,750)       (24,750)
                                                                             ------------   ------------   ------------
   Net cash used in investing activities                                      (14,872,502)   (24,843,711)   (34,843,145)
                                                                             ------------   ------------   ------------
</TABLE>

                                       F-6

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont.

<TABLE>
<S>                                                                          <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings, money market and demand deposits           20,761,499     (9,765,351)   (20,277,950)
Net (decrease) increase in certificates of deposit                            (18,572,709)    65,323,864     (2,699,068)
Proceeds from Federal Home Loan Bank advances                                 112,000,000     24,000,000     49,000,000
Repayments on Federal Home Loan Bank advances                                 (86,500,000)   (14,500,000)   (22,000,000)
Net (decrease) increase in overnight Federal Home Loan Bank borrowings         (1,000,000)   (16,116,000)    17,116,000
Net (decrease) increase in repurchase agreements with financial
   institutions                                                               (25,650,000)   (19,500,000)     6,800,000
Net increase in repurchase agreements with customers                            1,936,750      2,231,851      9,764,584
Net increase in collateralized borrowings                                       1,699,336             --             --
Proceeds from issuance of subordinated debt                                            --      3,093,000             --
Principal repayments on capital lease obligation                                  (17,077)        (1,383)            --
Purchase of treasury shares                                                      (132,208)      (109,000)            --
Distribution in cash for fractional shares of common stock                         (3,917)        (5,266)        (5,952)
Proceeds from exercise of stock options                                            87,487        138,197         73,747
Tax benefit of stock options exercised                                             30,051         63,020         60,875
Dividends paid on common stock                                                 (1,354,434)    (1,282,891)    (1,136,010)
Minority interest investment in subsidiary                                             --         50,000             --
                                                                             ------------   ------------   ------------
   Net cash provided by financing activities                                    3,284,778     33,620,041     36,696,226
                                                                             ------------   ------------   ------------
   Net (decrease) increase in cash and cash equivalents                        (7,700,443)    10,486,100      6,488,824
CASH AND CASH EQUIVALENTS, at beginning of year                                29,197,637     18,711,537     12,222,713
                                                                             ------------   ------------   ------------
CASH AND CASH EQUIVALENTS, at end of year                                    $ 21,497,194   $ 29,197,637   $ 18,711,537
                                                                             ============   ============   ============

SUPPLEMENTAL INFORMATION
Cash paid during the year for:
   Interest on deposits and borrowings                                       $ 15,155,901   $ 12,987,505   $  7,155,131
                                                                             ============   ============   ============
   Income taxes                                                              $        750   $    900,400   $    950,500
                                                                             ============   ============   ============
Noncash investing and financing activities:
   Due to broker for securities purchased                                    $         --   $         --   $  3,675,373
                                                                             ============   ============   ============
   Transfer of loans to repossessed assets                                   $     71,018   $     19,160   $     31,687
                                                                             ============   ============   ============
   Accrued dividends declared                                                $    355,229   $    338,100   $    320,456
                                                                             ============   ============   ============
   Treasury stock contributed to ESOP                                        $         --   $     67,592   $         --
                                                                             ============   ============   ============
   Change in other assets and other liabilities
      related to the unfunded pension liability                              $    398,201   $  1,152,582   $         --
                                                                             ============   ============   ============
   Capital lease incurred for acquisition of premises                        $         --   $  1,102,027   $         --
                                                                             ============   ============   ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  include  the  accounts  of  the  First
Litchfield Financial  Corporation (the "Company") and The First National Bank of
Litchfield (the "Bank"), a nationally-chartered  commercial bank, and the Bank's
wholly owned  subsidiaries,  Litchfield Mortgage Service Corporation and Lincoln
Corporation and First  Litchfield  Leasing  Corporation,  an entity in which the
Bank has an eighty  percent  ownership.  Deposits  in the Bank are insured up to
specified  limits  by the Bank  Insurance  Fund,  which is  administered  by the
Federal Deposit  Insurance  Corporation  (the "FDIC").  The Bank provides a full
range of banking  services to individuals  and businesses  located  primarily in
Northwestern  Connecticut.  These products and services include demand, savings,
NOW,  money market and time  deposits,  residential  and  commercial  mortgages,
consumer  installment and other loans and leases as well as trust services.  The
Bank is subject to competition  from other financial  institutions.  The Bank is
also  subject to the  regulations  of certain  federal  agencies  and  undergoes
periodic regulatory examinations.

On January 7, 2000, the Company filed a Form 10-SB  registration  statement with
the  Securities  and Exchange  Commission  (the "SEC") to register the Company's
$.01 par value common stock under the  Securities  and Exchange Act of 1934 (the
"Exchange  Act"). The Company files periodic  financial  reports with the SEC as
required  by the  Exchange  Act. On June 26,  2003,  the  Company  formed  First
Litchfield  Statutory  Trust  I for  the  purpose  of  issuing  trust  preferred
securities and investing the proceeds in subordinated  debentures  issued by the
Company.  On June 16, 2006, the Company formed First Litchfield  Statutory Trust
II for the purpose of issuing  trust  preferred  securities  and  investing  the
proceeds in subordinated debentures issued by the Company. (See Note I).

The significant  accounting  policies followed by the Company and the methods of
applying those policies are summarized in the following paragraphs:

BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements
have been prepared in accordance with accounting  principles  generally accepted
in the United  States of  America  and  general  practices  within  the  banking
industry.  All  significant  intercompany  balances and  transactions  have been
eliminated.  The  Trust I and  Trust  II are not  included  in the  consolidated
financial statements as they do not meet the requirements for consolidation.  In
preparing the financial statements, management is required to make estimates and
assumptions  that affect the  reported  amounts of assets and  liabilities,  and
disclosures of contingent assets and liabilities,  as of the date of the balance
sheet and the  reported  amounts of  revenues  and  expenses  for the  reporting
period.  Actual results could differ from those estimates.  A material  estimate
that is particularly  susceptible to significant change in the near term relates
to the determination of the allowance for loan and lease losses.

SIGNIFICANT  GROUP   CONCENTRATIONS  OF  CREDIT  RISK:  Most  of  the  Company's
activities are with customers  located within  Litchfield  County,  Connecticut.
Note C discusses  the types of  securities  that the Company  invests in. Note E
discusses the types of lending and lease  financing that the Company engages in.
The Company does not have any significant loan and lease  concentrations  to any
one industry or customer.  Note K discusses a concentration  related to the cash
surrender value of the life insurance.

SEGMENT REPORTING: The Company has two business segments,  community banking and
commercial leasing.  During the periods presented these segments represented all
the revenues and income for the consolidated  group and therefore,  are the only
reported  segments as defined by  Statement of  Financial  Accounting  Standards
("SFAS")  No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information" (SFAS 131).

DEBT AND MARKETABLE  EQUITY  SECURITIES:  Management  determines the appropriate
classification  of securities at the date individual  investment  securities are
acquired,  and the  appropriateness of such classification is reassessed at each
balance sheet date.

Debt  securities  that management has the positive intent and ability to hold to
maturity are  classified as "held to maturity"  and recorded at amortized  cost.
Trading securities, if any, are carried at fair value, with unrealized gains and
losses recognized in earnings.  Securities not classified as held to maturity or
trading,  including equity securities with readily determinable fair values, are
classified as "available for sale" and recorded at fair value,  with  unrealized
gains and losses  excluded  from  earnings and  reported in other  comprehensive
income, net of taxes.

                                       F-8

<PAGE>

Purchase  premiums and  discounts are  recognized  in interest  income using the
interest method over the terms of the securities.  Declines in the fair value of
held to maturity and  available  for sale  securities  below their cost that are
deemed to be other-than-temporary  are reflected in earnings as realized losses.
In estimating  other-than-temporary  impairment losses, management considers (1)
the  length of time and  extent to which the fair value has been less than cost,
(2) the financial  condition and near-term  prospects of the issuer, and (3) the
intent and ability of the Company to retain its  investment  in the issuer for a
period of time sufficient to allow for any  anticipated  recovery in fair value.
Gains and losses on the sale of  securities  are  recorded on the trade date and
are determined using the specific identification method.

The sale of a held maturity security within three months of its maturity date or
after  collection of at least 85% of the principal  outstanding  at the time the
security  was acquired is  considered a maturity for purposes of  classification
and disclosure.

INTEREST AND FEES ON LOANS AND LEASES: Interest on loans and leases ("loans") is
included in income as earned  based on  contractual  rates  applied to principal
amounts  outstanding.  The accrual of interest income is generally  discontinued
when a loan or lease  becomes 90 days past due as to principal  or interest,  or
when, in the judgment of management,  collectibility  of the loan,  lease,  loan
interest  or lease  interest  become  uncertain.  When  accrual of  interest  is
discontinued,  any unpaid interest  previously  accrued is reversed from income.
Subsequent  recognition  of income occurs only to the extent payment is received
subject  to  management's  assessment  of the  collectibility  of the  remaining
principal and interest.  The accrual of interest on loans and leases past due 90
days or more,  including  impaired  loans and leases,  may be continued when the
value of the  loan's or lease's  collateral  is  believed  to be  sufficient  to
discharge all principal and accrued interest income due on the loan or lease and
the loan or lease is in the process of collection.  A non-accrual  loan or lease
is restored to accrual status when it is no longer delinquent and collectibility
of interest and principal is no longer in doubt. Loan and lease origination fees
and certain  direct loan and lease  origination  costs are  deferred and the net
amount is amortized as an adjustment of the related loan's or lease's yield. The
Bank generally  amortizes these amounts over the contractual life of the related
loans and leases, utilizing a method which approximates the interest method.

LOANS HELD FOR SALE:  Loans  originated  and intended for sale in the  secondary
market are carried at the lower of aggregate  cost or fair value,  as determined
by aggregate  outstanding  commitments  from investors or current investor yield
requirements.  Net unrealized losses, if any, are recognized through a valuation
allowance by charges to noninterest income.

Mortgage  loans held for sale are  generally  sold with the  mortgage  servicing
rights  retained by the Company.  Gains or losses on sales of mortgage loans are
recognized  based on the  difference  between the selling price and the carrying
value of the related mortgage loans sold on the trade date.

TRANSFER OF FINANCIAL ASSETS: Transfers of financial assets are accounted for as
sales,  when  control  over  the  assets  has  been  surrendered.  Control  over
transferred  assets is deemed to be  surrendered  when (1) the assets  have been
isolated  from the Company,  (2) the  transferee  obtains the right to pledge or
exchange the transferred  assets and no condition both constrains the transferee
from taking advantage of that right and provides more than a trivial benefit for
the transferor,  and (3) the transferor does not maintain effective control over
the  transferred  assets  through either (a) an agreement that both entitles and
obligates the  transferor to repurchase or redeem the assets before  maturity or
(b) the  ability to  unilaterally  cause the holder to return  specific  assets,
other than through a cleanup call. Transfers that are not accounted for as sales
are accounted for as secured borrowings.

LOANS AND LEASES RECEIVABLE: Loans and leases receivable,  ("loans"), other than
those held for sale, are reported at their principal amount outstanding,  net of
unearned   discounts  and  unamortized   nonrefundable  fees  and  direct  costs
associated with their origination or acquisition. Management has the ability and
intent to hold its loans and leases for the foreseeable future or until maturity
or payoff.

Leases are for  equipment  to  customers  under  leases  that  qualify as direct
financing leases for financial  reporting.  Under the direct financing method of
accounting,  the minimum lease payments to be received under the lease contract,
together with the estimated  residual value,  are recorded as lease  receivables
when the lease  contract is signed and the leased  property is  delivered to the
customer.  The excess of the minimum lease payments and residual values over the
cost of the  equipment  is  recorded  as  unearned  income.  Unearned  income is
recognized  at an  effective  level  yield  method  over the  life of the  lease
contract. Lease payments are recorded when due under the lease contract.

A loan or lease is  classified  as a  restructured  loan or lease  when  certain
concessions have been made to the original contractual terms, such as reductions
of interest  rates or deferral of  interest or  principal  payments,  due to the
borrowers' financial condition.

                                       F-9

<PAGE>
A loan or lease is  considered  impaired  when it is probable  that the creditor
will be unable to collect amounts due, both principal and interest, according to
the contractual  terms of the loan or lease  agreement.  When a loan or lease is
impaired,  impairment is measured using (1) the present value of expected future
cash flows of the  impaired  loan or lease  discounted  at the loan's or lease's
original  effective  interest  rate,  (2) the  observable  market  price  of the
impaired  loan or lease or (3) the fair value of the  collateral  if the loan or
lease is  collateral-dependent.  When a loan or lease has been deemed to have an
impairment,  a valuation  allowance is established for the amount of impairment.
The Bank considers all non-accrual loans and leases;  other loans or leases past
due 90 days or more,  based on  contractual  terms,  and  restructured  loans or
leases to be impaired.

ALLOWANCE FOR LOAN AND LEASE LOSSES:  The allowance for loan and lease losses is
established  as losses are  estimated to have  occurred  through a provision for
loan and lease  losses  charged to  earnings.  Loan and lease losses are charged
against the allowance when management believes the uncollectibility of a loan or
lease balance is confirmed.  Subsequent recoveries,  if any, are credited to the
allowance.

The  allowance  for loan and lease  losses is  evaluated  on a regular  basis by
management and is based upon management's  periodic review of the collectibility
of the loans or leases in light of historical experience,  the nature and volume
of the  loan  or  lease  portfolio,  adverse  situations  that  may  affect  the
borrower's  ability to repay,  estimated value of any underlying  collateral and
prevailing economic conditions.  This evaluation is inherently  subjective as it
requires  estimates  that  are  susceptible  to  significant  revision  as  more
information becomes available.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component  relates to loans and leases that are  classified  as either
doubtful,  substandard  or special  mention.  For such loans and leases that are
also  classified as impaired,  an allowance is  established  when the discounted
cash flows (or observable  market price or collateral value if the loan or lease
is  collateral  dependent)  of the  impaired  loan or lease  is  lower  than the
carrying   value  of  that  loan  or  lease.   The  general   component   covers
non-classified  loans and  leases  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 of probable losses.
The  unallocated  component of the allowance  reflects the margin of imprecision
inherent in the underlying assumptions.

The Bank's mortgage loans and leases are  collateralized  by real estate located
principally  in  Litchfield  County,  Connecticut.   Accordingly,  the  ultimate
collectibility  of a substantial  portion of the Bank's loan and lease portfolio
is  susceptible  to changes in local market  conditions.  In  addition,  medical
equipment  secures  a  substantial   portion  of  the  Leasing  Company's  lease
portfolio.  Accordingly, the ultimate collectibility of a substantial portion of
the lease portfolio is susceptible to changes in the medical equipment market.

