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

                                    FORM 10-Q

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

                  For the Quarterly period ended: June 30, 2008

[ ]   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 or 15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934

           For the transition period from ___________ to ___________.

                         Commission File Number: 0-28815

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

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

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

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

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

                                 Yes [X] No [ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, a  non-accelerated  filer or a smaller  reporting company as
defined in Rule 12b-2 of the Exchange Act. (Check one):

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]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock,  as of the latest  practicable  date:  2,359,388  shares of Common
Stock, par value $.01 per share, were outstanding at August 5, 2008.

                                       1
<PAGE>

                     FIRST LITCHFIELD FINANCIAL CORPORATION
                                    FORM 10-Q
                                      INDEX

                                                                            Page
                                                                            ----
Part I - Financial Information

        Item 1 - Financial Statements

        Consolidated Balance Sheets - June 30, 2008 and December 31, 2007
        (unaudited) ..........................................................3

        Consolidated Statements of Income - Three and Six months ended
        June 30, 2008 and 2007 (unaudited) ...................................4

        Consolidated Statements of Changes in Shareholders' Equity -
        Six months ended June 30, 2008 and 2007 (unaudited) ..................5

        Consolidated Statements of Cash Flows - Six months ended
        June 30, 2008 and 2007 (unaudited) ...................................6

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

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

        Item 3 - Quantitative and Qualitative Disclosures about Market Risk
        [not applicable] .....................................................32

        Item 4T - Controls and Procedures ....................................32

Part II - Other Information

        Item 1 - Legal Proceedings ...........................................33

        Item 1A - Risk Factors [not applicable] ..............................33

        Item 2 - Unregistered Sales of Equity Securities and Use
        of Proceeds ..........................................................33

        Item 3 - Defaults Upon Senior Securities .............................33

        Item 4 - Submission of Matters to a Vote of Security Holders .........33

        Item 5 - Other Information ...........................................35

        Item 6 - Exhibits ....................................................36

Signatures ...................................................................37

                                       2
<PAGE>
<TABLE>
<CAPTION>

                                             PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)                                                         June 30,       December 31,
                                                                                                  2008             2007
                                                                                             -------------    -------------
<S>                                                                                             <C>              <C>
ASSETS
        Cash and due from banks                                                              $   9,879,291    $  10,876,445
        Interest - bearing accounts due from banks                                              14,201,940       10,620,749
                                                                                             -------------    -------------
                                                                CASH AND CASH EQUIVALENTS       24,081,231       21,497,194
                                                                                             -------------    -------------
        Securities:
                    Available for sale securities, at fair value                               152,191,082      128,979,548
                    Held to maturity securities (fair value $31,846-2008 and $33,712-2007)          32,176           34,185
                                                                                             -------------    -------------
                                                                         TOTAL SECURITIES      152,223,258      129,013,733
                                                                                             -------------    -------------

        Federal Home Loan Bank stock, at cost                                                    5,370,000        5,067,400
        Federal Reserve Bank stock, at cost                                                        225,850          225,850
        Other restricted stock, at cost                                                            100,000           95,000

        Loan and lease receivables, net of allowance for loan and lease
                    losses of  $2,233,578 -2008, $2,151,622 -2007
                                                                     NET LOANS AND LEASES      337,241,903      327,475,371
        Premises and equipment, net                                                              7,495,227        7,758,761
        Deferred income taxes                                                                    2,967,481        1,327,535
        Accrued interest receivable                                                              2,474,581        2,609,606
        Cash surrender value of insurance                                                       10,218,116       10,020,540
        Other assets                                                                             2,232,045        2,562,639
                                                                                             -------------    -------------

                                                                             TOTAL ASSETS    $ 544,629,692    $ 507,653,629
                                                                                             =============    =============
LIABILITIES
        Deposits:
                    Noninterest bearing                                                      $  71,480,790    $  70,564,267
                    Interest bearing                                                           273,276,745      265,053,397
                                                                                             -------------    -------------
                                                                           TOTAL DEPOSITS      344,757,535      335,617,664

        Federal Home Loan Bank advances                                                         95,762,000       91,500,000
        Repurchase agreements with financial institutions                                       49,550,000       21,550,000
        Repurchase agreements with customers                                                    12,617,814       14,142,773
        Junior subordinated debt issued by unconsolidated trust                                 10,104,000       10,104,000
        Collateralized borrowings                                                                1,402,321        1,699,336
        Capital lease obligation                                                                 1,074,684        1,083,567
        Accrued expenses and other liabilities                                                   3,949,582        3,593,677
                                                                                             -------------    -------------

                                                                        TOTAL LIABILITIES      519,217,936      479,291,017
                                                                                             -------------    -------------
        Minority interest                                                                           50,000           50,000
        Commitments and contingencies
SHAREHOLDERS' EQUITY
        Preferred stock $.00001 par value; 1,000,000 shares authorized, no
        shares outstanding Common stock $.01 par value
                    Authorized - 5,000,000 shares
                    2008 - Issued - 2,506,622 shares, outstanding - 2,360,283 shares
                    2007 - Issued - 2,501,229 shares, outstanding - 2,368,200 shares                25,033           25,012
        Additional paid-in capital                                                              27,885,151       27,858,841
        Retained earnings                                                                        3,015,400        2,623,110
        Less: Treasury stock at cost- 146,339 as of 6/30/08, 133,029 as of 12/31/07             (1,113,016)        (926,964)
        Accumulated other comprehensive loss, net of taxes                                      (4,450,812)      (1,267,387)
                                                                                             -------------    -------------
                                                               TOTAL SHAREHOLDERS' EQUITY       25,361,756       28,312,612
                                                                                             -------------    -------------

                                               TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $ 544,629,692    $ 507,653,629
                                                                                             =============    =============

See Notes to Consolidated Financial Statements.

                                                             3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                                      Three Months Ended June 30,    Six Months Ended June 30,
                                                          2008           2007           2008           2007
                                                      ------------   ------------   ------------   ------------
<S>                                                        <C>            <C>            <C>            <C>
INTEREST AND DIVIDEND INCOME
   Interest and fees on loans and leases              $  5,309,856   $  5,221,275   $ 10,836,939   $ 10,165,123
                                                      ------------   ------------   ------------   ------------

   Interest and dividends on securities:
        Mortgage-backed securities                         982,061        653,247      1,655,389      1,334,231
        US Treasury and other securities                   426,684        540,976        928,626      1,098,749
        State and municipal securities                     289,966        338,416        626,385        676,810
        Corporate bonds and other securities               101,155        185,131        219,776        370,326
                                                      ------------   ------------   ------------   ------------
             Total interest on securities                1,799,866      1,717,770      3,430,176      3,480,116
   Other interest income                                    68,343         28,814        167,386        199,449
                                                      ------------   ------------   ------------   ------------
                TOTAL INTEREST AND DIVIDEND INCOME       7,178,065      6,967,859     14,434,501     13,844,688
                                                      ------------   ------------   ------------   ------------

INTEREST EXPENSE
   Interest on deposits:
       Savings                                             116,210        150,791        305,886        330,080
       Money market                                        365,400        551,250        822,167      1,049,833
       Time certificates of deposit                      1,393,292      1,580,212      2,845,968      3,295,943
                                                      ------------   ------------   ------------   ------------
                TOTAL INTEREST ON DEPOSITS               1,874,902      2,282,253      3,974,021      4,675,856
   Interest on Federal Home Loan Bank advances           1,014,625        845,447      2,022,423      1,527,146
   Interest on repurchase agreements                       410,817        326,096        749,237        733,487
   Interest on subordinated debt                           125,813        198,275        315,761        395,896
   Interest on collateralized borrowings                    25,379             --         54,803             --
   Interest on capital lease obligation                     14,279         14,510         28,617         29,075
                                                      ------------   ------------   ------------   ------------
                            TOTAL INTEREST EXPENSE       3,465,815      3,666,581      7,144,862      7,361,460
                                                      ------------   ------------   ------------   ------------
                               NET INTEREST INCOME       3,712,250      3,301,278      7,289,639      6,483,228
PROVISION FOR LOAN AND LEASE LOSSES                        137,000             --        212,000        105,000
                                                      ------------   ------------   ------------   ------------
               NET INTEREST INCOME AFTER PROVISION
                          FOR LOAN AND LEASE LOSSES      3,575,250      3,301,278      7,077,639      6,378,228
                                                      ------------   ------------   ------------   ------------
NONINTEREST INCOME
   Banking service charges and fees                        380,741        335,434        725,920        646,666
   Trust                                                   333,569        340,647        673,093        670,236
   Gains (losses) on available for sale securities          20,899             --         32,841        (14,350)
   Other                                                   198,704        150,718        358,081        318,819
                                                      ------------   ------------   ------------   ------------
                          TOTAL NONINTEREST INCOME         933,913        826,799      1,789,935      1,621,371
                                                      ------------   ------------   ------------   ------------
NONINTEREST EXPENSE
   Salaries                                              1,719,704      1,530,909      3,317,339      3,134,724
   Employee benefits                                       450,090        382,119        891,839        809,067
   Net occupancy                                           292,397        261,855        604,223        536,913
   Equipment                                               154,770        167,535        314,384        336,056
   Legal fees                                               54,668         86,526        117,620        131,251
   Directors fees                                           50,200         52,278        100,300        108,453
   Computer services                                       214,114        196,213        487,087        457,371
   Supplies                                                 44,925         41,786         90,429         84,579
   Commissions, services and fees                          127,796        144,738        244,038        230,254
   Postage                                                  33,417         25,168         73,620         67,114
   Advertising                                             157,355        105,902        294,370        169,916
   Other                                                   524,283        457,070      1,087,513        843,307
                                                      ------------   ------------   ------------   ------------
                         TOTAL NONINTEREST EXPENSE       3,823,719      3,452,099      7,622,762      6,909,005
                                                      ------------   ------------   ------------   ------------

                        INCOME BEFORE INCOME TAXES         685,444        675,978      1,244,812      1,090,594
PROVISION FOR INCOME TAXES                                  68,996         94,212        129,841        105,934
                                                      ------------   ------------   ------------   ------------
                                        NET INCOME    $    616,448   $    581,766   $  1,114,971   $    984,660
                                                      ============   ============   ============   ============

INCOME PER SHARE
                        BASIC NET INCOME PER SHARE    $       0.26   $       0.25   $       0.47   $       0.42
                                                      ============   ============   ============   ============
                      DILUTED NET INCOME PER SHARE    $       0.26   $       0.25   $       0.47   $       0.42
                                                      ============   ============   ============   ============
DIVIDENDS PER SHARE                                   $       0.15   $       0.15   $       0.30   $       0.30
                                                      ============   ============   ============   ============

See Notes to Consolidated Financial Statements.

