SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)
[X] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES  EXCHANGE
ACT OF 1934

                   For the fiscal year ended December 31, 2006

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

For the transition period from ________________to ______________

                         Commission file number 0-24751
                                               ---------

                             SALISBURY BANCORP, INC.
             (Exact name of Registrant as specified in its charter)

Connecticut                                                  06-1514263
-------------------------------                              ----------------
(State or Other Jurisdiction of                              (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

5 Bissell Street, Lakeville, CT                              06039
---------------------------------------                      ---------
(Address of Principal Executive Offices)                     (Zip Code)

Registrant's telephone number, including area code: 860-435-9801

Securities  registered  pursuant to Section 12 (b) of the Act:
Common stock par value $.10 per share
-------------------------------------

Securities registered pursuant to Section 12 (g) of the Act:  None
                                                             -----

Name of exchange on which registered: American Stock Exchange
                                      -----------------------

Indicate by check mark if the  registrant  is a  well-known  seasoned  issuer as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]

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

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company. Yes [ ] No [X]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked price of such common  equity,  as of the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter: June 30, 2006: $61,528,473.

Note.  If a  determination  as to  whether a  particular  person or entity is an
affiliate cannot be made without  involving an unreasonable  effort and expense,
the  aggregate  market value of the common stock held by  non-affiliates  may be
calculated  on the basis of  assumptions,  reasonable  under the  circumstances,
provided that the assumptions are set forth in this Form.

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

The Company had 1,684,181 shares outstanding as of March 9, 2007.


                       DOCUMENTS INCORPORATED BY REFERENCE

Incorporated  by  reference  in Part III of this Form 10-K are  portions  of the
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007.

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                                TABLE OF CONTENTS
                                -----------------
                                                                            Page
                                                                            ----
Part I
     Item 1 - Business                                                         1

          (a)   General Development of the Business                            1
          (b)   Financial Information about Industry Segments                  1
          (c)   Narrative Description of Business                              2
          (d)   Financial Information about Foreign and Domestic
                Operations and Export Sales                                    6

          Item 1A - Risk Factors                                              11

          Item 1B - Unresolved Staff Comments                                 14

     Item 2 -Properties                                                       14

     Item 3 - Legal Proceedings                                               15

     Item 4 - Submission of Matters to a Vote of Security Holders             15

Part II
     Item 5 - Market for Registrant's Common Equity, Related
              Shareholder Matters and Issuer Purchases of Equity
              Securities                                                      15

     Item 6 - Selected Financial Data                                         18

     Item 7 - Management's Discussion and Analysis of Financial
              Condition and Results of Operation                              19

          Item 7A - Quantitative and Qualitative Disclosures about
                    Market Risk                                               34

     Item 8 - Financial Statements and Supplementary Data                     35

     Item 9 - Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure                             36

          Item 9A - Controls and Procedures                                   36

          Item 9B - Other Information                                         36

Part III
     Item 10 - Directors, Executive Officers and Corporate Governance         36

     Item 11 - Executive Compensation                                         37

     Item 12 - Security Ownership of Certain Beneficial Owners and
               Management and Related Shareholder Matters                     37

     Item 13 - Certain Relationships and Related Transactions, and
               Director Independence                                          37

     Item 14 - Principal Accounting Fees and Services                         37

Part IV
     Item 15 - Exhibits, Financial Statement Schedules                        38

Signatures                                                                    39

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PART I

ITEM 1.  BUSINESS

(a)      General Development of the Business

Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut  corporation
that was formed in 1998. Its primary  activity is to act as the holding  company
for its sole  subsidiary,  the  Salisbury  Bank and Trust  Company (the "Bank"),
which accounts for most of the Company's net income.  The Company was founded in
April,  1998 for the  purpose  of  acquiring  all of the  stock of the Bank in a
shareholder-approved  reorganization,  which became  effective in 1998. The Bank
assumed  its  present  name in 1925  following  the  acquisition  by the Robbins
Burrall Trust  Company of the Salisbury  Savings  Society.  The Robbins  Burrall
Trust Company was  incorporated  in 1909 as the  successor to a private  banking
firm  established in 1874. The Salisbury  Savings  Society was  incorporated  in
1848.  The Bank is chartered  as a state bank and trust  company by the State of
Connecticut  and its  deposits  are  insured by the  Federal  Deposit  Insurance
Corporation  in accordance  with the Federal  Deposit  Insurance Act. The Bank's
main office is at 5 Bissell Street, Lakeville,  Connecticut 06039. Its telephone
number is (860) 435-9801, and its website address is: www.salisburybank.com. The
                                                      ---------------------
Company  makes  available  free of  charge on the  Bank's  website a link to its
Annual Reports on Form 10-K, Quarterly Reports on Forms 10-Q and Current Reports
on Form 8-K promptly  after filing such reports with the Securities and Exchange
Commission ("SEC"). Also available on the website are the respective Charters of
the Board's Nominating and Governance Committee and Audit Committee.