Management  believes  that the  allowance for loan and lease losses is adequate.
While  management  uses available  information to recognize  losses on loans and
leases,  future additions to the allowance or write-downs may be necessary based
on changes in economic conditions, particularly in Connecticut. In addition, the
Office of the  Comptroller  of the Currency (the "OCC"),  as an integral part of
its examination process,  periodically reviews the Bank's allowance for loan and
lease  losses.  The OCC may  require  the  Bank to  recognize  additions  to the
allowance or write-downs based on their judgment about information  available to
them at the time of their examination.

RATE LOCK  COMMITMENTS:  The Company enters into  commitments to originate loans
and leases whereby the interest rate on the loan or lease is determined prior to
funding (rate lock  commitments).  Rate lock  commitments on mortgage loans that
are intended to be sold are  considered  to be  derivatives.  Accordingly,  such
commitments,  along with any related fees received from potential borrowers, are
recorded  at fair value in other  assets or  liabilities,  with  changes in fair
value recorded in the net gain or loss on sale of mortgage loans.  Fair value is
based on fees  currently  charged  to enter  into  similar  agreements,  and for
fixed-rate  commitments also considers the difference  between current levels of
interest rates and the committed rates.

DERIVATIVE  FINANCIAL  INSTRUMENTS:  The Company  records  derivative  financial
instruments  in  accordance  with  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging   Activities."   This  Statement   requires  that  all
derivatives  be  recognized  as assets or  liabilities  in the balance sheet and
measured at fair value.

PREMISES  AND  EQUIPMENT:  Bank  premises and  equipment  are stated at cost for
purchased assets, and for assets under capital lease, at the lower of fair value
or net present value of the minimum lease payments required over the term of the
lease, net of accumulated depreciation and amortization. Depreciation is charged
to operations using the straight-line  method over the estimated useful lives of
the  related  assets,   which  range  from  three  to  forty  years.   Leasehold
improvements  are capitalized and amortized over the shorter of the terms of the
related leases or the estimated  economic lives of the  improvements.  Gains and
losses on dispositions are recognized upon realization.  Maintenance and repairs
are expensed as incurred and improvements are capitalized.

                                      F-10
<PAGE>

IMPAIRMENT OF  LONG-LIVED  ASSETS:  Long-lived  assets,  including  premises and
equipment and certain identifiable  intangible assets which are held and used by
the  Company,  are  reviewed  for  impairment  whenever  events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  If  impairment  is indicated by that review,  the asset is written
down to its estimated fair value through a charge to noninterest expense.

FORECLOSED  REAL  ESTATE:  Foreclosed  real  estate,  if any,  is  comprised  of
properties acquired through  foreclosure  proceedings or acceptance of a deed in
lieu of foreclosure.  These  properties are carried at the lower of cost or fair
value  less  estimated  costs of  disposal.  At the time  these  properties  are
obtained,  they are  recorded  at fair value  with any  difference  between  the
carrying value and fair value reflected as a direct charge against the allowance
for loan and lease losses,  which  establishes a new cost basis.  Any subsequent
declines in value are charged to income with a  corresponding  adjustment to the
allowance for foreclosed real estate.  Revenue and expense from the operation of
foreclosed  real estate and changes in the  valuation  allowance are included in
operations.  Costs relating to the  development  and improvement of the property
are capitalized, subject to the limit of fair value. Upon disposition, gains and
losses, to the extent they exceed the  corresponding  valuation  allowance,  are
reflected in the statement of income.

COLLATERALIZED  BORROWINGS:  Collateralized  borrowings represent the portion of
loans  transferred to other  institutions  under loan  participation  agreements
which  were  not  recognized  as  sales  due  to  recourse   provisions   and/or
restrictions on the participant's right to transfer their portion of the loan.

REPURCHASE  AGREEMENTS WITH CUSTOMERS:  Repurchase agreements with customers are
classified as secured borrowings,  and generally mature within one to three days
of the transaction  date.  Repurchase  agreements are reflected at the amount of
cash received in connection  with the  transaction.  The Bank may be required to
provide  additional  collateral  based  on the  fair  value  of  the  underlying
securities.

TRUST ASSETS:  Assets of the Trust Department,  other than trust cash on deposit
at the Bank, are not included in these consolidated financial statements because
they are not assets of the  Company.  Trust fees are  recognized  on the accrual
basis of accounting.

INCOME TAXES: The Company  recognizes income taxes under the asset and liability
method.  Under this method,  deferred tax assets and  liabilities are recognized
for  the  future  tax  consequences  attributable  to  differences  between  the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their  respective tax bases.  Deferred tax assets and  liabilities  are measured
using  enacted  tax rates  expected  to apply to taxable  income in the years in
which those temporary  differences are expected to be recovered or settled.  The
effect  on  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized in income in the period that includes the  enactment  date.  Deferred
tax assets  may be reduced by a  valuation  allowance  when,  in the  opinion of
management,  it is more likely than not that some portion or all of the deferred
tax assets will not be realized.

When tax returns are filed,  it is highly certain that some positions taken will
be  sustained  upon  examination  by the taxing  authorities,  while  others are
subject to  uncertainty  about the merits of the position taken or the amount of
the position that would be ultimately  sustained.  The benefit of a tax position
is recognized in the financial  statements in the period during which,  based on
all available evidence,  management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or  litigation  processes,  if any. The  evaluation  of a tax position  taken is
considered  by itself and not offset or  aggregated  with other  positions.  Tax
positions that meet the more-likely-than-not  recognition threshold are measured
as the largest  amount of tax benefit  more than fifty  percent  likely of being
realized upon settlement with the applicable taxing authority.

Interest and  penalties  related to income  taxes are recorded as provision  for
income taxes.

Effective  January 1, 2007, the Company adopted Financial  Accounting  Standards
Board  Interpretation  (FIN) No. 48, Accounting for Uncertainty in Income Taxes,
which clarifies the accounting for uncertainty in income taxes  recognized in an
entity's  financial   statements  and  provides  guidance  on  the  recognition,
de-recognition  and  measurement  of benefits  related to an entity's  uncertain
income tax positions.  Based on a detailed  review of all tax positions,  it was
determined that the Company has no significant  unrecognized  tax benefits,  and
therefore  the  company's  adoption  of FIN 48 had no  impact  on the  Company's
consolidated financial statements.

PENSION PLAN: The Bank has a  noncontributory  defined benefit pension plan that
covers  substantially  all  employees.  Pension  costs are accrued  based on the
projected   unit  credit  method  and  the  Bank's  policy  is  to  fund  annual
contributions  in  amounts  necessary  to meet  the  minimum  funding  standards
established by the Employee Retirement Income Security Act (ERISA) of 1974.

                                      F-11

<PAGE>

In September 2006, the Financial  Accounting Standards Board (the "FASB") issued
FASB  Statement No. 158 ("SFAS No.  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.  The Company
adopted  SFAS No.  158  effective  December  31,  2006  and as a  result  of the
adoption,  a  liability  was  recognized  for the  under  funded  status  of the
Company's  qualified  pension  plan  and the net  impact  was  recognized  as an
after-tax charge to accumulated other comprehensive income (loss). Subsequent to
December 31, 2006,  changes in the under funded status of the plan is recognized
as a component of other comprehensive income.

STOCK OPTION PLANS: In December 2004, the FASB issued Statement No. 123 (revised
2004),  Share-Based  Payment ("SFAS No. 123(R)").  SFAS No. 123(R) requires that
the compensation cost relating to share-based payment transactions be recognized
in financial  statements.  That cost is measured  based on the fair value of the
equity or liability  instruments  issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including stock options,  restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase  plans.  SFAS No. 123(R) is a replacement of SFAS No. 123,  "Accounting
for Stock-Based  Compensation,"  and supersedes APB Opinion No. 25,  "Accounting
for Stock Issued to  Employees,"  and its related  interpretive  guidance.  This
statement requires entities to measure the cost of employee services received in
exchange for stock options based on the grant-date fair value of the award,  and
to  recognize  the cost over the  period the  employee  is  required  to provide
services  for  the  award.   SFAS  No.  123(R)  permits   entities  to  use  any
option-pricing model that meets the fair value objective in the Statement.

The  Company  elected  to adopt  SFAS No.  123(R) on  January  1, 2006 under the
modified prospective method. Compensation is measured using the fair value of an
award on the grant dates and is  recognized  over the service  period,  which is
usually the vesting period. Compensation cost related to the unvested portion of
awards  outstanding  as of that date was based on the  grant-date  fair value of
those awards as  calculated  under the original  provisions of SFAS No 123; that
is, the  Company  was not  required  to  re-measure  the  grant-date  fair value
estimate of the unvested  portion of awards  granted prior to the effective date
of SFAS No 123(R).

The Company had applied  Accounting  Principles Board Opinion No. 25 and related
Interpretations,  in  accounting  for the stock  option plan prior to January 1,
2006.  Under APB  Opinion  No. 25,  stock  options  issued  prior to 2006 had no
intrinsic  value  at the  grant  date and  therefore,  no  compensation  cost is
recognized for them. In addition,  all stock options outstanding at December 31,
2005 were fully  vested and  therefore  the  adoption of SFAS No.  123(R) had no
initial  impact on the Company's  financial  statements.  There are no pro forma
disclosures  required for 2007,  2006 and 2005 because there was no  stock-based
compensation attributed to those years.

EARNINGS PER SHARE:  Basic  earnings per share  represents  income  available to
common   shareholders   and  is  computed   by   dividing   net  income  by  the
weighted-average number of common shares outstanding. Diluted earnings per share
reflects  additional  common shares that would have been outstanding if dilutive
potential  common  shares had been issued,  as well as any  adjustment to income
that would result from the assumed issuance. Potential common shares that may be
issued by the Company  relate to  outstanding  stock options and are  determined
using the treasury stock method.

RELATED PARTY  TRANSACTIONS:  Directors and officers of the Company and Bank and
their affiliates have been customers of and have had transactions with the Bank,
and it is expected that such persons will continue to have such  transactions in
the future.  Management  believes that all deposit  accounts,  loans and leases,
services and commitments  comprising such transactions were made in the ordinary
course of business,  on substantially the same terms,  including  interest rates
and collateral, as those prevailing at the time for comparable transactions with
other  customers  who are not  directors  or  officers.  In the  opinion  of the
management,  the  transactions  with  related  parties did not involve more than
normal risks of  collectibility  or favored treatment or terms, or present other
unfavorable features.  Notes D, H, and P contain details regarding related party
transactions.

COMPREHENSIVE  INCOME:  Accounting  principles generally require that recognized
revenue, expenses, gains and losses are included in net income. Although certain
changes  in assets  and  liabilities,  such as  unrealized  gains and  losses on
available for sale  securities  and defined  benefit  pension  liabilities,  are
reported as a separate  component  of the  shareholders'  equity  section of the
balance  sheet,   such  items,   along  with  net  income,   are  components  of
comprehensive income.

STATEMENTS  OF CASH  FLOWS:  Cash and due from  banks,  Federal  funds  sold and
interest-earning  deposits in banks are  recognized as cash  equivalents  in the
statements  of cash flows.  For  purposes of reporting  cash flows,  the Company
considers all highly liquid debt instruments  purchased with a maturity of three
months or less to be cash equivalents. Generally, Federal

                                      F-12

<PAGE>

funds sold have a one-day maturity.  Cash flows from loans,  leases and deposits
are reported net. The Company maintains amounts due from banks and Federal funds
sold which, at times, may exceed federally  insured limits.  The Company has not
experienced any losses from such concentrations.

RECENT ACCOUNTING  PRONOUNCEMENTS:  In September 2006, FASB issued SFAS No. 157,
"Fair Value  Measurements."  This  statement  defines fair value,  establishes a
framework for measuring  fair value,  and expands  disclosures  about fair value
measurements.  It clarifies  that fair value is the price that would be received
to sell an asset or paid to  transfer  a  liability  in an  orderly  transaction
between  market  participants  in the  market  in  which  the  reporting  entity
operates.  This statement does not require any new fair value measurements,  but
rather, it provides enhanced  guidance to other  pronouncements  that require or
permit assets or  liabilities  to be measured at fair value.  This  statement is
effective  for fiscal years  beginning  after  November  15, 2007,  with earlier
adoption  permitted.  The  Company  does not expect  that the  adoption  of this
statement will have a material impact on its financial statements.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial Assets and Financial Liabilities." This statement permits companies to
elect  to  follow  fair  value  accounting  for  certain  financial  assets  and
liabilities  in an effort to mitigate  volatility in earnings  without having to
apply complex  hedge  accounting  provisions.  The  statement  also  establishes
presentation  and  disclosure  requirements  designed to  facilitate  comparison
between entities that chose different  measurement  attributes for similar types
of assets  and  liabilities.  This  statement  is  effective  for  fiscal  years
beginning after November 15, 2007. The Company does not expect that the adoption
of this statement will have a material impact on its financial statements.

In September  2006, the FASB ratified  Emerging Issues Task Force ("EITF") Issue
No. 06-4,  "Accounting for Deferred  Compensation  and  Postretirement  Benefits
Associated with Endorsement  Split-Dollar  Life Insurance  Arrangements"  ("EITF
06-4"),  and in March 2007, the FASB ratified EITF Issue No. 06-10,  "Accounting
for  Collateral  Assignment  Split-Dollar  Life Insurance  Arrangements"  ("EITF
06-10").  EITF 06-4 requires  deferred  compensation or  postretirement  benefit
aspects of an  endorsement-type  split-dollar  life insurance  arrangement to be
recognized  as a liability  by the  employer  and states the  obligation  is not
effectively  settled by the purchase of a life insurance  policy.  The liability
for future benefits should be recognized based on the substantive agreement with
the  employee,  which may be either to provide a future death  benefit or to pay
for the  future  cost of the life  insurance.  EITF 06-10  provides  recognition
guidance for postretirement benefit liabilities related to collateral assignment
split-dollar life insurance arrangements, as well as recognition and measurement
of the associated  asset on the basis of the terms of the collateral  assignment
split-dollar life insurance arrangement.  EITF 06-4 and EITF 06-10 are effective
for fiscal years  beginning after December 15, 2007. The Company does not expect
that the adoption of EITF 06-4 or EITF 06-10 will have a material  impact on its
financial statements.

NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain  reserves  against its  respective  transaction
accounts and nonpersonal  time deposits.  At December 31, 2007 and 2006 the Bank
was  required  to have cash and  liquid  assets of  approximately  $148,000  and
$6,207,000,  respectively,  to meet these requirements. In addition, the Bank is
required to maintain  $200,000 in the Federal Reserve Bank for clearing purposes
at both December 31, 2007 and 2006.