                                                       4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
                                                                                                        Accumulated
                                                              Additional                                   Other          Total
                                                  Common       Paid-In       Retained      Treasury    Comprehensive   Shareholders'
                                                  Stock        Capital       Earnings       Stock          Loss           Equity
                                               ------------  ------------  ------------  ------------   ------------   ------------
<S>                                           <C>           <C>           <C>           <C>            <C>            <C>
Six months ended June 30, 2007
Balance, December 31, 2006                     $     23,724  $ 25,840,623  $  3,953,216  $   (794,756)  $ (2,816,613)  $ 26,206,194
Comprehensive income:
Net income                                               --            --       984,660            --                       984,660
Other comprehensive loss, net of taxes:
     Net unrealized holding loss on available
      for sale securities                                --            --            --            --       (797,184)      (797,184)
                                                                                                                       ------------
Other comprehensive loss                                                                                                   (797,184)
                                                                                                                       ------------
Total comprehensive income                                                                                                  187,476
Cash dividends declared: $0.30 per share                 --            --      (676,531)           --             --       (676,531)
Stock options exercised - 4,983 shares                   48        38,371            --            --             --         38,419
Tax benefit on stock options exercised                   --        19,168            --            --             --         19,168
                                               ------------  ------------  ------------  ------------   ------------   ------------
Balance, June 30, 2007                         $     23,772  $ 25,898,162  $  4,261,345  $   (794,756)  $ (3,613,797)  $ 25,774,726
                                               ============  ============  ============  ============   ============   ============

Six months ended June 30, 2008
Balance, December 31, 2007                     $     25,012  $ 27,858,841  $  2,623,110  $   (926,964)  $ (1,267,387)  $ 28,312,612
Comprehensive loss:
Net income                                               --            --     1,114,971            --                     1,114,971
Other comprehensive loss, net of taxes:
     Net unrealized holding loss on available
      for sale securities                                --            --            --            --     (2,867,053)    (2,867,053)
     Net actuarial loss and prior service
      cost for pension benefits                          --            --            --            --       (316,372)      (316,372)
                                                                                                                       ------------
Other comprehensive loss                                                                                                 (3,183,425)
                                                                                                                       ------------
Total comprehensive loss                                                                                                 (2,068,454)
Cash dividends declared: $0.30 per share                 --            --      (710,409)           --                      (710,409)
Purchase of treasury shares                              --            --            --      (186,052)            --       (186,052)
Stock options exercised - 1,893 shares                   19        20,463            --            --             --         20,482
Tax benefit on stock options exercised                   --         2,025            --            --             --          2,025
Restricted stock grants and expense                       2         3,822            --            --             --          3,824
Adoption of EITF 06-4 as of January 1, 2008              --            --       (12,272)           --             --        (12,272)
                                               ------------  ------------  ------------  ------------   ------------   ------------
Balance, June 30, 2008                         $     25,033  $ 27,885,151  $  3,015,400  $ (1,113,016)  $ (4,450,812)  $ 25,361,756
                                               ============  ============  ============  ============   ============   ============

See Notes to Consolidated Financial Statements.

                                                                 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)                                     Six months ended June 30,
                                                                                        2008            2007
                                                                                    ------------    ------------
<S>                                                                                    <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                          $  1,114,971    $    984,660
Adjustments to reconcile net income to net cash provided by operating activities:
               (Accretion) amortization of discounts and premiums
                 on investment securities, net                                           (78,435)         96,598
               Provision for loan losses                                                 212,000         105,000
               Depreciation and amortization                                             372,100         361,876
               (Gains) losses on available for sale securities                           (32,841)         14,350
               Loss on sale of repossessed assets                                         11,937              --
               Loans originated for sale                                              (1,515,000)     (2,682,000)
               Proceeds from sales of loans held for sale                              1,525,302       2,432,858
               Gains on sales of loans held for sale                                     (10,302)         (9,675)
               Loss on disposals of bank premises and equipment                            2,188              --
               Stock based compensation                                                    3,824              --
               Decrease (increase) in accrued interest receivable                        135,025         (63,637)
               Decrease (increase) in other assets                                       296,593        (316,377)
               Increase in cash surrender value of insurance                            (197,576)       (187,916)
               Increase in deferred loan origination costs                               (63,759)        (14,959)
               (Decrease) increase in accrued expenses and other liabilities            (135,161)      1,143,642
                                                                                    ------------    ------------
                   Net cash provided by operating activities                           1,640,866       1,864,420
                                                                                    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
               Proceeds from maturities and principal payments                        18,721,350       5,463,118
               Purchases                                                             (52,095,778)             --
               Proceeds from sales                                                     5,930,151       4,985,650
Held to maturity mortgage-backed securities:
               Proceeds from principal payments                                            2,009           3,821
Purchase of restricted stock                                                              (5,000)        (15,000)
Redemption of restricted stock                                                                --          10,500
Purchase of Federal Home Loan Bank stock                                                (302,600)       (180,700)
Net increase in loans and leases                                                     (10,046,774)    (13,126,888)
Purchase of premises and equipment                                                      (110,754)       (837,062)
Proceeds from sale of repossessed assets                                                 154,064              --
                                                                                    ------------    ------------
               Net cash used in investing activities                                 (37,753,332)     (3,696,561)
                                                                                    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits                                414,916      14,186,803
Net increase (decrease) in certificates of deposit                                     8,724,955     (14,326,875)
Proceeds from Federal Home Loan Bank advances                                                 --      67,000,000
Repayments on Federal Home Loan Bank advances                                                 --     (60,000,000)
Net increase in Federal Home Loan Bank overnight borrowings                            4,262,000       3,155,000
Net increase (decrease) in repurchase agreements with financial institutions          28,000,000     (18,650,000)
Net decrease in repurchase agreements with customers                                  (1,524,959)     (3,382,814)
Net decrease in collateralized borrowings                                               (297,015)             --
Principal payments on capital lease obligation                                            (8,883)         (8,425)
Purchase of treasury shares                                                             (186,052)             --
Proceeds from the exercise of stock options                                               20,482          38,419
Tax benefit of stock options exercised                                                     2,025          19,168
Dividends paid on common stock                                                          (710,966)       (675,970)
                                                                                    ------------    ------------
               Net cash provided by (used in) financing activities                    38,696,503     (12,644,694)
                                                                                    ------------    ------------
               Net increase (decrease) in cash and cash equivalents                    2,584,037     (14,476,835)
CASH AND CASH EQUIVALENTS, at beginning of period                                     21,497,194      29,197,637
                                                                                    ------------    ------------
CASH AND CASH EQUIVALENTS, at end of period                                         $ 24,081,231    $ 14,720,802
                                                                                    ============    ============
SUPPLEMENTAL INFORMATION Cash paid during the period for:
               Interest on deposits and borrowings                                  $  7,144,394    $  7,286,943
                                                                                    ============    ============
               Income taxes                                                         $      1,000    $        500
                                                                                    ============    ============
Non cash investing and financing activities:
               Accrued dividends declared                                           $    354,672    $    337,912
                                                                                    ============    ============
               Transfer of loans  to repossessed assets                             $    132,001    $     82,017
                                                                                    ============    ============
               Increase in liabilities and decrease in retained earnings for
               adoption of EITF 06-4                                                $     12,272    $         --
                                                                                    ============    ============
               Change in other liabilities related to the unfunded
               pension liability                                                    $    479,352    $         --
                                                                                    ============    ============
See Notes to Consolidated Financial Statements.

                                                       6
</TABLE>
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.  The  consolidated  balance  sheet at December  31, 2007 of First  Litchfield
    Financial  Corporation  (the  "Company")  has been  derived from the audited
    financial  statements  at  that  date,  but  does  not  include  all  of the
    information  and  footnotes  required  by  accounting  principles  generally
    accepted in the United States of America for complete financial statements.

2.  The accompanying  unaudited  consolidated  financial  statements and related
    notes  have been  prepared  pursuant  to the rules  and  regulations  of the
    Securities and Exchange  Commission.  Accordingly,  certain  information and
    footnote  disclosures  normally included in financial statements prepared in
    accordance  with  accounting  principles  generally  accepted  in the United
    States of America have been omitted  pursuant to such rules and regulations.
    The  accompanying  financial  statements and related notes should be read in
    conjunction with the audited  financial  statements of the Company and notes
    thereto for the fiscal year ended December 31, 2007.

    These  financial  statements  reflect,  in the  opinion of  Management,  all
    adjustments,  consisting of only normal recurring adjustments, necessary for
    a fair presentation of the Company's  financial  position and the results of
    its operations and its cash flows for the periods presented.  The results of
    operations  for the six  months  ended  June 30,  2008  are not  necessarily
    indicative  of the results of  operations  that may be  expected  for all of
    2008.

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

    The following is information  about the  computation of net income per share
    for the three and six month periods  ended June 30, 2008 and 2007.  The 2007
    information  has been  restated  to give  retroactive  effect  to all  stock
    dividends.

                                                       Three Months Ended
                                                         June 30, 2008
                                               ---------------------------------
                                                  Net                  Per Share
                                                Income      Shares       Amount
                                               ---------   ---------   ---------
Basic Net Income Per Share
     Income available to common shareholders   $ 616,448   2,366,459   $    0.26
                                                                       =========
Effect of Dilutive Securities
     Options Outstanding                              --         668
Diluted Net Income Per Share
     Income available to common shareholders
                                               ---------   ---------
     plus assumed conversions                  $ 616,448   2,367,127   $    0.26
                                               =========   =========   =========

                                                       Three Months Ended
                                                         June 30, 2007
                                               ---------------------------------
                                                  Net                  Per Share
                                                Income      Shares       Amount
                                               ---------   ---------   ---------
Basic Net Income Per Share
     Income available to common shareholders   $ 581,766   2,370,886   $    0.25
                                                                       =========
Effect of Dilutive Securities
     Options Outstanding                              --       4,188
Diluted Net Income Per Share
     Income available to common shareholders
                                               ---------   ---------
     plus assumed conversions                  $ 581,766   2,375,074   $    0.25
                                               =========   =========   =========


                                        7
<PAGE>

                                                       Six Months Ended
                                                        June 30, 2008
                                               ---------------------------------
                                                   Net                 Per Share
                                                 Income      Shares      Amount
                                               ----------  ----------  ---------
Basic Net Income Per Share
     Income available to common shareholders   $1,114,971   2,368,223  $    0.47
                                                                       =========
Effect of Dilutive Securities
     Options Outstanding                               --         804
Diluted Net Income Per Share
     Income available to common shareholders
                                               ----------  ----------
     plus assumed conversions                  $1,114,971   2,369,027  $    0.47
                                               ==========  ==========  =========

                                                       Six Months Ended
                                                        June 30, 2007
                                               ---------------------------------
                                                   Net                 Per Share
                                                 Income      Shares      Amount
                                               ----------  ----------  ---------
Basic Net Income Per Share
     Income available to common shareholders   $  984,660   2,369,786  $    0.42
                                                                       =========
Effect of Dilutive Securities
     Options Outstanding                               --       4,692
Diluted Net Income Per Share
     Income available to common shareholders
                                               ----------  ----------
     plus assumed conversions                  $  984,660   2,374,478  $    0.42
                                               ==========  ==========  =========

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

<TABLE>
<CAPTION>
                                                                                       Six Months Ended
                                                                                        June 30, 2008
                                                                           -----------------------------------------
                                                                            Before-Tax        Tax        Net-of-Tax
                                                                              Amount         Effect         Amount
                                                                           -----------    -----------    -----------
<S>                                                                            <C>             <C>           <C>
Unrealized holding losses arising during the period                        $(4,311,178)   $ 1,465,800    $(2,845,378)
Less: reclassification adjustment for amounts recognized in net income         (32,841)        11,166        (21,675)
                                                                           -----------    -----------    -----------

Unrealized holding losses on available for sale securities, net of taxes    (4,344,019)     1,476,966     (2,867,053)
Net pension loss, net of taxes                                                (479,352)       162,980       (316,372)
                                                                           -----------    -----------    -----------
Total other comprehensive loss, net of taxes                               $(4,823,371)   $ 1,639,946    $(3,183,425)
                                                                           ===========    ===========    ===========
<CAPTION>
                                                                                       Six Months Ended
                                                                                        June 30, 2007
                                                                           -----------------------------------------
                                                                            Before-Tax        Tax        Net-of-Tax
                                                                              Amount         Effect         Amount
                                                                           -----------    -----------    -----------
<S>                                                                        <C>            <C>            <C>
Unrealized holding losses arising during the period                        $(1,222,204)   $   415,549    $  (806,655)
Add: reclassification adjustment for amounts recognized in net income           14,350         (4,879)         9,471
                                                                           -----------    -----------    -----------

Unrealized holding losses on available for sale securities, net of taxes   $(1,207,854)   $   410,670    $  (797,184)
                                                                           ===========    ===========    ===========
</TABLE>

5.   The  Company's  subsidiary,  The First  National  Bank of  Litchfield  (the
     "Bank") has a  noncontributory  defined  benefit  pension plan (the "Plan")
     that covers  substantially  all  employees  who have  completed one year of
     service  and have  attained  age 21.  The  benefits  are  based on years of
     service  and the  employee's  compensation  during  the last five  years of
     employment. The Bank's funding policy was to contribute amounts to the Plan
     sufficient  to meet  the  minimum  funding  requirements  set  forth in the
     Employee  Retirement  Income  Security  Act of 1974,  plus such  additional
     amounts as the Bank may determine to be appropriate  from time to time. The
     actuarial  information has been

                                       8
<PAGE>

     calculated  using the  projected  unit credit  method.  The increase in net
     actuarial  pension  loss for the six months  ended June 30,  2008 is due to
     changes in market value of the Plan's  investments since December 31, 2007.
     During the first quarter of 2005,  the Bank's pension plan was curtailed as
     the Bank's Board of Directors  approved the  cessation of benefit  accruals
     under the Plan effective April 30, 2005.