On September 10, 2004 the Company  completed the  acquisition of Canaan National
Bancorp,  Inc.  and the merger  with and into the  Company.  The Bank  currently
operates six (6) full service offices,  which are located in Canaan,  Lakeville,
Salisbury   and  Sharon,   Connecticut   and  South   Egremont  and   Sheffield,
Massachusetts.  Most of the Bank's business is derived from customers located in
Litchfield  County,  Connecticut,  Dutchess County and Columbia County, New York
and  Berkshire  County,  Massachusetts.  In  October,  2006 the Bank  entered  a
purchase  and  assumption  agreement  with New  York  Community  Bank  ("NYCB"),
pursuant  to which the Bank has  agreed to  purchase  certain  assets and assume
certain  liabilities of NYCB's branch office located in Mount Vernon,  New York.
The Bank has received  regulatory approval for the acquisition of such branch in
the first calendar quarter of 2007. The Bank has submitted application materials
to  regulators  to relocate  such Mount  Vernon  branch to a new office in Dover
Plains,  New York upon consummation of the purchase and assumption  transaction.
The Bank expects to commence operations in New York State later this year.

(b)      Financial Information about Industry Segments

The Company's products and services are all of a nature of a commercial bank and
trust  company.  The  Bank is a  full-service  bank  offering  a wide  range  of
commercial and personal banking services, including the following:

         Lending

Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's  assets.  The  portfolio  consists  of many types of loans.  These
include residential mortgages,  home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans,  Small Business  Administration  ("SBA") loans and real estate
loans for business customers.

The primary  lending  activity has been the  origination of first mortgage loans
for the purchase,  refinance or  construction  of residential  properties in the
Bank's  market  area.  Loans  secured by  mortgages  on a  borrower's  principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time  provide a  significant  yet  relatively  stable  source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary  mortgage market.  This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.

The Bank also  originates  a variety of other loans for  consumer  and  business
purposes.  Although these loans represent a smaller percentage of the total loan
portfolio,  the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.

         Investments

The Company's investment portfolio is also an important component of the Balance
Sheet.  It provides a source of earnings

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in the form of interest and dividends. It also plays a role in the interest rate
risk management of the Company and it provides a source of liquidity.

The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states.  At December 31, 2006, the portfolio totaled  $161,231,000  which
represents  approximately  35.80% of total assets,  and it produced interest and
dividend  income of $7,962,000 for the year 2006 as compared with $7,427,000 for
2005 and $6,905,000 for 2004, respectively.

         Deposits and Borrowings

The Bank's  primary  sources of funds are  deposits,  borrowings  and  principal
payments on loans. Although competition for funds from non-banking  institutions
remains   aggressive,   the  Bank   continues   its  efforts  to  build  account
relationships with its customers.  Deposits totaled $313,586,000 at December 31,
2006 as compared with $287,271,000 at December 31, 2005.

The  Bank is a  member  of the  Federal  Home  Loan  Bank of  Boston  ("FHLBB").
Borrowings from FHLBB totaled  $87,093,000 at December 31, 2006 as compared with
$71,016,000 at December 31, 2005.

For  additional  information  relating  to  the  asset,  deposit  and  borrowing
components of the Company,  see Item 7, Management's  Discussion and Analysis of
Financial  Condition and Results of Operation and the accompanying  Consolidated
Financial Statements, and Notes thereto.

         Fiduciary Activities

The Bank  provides  trust,  investment  and financial  planning  services to its
customers.

The Bank has a full service Trust and Investment  Services  Division.  Among the
services offered are:  custody and agency  accounts,  estate planning and estate
settlement.  Another  service is that of serving as Guardian or  Conservator  of
estates   and   managing   the   financial    position   of   Guardianships   or
Conservatorships. Self directed IRAs and Pension plans are also offered.

         Other Services

The Company also offers safe deposit rentals,  foreign exchange,  a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.