                                      F-13

<PAGE>

NOTE C - SECURITIES

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 December 31, 2007 and 2006 are as follows:

AVAILABLE FOR SALE

<TABLE>
<CAPTION>
                                                                            December 31, 2007
                                                     ---------------------------------------------------------------
                                                                          Gross           Gross
                                                       Amortized       Unrealized       Unrealized         Fair
                                                         Cost             Gains           Losses           Value
                                                     -------------   -------------    -------------    -------------
<S>                                                  <C>             <C>              <C>              <C>
Debt Securities:
   U.S. Treasury securities                          $   4,007,040   $      62,179    $          --    $   4,069,219
   U.S. Government Agency securities                    30,992,780           8,895         (106,435)      30,895,240
   State and Municipal obligations                      31,190,175         364,035          (49,871)      31,504,339
   Corporate and Other bonds                             4,898,731              --         (445,731)       4,453,000
                                                     -------------   -------------    -------------    -------------

                                                        71,088,726         435,109         (602,037)      70,921,798
                                                     -------------   -------------    -------------    -------------

Mortgage-Backed Securities:
   GNMA                                                    674,447              --          (16,521)         657,926
   FNMA                                                 40,041,144         221,704         (996,597)      39,266,251
   FHLMC                                                12,311,134          61,541         (295,091)      12,077,584
                                                     -------------   -------------    -------------    -------------
                                                        53,026,725         283,245       (1,308,209)      52,001,761
                                                     -------------   -------------    -------------    -------------

Marketable Equity Securities                             6,030,000          54,000          (28,011)       6,055,989
                                                     -------------   -------------    -------------    -------------

Total available for sale securities                  $ 130,145,451   $     772,354    $  (1,938,257)   $ 128,979,548
                                                     =============   =============    =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                                                            December 31, 2006
                                                     ---------------------------------------------------------------
                                                                          Gross           Gross
                                                       Amortized       Unrealized       Unrealized         Fair
                                                         Cost             Gains           Losses           Value
                                                     -------------   -------------    -------------    -------------
<S>                                                  <C>             <C>              <C>              <C>
Debt Securities:
   U.S. Treasury securities                          $   4,011,499   $          --    $     (19,624)   $   3,991,875
   U.S. Government Agency securities                    38,991,992              --       (1,190,389)      37,801,603
   State and Municipal obligations                      31,193,318         381,930          (43,720)      31,531,528
   Corporate and Other bonds                            11,274,073          67,326          (14,649)      11,326,750
                                                     -------------   -------------    -------------    -------------

                                                        85,470,882         449,256       (1,268,382)      84,651,756
                                                     -------------   -------------    -------------    -------------

Mortgage-Backed Securities:
   GNMA                                                  1,060,592              --          (18,763)       1,041,829
   FNMA                                                 47,084,763          78,779       (1,790,692)      45,372,850
   FHLMC                                                15,279,052          33,758         (546,682)      14,766,128
                                                     -------------   -------------    -------------    -------------
                                                        63,424,407         112,537       (2,356,137)      61,180,807
                                                     -------------   -------------    -------------    -------------

Marketable Equity Securities                             2,000,000              --          (52,288)       1,947,712
                                                     -------------   -------------    -------------    -------------

Total available for sale securities                  $ 150,895,289   $     561,793    $  (3,676,807)   $ 147,780,275
                                                     =============   =============    =============    =============
</TABLE>

                                      F-14

<PAGE>

HELD TO MATURITY

                                               December 31, 2007
                                 ----------------------------------------------
                                               Gross        Gross
                                 Amortized   Unrealized   Unrealized     Fair
                                    Cost        Gains       Losses       Value
                                 ---------   ----------   ----------   --------
Mortgage-Backed Securities:
GNMA                             $  34,185   $       --   $     (473)  $ 33,712
                                 =========   ==========   ==========   ========

                                                December 31, 2006
                                 ----------------------------------------------
                                               Gross        Gross
                                 Amortized   Unrealized   Unrealized     Fair
                                    Cost        Gains       Losses       Value
                                 ---------   ----------   ----------   --------
Mortgage-Backed Securities:
GNMA                             $  40,516   $       --   $     (542)  $ 39,974
                                 =========   ==========   ==========   ========

The following table presents the Bank's  securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2007:

<TABLE>
<CAPTION>
                                          Less than 12 Months           12 Months or More                  Total
                                       -------------------------   --------------------------   --------------------------
                                           Fair       Unrealized       Fair        Unrealized       Fair        Unrealized
                                           Value        Losses         Value         Losses         Value         Losses
                                       -------------------------   --------------------------   --------------------------
<S>                                    <C>            <C>          <C>            <C>           <C>            <C>
Investment Securities:
   U.S. Treasury securities            $         --   $       --   $         --   $        --   $         --   $        --
   U.S. Government Agency securities             --           --     21,893,564       106,435     21,893,564       106,435
   State & Municipal obligations          8,077,673       49,871             --            --      8,077,673        49,871
   Corporate & Other bonds                4,453,000      445,731             --            --      4,453,000       445,731
                                       ------------   ----------   ------------   -----------   ------------   -----------
                                         12,530,673      495,602     21,893,564       106,435     34,424,237       602,037

   Mortgage-Backed Securities:
      GNMA                                  348,421        6,769        327,981        10,225        676,402        16,994
      FNMA                                  110,712          817     27,637,383       995,780     27,748,095       996,597
      FHLMC                                      --           --      9,546,400       295,091      9,546,400       295,091
                                       ------------   ----------   ------------   -----------   ------------   -----------
                                            459,133        7,586     37,511,764     1,301,096     37,970,897     1,308,682
                                       ------------   ----------   ------------   -----------   ------------   -----------

Marketable Equity Securities                     --           --      1,971,989        28,011      1,971,989        28,011
                                       ------------   ----------   ------------   -----------   ------------   -----------
         Total                         $ 12,989,806   $  503,188   $ 61,377,317   $ 1,435,542   $ 74,367,123   $ 1,938,730
                                       ============   ==========   ============   ===========   ============   ===========
</TABLE>

The following table presents the Bank's  securities' gross unrealized losses and
fair value, aggregated by the length of time the individual securities have been
in a continuous unrealized loss position at December 31, 2006:

<TABLE>
<CAPTION>
                                          Less than 12 Months           12 Months or More                  Total
                                       -------------------------   --------------------------   --------------------------
                                           Fair       Unrealized       Fair        Unrealized       Fair        Unrealized
                                           Value        Losses         Value         Losses         Value         Losses
                                       -------------------------   --------------------------   --------------------------
<S>                                    <C>            <C>          <C>            <C>           <C>            <C>
Investment Securities:
   U.S. Treasury securities            $  3,007,031   $    5,394   $    984,844   $    14,230   $  3,991,875   $    19,624
   U.S. Government Agency securities      2,887,470      112,530     34,914,133     1,077,859     37,801,603     1,190,389
   State & Municipal obligations          5,361,502       25,491      1,241,836        18,229      6,603,338        43,720
   Corporate & Other bonds                3,880,000       14,649             --            --      3,880,000        14,649
                                       ------------   ----------   ------------   -----------   ------------   -----------
                                         15,136,003      158,064     37,140,813     1,110,318     52,276,816     1,268,382
   Mortgage-Backed Securities:
      GNMA                                       --           --      1,065,361        19,305      1,065,361        19,305
      FNMA                                2,713,210        2,927     35,794,145     1,787,765     38,507,355     1,790,692
      FHLMC                                 444,661        2,665     11,593,313       544,017     12,037,974       546,682
                                       ------------   ----------   ------------   -----------   ------------   -----------
                                          3,157,871        5,592     48,452,819     2,351,087     51,610,690     2,356,679
                                       ------------   ----------   ------------   -----------   ------------   -----------

Marketable Equity Securities                     --           --      1,947,712        52,288      1,947,712        52,288
                                       ------------   ----------   ------------   -----------   ------------   -----------
         Total                         $ 18,293,874   $  163,656   $ 87,541,344   $ 3,513,693   $105,835,218   $ 3,677,349
                                       ============   ==========   ============   ===========   ============   ===========
</TABLE>

                                      F-15

<PAGE>

At December 31, 2007,  fifty-one  securities have unrealized losses.  Management
does not believe that any of the  unrealized  losses are other than temporary as
they primarily relate to debt and mortgage-backed  securities issued by the U.S.
Treasury and U.S.  Government  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
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.

The  amortized  cost and fair value of debt  securities at December 31, 2007, by
contractual  maturity,  are shown below.  Actual  maturities of  mortgage-backed
securities  may  differ  from  contractual   maturities  because  the  mortgages
underlying  the  securities  may be called or prepaid  with or  without  call or
prepayment penalties. Because mortgage-backed securities are not due at a single
maturity date, they are not included in the maturity categories in the following
maturity summary.

<TABLE>
<CAPTION>
                                                                 December 31, 2007
                                            -----------------------------------------------------------
                                            Available-for-Sale Securities   Held-to-Maturity Securities
                                            -----------------------------   ---------------------------
                                              Amortized          Fair         Amortized        Fair
                                                 Cost           Value           Cost           Value
                                            -------------   -------------   ------------   ------------
<S>                                         <C>             <C>             <C>            <C>
Due in one year or less                     $   2,000,856   $   2,013,594   $         --   $         --
Due after one year through five years           9,006,185       9,039,298             --             --
Due after five years through ten years         23,982,494      23,943,788             --             --
Due after ten years                            36,099,191      35,925,119             --             --
                                            -------------   -------------   ------------   ------------
                                               71,088,726      70,921,798             --             --
Mortgage-backed securities                     53,026,725      52,001,761         34,185         33,712
                                            -------------   -------------   ------------   ------------
   TOTAL DEBT SECURITIES                    $ 124,115,451   $ 122,923,559   $     34,185   $     33,712
                                            =============   =============   ============   ============
</TABLE>

For the years ended December 31, 2007, 2006 and 2005, proceeds from the sales of
available for sale  securities  were  $16,295,820,  $33,625,157  and $9,687,181,
respectively.  Gross  losses of $666,702  were  realized on these sales in 2006.
Gross gains of $19,632 and $78,949, respectively, were realized on sales in 2007
and 2005, respectively.

Investment  securities with a carrying value of $62,582,000 and $95,244,000 were
pledged as collateral to secure treasury tax and loan, trust assets,  securities
sold under  agreements to  repurchase  and public funds at December 31, 2007 and
2006, respectively.

During 2007 and 2006,  there were no transfers of securities  from the available
for sale  category  into the held to maturity or trading  categories,  and there
were no  securities  classified  as held to maturity  that were  transferred  to
available for sale or trading categories.

NOTE D - LOANS TO RELATED PARTIES

In the normal  course of  business  the Bank has granted  loans to officers  and
directors of the Bank and to their associates. As of December 31, 2007 and 2006,
all  loans to  officers,  directors  and their  associates  were  performing  in
accordance  with the contractual  terms of the loans.  Changes in these loans to
persons considered to be related parties are as follows:

                                                      2007           2006
                                                  -----------    ------------
Balance at the beginning of year                  $ 2,471,904    $  2,874,780
Advances                                              596,691         234,271
Repayments                                           (792,962)     (1,114,905)
Other changes                                         (56,578)        477,758
                                                  -----------    ------------
BALANCE AT END OF YEAR                            $ 2,219,055    $  2,471,904
                                                  ===========    ============

Other changes in loans to related parties resulted from loans to individuals who
ceased  being  related  parties  during  the  year,  as well as  existing  loans
outstanding  at the  beginning  of the year to  individuals  who became  related
parties during the year.

                                      F-16

<PAGE>

NOTE E - LOAN AND LEASE RECEIVABLES

A summary of loans and leases at December 31, 2007 and 2006 is as follows:

<TABLE>
<CAPTION>
                                                                            2007            2006
                                                                       -------------   -------------
<S>                                                                    <C>             <C>
Real estate--residential mortgage                                      $ 189,556,668   $ 177,082,143
Real estate--commercial mortgage                                          55,752,240      53,318,351
Real estate--construction                                                 34,808,984      30,605,787
Commercial loans                                                          33,641,679      26,949,985
Commercial leases (net of unearned discount of $1,264,980)                 8,634,199              --
Installment                                                                6,519,812       7,167,980
Other                                                                         99,357         171,752
                                                                       -------------   -------------
                                             TOTAL LOANS AND LEASES      329,012,939     295,295,998
Net deferred loan origination costs                                          445,671         375,177
Premiums on purchased loans                                                  168,383         334,950
Allowance for loan and lease losses                                       (2,151,622)     (2,106,100)
                                                                       -------------   -------------

                                               NET LOANS AND LEASES    $ 327,475,371   $ 293,900,025
                                                                       =============   =============
</TABLE>

Changes in the allowance for loan and lease losses for the years ended  December
31, 2007, 2006 and 2005, were as follows:

<TABLE>
<CAPTION>
                                                            2007            2006            2005
                                                       -------------   -------------   -------------
<S>                                                    <C>             <C>             <C>
Balance at beginning of year                           $   2,106,100   $   1,759,611   $   1,389,947
Provision for loan and lease losses                          204,000         420,000         342,028
Loans and leases charged off                                (176,777)        (96,072)        (97,565)
Recoveries of loans and leases previously charged off         18,299          22,561         125,201
                                                       -------------   -------------   -------------
                        BALANCE AT END OF YEAR         $   2,151,622   $   2,106,100   $   1,759,611
                                                       =============   =============   =============
</TABLE>

A summary of nonperforming loans and leases follows:

<TABLE>
<CAPTION>
                                                                            2007            2006
                                                                       -------------   -------------
<S>                                                                    <C>             <C>
Non-accrual loans and leases                                           $   2,959,074   $   1,504,551
Accruing loans and leases contractually past due 90 days or more               3,111             343
                                                                       -------------   -------------
                                                               TOTAL   $   2,962,185   $   1,504,894
                                                                       =============   =============
</TABLE>

If interest income on non-accrual  loans and leases throughout the year had been
recognized in accordance with their contractual  terms,  approximately  $88,000,
$64,000 and $9,000 of additional interest would have been recorded for the years
ended December 31, 2007, 2006 and 2005, respectively.

The following  information  relates to impaired loans and leases,  which include
all  nonaccrual  loans and leases and other loans and leases past due 90 days or
more,  and all  restructured  loans and  leases,  as of and for the years  ended
December 31, 2007 and 2006:

<TABLE>
<CAPTION>
                                                                            2007            2006
                                                                       -------------   -------------
<S>                                                                    <C>             <C>
Loans and leases receivable for which there is a related allowance
   for loan and lease losses determined:
      Based on discounted cash flows                                   $      59,042   $      56,392
      Based on the fair value of collateral                                  267,985         170,677
                                                                       -------------   -------------
                                                               Total   $     327,027   $     227,069
                                                                       =============   =============
Loans and leases receivable for which there is no related allowance
   for loan and lease losses determined:
      Based on discounted cash flows                                   $   2,635,158   $   1,239,032
      Based on the fair value of collateral                                       --          38,793
                                                                       -------------   -------------
                                                               Total   $   2,635,158   $   1,277,825
                                                                       =============   =============
Allowance for loan and lease losses related to impaired loans and
   leases                                                              $     181,119   $      85,261
                                                                       =============   =============
</TABLE>

                                      F-17

<PAGE>

Additional information related to impaired loans and leases is as follows:

<TABLE>
<CAPTION>
                                                                    2007         2006         2005
                                                                 ----------   ----------   ----------
<S>                                                              <C>          <C>          <C>
Average recorded investment in impaired loans and leases         $1,865,000   $  745,000   $  985,000
                                                                 ==========   ==========   ==========
Interest income recognized                                       $  228,000   $   73,000   $    5,000
                                                                 ==========   ==========   ==========
Cash interest received                                           $  186,000   $   87,000   $   15,000
                                                                 ==========   ==========   ==========
</TABLE>

The Bank has no commitments to lend  additional  funds to borrowers  whose loans
and leases are impaired.