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

                                                2008        2007
                                              --------    --------
            Service cost                      $     --    $     --
            Interest cost                       46,306      46,042
            Expected return on plan assets     (50,363)    (50,062)
            Amortization of unrealized loss     14,812      16,952
                                              --------    --------
            Net periodic benefit cost         $ 10,755    $ 12,932
                                              ========    ========

     Components of net periodic benefit cost for the six months ended June 30:

                                                2008         2007
                                             ---------    ---------
           Service cost                      $      --    $      --
           Interest cost                        92,613       92,084
           Expected return on plan assets     (100,727)    (100,124)
           Amortization of unrealized loss      29,625       33,904
                                             ---------    ---------
           Net periodic benefit cost         $  21,511    $  25,864
                                             =========    =========


6.   The Bank is a member of the Federal Home Loan Bank of Boston (the "FHLBB").
     As a member of the  FHLBB,  the Bank has  access to a  preapproved  line of
     credit of up to 2% of its total assets and the capacity to borrow up to 30%
     of its total assets.  In accordance  with an agreement with the FHLBB,  the
     Bank is required to maintain qualified collateral,  as defined in the FHLBB
     Statement  of  Products  Policy,  free and  clear  of  liens,  pledges  and
     encumbrances  for  the  advances.  FHLBB  stock  and  certain  loans  which
     aggregate  approximately  100%  of the  outstanding  advance  are  used  as
     collateral.  Federal  Home Loan Bank  advances  as of June 30,  2008 are as
     follows:

      line of credit           $ 4,262,000 @    2.85%
      due       7/18/2008        4,500,000 @    3.27%
      due      10/02/2009        6,000,000 @    4.50%
      due      11/30/2009        5,000,000 @    3.95%
      due       6/24/2010        5,000,000 @    4.15%
      due      11/02/2010       10,000,000 @    4.45%
      due       5/29/2012        5,000,000 @    4.32%
      due       9/04/2012        5,000,000 @    4.38%
      due      11/02/2012        2,000,000 @    4.70%
      due       5/02/2014        7,000,000 @    4.59% , callable 5/3/2010
      due       8/20/2014        7,000,000 @    4.25% , callable 8/20/2009
      due       5/05/2016       10,000,000 @    4.53% , callable 8/5/2008
      due       3/23/2017       10,000,000 @    4.29% , callable 3/23/2009
      due       7/20/2017       10,000,000 @    4.29% , callable 7/22/2008
      due      11/20/2017        5,000,000 @    4.29% , callable 11/19/2012
                              ------------
                    Total     $ 95,762,000
                              ============

                                       9
<PAGE>

     As of June 30, 2008, the Bank had borrowings  under  repurchase  agreements
     with financial  institutions  totaling  $49,550,000.  This amount  includes
     borrowings:

       due         9/12/2008   $ 4,600,000 @   2.96%
       due         9/12/2008     4,700,000 @   2.96%
       due         9/12/2008     1,700,000 @   2.96%
       due         9/12/2008     1,500,000 @   2.96%
       due         7/28/2008     5,000,000 @   3.25%
       due         7/31/2008     5,000,000 @   3.27%
       due         2/25/2009     4,550,000 @   3.20%
       due         3/12/2013    12,500,000 @   3.19% , callable 3/12/2011
       due         5/23/2013    10,000,000 @   3.64% , callable 5/23/2011
                              ------------
                       Total  $ 49,550,000
                              ============


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

<TABLE>
<CAPTION>
                                                              For the three months ended June 30,
                                                       ------------------------------------------------
                                                                2008                      2007
                                                       ----------------------    ----------------------
<S>                                                    <C>               <C>     <C>               <C>
Provision for income taxes at statutory Federal rate   $ 233,052         34 %    $ 229,833         34 %
Increase (decrease) resulting from:
     Tax exempt income                                  (180,877)         (27)    (145,860)         (21)
     Nondeductible interest expense                       11,551            2       14,982            2
     Other                                                 5,270            1       (4,743)          (1)
                                                       ---------    ---------    ---------    ---------
Provision for income taxes                             $  68,996         10 %    $  94,212         14 %
                                                       =========    =========    =========    =========
<CAPTION>
                                                                For the six months ended June 30,
                                                       ------------------------------------------------
                                                                2008                      2007
                                                       ----------------------    ----------------------
<S>                                                    <C>               <C>     <C>               <C>
Provision for income taxes at statutory Federal rate   $ 423,236         34 %    $ 370,802         34 %
Increase (decrease) resulting from:
     Tax exempt income                                  (329,721)         (26)    (295,209)         (27)
     Nondeductible interest expense                       25,784            2       29,814            3
     Other                                                10,542            1          527           --
                                                       ---------    ---------    ---------    ---------
Provision for income taxes                             $ 129,841         11 %    $ 105,934         10 %
                                                       =========    =========    =========    =========

</TABLE>

                                       10
<PAGE>
8.   The amortized cost, gross  unrealized  gains,  gross unrealized  losses and
     approximate fair values of securities which are classified as available for
     sale and held to  maturity at June 30,  2008 and  December  31, 2007 are as
     follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE                                              June 30, 2008
                                          -----------------------------------------------------------
                                                            Gross           Gross
                                           Amortized      Unrealized      Unrealized         Fair
                                              Cost          Gains           Losses           Value
                                          ------------   ------------    ------------    ------------
<S>                                       <C>            <C>             <C>             <C>
Debt Securities:
      U.S. Treasury securities            $  4,002,137   $     58,167    $     (4,679)   $  4,055,625
      U.S. Government Agency securities     23,000,000             --        (396,959)     22,603,041
      State and Municipal Obligations       26,883,578        142,223        (472,516)     26,553,285
      Corporate and Other Bonds              4,895,747             --      (2,397,607)      2,498,140
                                          ------------   ------------    ------------    ------------
                                            58,781,462        200,390      (3,271,761)     55,710,091
                                          ------------   ------------    ------------    ------------
Mortgage-Backed Securities:
      GNMA                                     586,897             --         (12,794)        574,103
      FNMA                                  68,218,694         86,750      (1,759,124)     66,546,320
      FHLMC                                 15,933,153         27,236        (440,727)     15,519,662
                                          ------------   ------------    ------------    ------------
                                            84,738,744        113,986      (2,212,645)     82,640,085
                                          ------------   ------------    ------------    ------------

Money Market mutual fund                     6,150,796             --              --       6,150,796
Marketable Equity Securities                 8,030,000             --        (339,890)      7,690,110
                                          ------------   ------------    ------------    ------------

Total available for sale securities       $157,701,002   $    314,376    $ (5,824,296)   $152,191,082
                                          ============   ============    ============    ============
<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
                                          ============   ============    ============    ============
<CAPTION>
HELD TO MATURITY                                                 June 30, 2008
                                          -----------------------------------------------------------
                                                            Gross           Gross
                                           Amortized      Unrealized      Unrealized         Fair
                                              Cost          Gains           Losses           Value
                                          ------------   ------------    ------------    ------------
<S>                                       <C>            <C>             <C>             <C>
Mortgage-Backed Securities:
      GNMA                                $     32,176   $         --    $       (330)   $     31,846
                                          ============   ============    ============    ============
<CAPTION>
                                                              December 31, 2007
                                          -----------------------------------------------------------
                                                            Gross           Gross
                                           Amortized      Unrealized      Unrealized         Fair
                                              Cost          Gains           Losses           Value
                                          ------------   ------------    ------------    ------------
<S>                                       <C>            <C>             <C>             <C>
Mortgage-Backed Securities:
      GNMA                                $     34,185   $         --    $       (473)   $     33,712
                                          ============   ============    ============    ============
</TABLE>
                                       11
<PAGE>

     At June 30, 2008, gross unrealized holding losses on available for sale and
     held to maturity  securities  totaled  $5,824,626.  Of the securities  with
     unrealized losses,  there were thirty-eight  securities that have been in a
     continuous  unrealized loss position for a period of twelve months or more.
     The unrealized  losses on these securities  totaled  $1,413,182 at June 30,
     2008.  Management does not believe that the unrealized losses on securities
     other  than  Corporate  and other  bonds are other than  temporary  as they
     relate  primarily  to debt and  mortgage-backed  securities  issued by U.S.
     Government and U.S. Government  sponsored agencies,  and are due to changes
     in the interest rate  environment.  Unrealized  holding losses in Corporate
     and other bonds are due to both  changes in interest  rates as well as lack
     of liquidity currently in the financial markets.  Management believes these
     unrealized  losses to be  temporary  until such time as those  markets have
     stabilized.  The  Company has both the intent and the ability to hold these
     securities  until  maturity  or until the fair  value  fully  recovers.  In
     addition,  Management  considers  the  issuers  of  the  securities  to  be
     financially  sound  and that  the  Company  will  receive  all  contractual
     principal and interest  related to these  investments.  As a result,  it is
     anticipated 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.

9.   A summary  of the  Bank's  loan and lease  portfolio  at June 30,  2008 and
     December 31, 2007 is as follows:
<TABLE>
<CAPTION>
                                                                  2008             2007
                                                             -------------    -------------
<S>                                                          <C>              <C>
Real estate-residential mortgage                             $ 189,527,722    $ 189,556,668
Real estate-commercial mortgage                                 56,635,839       55,752,240
Real estate-construction                                        31,201,759       34,808,984
Commercial Loans                                                39,980,838       33,641,679
Commercial Leases (net of unearned discount of $2,112,616)      15,652,993        8,634,199
Installment                                                      5,698,322        6,519,812
Other                                                              149,542           99,357
                                                             -------------    -------------
                                   TOTAL LOANS AND LEASES      338,847,015      329,012,939
Net deferred loan origination costs                                509,430          445,671
Premiums on purchased loans                                        119,036          168,383
Allowance for loan and lease losses                             (2,233,578)      (2,151,622)
                                                             -------------    -------------
                                     NET LOANS AND LEASES    $ 337,241,903    $ 327,475,371
                                                             =============    =============
</TABLE>

10.  A summary of the Bank's  deposits at June 30, 2008 and December 31, 2007 is
     as follows:
<TABLE>
<CAPTION>
                                                                2008           2007
                                                           ------------   ------------
Noninterest bearing:
<S>                                                        <C>            <C>
      Demand                                               $ 71,480,790   $ 70,564,267
                                                           ------------   ------------
Interest bearing:
      Savings                                                53,987,512     56,344,878
      Money market                                           80,594,465     78,738,706
      Time certificates of deposit in
        denominations of $100,000 or more                    55,487,971     52,345,036
      Other time certificates of deposit                     83,206,797     77,624,777
                                                           ------------   ------------
      Total Interest bearing deposits                       273,276,745    265,053,397
                                                           ------------   ------------
                                          TOTAL DEPOSITS   $344,757,535   $335,617,664
                                                           ============   ============
</TABLE>

                                       12
<PAGE>

     Included  in  deposits  as of June  30,  2008  and  December  31,  2007 are
     approximately  $14,649,000  and  $6,538,000,   respectively,   of  brokered
     deposits which have varying maturities through December 2008.