(c)      Narrative Description of Business

Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").

The Bank is a full-service  commercial bank and its activities encompass a broad
range of services,  which include a complete menu of deposit services,  multiple
mortgage  products  and  various  other  types of loans  for both  business  and
personal needs. Full trust and investment services are also available.  The Bank
owns and operates two  subsidiaries,  SBT Realty,  Inc.,  which is  incorporated
under the laws of the State of New York, and SBT Mortgage  Service  Corporation,
which is incorporated  under the laws of the State of  Connecticut.  SBT Realty,
Inc.  holds and manages bank owned real estate  situated in New York State.  SBT
Mortgage Service Corporation, a Passive Investment Company ("PIC") was formed to
take  advantage of favorable  Connecticut  corporate tax benefits,  which result
when a Bank transfers a portion of its mortgage  portfolio to a PIC. In general,
the PIC will earn mortgage  interest  income and may dividend funds to the Bank.
In turn, those funds will be exempt from the Connecticut corporate business tax.

         Competition

The Company and the Bank encounter  competition in all phases of their business.
There are  numerous  financial  institutions  that have  offices in the areas in
which  the  Company  and  Bank  compete  in  Northwestern  Connecticut,  Western
Massachusetts and proximate areas of New York State.

The  offices  of the Bank are  located  in the  northwest  corner of  Litchfield
County,  Connecticut  and  South  Berkshire  County,

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Massachusetts.  The Bank  maintains  six (6) banking  offices  within  these two
counties and also attracts  customers from nearby  Columbia  County and Dutchess
County,  New York.  The Bank's market area within the four counties is served by
45 commercial banks and savings banks.

Banks  compete  on the basis of price,  including  rates  paid on  deposits  and
charged on  borrowings,  convenience  and quality of  service.  Savings and loan
associations  are able to  compete  aggressively  with  commercial  banks in the
important area of consumer  lending.  Credit unions and small loan companies are
significant  factors in the consumer  market.  Insurance  companies,  investment
firms, credit and mortgage companies,  brokerage firms cash management accounts,
money-market  funds and retailers are all  significant  competitors  for various
types of business.  Insurance companies,  investment  counseling firms and other
businesses  and  individuals  actively  compete  with the Bank for  personal and
corporate  trust  services and  investment  counseling  services.  Many non-bank
competitors  are not subject to the extensive  regulation  described below under
"Legislation,  Regulation and  Supervision"  and in certain  respects may have a
competitive advantage over banks in providing certain services.

In marketing its services,  the Bank  emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers.  Moreover,  the Bank competes for both deposits and loans by offering
competitive  rates and  convenient  business  hours.  In addition  to  providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine  networks and offers internet banking  services,
which  allow  the  Bank to  deliver  certain  financial  services  to  customers
regardless of their proximity to the primary service area of the Bank.

Connecticut has enacted  legislation that liberalizes  banking powers for thrift
institutions  thereby improving their competitive  position with other banks. In
addition,   the  Connecticut   Interstate  Banking  and  Branching  Act  permits
acquisitions  and mergers of Connecticut  banks and bank holding  companies with
banks and bank holding  companies in other states.  Accordingly,  it is possible
for large super-regional  organizations to enter many new markets, including the
market  served by the Bank.  Certain  competitors,  by virtue of their  size and
resources,  may enjoy certain  efficiencies and competitive  advantages over the
Bank in the pricing,  delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial  institutions competing with the Bank for deposits and loans in its
market place,  although it is impossible to predict the effect upon  competition
of such legislation.

Legislation, Regulation and Supervision

General
-------

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

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

Federal Reserve Board Regulation
--------------------------------

The Company is a registered  bank holding company under the Bank Holding Company
Act of 1956,  as amended  (the  "BHCA").  It is subject to the  supervision  and
examination  of the  Board of  Governors  of the  Federal  Reserve  System  (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.

The BHCA generally  requires prior approval by the Federal  Reserve Board of the
acquisition by the Company of substantially  all of the assets or more than five
percent (5%) of the voting  stock of any bank.  The BHCA also allows the Federal
Reserve Board to determine (by order or by  regulation)  what  activities are so
closely  related to banking as to be a proper  incident  of  banking,  and thus,
whether  the  Company  can engage in such  activities.  The BHCA  prohibits  the
Company and the Bank from engaging in certain tie-in  arrangements in connection
with any extension of credit, sale of property or furnishing of services.