The Bank's lending activities are conducted principally in the Litchfield County
section  of  Connecticut.   The  Bank  grants   single-family  and  multi-family
residential loans, commercial real estate loans, commercial business loans and a
variety  of  consumer  loans.  In  addition,  the  Bank  grants  loans  for  the
construction  of  residential  homes,  residential  developments  and  for  land
development projects. Although lending activities are diversified, a substantial
portion of many of the Bank's  customers'  net worth is dependent on real estate
values in the Bank's market area.  The Bank's  leasing  activities are conducted
primarily  in the New  England  states  as well as in New  Jersey.  The  leasing
company's activities are primarily equipment financing.

The Bank has  established  credit  policies  applicable  to each type of lending
activity in which it engages,  evaluates the  creditworthiness  of each customer
and,  in most  cases,  extends  credit of up to 80% of the  market  value of the
collateral  at the  date  of  the  credit  extension  depending  on  the  Bank's
evaluation of the borrowers' creditworthiness and type of collateral. The market
value of collateral is monitored on an ongoing basis and  additional  collateral
is obtained when warranted. Real estate is the primary form of collateral. Other
important  forms  of  collateral  are  marketable  securities,   time  deposits,
automobiles,  boats,  motorcycles and  recreational  vehicles.  While collateral
provides  assurance  as a secondary  source of  repayment,  the Bank  ordinarily
requires the primary source of repayment to be based on the  borrower's  ability
to generate  continuing cash flows. The Bank's policy for real estate collateral
requires  that,  generally,  the  amount of the loan may not  exceed  80% of the
original appraised value of the property. Private mortgage insurance is required
for the portion of the loan in excess of 80% of the original  appraised value of
the property.  For installment  loans, the Bank may loan up to 100% of the value
of the collateral.  For leases,  the leasing company will lend 100% of the asset
value financed.

NOTE F - PREMISES AND EQUIPMENT

The major  categories of premises and equipment as of December 31, 2007 and 2006
are as follows:

                                                          2007          2006
                                                      -----------   -----------
Land                                                  $ 1,245,465   $ 1,102,465
Buildings and improvements                              7,584,199     6,972,685
Furniture and fixtures                                  3,597,603     3,431,455
Leasehold improvements                                    212,106       308,591
                                                      -----------   -----------
                                                       12,639,373    11,815,196
Less accumulated depreciation and amortization          4,880,612     4,374,880
                                                      -----------   -----------
                                                      $ 7,758,761   $ 7,440,316
                                                      ===========   ===========

Depreciation  and  amortization  expense on premises and equipment for the years
ended  December  31,  2007,  2006 and 2005 was  $751,259,  $498,680 and $401,740
respectively.

Included in buildings  and  improvements,  premises  under capital lease totaled
$1,102,027,  and related  accumulated  amortization  as of December 31, 2007 and
2006 totaled $18,460 and $1,383, respectively.

NOTE G - LEASES

The Company leases a branch office of the Bank under a twenty-year capital lease
that  expires in 2026.  In  addition,  at  December  31,  2007,  the Company was
obligated  under  various  non-cancellable  operating  leases for office  space.
Certain leases contain renewal  options and provide for increased  rentals based
principally on increases in the average consumer price

                                      F-18

<PAGE>

index.  The Company also pays certain  executory  costs under these leases.  Net
rent expense under operating  leases was  approximately  $242,000,  $287,000 and
$153,000 for 2007,  2006 and 2005,  respectively.  The future  minimum  payments
under the capital lease and operating leases are as follows:

                                              Capital Lease    Operating Leases
                                              -------------    ----------------
2008                                                 75,000             175,400
2009                                                 75,000             151,053
2010                                                 75,000             108,742
2011                                                 75,917             112,018
2012                                                 86,000             115,365
2013 and thereafter                               1,406,832             420,450
                                              -------------    ----------------
                                                  1,793,749    $      1,083,028
                                                               ================
Less amount representing interest                  (710,182)
                                              -------------
Present value of future minimum lease
   payments-capital lease obligation          $   1,083,567
                                              =============

NOTE H - DEPOSITS

A summary of deposits at December 31, 2007 and 2006 is as follows:

                                                        2007            2006
                                                   -------------   -------------
Noninterest bearing:
   Demand                                          $  70,564,267   $  68,501,750
Interest bearing:
   Savings                                            56,344,878      45,304,667
   Money market                                       78,738,706      71,079,935
   Time certificates of deposit in
      denominations of $100,000 or more               52,345,036      72,781,087
   Other time certificates of deposit                 77,624,777      75,761,435
                                                   -------------   -------------
                                                     265,053,397     264,927,124
                                                   -------------   -------------
                                                   $ 335,617,664   $ 333,428,874
                                                   =============   =============

Included in deposits as of December  31, 2007 are  approximately  $6,538,000  of
brokered deposits which have varying maturities through December 2008.

The  following  is a summary of time  certificates  of deposits  by  contractual
maturity as of December 31, 2007:

      2008                125,199,263
      2009                  2,623,359
      2010                  1,424,059
      2011                    203,392
      2012                    519,740
                         ------------
      Total              $129,969,813
                         ============

Deposit accounts of officers, directors and their associates aggregated
$9,015,747 and $5,456,910 at December 31, 2007 and 2006, respectively.

NOTE I - BORROWINGS

Federal Home Loan Bank Borrowings
---------------------------------

The Bank,  which is a member  of the  Federal  Home  Loan  Bank of  Boston  (the
"FHLBB"), is required to maintain as collateral,  an investment in capital stock
of the  FHLBB in an  amount  equal to a certain  percentage  of its  outstanding
residential  first  mortgage  loans.  Purchases  of Federal Home Loan Bank stock
totaled $634,500 during 2007 and $242,200 during 2006.

                                      F-19

<PAGE>

Redemptions  during 2007  amounted to  $10,500.  There were no such  redemptions
during  2006.  The 2007 and 2006  increases  in FHLBB  stock are due to  capital
structure changes  implemented  during the second quarter of 2004 by the Federal
Home Loan Bank of Boston (FHLBB). These changes require each institution's stock
investment  in the FHLBB to be  reflective  of that  institution's  use of FHLBB
products.  The carrying value of Federal Home Loan Bank stock  approximates fair
value based on the  redemption  provision  of the Federal  Home Loan Bank.  As a
member of the FHLBB,  the Bank has access to a preapproved  line of credit of up
to 2% of its total assets and the capacity to obtain  additional  advances 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  advances are used as collateral.  At December 31, 2007,
there were no  advances  under the  Federal  Home Loan Bank line of  credit.  At
December  31,  2006,  advances  under the Federal  Home Loan Bank line of credit
totaled  $1,000,000.  At December 31, 2007 and 2006, other outstanding  advances
from the FHLBB aggregated $91,500,000 and $66,000,000, respectively, at interest
rates ranging from 3.27% to 4.70%, and 2.59% to 5.30%, respectively.

Repurchase Agreements with Financial Institutions
-------------------------------------------------

At December 31, 2007 and 2006,  securities  sold under  agreements to repurchase
totaled  $21,550,000 and  $47,200,000,  respectively,  at interest rates ranging
from 3.20% to 4.19%, and 2.40% to 4.19%, respectively.

Secured Borrowings
------------------

Secured  borrowings  amounted to $1,699,336  and as of December 31, 2007.  There
were no amounts outstanding during the year ended December 31, 2006. Pursuant to
SFAS Statement 140,  certain loan  participation  agreements did not qualify for
sale accounting due to buyback  provisions  included within the agreement,  thus
the Company  has not  surrendered  control  over the  transferred  loans and has
accounted for the transfers as secured borrowings.

Junior Subordinated Debt Issued by Unconsolidated Trusts
--------------------------------------------------------

The Company has  established two Delaware  statutory  trusts,  First  Litchfield
Statutory Trust I and First Litchfield  Statutory Trust II, for the sole purpose
of issuing trust preferred  securities and related trust common securities.  The
proceeds  from  such  issuances  were  used by the  trusts  to  purchase  junior
subordinated  notes of the  Company,  which are the sole  assets of each  trust.
Concurrently  with the issuance of the trust preferred  securities,  the Company
issued  guarantees  for  the  benefit  of the  holders  of the  trust  preferred
securities.  The trust  preferred  securities  are issues that qualify,  and are
treated by the Company,  as Tier 1 regulatory  capital.  The Company wholly owns
all of the common  securities  of each  trust.  The trust  preferred  securities
issued  by each  trust  rank  equally  with the  common  securities  in right of
payment,  except that if an event of default under the  indenture  governing the
notes has occurred and is continuing,  the preferred securities will rank senior
to the common securities in right of payment.

The table below  summarizes the outstanding  junior  subordinated  notes and the
related trust preferred securities issued by each trust as of December 31, 2007:

                                        First Litchfield      First Litchfield
                                       Statutory Trust I     Statutory Trust II
                                      -------------------   -------------------
Junior Subordinated Notes:
   Principal balance                  $         7,011,000   $         3,093,000

   Annual interest rate                  3 mo libor +3.10%     3 mo libor +1.65%
   Stated maturity date                     June 26, 2033         June 30, 2036
   Call date                                June 26, 2008         June 30, 2011

Trust Preferred Securities:
   Face value                                   6,800,000             3,000,000

   Annual distribution rate              3 mo libor +3.10%     3 mo libor +1.65%
   Issuance date                                June 2003             June 2006
   Distribution dates (1)                       Quarterly             Quarterly

(1)  All cash distributions are cumulative

                                      F-20

<PAGE>

Trust  preferred  securities  are currently  considered  regulatory  capital for
purposes of determining the Company's Tier I capital  ratios.  On March 1, 2005,
the Board of Governors of the Federal  Reserve  System,  which is the  Company's
banking regulator,  approved final rules that allow for the continued  inclusion
of  outstanding  and  prospective  issuances of trust  preferred  securities  in
regulatory  capital  subject to new,  more strict  limitations.  The Company has
until March 31, 2009 to meet the new  limitations.  Management  does not believe
these final rules will have a significant impact on the Company.

The trust preferred securities are subject to mandatory redemption,  in whole or
in part, upon repayment of the junior  subordinated notes at the stated maturity
date or upon  redemption  on a date no  earlier  than  June 26,  2008 for  First
Litchfield  Statutory Trust I and June 30, 2011 for First  Litchfield  Statutory
Trust II. Prior to these respective  redemption  dates, the junior  subordinated
notes  may be  redeemed  by the  Company  (in  which  case the  trust  preferred
securities  would also be redeemed)  after the occurrence of certain events that
would have a negative  tax effect on the Company or the trusts,  would cause the
trust  preferred  securities  to no longer  qualify as Tier 1 capital,  or would
result in a trust being treated as an investment  company.  Each trust's ability
to pay amounts due on the trust  preferred  securities is solely  dependent upon
the  Company  making  payment on the  related  junior  subordinated  notes.  The
Company's  obligation  under the junior  subordinated  notes and other  relevant
trust agreements, in aggregate, constitute a full and unconditional guarantee by
the Company of each trust's  obligations  under the trust  preferred  securities
issued by each trust.  The Company has the right to defer payment of interest on
the notes and, therefore,  distributions on the trust preferred securities,  for
up to five years,  but not beyond the stated  maturity  date in the table above.
During any such  deferral  period the Company may not pay cash  dividends on its
common stock and generally may not repurchase its common stock.

The contractual  maturities of the Company's borrowings at December 31, 2007, by
year, are as follows:

                                          Fixed        Floating
                                          Rate           Rate           Total
                                      ------------   ------------   ------------
   2008                               $ 21,500,000   $         --   $ 21,500,000
   2009                                 15,550,000             --     15,550,000
   2010                                 15,000,000             --     15,000,000
   2011                                         --             --             --
   2012                                 12,000,000             --     12,000,000
   Thereafter                           49,000,000     10,104,000     59,104,000
                                      ------------   ------------   ------------
TOTAL LONG-TERM DEBT                  $113,050,000   $ 10,104,000   $123,154,000
                                      ============   ============   ============

NOTE J - INCOME TAXES

The components of the income tax provision (benefit) are as follows:

                                           2007          2006           2005
                                       -----------   -----------    -----------
Current Provision:
   Federal                             $   178,289   $   279,765    $ 1,607,874

Deferred Provision (Benefit):
   Federal                                  47,413      (347,290)       (96,531)
                                       -----------   -----------    -----------
      Total                            $   225,702   $   (67,525)   $ 1,511,343
                                       ===========   ===========    ===========

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  (benefit) for income taxes as reported in the statements of income is
as follows:

<TABLE>
<CAPTION>
                                                             2007              2006               2005
                                                        --------------    --------------    ---------------
<S>                                                     <C>               <C>               <C>
Provision for income taxes at statutory Federal rate    $  738,835  34%   $  456,069  34%   $ 1,886,060  34%
Increase (decrease) resulting from:
   Tax exempt interest income                             (464,076)(21)     (482,846)(36)      (305,425) (6)
   Nondeductible interest expense                           62,718   3        57,165   4         22,783   1
   Nondeductible income from insurance policies           (130,587) (6)     (118,311) (9)      (113,077) (2)
   Other                                                    18,812  --        20,398   2         21,002  --
                                                        ---------------   ---------------   ----------------
(Benefit) provision for income taxes                    $  225,702  10%   $  (67,525) (5)%  $ 1,511,343  27%
                                                        ===============   ===============   ================
</TABLE>

                                      F-21

<PAGE>

The  tax  effects  of  temporary  differences  that  give  rise  to  significant
components of the deferred tax assets and deferred tax  liabilities  at December
31, 2007 and 2006 are presented below:

                                                          2007          2006
                                                      -----------   -----------
Deferred tax assets:
   Allowance for loan and lease losses                $   731,552   $   716,073
   Depreciation                                           140,883       101,807
   Accrued expenses                                       282,835       222,719
   Alternative minimum taxes                              261,503       261,503
   Unfunded pension liability                             256,490       391,878
   Unrealized loss on available for sale securities       396,407     1,059,106
                                                      -----------   -----------
      Total gross deferred tax assets                   2,069,670     2,753,086
                                                      -----------   -----------
Deferred tax liabilities:
   Tax bad debt reserve                                  (153,536)     (153,536)
   Prepaid pension costs                                 (246,976)     (232,209)
   Net deferred loan and lease costs                     (151,528)     (127,560)
   Leases                                                (151,856)           --
   Prepaid expenses and other                             (38,240)      (66,748)
                                                      -----------   -----------
      Total gross deferred tax liabilities               (742,136)     (580,053)
                                                      -----------   -----------
Net deferred tax asset                                $ 1,327,535   $ 2,173,033
                                                      ===========   ===========

Based on the Company's  earning history and amount of income taxes paid in prior
years, management believes that it is more likely than not that the deferred tax
asset will be realized.