11.  During 2007 the Company  approved a restricted stock plan (the "2007 Plan")
     for senior management.  As of December 31, 2007, no restricted stock awards
     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  ratably  over 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.
     Compensation  expense  related to these awards for the three and six months
     ended June 30, 2008 was $1,530 and $3,824 respectively.

     A summary of restricted shares under the 2007 Plan as of June 30, 2008, and
     changes  during  the six  months  then  ended,  (shares  in  thousands)  is
     presented below:

                                                      Weighted Average
                                                         Grant Date
                                              Shares     Fair Value
                                            ----------   ----------
             Nonvested at January 1, 2008           --   $       --

                            Granted              3,500        13.11
                            Vested                  --           --
                            Forfeited               --           --
                                            ----------   ----------

             Nonvested at June 30, 2008          3,500   $    13.11
                                            ==========   ==========


                                       13
<PAGE>

12.  The Company has two operating  segments for purposes of reporting  business
     line results:  Community Banking and Leasing. The Community Banking segment
     is defined as all the operating results of the Bank. The Leasing segment is
     defined as the results of First  Litchfield  Leasing  Corporation.  Because
     First  Litchfield  Leasing  Corporation  is a  relatively  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 the Company as of
     and for the three  months  and six  months  ended  June 30,  2008 and 2007,
     respectively.  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>
                                                                  Three Months Ended
                                                                     June 30, 2008
                                      ----------------------------------------------------------------------------
                                         Community                              Elimination         Consolidated
                                          Banking             Leasing             Entries              Total
                                      ----------------    ----------------    ----------------    ----------------
<S>                                   <C>                 <C>                 <C>                 <C>

Net interest income                   $      3,551,222    $        161,028    $             --    $      3,712,250
Provision for credit losses                    117,330              19,670                  --             137,000
                                      ----------------    ----------------    ----------------    ----------------

Net interest income after provision          3,433,892             141,358                  --           3,575,250
Noninterest income                             933,913                  --                  --             933,913
Noninterest expense                          3,740,585              83,134                  --           3,823,719
                                      ----------------    ----------------    ----------------    ----------------

Income before income taxes                     627,220              58,224                  --             685,444
Income tax provision                            51,124              17,872                  --              68,996
                                      ----------------    ----------------    ----------------    ----------------

Net income                            $        576,096    $         40,352    $             --    $        616,448
                                      ================    ================    ================    ================

Total assets as of June 30, 2008      $    527,445,033    $     17,386,586    $       (201,927)   $    544,629,692
                                      ================    ================    ================    ================
<CAPTION>
                                                                  Three Months Ended
                                                                     June 30, 2007
                                      ----------------------------------------------------------------------------
                                         Community                              Elimination         Consolidated
                                          Banking             Leasing             Entries              Total
                                      ----------------    ----------------    ----------------    ----------------
<S>                                   <C>                 <C>                 <C>                 <C>
Net interest income                   $      3,258,305    $         42,973    $             --    $      3,301,278
Provision for credit losses                    (22,183)             22,183                  --                  --
                                      ----------------    ----------------    ----------------    ----------------

Net interest income after provision          3,280,488              20,790                  --           3,301,278
Noninterest income                             826,799                  --                  --             826,799
Noninterest expense                          3,365,541              86,558                  --           3,452,099
                                      ----------------    ----------------    ----------------    ----------------

Income before income taxes                     741,746             (65,768)                 --             675,978
Income tax provision                           117,002             (22,790)                 --              94,212
                                      ----------------    ----------------    ----------------    ----------------

Net income                            $        624,744    $        (42,978)   $             --    $        581,766
                                      ================    ================    ================    ================

Total assets as of June 30, 2007      $    483,363,604    $      7,526,542    $       (971,364)   $    489,918,782
                                      ================    ================    ================    ================
</TABLE>

                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                                  Six Months Ended
                                                                   June 30, 2008
                                      ---------------------------------------------------------------------------

                                          Community                            Elimination         Consolidated
                                           Banking           Leasing             Entries              Total
                                      ----------------   ----------------    ----------------    ----------------
<S>                                  <C>                <C>                 <C>                 <C>

Net interest income                   $      6,995,497   $        294,142    $             --    $      7,289,639
Provision for credit losses                    160,317             51,683                  --             212,000
                                      ----------------   ----------------    ----------------    ----------------

Net interest income after provision          6,835,180            242,459                  --           7,077,639
Noninterest income                           1,789,935                 --                  --           1,789,935
Noninterest expense                          7,446,968            175,794                  --           7,622,762
                                      ----------------   ----------------    ----------------    ----------------

Income before income taxes                   1,178,147             66,665                  --           1,244,812
Income tax provision                           109,764             20,077                  --             129,841
                                      ----------------   ----------------    ----------------    ----------------

Net income                            $      1,068,383   $         46,588    $             --    $      1,114,971
                                      ================   ================    ================    ================

Total assets as of June 30, 2008      $    527,445,033   $     17,386,586    $       (201,927)   $    544,629,692
                                      ================   ================    ================    ================
<CAPTION>
                                                                  Six Months Ended
                                                                   June 30, 2007
                                      ---------------------------------------------------------------------------

                                          Community                            Elimination         Consolidated
                                           Banking           Leasing             Entries              Total
                                      ----------------   ----------------    ----------------    ----------------
<S>                                  <C>                <C>                 <C>                 <C>

Net interest income                   $      6,404,739   $         78,489    $             --    $      6,483,228
Provision for credit losses                     54,471             50,529                  --             105,000
                                      ----------------   ----------------    ----------------    ----------------

Net interest income after provision          6,350,268             27,960                  --           6,378,228
Noninterest income                           1,621,371                 --                  --           1,621,371
Noninterest expense                          6,741,461            167,544                  --           6,909,005
                                      ----------------   ----------------    ----------------    ----------------

Income before income taxes                   1,230,178           (139,584)                 --           1,090,594
Income tax provision                           153,821            (47,887)                 --             105,934
                                      ----------------   ----------------    ----------------    ----------------

Net income                            $      1,076,357   $        (91,697)   $             --    $        984,660
                                      ================   ================    ================    ================

Total assets as of June 30, 2007      $    483,363,604   $      7,526,542    $       (971,364)   $    489,918,782
                                      ================   ================    ================    ================
</TABLE>

13.  Effective  January 1, 2008,  the Company  adopted  Statement  of  Financial
     Accounting  Standards  ("SFAS") No. 157, "Fair Value  Measurements"  ("SFAS
     157") which  provides a framework for measuring and  disclosing  fair value
     under  generally  accepted   accounting   principles.   SFAS  157  requires
     disclosures  about the fair value of assets and  liabilities  recognized in
     the balance sheet in periods subsequent to initial recognition, whether the
     measurements are made on a recurring basis (for example, available-for-sale
     investment  securities) or on a nonrecurring  basis (for example,  impaired
     loans).

     SFAS 157 defines  fair value as the  exchange  price that would be received
     for an  asset or paid to  transfer  a  liability  (an  exit  price)  in the
     principal  or most  advantageous  market for the asset or  liability  in an
     orderly  transaction  between market  participants on the measurement date.
     SFAS 157 also  establishes a fair value  hierarchy which requires an entity
     to  maximize  the  use  of  observable  inputs  and  minimize  the  use  of
     unobservable inputs when measuring fair value. The standard describes three
     levels of inputs that may be used to measure fair value:

                                       15
<PAGE>

Level 1     Quoted prices in active markets for identical assets or liabilities.
            Level 1 assets include debt and equity securities that are traded in
            an active exchange market, as well as U.S. Treasury securities, that
            are  highly  liquid  and are  actively  traded  in  over-the-counter
            markets.

Level 2     Observable  inputs  other than Level 1 prices such as quoted  prices
            for similar assets or liabilities; quoted prices in markets that are
            not  active;   or  other  inputs  that  are  observable  or  can  be
            corroborated by observable  market data for  substantially  the full
            term of the assets or  liabilities.  Level 2 assets and  liabilities
            include  debt  securities  with  quoted  prices that are traded less
            frequently   than   exchange-traded   instruments   whose  value  is
            determined  using a pricing model with inputs that are observable in
            the market or can be derived  principally  from or  corroborated  by
            observable market data. This category  generally includes other U.S.
            Government and agency mortgage-backed and debt securities, state and
            municipal  obligations,   corporate  and  other  bonds,  and  equity
            securities quoted in markets that are not active.  Also included are
            certain collateral-dependant impaired loans.

Level 3     Unobservable  inputs  that are  supported  by  little  or no  market
            activity and that are significant to the fair value of the assets or
            liabilities.  Level  3  assets  and  liabilities  include  financial
            instruments   whose  value  is  determined   using  pricing  models,
            discounted cash flow methodologies,  or similar techniques,  as well
            as instruments  for which the  determination  of fair value requires
            significant  management  judgment or estimation.  For example,  this
            category  could include  certain  private  equity  investments,  and
            certain collateral-dependant impaired loans.

<TABLE>
<CAPTION>
                                     Fair Value Measurements at June 30, 2008, Using

                                                           Quoted Prices in                            Significant
                                            June          Active Markets for    Significant Other     Unobservable
                                          30, 2008         Identical Assets     Observable Inputs        Inputs
                                            Total             (Level 1)             (Level 2)           (Level 3)
                                     ------------------   ------------------   ------------------   ------------------
<S>                                  <C>                  <C>                  <C>                  <C>
Assets:
     Available for sale securities   $      152,191,082   $        4,055,625   $      148,135,457   $               --
                                     ==================   ==================   ==================   ==================
</TABLE>

     U.S. Treasury  securities,  with a carrying value of $4,055,625 at June 30,
     2008,  are the only assets  whose fair  values are  measured on a recurring
     basis using Level 1 inputs (active market quotes).

     The fair values of U. S. Government and agency mortgaged backed  securities
     and debt  securities,  State and  Municipal  obligations,  other  corporate
     bonds,  and certain equity  securities  are measured on a recurring  basis,
     using Level 2 inputs of observable market data on similar  securities.  The
     carrying  value of these  securities  totaled  $148,135,457  as of June 30,
     2008.

     For  the  second   quarter  of  2008  there  has  been  no  change  in  the
     categorization of securities measured within levels 1 through 3.

     Loans which are deemed to be impaired are primarily  valued at the lower of
     the current  value,  present value of future cash flows or, the fair values
     of the  underlying  collateral of the impaired  loan.  Such fair values are
     obtained using  independent  appraisals,  which the Company considers to be
     level 2 inputs.  If such  appraisal  amounts are  subsequently  adjusted by
     management,  such fair values may then be  considered to be Level 3 inputs.
     Collateral dependant impaired loans were insignificant at June 30, 2008.