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Federal  legislation  permits  adequately  capitalized bank holding companies to
venture across state lines to offer banking services  through bank  subsidiaries
to  a  wide  geographic   market.  It  is  possible  for  large   super-regional
organizations  to enter many new  markets,  including  the market  served by the
Bank,  although  it is  impossible  to assess  what impact this will have on the
Company or the Bank.

The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company  and  certain  other  activities,  on  investments  in  their  stock  or
securities,  and on the  taking  by the  Bank of such  stock  or  securities  as
collateral security for loans to any borrower.

Under the BHCA and the  regulations of the Federal  Reserve  System  promulgated
thereunder ("Regulation Y"), no corporation may become a bank holding company as
defined  therein,  without  prior  approval of the Federal  Reserve  Board.  The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it  wishes  to  acquire  voting  shares  of any  other  bank,  if after  such
acquisition  it would own or control  more than five  percent (5%) of the voting
share of such bank.  The BHCA  imposes  limitations  upon the  Company as to the
types of business in which it may engage.

Regulation  Y requires  bank holding  companies  to provide the Federal  Reserve
Board with written notice before  purchasing or redeeming  equity  securities if
the gross consideration for the purchase or redemption, when aggregated with the
net  consideration  paid by the Company for all such  purchases  or  redemptions
during the preceding  twelve (12) months,  is equal to ten percent (10%) or more
of the  Company's  consolidated  net worth.  For purposes of  Regulation Y, "net
consideration"  is the  gross  consideration  paid by a  company  for all of its
equity  securities  purchased  or redeemed  during the  period,  minus the gross
consideration  received for all of its equity  securities sold during the period
other than as part of a new issue.  However,  a bank  holding  company  need not
obtain Federal  Reserve Board approval of any equity security  redemption  when:
(i) the bank holding company's  capital ratios exceed the threshold  established
for  "well-capitalized"  state  member banks  before and  immediately  after the
redemption;  (ii) the bank holding company is  well-managed;  and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.

Gramm-Leach-Bliley Act
----------------------

The  Gramm-Leach-Bliley  Financial  Services  Modernization  Act  of  1999  (the
"GLBA"),  provides bank holding companies,  banks,  securities firms,  insurance
companies,  and  investment  management  firms the option of engaging in a broad
range of  financial  and  related  activities  by opting to become a  "financial
holding  company." The Company  qualified and registered as a financial  holding
company on May 3, 2000.  Financial holding companies are subject to oversight by
the Federal Reserve Board, in addition to other regulatory  agencies.  Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank  subsidiaries,  that are financial in nature or
that engage in activities  incidental or complementary to a financial  activity.
Additionally, pursuant to the GLBA, securities and insurance firms are permitted
to  purchase  full-service  banks.  While the GLBA  facilitates  the  ability of
financial  institutions  to offer a wide  range  of  financial  services,  large
financial  institutions would appear to be the beneficiaries as a result of this
Act because  many  community  banks lack the capital  and  management  resources
needed to facilitate broad expansion of financial services.

Sarbanes-Oxley Act
------------------

In July, 2002,  President Bush signed into law the  Sarbanes-Oxley  Act of 2002.
The purpose of the  Sarbanes-Oxley  Act is to protect investors by improving the
accuracy  and  reliability  of  corporate   disclosures  made  pursuant  to  the
securities laws, and for other purposes.

The Sarbanes-Oxley Act amends the Securities  Exchange Act of 1934 to prohibit a
registered  public accounting firm from performing  specified  nonaudit services
contemporaneously  with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit  committee  of  an  issuer  with   responsibility   for  the  appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services.  It requires each committee member to be a member of the
board  of  directors  of  the  issuer,  and  to be  otherwise  independent.  The
Sarbanes-Oxley  Act  further  requires  the chief  executive  officer  and chief
financial officer of an issuer to make certain  certifications as to each annual
or quarterly report. In addition,  the  Sarbanes-Oxley  Act requires officers to
forfeit certain bonuses and profits under certain  circumstances.  Specifically,
if an issuer  is  required  to  prepare  an  accounting  restatement  due to the
material  noncompliance  of the  issuer  as a  result  of  misconduct  with  any
financial reporting  requirements under the securities laws, the chief executive
officer and chief financial officer of the issuer shall be required to reimburse
the  issuer  for  (1)  any  bonus  or  other  incentive-based  or  equity  based
compensation  received by that person from the issuer during the 12-month period
following  the first  public  issuance or filing

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with  the SEC of the  financial  document  embodying  such  financial  reporting
requirements;  and (2) any profits  realized  from the sale of securities of the
issuer during that 12-month period.