Effective  for taxable  years  commencing  after  December 31,  1998,  financial
services institutions doing business in Connecticut are permitted to establish a
"passive  investment  company"  ("PIC") to hold and manage loans secured by real
property.  PICs are  exempt  from  Connecticut  corporation  business  tax,  and
dividends received by the financial services  institution's parent from PICs are
not  taxable.  In August 2000,  the Bank  established  a PIC, as a  wholly-owned
subsidiary,  and  beginning  in  October  2000,  transferred  a  portion  of its
residential and commercial  mortgage loan portfolios from the Bank to the PIC. A
substantial  portion of the  Company's  interest  income is now derived from the
PIC,  an entity  that has been  organized  as a state  tax  exempt  entity,  and
accordingly there is no provision for state income taxes in 2007, 2006 and 2005.

NOTE K - EMPLOYEE BENEFITS

PENSION PLAN: 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. During the
first  quarter of 2005,  the Bank's  pension  plan was  curtailed.  Prior to the
Plan's  curtailment,  the Bank's funding policy was to contribute amounts to the
Plan  sufficient to meet the minimum  funding  requirements  set forth in ERISA,
plus such additional  amounts as the Bank determined to be appropriate from time
to time. The actuarial  information has been calculated using the projected unit
credit method.

As  described  in Note A, the Company  adopted SFAS No. 158 at December 31, 2006
and,  as a result,  an  adjustment  to record  the  Company's  unfunded  pension
liability of $1,152,582 was made to decrease  prepaid pension costs and increase
accrued expenses and other  liabilities.  This amount,  net of deferred taxes of
$391,878,  was recorded as an  adjustment  to  accumulated  other  comprehensive
income of $760,704.

The following  table sets forth the Plan's funded status and amounts  recognized
in the  consolidated  balance sheets at December 31, 2007, 2006 and 2005 using a
measurement date of December 31:

                                      F-22

<PAGE>

<TABLE>
<CAPTION>
                                                                          2007           2006           2005
                                                                      -----------    -----------    -----------
<S>                                                                   <C>            <C>            <C>
Change in benefit obligation
   Benefit obligation, beginning                                      $ 3,408,732    $ 3,586,983    $ 3,567,063
   Service cost                                                                --             --             --
   Interest cost                                                          184,166        193,161        210,062

   Change in assumptions due to plan amendments                                --             --        813,887
   Actuarial gain                                                         (31,536)            --        (38,658)
   Curtailment gain                                                            --             --       (644,297)
   Benefits paid                                                         (291,209)      (371,412)      (321,074)
                                                                      -----------    -----------    -----------
   Benefit obligation, ending                                           3,270,153      3,408,732      3,586,983
                                                                      -----------    -----------    -----------

Change in plan assets:
   Fair value of plans assets, beginning                                2,939,118      2,981,138      3,077,431
   Actual return on plan assets                                           494,263        329,392        224,781
   Employer contribution                                                  100,000             --             --
   Benefits paid                                                         (291,209)      (371,412)      (321,074)
                                                                      -----------    -----------    -----------
   Fair value of plan assets, ending                                    3,242,172      2,939,118      2,981,138
                                                                      -----------    -----------    -----------
Funded status at end of year included
   in accrued expenses and other liabilities in 2007 and 2006         $   (27,981)      (469,614)      (605,845)
                                                                      ===========    ===========
Unrecognized net actuarial loss                                                                       1,334,951
Unrecognized service cost                                                                                    --
                                                                                                    -----------
Prepaid benefit cost included in other assets                                                       $   729,106
                                                                                                    ===========
</TABLE>

The accumulated benefit obligation was $3,270,153 and $3,408,732 at December 31,
2007 and  2006,  respectively.  At  December  31,  2007 and 2006,  $754,381  and
$1,152,582,   respectively   of  net  actuarial  gains  are  included  in  other
comprehensive  income.  The  estimated  net gain  that  will be  amortized  from
accumulated other comprehensive income into net periodic benefit cost in 2008 is
$59,249.

<TABLE>
<CAPTION>
                                                                          2007           2006           2005
                                                                      -----------    -----------    -----------
<S>                                                                   <C>            <C>            <C>
Components of net periodic benefit cost and other
   amounts recognized in other comprehensive income:

Service cost                                                          $        --    $        --    $        --
Interest cost                                                             184,166        193,161        210,062
Expected return on plan assets                                           (200,249)      (214,862)      (233,238)
Amortization of unrealized loss                                            72,651         67,839         52,887
                                                                      -----------    -----------    -----------
Net periodic benefit cost                                                  56,568         46,138         29,711
                                                                      -----------    -----------    -----------

Other changes in Plan Assets and Benefit Obligations
   recognized in Other Comprehensive Income:

   Net gain                                                              (398,201)
                                                                      -----------
Total recognized in net periodic
   benefit cost and other comprehensive income                        $  (341,633)
                                                                      ===========
</TABLE>

Weighted-average  assumptions used to determine benefit  obligations at December
31:

                                                                    2007   2006
                                                                    ----   ----
   Discount rate                                                    6.00%  5.50%
   Rate of compensation increase                                     N/A    N/A

Weighted-average  assumptions  used to determine  net periodic  benefit cost for
years ended December 31:

                                                                    2007   2006
                                                                    ----   ----
   Discount rate                                                    6.00%  5.50%
   Expected return on plan assets                                   7.50%  7.50%
   Rate of compensation increase                                     N/A    N/A

                                      F-23

<PAGE>

The pension expense for the Plan was $56,568,  $46,138 and $29,711 for the years
ended December 31, 2007, 2006 and 2005,  respectively,  and is calculated  based
upon a number of actuarial assumptions,  including an expected long-term rate of
return on Plan assets of 7.50% each year. In developing  the expected  long-term
rate of  return  assumption,  management  evaluated  input  from its  investment
advisor and actuaries, including their review of asset class return expectations
as  well  as  long-term  inflation  assumptions.   Management  anticipates  that
investments  will  continue to generate  long-term  returns  averaging  at least
7.50%.  Management  regularly  reviews the asset  allocations  and  periodically
rebalances  investments  when considered  appropriate.  Management  continues to
believe that 7.50% is a  conservatively  reasonable  long-term rate of return on
Plan assets.  Management  will continue to evaluate the  actuarial  assumptions,
including the expected  rate of return,  at least  annually,  and will adjust as
necessary.

The Bank's pension plan weighted average asset  allocations at December 31, 2007
and 2006 by asset category are as follows:

                                                  Percentage of
                                                Plan Assets as of
                                                   December 31,
      Asset Category                            2007         2006
      --------------                            -----------------
      Cash and receivables                         5%           2%
      Corporate debt and equity securities        18%          13%
      Pooled funds/Mutual funds                   60%          66%
      Government securities                       17%          19%
                                                ----         ----
      Total                                      100%         100%
                                                ====         ====

The  purpose of the  pension  investment  program is to provide the means to pay
retirement  benefits to participants and their  beneficiaries in the amounts and
at the times called for by the Plan. Plan benefits were frozen  effective May 1,
2005. No contributions are expected to be made in 2008.

Plan  assets  are   diversified  and  invested  in  accordance  with  guidelines
established by the Bank's  Compensation and Trust  Committees.  The portfolio is
managed  according to a standard Growth and Income  Investment  Objective model.
The  target  asset  allocation  is 60%  equity  and 40% fixed  income  exposure.
Rebalancing  takes  place when the  investment  mix  varies  more than 5% of its
Investment  Objective  model.  Equity  plan assets are  further  diversified  in
investment styles ranging from large cap, mid cap, small cap and  international.
Individual corporate,  government agency and municipal bonds/notes, fixed income
mutual funds and exchange  traded funds,  as well as  certificates  of deposits,
provide fixed income for the plan and are  diversified  by type,  credit quality
and duration.  The fixed income investments are laddered by maturity in order to
mitigate interest rate sensitivity and income fluctuations over time.

The following  benefit  payments,  which reflect  expected  future  service,  as
appropriate, are expected to be paid:

                      2008              $  202,000
                      2009                 202,000
                      2010                 214,000
                      2011                 252,000
                      2012                 258,000
                      2013-2017          1,292,000

EMPLOYEE  SAVINGS PLAN:  The Bank offers an employee  savings plan under section
401(k) of the Internal Revenue Code. Under the terms of the Plan,  employees may
contribute up to 10% of their pre-tax compensation. For the years ended December
31, 2007,  2006 and 2005, the Bank made matching  contributions  equal to 50% of
participant  contributions  up to the  first  6% of  pre-tax  compensation  of a
contributing  participant.  The Bank also made a  contribution  of 3% of pre-tax
compensation for all eligible participants regardless of whether the participant
made voluntary  contributions to the 401(k) plan.  Participants vest immediately
in both their own contributions and the Bank's  contributions.  Employee savings
plan  expense was  $237,461,  $202,563  and  $178,279  for 2007,  2006 and 2005,
respectively.

                                      F-24

<PAGE>

OTHER  BENEFIT  PLANS:  Effective  December  31,  1996,  the Bank entered into a
supplemental retirement plan with the Bank's Senior Lending Officer, who retired
in 1997.  At December  31, 2006,  accrued  supplemental  retirement  benefits of
$5,000 is recognized in the  Company's  balance sheet related to this plan.  The
Bank  completed  all payments to this retiree in 2007 and therefore no liability
is recognized as of December 31, 2007.

Beginning  in 1996,  the  Company  offered  directors  the option to defer their
directors'  fees.  If  deferred,  the fees are held in a trust  account with the
Bank.  The Bank has no control  over the trust.  The market value of the related
trust  assets and  corresponding  liability of $180,951 and $198,960 at December
31, 2007, and 2006,  respectively  are included in the Company's  balance sheet.
During 2005, the plan was amended to cease the deferral of any future fees.

In 2000,  the Bank  adopted  a  long-term  incentive  compensation  plan for its
executive  officers and directors.  Under this plan,  officers and directors are
awarded  deferred  incentive   compensation   annually  based  on  the  earnings
performance of the Bank.  Twenty percent of each award vests immediately and the
remainder  vests  ratably  over  the  next  four  years,  however,   awards  are
immediately  vested upon change of control of the Bank, or when the participants
reach their  normal  retirement  date or early  retirement  age, as defined.  In
addition,  interest is earned annually on the vested portion of the awards. Upon
retirement,  the participants' total deferred  compensation,  including earnings
thereon,  may be paid out in one lump sum, or paid in equal annual  installments
over fifteen years for executive  officers and ten years for directors.  For the
years ended  December 31, 2007,  2006 and 2005,  $72,702,  $54,620 and $132,938,
respectively, were charged to operations under this plan. The related liability,
of  $419,187  and  $347,115  at December  31,  2007 and 2006,  respectively,  is
included in accrued  expenses  and other  liabilities.  At December 31, 2006 and
2005,  unvested benefits earned under this plan were  approximately  $58,000 and
$107,000, respectively.

In 2005, the Bank established an Employee Stock Ownership Plan ("ESOP"), for the
benefit of its eligible employees. The ESOP invests in the stock of the Company
providing participants with the opportunity to participate in any increases in
the value of Company stock. Under the ESOP, eligible employees, which represent
substantially all full-time employees, are awarded shares of the Company's stock
which are allocated among participants in the ESOP in proportion to their
compensation. The Board determines the total amount of compensation to be
awarded under the plan. That amount of compensation divided by the fair value of
the Company's shares at the date the shares are transferred to the plan
determines the number of shares contributed to the plan. Dividends are allocated
to participant accounts in proportion to their respective shares. For the years
ended December 31, 2007, 2006 and 2005, $0, $0 and $67,592 was charged to
operations under the ESOP. During 2006, the Company contributed 2,414 shares to
the ESOP which are held by the ESOP at December 31, 2006. The Company did not
contribute any shares to the ESOP during 2007 or 2005. Under the terms of the
ESOP, the Company is required to repurchase shares from participants upon death
or termination. The fair value of shares subject to repurchase at December 31,
2007 is approximately $15,000.

Effective  January  1,  2006,  the Bank  entered  into  supplemental  retirement
agreements  with three of the Bank's Senior  Officers.  At December 31, 2007 and
2006,  accrued  supplemental  retirement  benefits  of  $214,000  and  $104,000,
respectively,  are  recognized in the  Company's  balance sheet related to these
plans.  Upon  retirement,  the plans  provide for payments to these  individuals
ranging  from  10%  to  25%  of  the  three  year  average  of  the  executive's
compensation prior to retirement for the life expectancy of the executive at the
retirement date.

The Bank  has an  investment  in,  and is the  beneficiary  of,  life  insurance
policies on the lives of certain current and former directors and officers.  The
purpose of these life  insurance  investments  is to provide  income through the
appreciation in cash surrender  values of the policies,  which is used to offset
the costs of the long-term incentive compensation plan as well as other employee
benefit  plans.   These  policies  have  aggregate  cash  surrender   values  of
approximately  $10,021,000  and  $9,636,000  at  December  31,  2007  and  2006,
respectively.  In addition,  these assets are unsecured and are maintained  with
four insurance carriers.

The Company has  agreements  with  certain  members of senior  management  which
provide for cash severance  payments equal to two times annual  compensation for
the previous  year,  upon  involuntary  termination  or  reassignment  of duties
inconsistent  with the duties of a senior  executive  officer,  within 24 months
following a "change in control"  (as such terms are defined in the  agreements).
In addition,  the agreements  provide for the  continuation  of health and other
insurance benefits for a period of 24 months following a change in control.  The
Company has similar  agreements  with other members of management  which provide
for  cash  severance  of  six  months  annual  compensation  if  termination  or
reassignment  of duties occurs within six months  following a change of control,
and provide for the  continuation of health and other  insurance  benefits for a
period of six months following a change in control.

                                      F-25

<PAGE>

STOCK  COMPENSATION  PLAN:  During 2007 the Company  approved a restricted stock
plan  ("the 2007  Plan")  for senior  management.  As of  December  31,  2007 no
restricted  stock award had been  granted.  On February  15,  2008,  the Company
granted 3,500 restricted  stock awards to senior  management from the 2007 Plan.
These  awards  vest at the end of a five-year  period,  or earlier if the senior
manager  ceases to be a senior  manager  for any reason  other than  cause,  for
example,  retirement.  The  holders  of these  awards  participate  fully in the
rewards of stock ownership of the Company, including voting and dividend rights.
The senior managers are not required to pay any consideration to the Company for
the restricted  stock awards.  The Company measured the fair value of the awards
based on the  average  of the high  price and low  price at which the  Company's
common stock traded on the date of the grant.