     The  Company has no  liabilities  carried at fair value or measured at fair
     value on a nonrecurring basis.

     Also in February 2008,  the FASB issued FSP FAS 157-1,  Application of FASB
     Statement  No.  157  to  FASB   Statement  No.  13  and  Other   Accounting
     Pronouncements  That Address Fair Value

                                       16
<PAGE>

     Measurements  for Purposes of Lease  Classification  or  Measurement  under
     Statement  13,"  which  clarified  that  Statement  157 does  not  apply to
     Statement  13,  "Accounting  for  Leases,"  and other  pronouncements  that
     address fair value  measurements  for purposes of lease  classification  or
     measurement.  The scope  exception  does not apply to assets  acquired  and
     liabilities  assumed  in a business  combination  that are  required  to be
     measured  at fair  value  under  Statement  141,  "Business  Combinations,"
     regardless of whether those assets and liabilities are related to leases.

     On February 12, 2008, the FASB issued Staff Position 157-2 which defers the
     effective  date  of  Statement  157 for  certain  nonfinancial  assets  and
     liabilities  to fiscal years  beginning  after November 15, 2008. All other
     provisions of Statement 157 are effective for fiscal years  beginning after
     November 15, 2007 and interim periods within those fiscal years.

     The Company  adopted the  provisions of Statement 157 for the quarter ended
     March 31, 2008 except for those nonfinancial assets and liabilities subject
     to deferral as a result of Staff Position 157-2. There was no impact on the
     consolidated  financial  statements  of  the  Company  as a  result  of the
     adoption of Statement 157.

14.  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  adoption  of EITF 06-4 or EITF 06-10  resulted in a decrease to
     retained earnings of $12,272.

15.  Recent Accounting Pronouncements

     In February  2007,  the FASB issued SFAS No, 159, The Fair Value Option for
     Financial Assets and Financial Liabilities - Including an Amendment of FASB
     Statement  No, 115  (Statement  159)  which  permits an entity to choose to
     measure  certain  financial  instruments  and  certain  other items at fair
     value, on an instrument-by-instrument  basis. Once an entity has elected to
     record  eligible items at fair value,  the decision is irrevocable  and the
     entity  should  report  unrealized  gains and losses on items for which the
     fair value option has been elected in earnings.  Statement 159 is effective
     for fiscal years  beginning after November 15, 2007. At the effective date,
     an entity may elect the fair value option for eligible  items that exist at
     that date with the effect of the first  measurement  to fair value reported
     as a  cumulative-effect  adjustment  to the  opening  balance  of  retained
     earnings.  There was no impact on the consolidated  financial statements of
     the Company as a result of the adoption of  Statement  159 during the first
     quarter of 2008 since the Company has not elected the fair value option for
     any eligible items, as defined in Statement 159.

     In September 2006, the FASB issued 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) (SFAS 158). SFAS 158 requires an
     employer to recognize the over-funded or  under-funded

                                       17
<PAGE>

     status of a defined benefit  postretirement plan as an asset or a liability
     in its balance sheet and to recognize  changes in that funded status in the
     year in which the changes occur  through  accumulated  other  comprehensive
     income.  The Company  adopted the  recognition  provisions of this standard
     effective  December 31, 2006. SFAS 158 also requires an employer to measure
     the funded status of a plan as of the employer's  year-end  reporting date.
     The Company's  non-contributory pension plan was frozen in May of 2005. The
     measurement  date  provisions of SFAS 158 are effective for the Company for
     the year ending December 31, 2008.  Management does not expect the adoption
     of the measurement date provisions of SFAS 158 to have a material impact on
     the Company's financial position or results of operations.

     In December 2007,  the Financial  Accounting  Standards  Board (the "FASB")
     issued SFAS No.  141(R),  "Business  Combinations,"  ("SFAS  141(R)") which
     replaces SFAS 141. SFAS 141(R) establishes  principles and requirements for
     how an acquirer in a business  combination  recognizes  and measures in its
     financial  statements the  identifiable  assets  acquired,  the liabilities
     assumed,  and any controlling  interest;  recognizes and measures  goodwill
     acquired in the business combination or a gain from a bargain purchase; and
     determines  what  information  to disclose to enable users of the financial
     statements  to evaluate  the nature and  financial  effects of the business
     combination. FAS 141(R) is effective for acquisitions by the Company taking
     place  on  or  after  January  1,  2009.   Early  adoption  is  prohibited.
     Accordingly, a calendar year-end company is required to record and disclose
     business combinations  following existing accounting guidance until January
     1, 2009.  The  Company  will assess the impact of SFAS 141(R) if and when a
     future acquisition occurs.

     In December 2007, the FASB issued SFAS No. 160,  "Noncontrolling  Interests
     in Consolidated  Financial  Statements - an amendment of ARB No. 51" ("SFAS
     160"). SFAS 160 establishes new accounting and reporting  standards for the
     noncontrolling  interest in a subsidiary and for the  deconsolidation  of a
     subsidiary.  Before this statement,  limited guidance existed for reporting
     noncontrolling  interests (minority  interest).  As a result,  diversity in
     practice exists. In some cases minority interest is reported as a liability
     and in others it is reported in the mezzanine  section between  liabilities
     and  equity.   Specifically,   SFAS  160  requires  the  recognition  of  a
     noncontrolling  interest (minority  interest) as equity in the consolidated
     financials  statements and separate from the parent's equity. The amount of
     net income attributable to the noncontrolling  interest will be included in
     consolidated  net  income  on the face of the  income  statement.  SFAS 160
     clarifies  that  changes in a parent's  ownership  interest in a subsidiary
     that do not result in deconsolidation are equity transactions if the parent
     retains its controlling  financial  interest.  In addition,  this statement
     requires  that a  parent  recognize  gain  or  loss  in net  income  when a
     subsidiary is deconsolidated.  Such gain or loss will be measured using the
     fair value of the noncontrolling  equity investment on the  deconsolidation
     date. SFAS 160 also includes expanded disclosure requirements regarding the
     interests  of the  parent  and its  noncontrolling  interests.  SFAS 160 is
     effective  for  the  Company  on  January  1,  2009.  Earlier  adoption  is
     prohibited.  The Company is currently  evaluating  the impact,  if any, the
     adoption  of SFAS 160  will  have on its  financial  position,  results  of
     operations and cash flows.

                                       18
<PAGE>


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

GENERAL

First Litchfield Financial  Corporation (the "Company"),  a Delaware corporation
formed in 1988, is the one-bank  holding  company for The First National Bank of
Litchfield  (the "Bank"),  a national bank supervised and examined by the Office
of the  Comptroller  of the  Currency  (the  "OCC").  The Bank is the  Company's
primary subsidiary and only source of income.  The Bank has three  subsidiaries,
The Lincoln Corporation and Litchfield Mortgage Service  Corporation,  which are
Connecticut  corporations,  and First  Litchfield  Leasing  Corporation  ("First
Litchfield  Leasing"),  which is a  Delaware  corporation.  The  purpose  of The
Lincoln Corporation is to hold property such as real estate,  personal property,
securities,  or other  assets,  acquired  by the  Bank  through  foreclosure  or
otherwise  to  compromise  a  doubtful  claim  or  collect  a  debt   previously
contracted. The purpose of Litchfield Mortgage Service Corporation is to operate
as a passive  investment company in accordance with Connecticut law. The purpose
of First Litchfield  Leasing  Corporation is to provide equipment  financing and
leasing products to complement the Bank's array of commercial products.

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

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.

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

FINANCIAL CONDITION

Total assets as of June 30, 2008 were $544,629,692,  an increase of $36,976,063,
or 7.28% from year-end 2007 total assets of $507,653,629.

Net loans and leases  increased  $9,766,532  over the year-end 2007 amount.  Net
loans and  leases as of June 30,  2008 were  $337,241,903,  as  compared  to the
year-end 2007 level of $327,475,371.

                                       19
<PAGE>

Consistent  with  Management's  strategy  to migrate to a more  profitable  loan
composition,  commercial  loan and lease  growth  was  strong  during the second
quarter of 2008.  Leases,  net of unearned income,  were $15,652,993 at June 30,
2008,  which was an increase of  $7,018,794  from the  year-end  2007 balance of
$8,634,199.  Commercial  loans  totaled  $39,980,838,  which is an  increase  of
$6,339,159,  from year-end  2007.  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. The residential mortgage loan portfolio totaled $189,527,722, which was
a decrease of $28,946 from  year-end  2007.  This  decrease is the result of the
weakened economic and real estate market conditions.

As of June 30, 2008, the securities portfolio totaled  $152,223,258,  which is a
17.99% increase from the year-end 2007 balance. This increase is the result of a
leverage strategy executed during the first quarter of 2008, whereby $25,000,000
of fixed rate mortgage backed securities were purchased and funded by borrowings
from repurchase  agreements.  This transaction was effected to take advantage of
the  steepening   yield  curve  with  the  result  of  improving  the  Company's
profitability  with minimal  credit or interest  rate risk. As of June 30, 2008,
the unrealized loss on available for sale securities totaled  $5,509,920,  which
is an  increase  of  $4,344,017,  from  the  year  end  net  unrealized  loss of
$1,165,903.  The increase in the unrealized loss is reflective of the volatility
and  lack  of  liquidity  in  the  markets  and  changes  in the  interest  rate
environment.   Management  believes  the  issuers  of  these  securities  to  be
financially sound and the unrealized losses are temporary until such time as the
corporate and bond markets have stabilized

Cash  and  cash  equivalents  totaled  $24,081,231,  which  is  an  increase  of
$2,584,037,  or 12.02%  from  year-end  2007.  During  2008,  funds  temporarily
invested in  interest  bearing  correspondent  bank  balances  at year-end  were
reinvested in overnight  institutional funds to take advantage of better yields.
As of June 30, 2008 and December 31, 2007,  there were no investments in Federal
Funds Sold.

Total  liabilities were  $519,217,936 as of June 30, 2008, which was an increase
of $39,926,919 from total liabilities of $479,291,017 as of year-end 2007. Total
deposits  increased by $9,139,871,  or 2.72% from their year-end  levels.  Money
market deposits increased by $1,855,759, or 2.36% as a result of higher balances
held for the Bank's  trust  customers.  Time  certificates  of  deposit  totaled
$138,694,768 as of June 30, 2008,  which was an increase of 6.71%, or $8,724,955
from year-end  2007. The growth in time deposits is reflective of the customer's
desire  for   optimization  of  investment   yield  in  the  low  interest  rate
environment.

As of June 30, 2008,  repurchase  agreements with customers totaled $12,617,814,
which was a decrease of $1,524,959 from the year-end 2007 balance. Because these
accounts  represent  overnight  investments  by commercial  and  municipal  cash
management  customers,  fluctuations  in the  balances  of  these  accounts  are
reflective of the temporary nature of these funds.  During the second quarter of
2008, advances under Federal Home Loan Bank borrowings  increased by $4,262,000,
while repurchase agreements with financial institutions increased by $28,000,000
as a result of the first quarter leverage strategy discussed above.

RESULTS OF OPERATIONS- THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2007

Summary

Net income for the  Company  for the second  quarter of 2008  totaled  $616,448.
These  earnings  are $34,682 or 6.0% above  earnings  for the second  quarter of
2007, which totaled $581,766.  Basic and diluted income per share for the second
quarter of 2008 were both $.26,  compared to basic and diluted

                                       20
<PAGE>

income per share of $.25 for the second  quarter of 2007.  The  increase  in net
income is due primarily to the increase in interest income and fees on loans and
leases as well as increased  noninterest income. For the second quarter of 2008,
the return on average equity for the Company totaled 9.00% compared to 8.88% for
the second quarter of 2007.