The Sarbanes-Oxley Act also instructs the SEC to require by rule:

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

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

The  Sarbanes-Oxley  Act also prohibits  insider  transactions  in the Company's
stock during a lock out period of Company's  pension  plans,  and any profits of
such  insider  transactions  are  to  be  disgorged.  In  addition,  there  is a
prohibition of Company loans to its executives, except in certain circumstances.
The  Sarbanes-Oxley  Act also provides for mandated  internal control report and
assessment with the annual report and an attestation and a report on such report
by the Company's auditor. The SEC also requires an issuer to institute a code of
ethics  for  senior  financial  officers  of  the  Company.   Furthermore,   the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.

The Patriot Act
---------------

The terrorist  attacks in September,  2001 have impacted the financial  services
industry and led to federal  legislation that attempts to address certain issues
involving financial  institutions.  In 2001,  President Bush signed into law the
Uniting and  Strengthening  America by Providing  Appropriate  Tools Required to
Intercept and Obstruct  Terrorism Act of 2001 (the "Patriot  Act"). On March 10,
2006, the President signed  legislation  making permanent certain  provisions of
the Patriot Act.

Part of the Patriot Act is the  International  Money  Laundering  Abatement  and
Financial  Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury,  in consultation with the heads of other government  agencies,  to
adopt special measures applicable to banks, bank holding companies, and/or other
financial  institutions.  These measures may include enhanced  recordkeeping and
reporting  requirements for certain  financial  transactions that are of primary
money laundering concern, due diligence  requirements  concerning the beneficial
ownership of certain types of accounts,  and  restrictions  or  prohibitions  on
certain types of accounts with foreign financial institutions.

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

Connecticut Regulation
----------------------

The Company is  incorporated  in the State of Connecticut  and is subject to the
Connecticut  Business  Corporation Act and the Connecticut  Bank Holding Company
Statutes.  As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"),  the Bank is subject to regulation both by the Connecticut
Banking  Commissioner  and the  FDIC.  Applicable  laws and  regulations  impose
restrictions and  requirements in many areas,  including  capital  requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and  investments,  consumer  protection,  employment  practices  and other
matters.   Any  new  regulations  or  amendments  to  existing  regulations  may
materially  affect  the  services  offered,   expenses  incurred  and/or  income
generated by the Bank.

The Connecticut Banking Commissioner  regulates the Bank's internal organization
as well as its deposit,  lending and investment activities.  The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations.  The
Connecticut Banking

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<page>

Commissioner conducts periodic examinations of the Bank. The Connecticut banking
statutes  also  restrict the ability of a bank to declare cash  dividends to its
shareholders.

Subject to certain  limited  exceptions,  loans made to any one  obligor may not
exceed fifteen percent (15%) of the Bank's capital,  surplus,  undivided profits
and loan reserves. In addition,  under Connecticut law, the beneficial ownership
of more than ten percent  (10%) of any class of voting  securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.

FDIC Regulation
---------------

The FDIC  currently  insures  the  Bank's  deposit  accounts  in an amount up to
$100,000 for each insured depositor.  In addition,  effective April 1, 2006, the
federal deposit  insurance limits on certain  retirement  accounts  increased so
that such  retirement  accounts  are  separately  insured up to  $250,000.  FDIC
insurance of deposits may be terminated by the FDIC, after notice and a hearing,
upon a finding by the FDIC that the insured institution has engaged in unsafe or
unsound  practices,  or  is  in an  unsafe  or  unsound  condition  to  continue
operations, or has violated any applicable law, regulation, rule or order of, or
condition imposed by, the FDIC. A bank's failure to meet the minimum capital and
risk-based capital  guidelines  discussed below would be considered to be unsafe
and unsound banking practices. The Bank, as a Connecticut-chartered FDIC-insured
bank,  is  regulated  by the FDIC in many of the  areas  also  regulated  by the
Connecticut  Banking  Commissioner.  The FDIC  also  conducts  its own  periodic
examinations of the Bank, and the Bank is required to submit financial and other
reports to the FDIC on a quarterly and annual basis, or as otherwise required by
the FDIC.

FDIC-insured  banks,  such as the Bank, pay premium  assessments to the FDIC for
the insurance of deposits.