NOTE L - SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE

In  November  2007,  2006 and 2005,  the Board of  Directors  declared  5% stock
dividends  payable on December  31, 2007,  December  29, 2006,  and December 30,
2005,  respectively.  Payment of these  dividends  resulted  in the  issuance of
118,873, 112,755 and 106,787 additional common shares in December 2007, 2006 and
2005,  respectively.  The  market  value of the  shares  issued  was  charged to
retained  earnings,  the par value of the shares  issued was  credited to common
stock and the remainder was credited to additional  paid-in capital.  Fractional
shares were payable in cash on an equivalent  share basis of $16.00 for the 2007
stock dividend, $23.00 for the 2006 stock dividend and $27.80 for the 2005 stock
dividend.  Weighted-average shares and per share data have been restated to give
effect to all stock dividends and splits.

The following is information  about the  computation of net income per share for
the years ended December 31, 2007, 2006 and 2005. Shares outstanding include all
shares  contributed  to the ESOP as all such shares have been  allocated  to the
participants.   The  2006  and  2005  information  has  been  restated  to  give
retroactive  effect to all stock  dividends  and stock  splits  for the  periods
presented.

<TABLE>
<CAPTION>
                                                 For the Year Ended December 31, 2007
                                                 ------------------------------------
                                                     Net                    Per Share
                                                    Income       Shares       Amount
                                                 -----------   ---------   ---------
<S>                                              <C>           <C>          <C>
Basic Net Income Per Share
   Income available to common stockholders       $ 1,947,342   2,369,210    $     .82
                                                                            =========
Effect of Dilutive Securities
   Options Outstanding                                    --       3,513
                                                 -----------   ---------
Diluted Net Income Per Share
   Income available to common stockholders
   plus assumed conversions                      $ 1,947,342   2,372,723    $     .82
                                                 ===========   =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                 For the Year Ended December 31, 2006
                                                 ------------------------------------
                                                     Net                    Per Share
                                                    Income       Shares       Amount
                                                 -----------   ---------    ---------
<S>                                              <C>           <C>          <C>
Basic Net Income Per Share
   Income available to common stockholders       $ 1,408,903   2,361,765    $     .60
                                                                            =========
Effect of Dilutive Securities
   Options Outstanding                                    --      11,018
                                                 -----------   ---------
Diluted Net Income Per Share
   Income available to common stockholders
   plus assumed conversions                      $ 1,408,903   2,372,783    $     .59
                                                 ===========   =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                 For the Year Ended December 31, 2005
                                                 ------------------------------------
                                                     Net                    Per Share
                                                    Income       Shares       Amount
                                                 -----------   ---------    ---------
<S>                                              <C>           <C>          <C>
Basic Net Income Per Share
   Income available to common stockholders       $ 4,035,891   2,349,472    $    1.72
                                                                            =========
Effect of Dilutive Securities
   Options Outstanding                                    --      25,423
                                                 -----------   ---------
Diluted Net Income Per Share
   Income available to common stockholders
   plus assumed conversions                      $ 4,035,891   2,374,895    $    1.70
                                                 ===========   =========    =========
</TABLE>

                                      F-26

<PAGE>

NOTE M - STOCK OPTION PLANS

At December 31, 2007, the Company had one fixed option plan,  which is described
below.  Effective January 1, 2006, the Company adopted SFAS No. 123(R) utilizing
the modified prospective approach. Prior to the adoption of SFAS No. 123(R), the
Company  accounted for the stock options  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.

OPTION PLAN FOR OFFICERS AND OUTSIDE DIRECTORS

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 3,721 shares of the Company's  common stock.  Automatic annual
grants of an additional  631 shares for each director were given for each of the
four following years.

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

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 2007 and 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>
                                               2007                           2006                           2005
                                   ----------------------------   ----------------------------   ----------------------------
                                                   Weighted                       Weighted                       Weighted
                                   Number of   Average Exercise   Number of   Average Exercise   Number of   Average Exercise
                                     Shares     Price Per Share     Shares     Price Per Share     Shares     Price Per Share
                                   ----------------------------   ----------------------------   ----------------------------
<S>                                <C>         <C>                <C>         <C>                <C>         <C>
Options outstanding at the
   beginning of the year              17,744            $  9.74      31,922             $ 9.74      42,549             $ 9.04
      Granted                             --                 --          --                 --          --                 --
      Exercised                       10,417               8.40      14,178               9.75      10,627               6.94
      Cancelled                           --                 --          --                 --          --                 --
                                   ----------------------------   ----------------------------   ----------------------------
Options outstanding and
   exercisable at end of year          7,327            $ 11.64      17,744             $ 9.74      31,922             $ 9.74
                                   ============================   ============================   ============================
</TABLE>

At  December  31,  2007,  exercise  prices  ranged from $10.82 to $11.93 with an
average remaining  contractual life of 11 months and a weighted average exercise
price of $11.64.

Shares reserved for issuance of common stock under all the option plans is equal
to the amount of options outstanding at the end of the year or 7,327.

The intrinsic value of options  outstanding and exercisable at December 31, 2007
and 2006 is $20,932 and $180,120,  respectively.  The intrinsic value of options
exercised  during the years ended December 31, 2007,  2006 and 2005 was $63,571,
$143,805 and $202,090, respectively.

NOTE N - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Dividends  are paid by the Company from its assets which are mainly  provided by
dividends  from the Bank.  However,  certain  restrictions  exist  regarding the
ability  of the  Bank to  transfer  funds  to the  Company  in the  form of cash
dividends, loans or

                                      F-27

<PAGE>

advances.  The  approval of the  Comptroller  of the Currency is required to pay
dividends  in excess of the Bank's  earnings  retained in the current  year plus
retained net profits for the preceding two years.  As of December 31, 2007,  the
Bank had retained earnings of approximately $27,337,000,  of which approximately
$3,417,000 was available for  distribution  to the Company as dividends  without
prior regulatory approval.

Under Federal Reserve regulation,  the Bank is also limited in the amount it may
loan  to  the  Company,  unless  such  loans  are  collateralized  by  specified
obligations.  At December 31, 2007,  the amount  available for transfer from the
Bank to the Company in the form of loans is limited to 10% of the Bank's capital
stock and surplus.

NOTE O - COMMITMENTS AND CONTINGENCIES

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal  course of business,  the Bank is party to  financial  instruments
with off-balance sheet risk to meet the financing needs of its customers.  These
instruments include commitments to extend credit and unused lines of credit, and
expose  the Bank to  credit  risk in  excess of the  amounts  recognized  in the
balance sheets.

The contractual amounts of commitments to extend credit represent the amounts of
potential accounting loss should: the contract be fully drawn upon; the customer
default;  and the value of any existing  collateral become  worthless.  The Bank
uses the same  credit  policies  in  making  off-balance-sheet  commitments  and
conditional obligations as it does for on-balance-sheet instruments.  Management
believes that the Bank controls the credit risk of these  financial  instruments
through credit approvals,  credit limits,  monitoring procedures and the receipt
of collateral as deemed  necessary.  Total credit exposures at December 31, 2007
and 2006 related to these items are summarized below:

<TABLE>
<CAPTION>
                                                              2007              2006
                                                        ---------------   ---------------
                                                        Contract Amount   Contract Amount
                                                        ---------------   ---------------
<S>                                                     <C>               <C>
Loan  and lease commitments:
   Approved  loan and lease commitments                 $    16,791,000   $    12,285,000
   Unadvanced portion of:
      Construction loans                                     15,061,000         8,701,000
      Commercial lines of credit                             49,189,000        24,158,000
      Home equity lines of credit                            31,922,000        31,535,000
      Overdraft protection and other consumer lines             994,000           712,000
      Credit cards                                            3,362,000         2,612,000
      Standby letters of credit                               2,773,000         2,211,000
                                                        ---------------   ---------------
                                                        $   120,092,000   $    82,214,000
                                                        ===============   ===============
</TABLE>

Loan and lease commitments are agreements to lend to a customer as long as there
is no  violation  of any  condition  established  in the  contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since some of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent future cash  requirements.  The Bank evaluates each customer's  credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's  credit
evaluation  of the  counterparty.  Collateral  for  loans  and  leases  held  is
primarily  residential  property.  Collateral for leases is primarily equipment.
Interest rates on the above are primarily  variable.  Standby  letters of credit
are written  commitments  issued by the Bank to guarantee the  performance  of a
customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan and lease  facilities
to customers.  As of January 1, 2003,  newly issued or modified  guarantees that
are not derivative  contracts  have been recorded on the Company's  consolidated
balance  sheet at their  fair  value  at  inception.  No  liability  related  to
guarantees was required to be recorded at December 31, 2007 and 2006.

LEGAL PROCEEDINGS

The Company is  involved in various  legal  proceedings  which arose  during the
course of business and are pending against the Company.  Management believes the
ultimate  resolution of these actions and the liability,  if any, resulting from
such actions will not  materially  affect the financial  condition or results of
operations of the Company.

                                      F-28

<PAGE>

NOTE P - RELATED PARTY TRANSACTIONS

For the years  ended  December  31, 2007 and 2006,  the Bank paid  approximately
$25,000 and $73,000,  respectively,  for rent and legal fees, to companies,  the
principals of which are Directors of the Company. During the year ended December
31, 2007, the Company paid  approximately  $421,000 to a company,  the principal
which  is a  Director  of the  Company,  for  rent and the  purchase  of  branch
property.

NOTE Q - REGULATORY CAPITAL

The  Company  (on a  consolidated  basis)  and the Bank are  subject  to various
regulatory  capital  requirements  administered by the federal banking agencies.
Failure to meet minimum capital  requirements can initiate certain mandatory and
possibly  additional  discretionary  actions by regulators  that, if undertaken,
could have a direct  material  effect on the Company's and the Bank's  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt  corrective  action,  the Company and the Bank must meet specific capital
guidelines  that involve  quantitative  measures of the assets,  liabilities and
certain  off-balance-sheet  items  as  calculated  under  regulatory  accounting
practices.  The Bank's capital  amounts and  classification  are also subject to
qualitative  judgments by the regulators about  components,  risk weightings and
other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier 1  Capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2007 that the  Company and the Bank meet all capital  adequacy  requirements  to
which it is subject.

Tier 1  capital  consists  of common  shareholders'  equity,  noncumulative  and
cumulative  perpetual  preferred  stock,  and minority  interests less goodwill.
Total capital  includes the allowance for loan and lease losses (up to a certain
amount),  perpetual  preferred  stock (not included in Tier 1),  hybrid  capital
instruments, term subordinated debt and intermediate-term preferred stock. Trust
preferred securities are currently considered regulatory capital for purposes of
determining the Company's Tier I capital ratios. Risk adjusted assets are assets
adjusted for categories of on and off-balance sheet credit risk.

As of December 31, 2007 the most recent  notification  from the OCC  categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based,  Tier 1 risk-based,  and Tier 1 leverage ratios as set
forth in the table.  There were no conditions or events since that  notification
that management believes have changed the Bank's category.

The Company's and Bank's actual capital  amounts and ratios compared to required
regulatory amounts and ratios are presented below:

<TABLE>
<CAPTION>
                                                                       Minimum Required      To Be Well Capitalized
                                                                          For Capital       Under Prompt Corrective
                                                     Actual            Adequacy Purposes        Action Purposes
                                              --------------------   --------------------   -----------------------
                                                 Amount      Ratio      Amount      Ratio      Amount        Ratio
                                              ------------   -----   ------------   -----   ------------     ------
<S>                                           <C>            <C>     <C>            <C>     <C>              <C>
As of December 31, 2007:

The Company
-----------
Total Capital to Risk Weighted Assets         $ 41,561,000   12.61%  $ 26,367,000     8%             N/A        N/A
Tier I Capital to Risk Weighted Assets          39,409,000   11.96     13,180,000     4              N/A        N/A
Tier I Capital to Average Assets                39,409,000    8.04     19,606,000     4              N/A        N/A

The Bank
--------
Total Capital to Risk Weighted Assets         $ 38,312,000   11.65%  $ 26,309,000     8%    $ 32,886,000         10%
Tier I Capital to Risk Weighted Assets          36,160,000   11.00     13,149,000     4       19,724,000          6
Tier I Capital to Average Assets                36,160,000    7.36     19,652,000     4       24,565,000          5

As of December 31, 2006:

The Company
-----------
Total Capital to Risk Weighted Assets         $ 40,824,000   13.25%  $ 24,556,000     8%             N/A        N/A
Tier I Capital to Risk Weighted Assets          38,719,000   12.57     12,278,000     4              N/A        N/A
Tier I Capital to Average Assets                38,719,000    7.55     20,500,000     4              N/A        N/A

The Bank
--------
Total Capital to Risk Weighted Assets         $ 37,599,000   12.24%  $ 24,494,000     8%    $ 30,618,000         10%
Tier I Capital to Risk Weighted Assets          35,493,000   11.55     12,250,000     4       18,374,000          6
Tier I Capital to Average Assets                35,493,000    6.94     20,457,000     4       25,571,000          5
</TABLE>

                                      F-29

<PAGE>

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK

SFAS No. 107, "Disclosures About Fair Value of Financial  Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance  sheet,  for which it is  practicable to estimate that
value.  In cases where quoted market prices are not  available,  fair values are
based on estimates  using present  value or other  valuation  techniques.  Those
techniques are  significantly  affected by the assumptions  used,  including the
discount rates and estimates of future cash flows.  In that regard,  the derived
fair value  estimates  cannot be  substantiated  by  comparisons  to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument.  SFAS  No.  107  excludes  certain  financial  instruments  from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.

Management  uses its best judgment in estimating the fair value of the Company's
financial instruments;  however, there are inherent weaknesses in any estimation
technique.  Therefore,  for  substantially all financial  instruments,  the fair
value estimates  presented herein are not necessarily  indicative of the amounts
the Company could have realized in a sales  transaction  at either  December 31,
2007 or 2006.  The  estimated  fair  value  amounts  for 2007 and 2006 have been
measured as of their  respective  year-ends,  and have not been  reevaluated  or
updated  for  purposes  of  these  financial  statements   subsequent  to  those
respective  dates.  As such,  the  estimated  fair  values  of  these  financial
instruments  subsequent to the respective  reporting dates may be different than
the amounts reported at each year-end.

The information  presented  should not be interpreted as an estimate of the fair
value of the entire Company since a fair value  calculation is only required for
a limited portion of the Company's assets and liabilities. Due to the wide range
of  valuation  techniques  and the  degree of  subjectivity  used in making  the
estimate,  comparisons  between  the  Company's  disclosures  and those of other
companies or banks may not be meaningful.