Net Interest Income

Net interest  income is the single  largest  source of the Company's net income.
Net interest income is defined as the difference  between  interest and dividend
income from earning  assets,  primarily  loans and  investment  securities,  and
interest expense on deposits and borrowed money.  Interest income is the product
of the average balances  outstanding on loans,  securities and  interest-bearing
deposit  accounts  multiplied by their  effective  yields.  Interest  expense is
similarly  calculated as the result of the average balances of  interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
Other  components  of  operating  income  are the  provision  for  loan  losses,
noninterest income such as service charges and trust fees,  noninterest expenses
and income taxes.

Net  interest  income  on a  fully  tax-equivalent  basis  is  comprised  of the
following for the three months ended June 30, 2008 and 2007.

                                               2008           2007
                                           -----------    -----------
          Interest and dividend income     $ 7,178,065    $ 6,967,859
          Tax-equivalent adjustments (1)       205,124        152,495
          Interest expense                  (3,465,815)    (3,666,581)
                                           -----------    -----------
          Net interest income              $ 3,917,374    $ 3,453,773
                                           ===========    ===========


(1)  Interest  income is presented on a  tax-equivalent  basis which  reflects a
     federal tax rate of 34% for all periods presented.

                                       21
<PAGE>

The following table presents on a tax-equivalent  basis,  the Company's  average
balance sheet amounts (computed on a daily basis), net interest income, interest
rates,  interest  spread and net interest margin for the three months ended June
30, 2008 and 2007. Average loans outstanding include nonaccruing loans.

<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

                                             Three months ended June 30, 2008              Three months ended June 30, 2007
                                       -------------------------------------------    -------------------------------------------
                                                         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 and leases                       $338,109,000    $  5,313,355           6.29%   $307,243,000    $  5,222,038           6.80%
Investment securities                   162,975,000       2,042,869           5.01%    146,742,000       1,869,502           5.10%
Other interest earning assets             5,098,000          26,965           2.12%      2,744,000          28,814           4.20%
                                       ------------    ------------                   ------------    ------------

Total interest earning assets           506,182,000       7,383,189           5.83%    456,729,000       7,120,354           6.24%
                                       ------------    ------------   ------------    ------------    ------------   ------------

Allowance for loan and
  lease losses                           (2,157,000)                                    (2,137,000)
Cash and due from banks                  11,508,000                                     10,820,000
Premises and equipment                    7,592,000                                      7,816,000
Net unrealized losses on
  securities                             (2,791,000)                                    (2,783,000)
Other assets                             16,734,000                                     16,914,000
                                       ------------                                   ------------

Total Average Assets                   $537,068,000                                   $487,359,000
                                       ============                                   ============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                       $ 54,314,000         116,210           0.86%   $ 50,493,000         150,791           1.19%
Money Market deposits                    80,431,000         365,400           1.82%     74,980,000         551,250           2.94%
Time deposits                           139,872,000       1,393,292           3.98%    136,211,000       1,580,212           4.64%
Borrowed funds                          162,373,000       1,590,913           3.92%    124,306,000       1,384,328           4.45%
                                       ------------    ------------                   ------------    ------------

Total interest bearing liabilities      436,990,000       3,465,815           3.17%    385,990,000       3,666,581           3.80%
                                                       ------------    ------------                   ------------    ------------

Demand deposits                          67,354,000                                     70,063,000
Other liabilities                         5,312,000                                      5,109,000
Shareholders' Equity                     27,412,000                                     26,197,000
                                       ------------                                   ------------

Total liabilities and equity           $537,068,000                                   $487,359,000
                                       ============                                   ============

Net interest income                                    $  3,917,374                                   $  3,453,773
                                                       ============                                   ============
Net interest spread                                                           2.66%                                          2.44%
                                                                      ============                                   ============
Net interest margin                                                           3.10%                                          3.02%
                                                                      ============                                   ============
</TABLE>

                                       22
<PAGE>

RATE/VOLUME ANALYSIS

The following table, which is presented on a tax-equivalent  basis, reflects the
changes  for the three  months  ended June 30,  2008 when  compared to the three
months  ended June 30,  2007 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.

                                           06/30/08 Compared to 06/30/07
                                            Increase (Decrease) Due to
                                            --------------------------

                                         Volume        Rate        Total
                                        ---------   ---------    ---------

Interest earned on:
Loans and leases                        $ 502,016   $(410,699)   $  91,317
Investment securities                     209,717     (36,350)     173,367
Other interest earning assets              32,490     (34,339)      (1,849)
                                        ---------   ---------    ---------
Total interest earning assets             744,223    (481,388)     262,835
                                        ---------   ---------    ---------

Interest paid on:                              --
Deposits                                  108,253    (515,604)    (407,351)
Borrowed money                            387,339    (180,754)     206,585
                                        ---------   ---------    ---------
Total interest bearing liabilities        495,592    (696,358)    (200,766)
                                        ---------   ---------    ---------

Increase in net interest income         $ 248,631   $ 214,970    $ 463,601
                                        =========   =========    =========


Tax-equivalent  net  interest  income  for the second  quarter  of 2008  totaled
$3,917,374,  an increase of $463,601,  or 13.4% from the second quarter of 2007.
Both the increase in the volume of earning assets as well as increased  interest
margin  contributed  to the  improvement in net interest  income.  The effect of
increased volume of earning assets over interest bearing  liabilities  increased
net interest income by $248,631. Also, the Company was able to decrease its cost
of deposit  interest  to a greater  degree than the  interest  earned on earning
assets which resulted in $214,970 in additional net interest income.

Average  earning  assets for the second  quarter of 2008  totaled  $506,182,000,
which was  $49,453,000  or 10.8%  greater  than average  earning  assets for the
second  quarter of 2007 which  totaled  $456,729,000.  This  increase in earning
assets,  both in loans and  investments,  net of  increased  volume of  interest
bearing  liabilities,  contributed  to an  additional  $248,631 in net  interest
income.  Average  loans and leases  increased  by $31 million,  or 10.0%,  while
average  investments  increased by $16 million or 11.1%. The increase in earning
assets came from  organic  growth in  commercial  leasing and lending as well as
increases in the securities portfolio  strategically  designed to take advantage
of the steepened yield curve.

The tax equivalent net interest margin improved 8 basis points from 3.02% in the
second  quarter  of 2007 to  3.10%  for the  second  quarter  of  2008.  The tax
equivalent Funding costs decreased by 63 basis points while the yield on earning
assets  decreased by 41 basis points.  The significant drop in interest rates by
the Federal Open Market Committee of the Federal Reserve (the "FOMC") during the
first quarter allowed management to similarly adjust its deposit rates. Although
yields on  earning  assets  are  subject to  similar  declines,  the  structural
repricing  intervals  for many  earning  assets  will not occur until later this
year.  Also,  many  interest  earning  assets are  priced  off of longer  market
indices,  which were not as dramatically impacted by the FOMC decreases.  Retail
deposits  is  the  primary  source  of  the  Company's   funding  and  therefore
competition  for these  deposits  remains the biggest threat to the net interest
margin.

                                       23
<PAGE>

Provision for Loan and Lease Losses

The provision  for loan and lease losses for the second  quarter of 2008 totaled
$137,000,  which is an increase of $137,000  from the  provision  for the second
quarter of 2007. The provision for loan and lease losses is determined quarterly
and assessed  along with the adequacy of the loan and lease loss  reserve.  (See
discussion of the Allowance for Loan and Lease Losses.)

During the second  quarter of 2008,  the Company  recorded  net  charge-offs  of
$98,914  compared to second quarter 2007 net charge-offs of $38,413.  The change
in the level of charge-offs from 2007 to 2008 is not considered by Management to
be indicative of any trend.  The increase in charge-offs  for the second quarter
of 2008 was related to one commercial  loan. The remaining  charge-off  activity
for the second  quarter of 2008 and the 2007 activity is primarily  attributable
to consumer  automobile  loans which the Bank purchased in 2006 as well as other
consumer loans.

Noninterest Income

Noninterest  income for the second quarter of 2008 totaled $933,913,  increasing
$107,114,  or 12.96%  from the second  quarter  2007 income of  $826,799.  Trust
income totaled $333,569,  which represented 36% of noninterest income, decreased
slightly from second quarter 2007 levels.  Income from banking  service  charges
and fees increased by $45,307,  or 13.51%, from the second quarter of 2007. This
increase is due  primarily to higher  levels of deposit  service  charges,  cash
management,  and master money interchange fees. Other noninterest income totaled
$198,704, which was an increase of $47,986, or 31.84% from the second quarter of
2007.  This  increase is mostly  related to revenue from loan fees as well as to
increases in the cash surrender value of bank owned life insurance.

During  the  second  quarter  of 2008,  sales of  available  for sale  municipal
securities were sold for the purpose of shortening the duration of the portfolio
as well as to ensure acceptable market bond ratings.  These sales resulted in an
aggregate gain of $20,899.

Noninterest Expense

Second quarter 2008 noninterest expense totaled  $3,823,719,  increasing 10.77%,
or $371,620  from the second  quarter 2007 expense of  $3,452,099.  Increases in
noninterest expenses are reflected in staffing,  occupancy,  advertising,  exam,
audit and consulting fees.  Increased  salary and benefits  expenses were due to
additional  compliance  personnel and an increased  emphasis on  commercial  and
small business  development.  Occupancy costs reflect  increases due to a larger
branch network and its related  maintenance costs.  Advertising  expense totaled
$157,355,  which was an increase of $51,453,  or 48.59% increase from the second
quarter of 2007.  This  increase is due  primarily to the Bank's image  campaign
which was  launched  during  the fourth  quarter of 2007 as well as product  and
publicity  promotions.  Costs for exam and audit fees increased due to costs for
regulatory reporting, compliance and internal audit.

Other noninterest  expenses totaled $524,283 which is an increase of $67,213, or
14.71% from the second quarter of 2007. The majority of the increase is a result
of  higher  2008  costs  for exam and audit  fees as they  relate to  regulatory
reporting compliance and internal audit initiatives.

Income Taxes

The second quarter 2008 provision for income taxes totaled  $68,996,  which is a
decrease of $25,216 or 26.77% from the second  quarter of 2007.  The decrease in
income tax expense in the second quarter of 2008 is due to a greater  percentage
of tax-exempt  income.  Pretax income totaled  $685,444 in the

                                       24
<PAGE>

second quarter of 2008 which was 1.4% higher than that for the second quarter of
2007.  Additionally,  the  Company's  effective  tax rate of 10% for the  second
quarter  of 2008 was lower  than the  effective  tax rate of 14% for the  second
quarter  of  2007.  The  decrease  in  the  effective  tax  rate  is  due  to  a
proportionately higher level of non-taxable income from both state and municipal
investments as well as that from bank owned life insurance.


RESULTS OF  OPERATIONS - SIX MONTHS  ENDED JUNE 30, 2008  COMPARED TO SIX MONTHS
ENDED JUNE 30, 2007

Summary

Net  income for the  Company  for the six months  ended  June 30,  2008  totaled
$1,114,971.  These  earnings are $130,311 or 13.23% above 2007  earnings,  which
totaled  $984,660.  Basic and diluted  income per share for the six months ended
June 30, 2008 were both $.47,  compared to basic and diluted income per share of
$.42 for the six months ended June 30,  2007.  The increase in net income is due
primarily to the increase in interest on mortgage-backed securities and interest
income and fees on loans and leases as well as increased noninterest income. For
the first six  months of 2008,  the return on  average  equity  for the  Company
totaled 7.93% compared to 7.36% for the first six months of 2007.