Under  FDIC  regulations,  FDIC-insured,  state-chartered  banks  which  are not
members  of the  Federal  Reserve  System,  must meet  certain  minimum  capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".

The  Community  Reinvestment  Act  ("CRA")  requires  lenders  to  identify  the
communities  served by the  institution's  offices and to identify  the types of
credit the institution is prepared to extend within such  communities.  The FDIC
conducts  examinations  of insured  institutions'  CRA compliance and rates such
institutions   as   "Outstanding",   "Satisfactory",   "Needs  to  Improve"  and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of  "Satisfactory".  Failure to receive at least a "Satisfactory"  rating
may  inhibit an  institution  from  engaging  in certain  activities,  including
acquisitions of other financial institutions,  which require regulatory approval
based, in part, on CRA compliance considerations.  Similarly,  failure of a bank
to maintain a CRA rating of  "Satisfactory"  or better would  preclude it or its
holding  company from engaging in any new financial  activities  pursuant to the
GLBA.

Employees
---------

The  Company's  current  workforce at March 9, 2007 consists of 133 employees of
whom 118 were full time and 15 were part time. The employees are not represented
by a collective bargaining unit.

(d)      Financial Information about Geographic Areas

The Company does not have any foreign business operations or export sales of its
own. However,  it does provide financial  services  including wire transfers and
foreign currency exchange to other businesses involved in foreign trade.

                                       6
<page>

STATISTICAL  DISCLOSURE  REQUIRED PURSUANT TO SECURITIES  EXCHANGE ACT, INDUSTRY
GUIDE 3

The statistical disclosures required pursuant to Industry Guide 3, not contained
in  Management's  Discussion and Analysis of Financial  Condition and Results of
Operations, are presented on the following pages of this Report on Form 10-K.

                                                                     Page(s) of
Item of Guide 3                                                      This Report
---------------                                                      -----------

I.       Distribution of Assets, Liabilities and Shareholders'
         Equity; Interest Rates and Interest Differential                22

II.      Investment Portfolio                                             8

III.     Loan Portfolio                                                   9

IV.      Summary of Loan Loss Experience                                 10

V.       Deposits                                                        30

VI.      Return on Equity and Assets                                      9

VII.     Short-Term Borrowings                                           11


                                       7
<page>

Investment Portfolio

The Company  categorizes  investments into three groups and further provides for
the  accounting  and  reporting  treatment  of each  group.  Investments  may be
classified as  held-to-maturity,  available-for-sale,  or trading. The Bank does
not purchase or hold any  investment  securities for the purpose of trading such
investments.  The  following  tables  set  forth  the  carrying  amounts  of the
investment securities as of December 31:

(dollars in thousands)                              2006       2005        2004
                                                  ------------------------------

Available-for-sale securities:
 (at fair value)
Equity securities                                 $    181   $    148   $    146
U.S. government agencies preferred stock             2,512     12,446     12,209
U.S. Treasury securities and other
   U.S. government corporations and agencies        54,146     50,516     53,416
Obligations of states and political subdivisions    45,236     41,332     58,452
Mortgage-backed securities                          54,417     41,166     54,432
                                                  ------------------------------
                                                  $156,492   $145,608   $178,655
                                                  ==============================
Held-to-maturity securities
 (at amortized cost)
Mortgage-backed securities                        $     75   $    147   $    218
                                                  ==============================

Federal Home Loan Bank stock                      $  4,664   $  5,413   $  5,413
                                                  ==============================


For the following table, yields are not presented on a fully  taxable-equivalent
("FTE") basis.

The scheduled maturities of held-to-maturity  securities and  available-for-sale
securities  (other than equity  securities)  were as follows as of December  31,
2006:

(dollars in thousands)
<table>
<caption>
                           Maturing             Maturing                Maturing              Maturing
                           --------             --------                --------              --------
                           Within     Yield     After 1 but    Yield    After 5       Yield   After 10      Yield    Total
                           ------     -----     -----------    -----    -------       -----   --------      -----    -----
                           1 year               within 5                but within            Years
                           ------               --------                ----------            -----
                           Amount               Years                   10 Years              Amount
                           ------               -----                   --------              ------
                                                Amount                  Amount
                                                ------                  ------

                        <c>       <c>       <c>            <c>       <c>           <c>       <c>         <c>       <c>
Held-to-maturity
----------------
securities
----------
(at amortized cost)
Mortgage-backed
 securities                 $      0            $      0               $      0               $     75       5.35%   $     75
                            ========            ========               ========               ========               ========