Cash and due from banks, federal funds sold, interest income receivable, accrued
interest  payable,  collateralized  borrowings,  and  short-term  borrowings are
short-term, and therefore, book value is a reasonable estimate of fair value.

The fair value of the Federal Home Loan Bank stock,  Federal  Reserve Bank stock
and other  restricted stock is estimated to equal the carrying value, due to the
historical experience that these stocks are redeemed at par.

The fair value of securities is based on quoted market prices or dealer  quotes,
if available, or if not available, on dealer quotes for similar instruments.

The fair  value of loans  and  leases  held for sale is based on  quoted  market
prices.

Fair  values are  estimated  for  portfolios  of loans and leases  with  similar
financial  characteristics.  Loans and  leases  are  segregated  by type such as
residential mortgages, commercial mortgages, construction mortgages, commercial,
installment and other loans and leases.  Each category is further segmented into
fixed and adjustable  rate interest  terms and by performing  and  nonperforming
categories.

Fixed rate loans and leases were priced using the  discounted  cash flow method.
The fair value was determined using a discount rate equivalent to the prevailing
market interest rate for similar loans and leases.

                                      F-30

<PAGE>

Variable rate loans and leases were valued at carrying value due to the frequent
repricing  characteristics  of the portfolio.  The fair value of fees associated
with off-balance-sheet lending commitments is based on fees currently charged to
enter into similar  agreements,  taking into account the remaining  terms of the
agreements and the counter parties' credit standings.

Nonperforming loans and leases were valued using either the discounted cash flow
method or collateral value, if collateral dependent.  Discounted cash flows were
determined  using a discount rate  commensurate  with the anticipated  risks and
repayment period.

The fair value of deposits with no stated maturity, such as non-interest bearing
demand  deposits,  savings,  and money market  accounts,  is equal to the amount
payable  on demand at the  reporting  date.  The fair value of  certificates  of
deposit and other  borrowings is based on the  discounted  value of  contractual
cash flows that applies  interest rates currently  offered or that would be paid
for deposits or  borrowings  of similar  remaining  maturities  to a schedule of
aggregate expected maturities.

The recorded book balances and estimated fair values of the Company's  financial
instruments at December 31, 2007 and 2006 are as follows:

<TABLE>
<CAPTION>
                                                       2007                            2006
                                          -----------------------------   -----------------------------
                                               Book         Estimated          Book         Estimated
                                              Value         Fair Value        Value         Fair Value
                                          -------------   -------------   -------------   -------------
<S>                                       <C>             <C>             <C>             <C>
Financial Assets:
Cash and due from banks                   $  21,497,194   $  21,497,194   $  29,197,637   $  29,197,637
Available for sale securities               128,979,548     128,979,548     147,780,275     147,780,275
Held to maturity securities                      34,185          33,712          40,516          39,974
Federal Home Loan Bank stock                  5,067,400       5,067,400       4,443,400       4,443,400
Federal Reserve Bank stock                      225,850         225,850         225,850         225,850
Other restricted stock                           95,000          95,000          80,000          80,000
Loans and leases held for sale                       --              --       1,042,183       1,044,269
Loans and leases, net                       327,475,371     335,526,483     293,900,025     287,636,158
Accrued interest receivable                   2,609,606       2,609,606       2,598,726       2,598,726

Financial Liabilities:
Savings deposits                             56,344,878      56,344,878      45,304,667      45,304,667
Money market and demand deposits            149,302,973     149,302,973     139,581,685     139,581,685
Time certificates of deposit                129,969,813     130,267,235     148,542,522     148,804,248
Federal Home Loan Bank advances              91,500,000      96,219,124      67,000,000      66,045,391
Repurchase agreements with
   financial institutions                    21,550,000      21,421,552      47,200,000      46,447,584
Repurchase agreements with customers         14,142,773      14,142,773      12,206,023      12,206,023
Subordinated debt                            10,104,000      10,104,000      10,104,000      10,104,000
Accrued interest payable                        731,496         731,496       1,002,194       1,002,194
Collateralized borrowings                     1,699,336       1,699,336              --              --
</TABLE>

Loan  and  lease  commitments,   rate  lock  derivative  commitments  and  other
commitments,  on which the  committed  interest  rate is less  than the  current
market rate are insignificant at December 31, 2007 and 2006.

The Bank assumes  interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations.  As a result, the fair values
of the Bank's financial instruments will change when interest rate levels change
and that change may be either  favorable or unfavorable to the Bank.  Management
attempts to match  maturities of assets and  liabilities to the extent  believed
necessary to minimize  interest rate risk.  However,  borrowers  with fixed rate
obligations  are less  likely to prepay in a rising  rate  environment  and more
likely to prepay in a falling rate environment.  Conversely,  depositors who are
receiving  fixed rates are more likely to withdraw  funds  before  maturity in a
rising rate environment and less likely to do so in a falling rate  environment.
Management  monitors rates and maturities of assets and liabilities and attempts
to  minimize  interest  rate risk by  adjusting  terms of new loans,  leases and
deposits  and by  investing in  securities  with terms that  mitigate the Bank's
overall interest rate risk.

                                      F-31

<PAGE>

NOTE S - OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive loss is comprised of the following at December
31, 2007 and 2006:

<TABLE>
<CAPTION>
                                                                                             2007           2006
                                                                                         ------------   ------------
<S>                                                                                      <C>            <C>
Unrealized losses on available for sale securities,
   net of taxes                                                                          $    769,496   $  2,055,909
Unfunded pension liability, net of taxes                                                      497,891        760,704
                                                                                         ------------   ------------
                                                                                         $  1,267,387   $  2,816,613
                                                                                         ============   ============
</TABLE>

Other comprehensive income for the years ended December 31, 2007, 2006 and 2005
is as follows:

<TABLE>
<CAPTION>
                                                                                             2007
                                                                          ------------------------------------------
                                                                           Before-Tax                    Net-of-Tax
                                                                             Amount          Taxes         Amount
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Unrealized holding gains arising during the period                        $  1,968,743   $   (669,373)  $  1,299,370
Less: reclassification adjustment for gains recognized in net income           (19,632)         6,675        (12,957)
                                                                          ------------   ------------   ------------
Unrealized holding gain on available for sale securities,
   net of taxes                                                              1,949,111       (662,698)     1,286,413
Net pension gain                                                               398,201       (135,388)       262,813
                                                                          ------------   ------------   ------------
Total other comprehensive income, net of taxes                            $  2,347,312   $   (798,086)  $  1,549,226
                                                                          ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                             2006
                                                                          ------------------------------------------
                                                                           Before-Tax                    Net-of-Tax
                                                                             Amount          Taxes         Amount
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Unrealized holding gains arising during the period                        $    445,798   $   (151,571)  $    294,227
Add: reclassification adjustment for losses recognized in net income           666,702       (226,679)       440,023
                                                                          ------------   ------------   ------------
Total other comprehensive income, net of taxes                            $  1,112,500   $   (378,250)  $    734,250
                                                                          ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                             2005
                                                                          ------------------------------------------
                                                                           Before-Tax                    Net-of-Tax
                                                                             Amount          Taxes         Amount
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Unrealized holding losses on available for sale securities
   arising during the period                                              $ (2,296,237)  $    780,721   $ (1,515,516)
Less: reclassification adjustment for gains recognized in net income           (78,949)        26,842        (52,107)
                                                                          ------------   ------------   ------------
Total other comprehensive loss, net of taxes                              $ (2,375,186)  $    807,563   $ (1,567,623)
                                                                          ============   ============   ============
</TABLE>

NOTE T - FIRST LITCHFIELD FINANCIAL CORPORATION PARENT COMPANY ONLY FINANCIAL
INFORMATION

FIRST LITCHFIELD FINANCIAL CORPORATION
Condensed Balance Sheets

<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                         ---------------------------
                                                                                             2007           2006
                                                                                         ------------   ------------
<S>                                                                                      <C>            <C>
Assets
Cash and due from banks                                                                  $  3,114,290   $  3,167,243
Investment in The First National Bank of Litchfield                                        34,863,604     32,687,814
Investment in First Litchfield Statutory Trusts I,II                                          304,000        304,000
Other assets                                                                                  501,838        503,388
                                                                                         ------------   ------------
Total Assets                                                                             $ 38,783,732   $ 36,662,445
                                                                                         ============   ============
Liabilities and Shareholders' Equity
Liabilities:
Subordinated debt                                                                        $ 10,104,000   $ 10,104,000
Other liabilities                                                                             367,120        352,251
                                                                                         ------------   ------------
Total Liabilities                                                                          10,471,120     10,456,251
                                                                                         ------------   ------------
Shareholders' equity                                                                       28,312,612     26,206,194
                                                                                         ------------   ------------
Total Liabilities and Shareholders' Equity                                               $ 38,783,732   $ 36,662,445
                                                                                         ============   ============
</TABLE>

                                      F-32

<PAGE>

Condensed Statements of Income

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                          ------------------------------------------
                                                                              2007           2006           2005
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Dividends from subsidiary                                                 $  1,900,000   $  1,900,000   $  1,600,000
Other expenses, net                                                            877,608        764,705        516,979
                                                                          ------------   ------------   ------------
Income before taxes and equity in earnings of subsidiary                     1,022,392      1,135,295      1,083,021
Income tax benefit                                                             298,386        259,919        175,772
                                                                          ------------   ------------   ------------
Income before equity in undistributed earnings of subsidiary                 1,320,778      1,395,214      1,258,793
Equity in undistributed earnings of subsidiary                                 626,564         13,689      2,777,098
                                                                          ------------   ------------   ------------
Net income                                                                $  1,947,342   $  1,408,903   $  4,035,891
                                                                          ============   ============   ============
</TABLE>

Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                          ------------------------------------------
                                                                              2007           2006           2005
                                                                          ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Cash flows from operating activities:
Net Income                                                                $  1,947,342   $  1,408,903   $  4,035,891
Adjustments to reconcile net income
  to cash provided by operating activities:
  Equity in undistributed earnings of subsidiary                              (626,564)       (13,689)    (2,777,098)
  Other, net                                                                   135,247         (9,766)       127,013
                                                                          ------------   ------------   ------------
Cash provided by operating activities                                        1,456,025      1,385,448      1,385,806
                                                                          ------------   ------------   ------------

Cash flows from investing activities:
   Investment in First Litchfield Statutory Trust II                                --        (93,000)            --
   Investment in The First National Bank of Litchfield                              --     (3,000,000)            --
                                                                          ------------   ------------   ------------
Cash used in investing activities                                                   --     (3,093,000)            --
                                                                          ------------   ------------   ------------

Cash flows from financing activities:
   Stock options exercised                                                      87,487        138,197         73,747
   Distribution in cash for fractional shares of common stock                   (3,917)        (5,266)        (5,952)
   Proceeds from issuance of subordinated debt                                      --      3,093,000             --
   Contribution of treasury shares to ESOP                                          --         67,592             --
   Purchase of treasury shares                                                (132,208)      (109,000)            --
   Dividends paid on common stock                                           (1,354,434)    (1,282,890)    (1,136,010)
                                                                          ------------   ------------   ------------
   Cash (used in) provided by financing activities                          (1,403,072)     1,901,633     (1,068,215)
                                                                          ------------   ------------   ------------
   Net increase in cash and due from banks                                      52,953        194,081        317,591
Cash and due from banks at the beginning of the year                         3,167,243      2,973,162      2,655,571
                                                                          ------------   ------------   ------------
Cash and due from banks at the end of the year                            $  3,114,290   $  3,167,243   $  2,973,162
                                                                          ============   ============   ============
</TABLE>

                                      F-33

<PAGE>

NOTE S - SEGMENT REPORTING

Beginning in 2007, with First Litchfield Leasing  Corporation fully operational,
the Company has two operating  segments for purposes of reporting  business line
results. These segments are Community Banking and Leasing. The Community Banking
segment is defined as all the  operating  results of The First  National Bank of
Litchfield.  The Leasing  segment is defined as the results of First  Litchfield
Leasing  Corporation.  Because First  Litchfield  Leasing  Corporation  is a new
subsidiary, methodologies and organizational hierarchies are newly developed and
will be subject to periodic  review and  revision.  The  following  presents the
operating  results  and  total  assets  for the  segments  of  First  Litchfield
Financial  Corporation for the year ended December 31, 2007. The Company uses an
internal  reporting  system  to  generate   information  by  operating  segment.
Estimates and allocations  are used for  noninterest  expenses and income taxes.
The Company uses a matched maturity funding concept to allocate interest expense
to First Litchfield  Leasing  Corporation.  The matched maturity funding concept
utilizes the  origination  date and the maturity  date of the lease to assign an
interest expense to each lease.

<TABLE>
<CAPTION>
                                                                                       For the Year Ended
                                                                                       December 31, 2007
                                                                 -------------------------------------------------------------
                                                                   Community                      Elimination     Consolidated
                                                                    Banking         Leasing         Entries          Total
                                                                 -------------   -------------   -------------   -------------
<S>                                                              <C>             <C>             <C>             <C>
Net interest income                                              $  12,951,760   $     261,299              --   $  13,213,059
Provision for credit losses                                            123,726          80,274              --         204,000
                                                                 -------------   -------------   -------------   -------------

Net interest income after provision for credit losses               12,828,034         181,025              --      13,009,059
Noninterest income                                                   3,431,476              --              --       3,431,476
Noninterest expense                                                 13,977,928         318,843         (29,280)     14,267,491
                                                                 -------------   -------------   -------------   -------------

Income (loss) before income taxes                                    2,281,582        (137,818)         29,280       2,173,044
Income tax provision (benefit)                                         274,159         (48,457)             --         225,702
                                                                 -------------   -------------   -------------   -------------

Net income (loss)                                                $   2,007,423   $     (89,361)  $      29,280   $   1,947,342
                                                                 =============   =============   =============   =============
Total assets as of December 31, 2007                             $ 535,136,271   $  10,972,121   $ (38,454,762)  $ 507,653,629
                                                                 =============   =============   =============   =============
</TABLE>

                                      F-34

<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

There were no changes in or  disagreements  with the  accountants of the Company
during the 24 month period prior to December 31, 2007, or subsequently.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure 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.  In designing  and  evaluating  the  disclosure
controls and procedures, management recognizes 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  is
required  to apply its  judgment  in  evaluating  the  cost-benefit  of possible
controls and procedures.

The Company's  Management,  under the supervision and with the  participation of
the Company's Chief Executive  Officer and the Company's Chief Financial Officer
evaluated the effectiveness of the Company's  disclosure controls and procedures
as of December 31, 2007.  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.

ITEM 9A(T). CONTROLS AND PROCEDURES

(a) Management's Report on Internal Control over Financial Reporting

Management is responsible for  establishing  and  maintaining,  for the Company,
adequate internal control over financial  reporting,  as such term is defined in
Exchange act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the
supervision and with the  participation  of the Chief Executive  Officer and the
Chief Financial Officer,  we conducted an evaluation of the effectiveness of our
control  over   financial   reporting   based  on  the   framework  in  Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of  the  Treadway  Commission  ("COSO").  Based  on  our  evaluation  under  the
framework,  management  has concluded  that our internal  control over financial
reporting  was  effective  as of  December  31,  2007.  There  were no  material
weaknesses in the Company's internal control over financial reporting identified
by management.