Net Interest Income

Net interest  income is the single  largest  source of the Company's net income.
Net interest income is defined as the difference  between  interest and dividend
income from earning  assets,  primarily  loans and  investment  securities,  and
interest expense on deposits and borrowed money.  Interest income is the product
of the average balances  outstanding on loans,  securities and  interest-bearing
deposit  accounts  multiplied by their  effective  yields.  Interest  expense is
similarly  calculated as the result of the average balances of  interest-bearing
deposits and borrowed funds multiplied by the average rates paid on those funds.
Other  components  of  operating  income  are the  provision  for  loan  losses,
noninterest income such as service charges and trust fees,  noninterest expenses
and income taxes.

Net  interest  income  on a  fully  tax-equivalent  basis  is  comprised  of the
following for the six months ended June 30,

                                      2008            2007
                                 ------------    ------------
Interest and dividend income     $ 14,434,501    $ 13,844,688
Tax-equivalent adjustments (1)        358,728         305,310
Interest expense                   (7,144,862)     (7,361,460)
                                 ------------    ------------
Net interest income              $  7,648,367    $  6,788,538
                                 ============    ============

(1)  Interest  income is presented on a  tax-equivalent  basis which  reflects a
federal tax rate of 34% for all periods presented.

                                       25
<PAGE>


The following table presents on a tax-equivalent  basis,  the Company's  average
balance sheet amounts (computed on a daily basis), net interest income, interest
rates,  interest  spread and net interest margin for the three months ended June
30, 2008 and 2007. Average loans outstanding include nonaccruing loans.

<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

                                               Six months ended June 30, 2008               Six months ended June 30, 2007
                                       -------------------------------------------    -------------------------------------------
                                                         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 and leases                       $336,323,000    $ 10,841,965           6.45%   $303,118,000    $ 10,166,621           6.71%
Investment securities                   154,097,000       3,877,507           5.03%    150,424,000       3,783,928           5.03%
Other interest earning assets             5,700,000          73,757           2.59%      7,641,000         199,449           5.22%
                                       ------------    ------------                   ------------    ------------

Total interest earning assets           496,120,000      14,793,229           5.96%    461,183,000      14,149,998           6.14%
                                       ------------    ------------   ------------    ------------    ------------   ------------

Allowance for loan and
  lease losses                           (2,165,000)                                    (2,134,000)
Cash and due from banks                  11,427,000                                     14,371,000
Premises and equipment                    7,659,000                                      7,549,000
Net unrealized losses on
  securities                             (1,732,000)                                    (2,833,000)
Other assets                             16,356,000                                     17,086,000
                                       ------------                                   ------------

Total Average Assets                   $527,665,000                                   $495,222,000
                                       ============                                   ============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                       $ 56,356,000         305,886           1.09%   $ 52,587,000         330,080           1.26%
Money Market deposits                    81,697,000         822,167           2.01%     74,073,000       1,049,833           2.83%
Time deposits                           137,022,000       2,845,968           4.15%    142,765,000       3,295,943           4.62%
Borrowed funds                          153,347,000       3,170,841           4.14%    125,736,000       2,685,604           4.27%
                                       ------------    ------------                   ------------    ------------

Total interest bearing liabilities      428,422,000       7,144,862           3.34%    395,161,000       7,361,460           3.73%
                                                       ------------   ------------                    ------------   ------------

Demand deposits                          66,034,000                                     68,709,000
Other liabilities                         5,073,000                                      4,586,000
Shareholders' Equity                     28,136,000                                     26,766,000
                                       ------------                                   ------------

Total liabilities and equity           $527,665,000                                   $495,222,000
                                       ============                                   ============

Net interest income                                    $  7,648,367                                   $  6,788,538
                                                       ============                                   ============
Net interest spread                                                           2.62%                                          2.41%
                                                                      ============                                   ============
Net interest margin                                                           3.08%                                          2.94%
                                                                      ============                                   ============

</TABLE>

                                       26
<PAGE>

RATE/VOLUME ANALYSIS

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the six months  ended June 30, 2008 when  compared to the six months
ended June 30, 2007 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.

                                          06/30/08 Compared to 06/30/07
                                            Increase (Decrease) Due to
                                            --------------------------

                                       Volume           Rate           Total
                                     -----------    -----------    -----------
Interest earned on:
Loans and leases                     $ 1,081,754    $  (406,410)   $   675,344
Investment securities                     92,422          1,157         93,579
Other interest earning assets            (42,107)       (83,585)      (125,692)
                                     -----------    -----------    -----------
Total interest earning assets          1,132,069       (488,838)       643,231
                                     -----------    -----------    -----------

Interest paid on:
Deposits                                  96,228       (798,063)      (701,835)
Borrowed money                           573,315        (88,078)       485,237
                                     -----------    -----------    -----------
Total interest bearing liabilities       669,543       (886,141)      (216,598)
                                     -----------    -----------    -----------

Increase in net interest income      $   462,526    $   397,303    $   859,829
                                     ===========    ===========    ===========

Tax-equivalent  net  interest  income for the first six  months of 2008  totaled
$7,648,367, an increase of $859,829, or 12.7% from the first six months of 2007.
Both the increase in the volume of earning assets as well as increased  interest
margin  contributed  to the  improvement in net interest  income.  The effect of
increased volume of earning assets over interest bearing  liabilities  increased
net interest income by $462,526. Also, the Company was able to decrease its cost
of deposit  interest  to a greater  degree than the  interest  earned on earning
assets which resulted in $397,303 in additional net interest income.

Average  earning  assets for the first six months of 2008 totaled  $496,120,000,
which was $34,937,000, or 7.6% greater than average earning assets for the first
six months of 2007, which totaled $461,183,000.  This increase in earning assets
was  mostly  in  the  loan  and  lease   portfolio   which  on  average  totaled
$336,323,000,  an increase of  $33,205,000  or 11%.  The increase in loan volume
contributed  $1,081,754 in additional  interest income. For the first six months
of 2008,  loans were 67.8% of earning assets compared to 65.7% for the same time
in 2007.  This higher  percentage of loans and leases to average  earning assets
contributed to a more profitable mix of earning assets.

The 2008 year to date net interest margin  increased by 14 basis points from the
same period in 2007.  Funding costs decreased by 39 basis points while the yield
on earning assets decreased by 18 basis points. The significant drop in interest
rates by the Federal Open Market  Committee of the Federal  Reserve (the "FOMC")
during the first  quarter  allowed  management  to similarly  adjust its deposit
rates.  Although yields on earning assets are subject to similar  declines,  the
structural  repricing  intervals  for many  earning  assets will not occur until
later this year.  Also,  many interest  earning  assets are priced off of longer
market indices,  which were not as dramatically  impacted by the FOMC decreases.
Retail  deposits is the primary  source of the  Company's  funding and therefore
competition  for these  deposits  remains the biggest threat to the net interest
margin.

Provision for Loan and Lease Losses

The  provision  for loan and lease losses for the six months ended June 30, 2008
totaled  $212,000,  which is an increase of $107,000  from the provision for the
six months  ended June 30,  2007.  The  provision

                                       27
<PAGE>

for loan and lease losses is determined  quarterly  and assessed  along with the
adequacy of the loan and lease loss  reserve.  (See  discussion of the Allowance
for Loan and Lease Losses.)

During the first six months of 2008,  the Company  recorded net  charge-offs  of
$130,044  compared to 2007 net charge-offs for the same period totaling $88,080.
The  change  in the  level  of  charge-offs  from  2007  to  2008  is due to one
commercial  loan  charge-off in 2008.  For both years  however,  the  charge-off
activity is primarily  attributable to consumer automobile loans, which the Bank
purchased in 2006 as well as other consumer loans.

Noninterest Income

Year  to date  noninterest  income  as of  June  30,  2008  totaled  $1,789,935,
increasing  $168,564,  or 10.4%  from the  first six  months  of 2007  income of
$1,621,371.   Trust  income  totaled   $673,093,   which  represented  37.6%  of
noninterest  income and increased  $2,857, or 0.43% from the first six months of
2007.  Income from banking  service  charges and fees  increased by $79,254,  or
12.26%,  from the first half of 2007.  This  increase is due primarily to higher
levels of deposit service charges, cash management, and master money interchange
fees.  Other  noninterest  income  totaled  $358,081,  which was an  increase of
$39,262, or 12.31% from the first six months of 2007.

During the first half of 2008, available for sale municipal securities were sold
for the  purpose of  shortening  the  duration  of the  portfolio  as well as to
ernsure  acceptable  market bond ratings.  These sales  resulted in an aggregate
gain of $32,841.  During the first six months of 2007, the Bank recorded  losses
on the sales of available for sale securities of $14,350.  These sales were made
for the purpose of reducing  interest rate risk and  positioning  earning assets
for future profitability.

Noninterest Expense

Six-month noninterest expense as of June 30, 2008 totaled $7,622,762, increasing
10.33%,  or $713,757 from the same period in 2007.  Advertising  expense totaled
$294,370,  which was an increase of $124,454,  or 73.24%  increase  from the six
months ended June 30, 2007.  This  increase is due primarily to the Bank's image
campaign which was launched during the fourth quarter of 2007 as well as product
and publicity  promotions.  Occupancy  costs  reflect  increases due to a larger
branch network and its related maintenance costs. Commissions, services and fees
expense totaled $244,038  compared to 2007 costs of $230,254.  The increase from
the prior year relates  primarily to  strategic  services  related to the wealth
management and retail areas.

Other noninterest  expenses totaled $1,087,513 which is an increase of $244,206,
or 28.96% from the first six months of 2007.  The  majority of the increase is a
result of higher 2008 costs for exam and audit fees as they relate to regulatory
reporting  compliance and internal audit  initiatives.  Also contributing to the
increase  were  costs for  placement  fees for key  personnel  during  the first
quarter of 2008.

Income Taxes

The  provision  for  income  taxes  for the first  six  months  of 2008  totaled
$129,841,  which is an increase  of  $23,907,  or 22.57% from the same period in
2007.  The increase in income tax expense in the first six months of 2008 is due
to a higher level of taxable  income.  Pretax income  totaled  $1,244,812 in the
first half of 2008 which was 14.14% higher than that for the first half of 2007.
Additionally,  the Company's  effective tax rate of 11% for 2008 was higher than
the effective  tax rate of 10% for 2007.  The increase in the effective tax rate
is due to a  proportionately  lower level of non-taxable  income from both state
and municipal investments as well as that from bank owned life insurance.

                                       28
<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  demand  and the level of total  deposits.  Accordingly,  the Bank has a
liquidity  policy that provides  flexibility  to meet cash needs.  The liquidity
objective is achieved through the maintenance of readily  marketable  investment
securities as well as a balanced flow of asset maturities and prudent pricing on
loan and deposit products.

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

As of June 30, 2008, the Company had $135,089,450 in loan commitments and credit
lines outstanding. Because some commitments are expected to expire without being
drawn upon,  the total  commitment  amount does not  necessarily  represent  all
future cash requirements.  The funding of these commitments is anticipated to be
met through deposits, loan and security amortizations and maturities. Management
believes liquidity is adequate to meet its present and foreseeable needs.