The annual  report  does not  include an  attestation  report of the  Company's,
registered  public  accounting firm,  regarding  internal control over financial
reporting.  Management's  report was not subject to attestation by the Company's
registered  public accounting firm pursuant to temporary rules of the Securities
and Exchange  Commission  that permit the Company to provide  only  Management's
report in this annual report.

(b) Changes in Internal Control over Financial Reporting

There was no change in the Company's  internal control over financial  reporting
that occurred  during the Company's  fourth  quarter of 2007 that has materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

                                       31

<PAGE>

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5)
of  Regulation  S-K is  incorporated  into this Form  10-K by  reference  to the
Company's  Definitive Proxy Statement (the "Definitive Proxy Statement") for its
2008 Annual Meeting of Shareholders.

Code of Ethics
--------------

The Company has adopted a Code of Ethics  that  applies to the  Company's  Chief
(Principal) Executive Officer and Chief (Principal) Financial Officer. Such Code
of Ethics may be  obtained by any  person,  without  charge,  upon  request,  by
writing  to:  Carroll  A.  Pereira,   Treasurer,   First  Litchfield   Financial
Corporation, 13 North Street, Litchfield, CT 06759.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 402 and paragraph (e)(4) and (e)(5) of item 407
of  Regulation  S-K is  incorporated  into this Form  10-K by  reference  to the
Definitive Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

The  information  required  by Item  201(d)  and Item 403 of  Regulation  S-K is
incorporated into this Form 10-K by reference to the Definitive Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The  information  required  by Items 404 of  Regulation  S-K and Item  407(a) of
Regulation  S-K  is  incorporated  into  this  Form  10-K  by  reference  to the
Definitive Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information  required by Item 9(e) of Schedule 14A is incorporated into this
Form 10-K by reference to the Company's Definitive Proxy Statement.

                                       32

<PAGE>

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

A.    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.

4.1         Indenture dated June 16, 2006,  between First  Litchfield  Financial
            Corporation,  as issuer, and Wilmington Trust Company,  as indenture
            trustee.  Exhibit is incorporated by reference to Exhibit 4.1 to the
            Company's  Registration  Statement  on Form  8-K/A as filed with the
            Securities and Exchange Commission on June 30, 2006.

4.2         Guarantee  Agreement  dated  as of  June  16,  2006,  between  First
            Litchfield  Financial  Corporation,  and  Wilmington  Trust Company.
            Exhibit is incorporated by reference to Exhibit 4.2 to the Company's
            Registration  Statement  on Form 8-K/A as filed with the  Securities
            and Exchange Commission on June 30, 2006.

4.3         Form  of  Junior  Subordinated  Note.  Exhibit  is  incorporated  by
            reference to Exhibit 4.3 to the Company's  Registration Statement on
            Form 8-K/A as filed with the Securities  and Exchange  Commission on
            June 30, 2006.

10.1        1994 Stock Option Plan for Officers and Outside  Directors.  Exhibit
            is  incorporated  by  reference  to  Exhibit  10.2 set  forth in the
            Company's  Registration  Statement  on Form  10-SB as filed with the
            Securities and Exchange Commission on January 7, 2000.

10.2        Supplemental  Employee Retirement  Agreement between the Company and
            Walter Hunt.  Exhibit is  incorporated  by reference to Exhibit 10.9
            set forth in the Company's  Registration  Statement on Form 10-SB as
            filed with the  Securities  and  Exchange  Commission  on January 7,
            2000.

10.3        Deferred  Directors' Fee Plan.  Exhibit is incorporated by reference
            to Exhibit 10.10 set forth in the Company's  Registration  Statement
            on Form 10-SB as filed with the Securities  and Exchange  Commission
            on January 7, 2000.

10.4        Split Dollar Agreement with Salisbury Bank as Trustee dated November
            21, 2000.  Exhibit is incorporated by reference to Exhibit 10.13 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.5        The Rabbi  Trust  Agreement  with  Salisbury  Bank as Trustee  dated
            November 21, 2000.  Exhibit is  incorporated by reference to Exhibit
            10.14 set forth in the  Company's  Annual  Report in Form 10-KSB for
            the fiscal year ended December 31, 2000 as filed with the Securities
            and Exchange Commission on April 2, 2001.

10.6        The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Jerome J. Whalen and the Bank dated December 28,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.15 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.7        The First National Bank of Litchfield Executive Incentive Retirement
            Agreement between Carroll A. Pereira and the Bank dated November 30,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.16 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

                                       33

<PAGE>

10.8        The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Philip G.  Samponaro and the Bank dated December
            19, 2000.  Exhibit is incorporated by reference to Exhibit 10.17 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.9        The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Revere H. Ferris and the Bank dated November 30,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.18 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.10       The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  John S. Newton and the Bank dated  December  21,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.19 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.11       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement  between  Charles E. Orr and the Bank dated  November  29,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.20 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.12       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement between Patricia D. Werner and the Bank dated November 30,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.21 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.13       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement  between  George M. Madsen and the Bank dated  December 7,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.23 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.14       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement  between  William J. Sweetman and the Bank dated  December
            20, 2000.  Exhibit is incorporated by reference to Exhibit 10.24 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.15       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement  between H. Ray Underwood and the Bank dated  December 20,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.25 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.16       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement  between  Perley H. Grimes and the Bank dated December 27,
            2000.  Exhibit is  incorporated  by reference  to Exhibit  10.29 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2000 as filed  with the  Securities  and
            Exchange Commission on April 2, 2001.

10.17       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement  between  Alan B. Magary and the Bank dated  December  19,
            2002.  Exhibit is  incorporated  by reference  to Exhibit  10.38 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2002 as filed  with the  Securities  and
            Exchange Commission on March 31, 2003.

10.18        The First National Bank of Litchfield Director Incentive Retirement
             Agreement between Gregory S. Oneglia and the Bank dated December
             19, 2002. Exhibit is incorporated by reference to Exhibit 10.39 set
             forth in the Company's Annual Report in Form 10-KSB for the fiscal
             year ended December 31, 2002 as filed with the Securities and
             Exchange Commission on March 31, 2003.

10.19       The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Joseph J. Greco and the Bank dated  December 19,
            2002.  Exhibit is  incorporated  by reference  to Exhibit  10.40 set
            forth in the  Company's  Annual Report in Form 10-KSB for the fiscal
            year  ended  December  31,  2002 as filed  with the  Securities  and
            Exchange Commission on March 31, 2003.

10.20       Split  dollar  life  agreement  between  Joelene  E.  Smith  and the
            Company.  Exhibit is  incorporated by reference to Exhibit 10.47 set
            forth in the Company's 10-QSB for the quarter ended June 30, 2003 as
            filed with the  Securities  and  Exchange  Commission  on August 13,
            2003.

                                       34

<PAGE>

10.21       Amended  and  Restated  Declaration  of Trust  of  First  Litchfield
            Statutory  Trust I. Exhibit is  incorporated by reference to Exhibit
            10.52 set forth in the  Company's  10-QSB for the quarter ended June
            30, 2003 as filed with the  Securities  and Exchange  Commission  on
            August 13, 2003.

10.22       Indenture  for  the  Company's  Floating  Rate  Junior  Subordinated
            Deferrable  Interest Debentures due 2033. Exhibit is incorporated by
            reference to Exhibit 10.53 set forth in the Company's 10-QSB for the
            quarter  ended  June 30,  2003 as  filed  with  the  Securities  and
            Exchange Commission on August 13, 2003.

10.23       The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Joelene E. Smith and the Bank dated December 22,
            2003.  Exhibit is  incorporated  by reference  to Exhibit  10.54 set
            forth in the Company's  10-KSB for the year ended  December 31, 2003
            as filed with the  Securities  and Exchange  Commission on March 30,
            2004.

10.24       The First National Bank of Litchfield Director Incentive  Retirement
            Agreement between Kathleen A. Kelley and the Bank dated September 1,
            2004.  Exhibit is  incorporated  by reference  to Exhibit  10.56 set
            forth in the Company's  10-QSB for the quarter  ended  September 30,
            2004 as  filed  with  the  Securities  and  Exchange  Commission  on
            November 14, 2004.

10.25       Amendment  to  The  First  National  Bank  of  Litchfield   Director
            Incentive  Retirement  Agreement between Alan B. Magary and the Bank
            dated  August 26,  2004.  Exhibit is  incorporated  by  reference to
            Exhibit  10.57 set forth in the  Company's  10-QSB  for the  quarter
            ended  September 30, 2004 as filed with the  Securities and Exchange
            Commission on November 14, 2004.

10.26       The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Robert E.  Teittinen and the Bank dated November
            21, 2005.  Exhibit is incorporated by reference to Exhibit 10.59 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 30, 2006.

10.27       The  First  National  Bank  of  Litchfield   Supplemental  Executive
            Retirement  Agreement  between  Joseph J.  Greco and the Bank  dated
            April 27,  2006.  Exhibit is  incorporated  by  reference to Exhibit
            10.60 set forth in the Company's 10-Q for the quarter ended June 30,
            2006 as filed with the Securities and Exchange  Commission on August
            14, 2006.

10.28       The  First  National  Bank  of  Litchfield   Supplemental  Executive
            Retirement  Agreement  between Carroll A. Pereira and the Bank dated
            April 27,  2006.  Exhibit is  incorporated  by  reference to Exhibit
            10.61 set forth in the Company's 10-Q for the quarter ended June 30,
            2006 as filed with the Securities and Exchange  Commission on August
            14, 2006.

10.29       The  First  National  Bank  of  Litchfield   Supplemental  Executive
            Retirement  Agreement  between  Joelene  E. Smith and the Bank dated
            April 27,  2006.  Exhibit is  incorporated  by  reference to Exhibit
            10.62 set forth in the Company's 10-Q for the quarter ended June 30,
            2006 as filed with the Securities and Exchange  Commission on August
            14, 2006.

10.30       The First National Bank of Litchfield Executive Incentive Retirement
            Agreement  between  Frederick F. Judd,  III and the Bank dated April
            28, 2006.  Exhibit is incorporated by reference to Exhibit 10.63 set
            forth in the  Company's  10-Q for the quarter ended June 30, 2006 as
            filed with the  Securities  and  Exchange  Commission  on August 14,
            2006.

10.31       Executive  Change in Control  Agreement  between Joseph J. Greco and
            the Company and the Bank dated May 26, 2006. Exhibit is incorporated
            by reference to Exhibit  10.64 set forth in the  Company's  10-Q for
            the  quarter  ended June 30, 2006 as filed with the  Securities  and
            Exchange Commission on August 14, 2006.

10.32       Executive Change in Control Agreement between Carroll A. Pereira and
            the Company and the Bank dated May 26, 2006. Exhibit is incorporated
            by reference to Exhibit  10.65 set forth in the  Company's  10-Q for
            the  quarter  ended June 30, 2006 as filed with the  Securities  and
            Exchange Commission on August 14, 2006.

10.33       Executive Change in Control  Agreement  between Joelene E. Smith and
            the Company and the Bank dated May 26, 2006. Exhibit is incorporated
            by reference to Exhibit  10.66 set forth in the  Company's  10-Q for
            the  quarter  ended June 30, 2006 as filed with the  Securities  and
            Exchange Commission on August 14, 2006.

10.34       Executive  Change in Control  Agreement  between Robert E. Teittinen
            and the  Company  and  the  Bank  dated  May 26,  2006.  Exhibit  is
            incorporated  by  reference  to  Exhibit  10.67  set  forth  in  the
            Company's 10-Q for the quarter ended June 30, 2006 as filed with the
            Securities and Exchange Commission on August 14, 2006.

10.35       Executive Change in Control Agreement between Frederick F. Judd, III
            and the  Company  and  the  Bank  dated  May 26,  2006.  Exhibit  is
            incorporated  by  reference  to  Exhibit  10.68  set  forth  in  the
            Company's 10-Q for the quarter ended June 30, 2006 as filed with the
            Securities and Exchange Commission on August 14, 2006.

10.36       Form  of   Employee   Change  in  Control   Agreement.   Exhibit  is
            incorporated  by  reference  to  Exhibit  10.69  set  forth  in  the
            Company's 10-Q for the quarter ended June 30, 2006 as filed with the
            Securities and Exchange Commission on August 14, 2006.

10.37       First Litchfield  Financial  Corporation 2007 Restricted Stock Plan.
            Exhibit  is  incorporated  by  reference  to  Exhibit  99.1  to  the
            Company's  Registration  Statement  on Form  S-8 as  filed  with the
            Securities  and  Exchange  Commission  on July 30,  2007  (File  No.
            333-144951).

                                       35

<PAGE>

21.         List of Subsidiaries of First Litchfield Financial Corporation

23.         Consent of McGladrey & Pullen, LLP.

31.1        Certification of Chief Executive Officer of the Company.

31.2        Certification of Chief Financial Officer of the Company.

32.0        Certification  of 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.

                                       36

<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:  March 31, 2008                  FIRST LITCHFIELD FINANCIAL CORPORATION

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

Dated:  March 31, 2008                    By: /s/ Carroll A. Pereira
                                             --------------------------------
                                              Carroll A. Pereira,
                                              Principal Accounting Officer
                                              and Treasurer

                                       37

<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

Name                                 Title                               Date
----                                 -----                               ----
/s/ Joseph J. Greco                  President, Chief Executive          3/28/08
----------------------------         Officer and Director
Joseph J. Greco

/s/ Patrick J. Boland                Director                            3/28/08
----------------------------
Patrick J. Boland

/s/ John A. Brighenti                Director                            3/28/08
----------------------------
John A. Brighenti

/s/ Perley H. Grimes, Jr.            Director                            3/28/08
----------------------------
Perley H. Grimes, Jr.

/s/ Kathleen A. Kelley               Director                            3/28/08
----------------------------
Kathleen A. Kelley

/s/ George M. Madsen                 Director                            3/28/08
----------------------------
George M. Madsen

/s/ Alan B. Magary                   Director                            3/28/08
----------------------------
Alan B. Magary

/s/ Gregory Oneglia                  Director                            3/28/08
----------------------------
Gregory Oneglia

/s/ Charles E. Orr                   Director                            3/28/08
---------------------------
Charles E. Orr

/s/ Richard E. Pugh                  Director                            3/28/08
----------------------------
Richard E. Pugh

/s/ William J. Sweetman              Director                            3/28/08
----------------------------
William J. Sweetman

/s/ H. Ray Underwood                 Director                            3/28/08
----------------------------
H. Ray Underwood

/s/ Patricia D. Werner               Director                            3/28/08
----------------------------
Patricia D. Werner

                                       38