CAPITAL

At June 30,  2008,  total  shareholders'  equity  was  $25,361,756  compared  to
$28,312,612  at December 31, 2007.  From a regulatory  perspective,  the capital
ratios of the Company  and the Bank place each entity in the  "well-capitalized"
categories under applicable regulations. In September 2007, the Company 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  Common Stock.  Shares
repurchased by the Company  during the first six months of 2008 totaled  13,310.
(See  Part II,  Item 2.  Unregistered  Sales  of  Equity  Securities  and Use of
Proceeds.)

The various capital ratios of the Company and the Bank are as follows as of June
30, 2008:

Minimum                                 Regulatory
                                      Capital Levels    The Company    The Bank
                                      --------------    -----------    --------
TIER 1:
      Leverage capital ratio                      4%           7.34%       6.78%

      Risk-based capital ratio                    4%          11.25%      10.40%

      Total risk-based capital ratio              8%          11.89%      11.04%


ALLOWANCE FOR LOAN AND LEASE LOSSES AND CRITICAL ACCOUNTING POLICIES

In the ordinary course of business,  the Bank has made a number of estimates and
assumptions  relating  to the  reporting  results of  operations  and  financial
condition in preparing its financial  statements in conformity  with  accounting
principles  generally  accepted in the United States of America.  Actual results
could differ significantly from those estimates under different  assumptions and
conditions.  The Company believes the following  discussion addresses the Bank's
only critical  accounting policy,  which is the policy that is most important to
the portrayal of the Bank's  financial  results and requires

                                       29
<PAGE>

management's most difficult, subjective and complex judgments, often as a result
of the need to make  estimates  about the effect of matters that are  inherently
uncertain.

The Bank makes  provisions  for loan 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 those considered
impaired,  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.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component relates to loans and leases that are classified as 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 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.

There were no material  changes in loan or lease  concentration or loan or lease
quality that had a significant effect on the allowance for loan and lease losses
calculation at June 30, 2008. 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 or lease portfolio.

At June 30, 2008,  the allowance for loan and lease losses was equivalent to 60%
of total  non-performing  assets as  compared  with 72% of total  non-performing
assets at December 31,  2007.  As of June 30,  2008,  non-performing  assets and
loans and  leases  were  $3,752,118  and  represented  1.11% of total  loans and
leases.  As of December  31,  2007,  non-performing  assets and loans and leases
totaled $2,962,185 and represented 0.90% of total loans and leases. The ratio of
the  allowance  for such loan and lease losses to total loans and leases at June
30, 2008 and December 31, 2007 was 0.66%.  Changes in the allowance for loan and
lease losses for the six month periods ended June 30, 2008 and 2007 are as shown
below:

                                       30
<PAGE>

For the six months ended June 30,                          2008         2007
                                                       -----------  -----------

Balance at beginning of the year                       $ 2,151,622  $ 2,106,100

Provision for loan and lease losses                        212,000      105,000
Loans and leases charged off                              (152,265)     (94,713)
Recoveries of loans and leases previously charged-off       22,221        6,633
                                                       -----------  -----------

Balance as of June 30,                                 $ 2,233,578  $ 2,123,020
                                                       ===========  ===========

The following table summarizes the Bank's Other Real Estate Owned ("OREO"), past
due and non-accrual loans and leases, and total nonperforming  assets as of June
30, 2008 and December 31, 2007.

<TABLE>
<CAPTION>
                                                     June 30, 2008     December 31, 2007
                                                     ---------------   -----------------
<S>                                                  <C>               <C>
Nonaccrual loans and leases                          $     3,751,066   $       2,959,074

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

Total nonperforming assets                           $     3,751,066   $       2,959,074
                                                     ===============   =================

Loans and leases past due in excess of 90 days and
  accruing interest                                  $         1,052   $           3,111
                                                     ===============   =================
</TABLE>

POTENTIAL PROBLEM LOANS

As of June 30,  2008,  there  were no  potential  problem  loans or  leases  not
disclosed above, which cause Management to have serious doubts as to the ability
of such borrowers to comply with their present loan or lease repayment terms.

OFF BALANCE SHEET ARRANGEMENTS

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

At June 30,  2008,  there  have been no  significant  changes  in the  Company's
off-balance sheet arrangements from December 31, 2007.

FORWARD-LOOKING STATEMENTS

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

                                       31
<PAGE>

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T.  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 recognized that any controls and procedures,
no matter how well designed and operated,  can provide only reasonable assurance
of achieving the desired  control  objectives,  and management  necessarily  was
required  to apply its  judgment  in  evaluating  the  cost-benefit  of possible
controls and procedures.

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

There were no changes in the Company's internal control over financial reporting
that occurred  during the Company's  second  quarter of 2008 that has materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.

                                       32
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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


ITEM 1A.  RISK FACTORS.

Not applicable

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In September 2007 the Company approved a stock repurchase  program to acquire up
to an aggregate of 30,000  shares of the  Company's  outstanding  Common  Stock.
Shares  purchased  pursuant to the  repurchase  program in the second quarter of
2008, are shown below.

<TABLE>
<CAPTION>
                                          Issuer Purchases of Equity Securities
                            (a)                  (b)                  (c)                      (d)
                                                                 Total number of       Maximum number (or
                                                                shares (or units)     approximate dollar
                                                                  purchased as        value) of shares (or
                    Total number of        Average price        part of publicly     units) that may yet be
                    shares (or units)      paid per share       announced plans       purchased under the
    Period             purchased              (or unit)           or programs          plans or programs
----------------   -------------------   -------------------   -------------------   --------------------
<S>                        <C>              <C>                             <C>            <C>
April 1-30, 2008                 1,600   $             14.31                 1,600          28,400 shares
                   -------------------   -------------------   -------------------   --------------------

 May 1-31, 2008                  8,200                 14.05                 8,200          20,200 shares
                   -------------------   -------------------   -------------------   --------------------

June 1-30, 2008                  3,510                 13.54                 3,510          16,690 shares
                   -------------------   -------------------   -------------------   --------------------

     Total                      13,310   $             13.98                13,310          16,690 shares
                   ===================   ===================   ===================   ====================
</TABLE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None

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

The Annual Meeting of Shareholders  of First  Litchfield  Financial  Corporation
(the "Company") was held on Wednesday, May 21, 2008.


                                       33
<PAGE>

1.   Election of Directors.
     ---------------------

     The vote for  re-electing  each of the five (5)  Directors  listed below to
     serve for a term of three (3) years is as follows:
<TABLE>
<CAPTION>
                                                                                            Withholding
                                                                              For            Authority
                                                                         ---------------   ---------------
<S>                                                                              <C>                <C>
     Patrick J. Boland       Number of Shares:                                1,953,773            24,680
                                                                         ---------------   ---------------

                             Percentage of Shares Voted:                         98.75%             1.25%
                                                                         ---------------   ---------------

                             Percentage of Shares Entitled to Vote:              82.38%             1.04%
                                                                         ---------------   ---------------
<CAPTION>
                                                                                            Withholding
                                                                              For            Authority
                                                                         ---------------   ---------------
<S>                                                                           <C>                  <C>
     John A. Brighenti       Number of Shares:                                1,953,773            24,680
                                                                         ---------------   ---------------

                             Percentage of Shares Voted:                         98.75%             1.25%
                                                                         ---------------   ---------------

                             Percentage of Shares Entitled to Vote:              82.38%             1.04%
                                                                         ---------------   ---------------
<CAPTION>
                                                                                            Withholding
                                                                              For            Authority
                                                                         ---------------   ---------------
<S>                                                                           <C>                   <C>
     Kathleen A. Kelley      Number of Shares:                                1,974,318             4,135
                                                                         ---------------   ---------------

                             Percentage of Shares Voted:                         99.79%             0.21%
                                                                         ---------------   ---------------

                             Percentage of Shares Entitled to Vote:              83.24%             0.17%
                                                                         ---------------   ---------------
<CAPTION>
                                                                                            Withholding
                                                                              For            Authority
                                                                         ---------------   ---------------
<S>                                                                           <C>                  <C>
     Richard E. Pugh         Number of Shares:                                1,950,824            27,629
                                                                         ---------------   ---------------

                             Percentage of Shares Voted:                         98.60%             1.40%
                                                                         ---------------   ---------------

                             Percentage of Shares Entitled to Vote:              82.25%             1.16%
                                                                         ---------------   ---------------
<CAPTION>
                                                                                            Withholding
                                                                              For            Authority
                                                                         ---------------   ---------------
<S>                                                                           <C>                  <C>
     H. Ray Underwood        Number of Shares:                                1,953,542            24,911
                                                                         ---------------   ---------------

                             Percentage of Shares Voted:                         98.74%             1.26%
                                                                         ---------------   ---------------

                             Percentage of Shares Entitled to Vote:              82.37%             1.05%
                                                                         ---------------   ---------------
</TABLE>

     Continuing as Directors  with terms to expire at the 2009 Annual Meeting of
     Shareholders  are:  Joseph J.  Greco,  Perley H.  Grimes,  Jr.,  Gregory S.
     Oneglia and Charles E. Orr. Continuing as Directors with terms to expire at
     the 2010 Annual  Meeting of  Shareholders  are:  George M. Madsen,  Alan B.
     Magary, William J. Sweetman and Patricia D. Werner.

     On June 11, 2008,  Kathleen A. Kelley resigned as a Director of the Company
     and of the Bank for personal reasons. Information regarding the resignation
     is set forth in the  Company's  Current  Report on Form 8-K , as filed with
     the Securities and Exchange Commission of June 16, 2008.

                                       34
<PAGE>

2.   Appointment of Auditors.
     -----------------------

     Votes cast "FOR,"  "AGAINST"  and  "ABSTAIN"  on the proposal to ratify the
     appointment of McGladrey & Pullen,  LLP to act as  independent  auditors of
     the current fiscal year were as follows:

<TABLE>
<CAPTION>
                                                                                            BROKER
     "FOR APPROVAL"                "AGAINST APPROVAL"                "ABSTAIN"             NON-VOTES
<S>                                 <C>                              <C>                           <C>
        1,929,117                        44,422                        4,914
--------------------------   --------------------------------  ----------------------  ------------------
         Number                          Number                       Number

         81.34%                           1.87%                        0.21%
--------------------------   --------------------------------  ----------------------
                         (Percent of shares entitled to vote)

         97.51%                           2.25%                        0.25%
--------------------------   --------------------------------  ----------------------
                     (Percent of shares actually voted at the meeting)

</TABLE>

ITEM 5.  OTHER INFORMATION.

None


                                       35
<PAGE>

ITEM 6.  EXHIBITS

                                  EXHIBIT INDEX

Exhibit
   No.      Exhibit
-------     -------
3.1         Certificate  of   Incorporation   of  First   Litchfield   Financial
            Corporation,  as amended.  Exhibit is  incorporated  by reference to
            Exhibit 3.1 set forth in the  Company's  Registration  Statement  on
            Form 10-SB as filed with the Securities  and Exchange  Commission on
            January 7, 2000.

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

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

21.         List of  Subsidiaries  of First  Litchfield  Financial  Corporation.
            Exhibit is  incorporated by reference to Exhibit 21 set forth in the
            Company's  10-K for the year ended  December  31, 2006 as filed with
            the Securities and Exchange Commission on April 2, 2007.

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

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

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


                                       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:  August 6, 2008                        FIRST LITCHFIELD FINANCIAL
                                              CORPORATION


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



Dated:  August 6, 2008                        By:  /s/ Carroll A. Pereira
                                                  ---------------------------
                                                  Carroll A. Pereira
                                                  Principal Financial and
                                                  Accounting Officer


                                       37