Available-for-sale
------------------
securities
----------
(at fair value)
U.S. Treasury
securities
 and other U.S.
 government
 corporations and
 agencies                   $      0            $      0               $ 17,794       5.46%   $ 36,352       6.19%   $ 54,146

Obligations of states and
 political subdivisions            0                   0                    173       3.55%     45,063       5.04%     45,236

Mortgage-backed
 securities                        0                 623       4.57%        271       5.63%     53,523       4.35%     54,417
                            --------             --------               --------               --------               --------
                            $      0            $    623               $ 18,238               $134,938               $153,799
                            ========             ========              ========               ========               ========

</table>

                                       8
<page>

Loan Portfolio Analysis by Category
(dollars in thousands)

<table>
<caption>
                                                         December 31
                                    2006         2005         2004         2003         2002
                               -------------------------------------------------------------

                              <c>          <c>          <c>           <c>          <c>
Commercial, financial and
   agricultural                $  16,465    $  15,354    $  15,127    $   9,149    $  10,127
Real Estate-construction and
   land development               21,169       18,814       14,290       15,307        6,027
Real Estate - residential        145,395      135,619      130,414       90,807       93,636
Real Estate-commercial            50,859       40,889       35,487       19,199       18,002
Consumer                           8,816        7,900        9,122        6,692        9,007
Term federal funds                12,000            0            0            0            0
Other                                 69           47           69           73          291
                               -------------------------------------------------------------
                                 254,773      218,623      204,509      141,227      137,090
Deferred costs, net                  168            0            0            0            0
Allowance for loan losses         (2,474)      (2,626)      (2,512)      (1,664)      (1,458)
Unearned income                       (3)          (8)         (19)          (0)          (0)
                               -------------------------------------------------------------
     Net loans                 $ 252,464    $ 215,989    $ 201,978    $ 139,563    $ 135,632
                               =============================================================
</table>

There are no industry concentrations in the Bank's loan portfolio.

The following table shows the maturity of commercial, financial and agricultural
loans,  real  estate  commercial  loans  and  real   estate-construction   loans
outstanding as of December 31, 2006. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.

<table>
<caption>
                                                                 Due after
                                                  Due in one     one year to    Due after
(dollars in thousands)                            year or less   five years     five years
                                                  ----------------------------------------

                                               <c>            <c>            <c>

Commercial, financial,
 agricultural and real estate commercial          $    2,232     $    8,754     $   56,338
Real estate-construction and land development         20,990            179              0
                                                  ----------------------------------------
                                                  $   23,222     $    8,933     $   56,338
                                                  ========================================

Maturities after one year with:
  Fixed interest rates                                           $    6,338     $   10,410
  Variable interest rates                                             2,595         45,928
                                                                 ------------  -----------
                                                                 $    8,933     $   56,338
                                                                 ============  ===========
</table>

Return on Equity and Assets

The following table summarizes  various financial ratios of the Company for each
of the last three (3) years:

<table>
<caption>
                                                                At or for the
                                                                -------------
                                                           Year ended December 31,
                                                           -----------------------
                                                            2006     2005     2004
                                                            ----     ----     ----

                                                         <c>      <c>      <c>
Return on average total assets
 (net income divided by average total assets)               1.02%    1.12%    1.14%

Return on average shareholders' equity
 (net income divided by average shareholders' equity)       9.83%   10.81%   12.34%

Dividend payout ratio
 (total declared dividends per share
   divided by net income per share)                        41.11%   36.90%   35.96%

Equity to assets ratio
 (average shareholders' equity divided by
   average total assets)                                   10.37%   10.38%    9.20%
</table>

                                       9
<page>

Nonaccrual, Past Due and Restructured Loans

At  December  31,  2006,  there  were seven (7)  nonaccrual  loans in the Bank's
portfolio six of which were secured by real estate.  In the month  following the
month in which a  mortgage  loan  becomes 90 days past due,  the Bank  generally
stops accruing interest unless there are unusual  circumstances which warrant an
exception.  Generally  the  only  loan  types  that  the  Bank  reclassifies  to
nonaccrual are those secured by real estate or large  commercial  loans on which
substantial  collateral  exists.  Other types of loans are generally charged off
when they become 120 days or more delinquent. However, exceptions may be made as
warranted.

Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)

<table>
<caption>
                                                       December 31
                                       2006      2005      2004      2003      2002
                                      ----------------------------------------------

                                   <c>       <c>       <c>       <c>       <c>
Nonaccrual                            $  886    $  694    $1,739    $   75    $  855
90 days or more past due                  77        79       528       535       124
Restructured loans                         0         0         0         0       271
                                      ----------------------------------------------
Total nonperforming loans             $  963    $  773    $2,267    $  610    $1,250
                                      ==============================================

Total nonperforming loans as per-
   centage of the loan portfolio        0.38%     0.35%     1.11%     0.43%     0.92%
Allowance for loan losses as a per-
   centage of nonperforming loans     256.91%   339.72%   110.81%   272.79%   116.64%

</table>

         Information with respect to nonaccrual and restructured loans
               at December 31, 2006, 2005 and 2004 is as follows:
<table>
<caption>

(dollars in thousands)                                                 Year Ended December 31

                                                                     2006       2005       2004
                                                                     --------------------------

                                                                    <c>       <c>         <c>
Interest income that would have been recorded under original terms   $ 66       $157       $100
Less gross interest recorded                                           37        133         72
                                                                     --------------------------
Foregone interest                                                    $ 29       $ 24       $ 28
                                                                     ==========================
</table>
<table>
<caption>

Summary of Loan Loss Experience
(dollars in thousands)                              Year Ended December 31
                                       2006        2005       2004       2003       2002
                                     ----------------------------------------------------

                                      <c>         <c>         <c>        <c>       <c>
Balance of the allowance for
  loan losses at beginning of year   $ 2,626     $ 2,512    $ 1,664    $ 1,458    $ 1,445
Charge-offs:
   Commercial, financial and
      agricultural                        25           7          0         71         60
   Real estate mortgage                    0           0          0          0         46
   Consumer                              106         128         70         84        146
                                     ----------------------------------------------------
       Total charge-offs                 131         135         70        155        252
                                     ----------------------------------------------------

Recoveries:
   Commercial, financial and
       agricultural                        6           0          0         25          2
   Real estate mortgage                    0           0          0          0          1
   Consumer                               60          39         28         24         26
                                     ----------------------------------------------------
       Total recoveries                   66          39         28         49         29
                                     ----------------------------------------------------
Net charge-offs                           65          96         42        106        223
(Benefit) provision charged to
  operations                             (87)        210        250        312        300
Balance acquired from CNB                  0           0        640          0          0
Transfer of allowance for loan
  losses to other liabilities              0           0          0          0        (64)
                                     ----------------------------------------------------
Balance at end of year               $ 2,474     $ 2,626    $ 2,512    $ 1,664    $ 1,458
                                     ====================================================
Ratio of net charge-offs
  to average loans outstanding           .03%        .05%       .03%       .07%       .02%
Ratio of allowance for loan losses
  to year end loans                      .97%       1.20%      1.23%      1.18%      1.07%
</table>

                                       10
<page>
<table>
<caption>

Allocation of the Allowance for Loan Losses; Percentage of loans by type to total loans
(dollars in thousands)

                                  2006                2005                2004               2003                 2002
                            ----------------    ----------------    ----------------    ----------------    ----------------
                            Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent

                            <c>      <c>        <c>      <c>        <c>      <c>        <c>      <c>        <c>      <c>
Commercial, financial and
 agricultural               $  342      6.46%   $  495      7.02%   $  613      7.40%   $  441      6.47%   $  316      7.39%
Real estate construction
 and land development           85      8.31%       95      8.61%       83      6.99%      112     10.82%       50      4.40%
Real estate mortgage         1,832     77.03%    1,761     80.74%    1,614     81.12%      749     77.94%      840     81.43%
Consumer                       173      3.46%      247      3.61%      198      4.46%      357      4.72%      244      6.57%
Term Federal Funds               0      4.71%        0                                                 0         0         0
Other loans                     42       .03%       28       .02%        4       .03%        5       .05%        8       .21%
                            ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
                            $2,474    100.00%   $2,626    100.00%   $2,512    100.00%   $1,664    100.00%   $1,458    100.00%
                            ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
</table>

Provisions to the  allowance  for loan losses are charged to operating  expenses
and are based on past experience,  current economic  conditions and management's
judgement of the amount necessary to cover losses inherent in the portfolio. The
Bank records  provisions  for estimated loan losses,  which are charged  against
earnings, in the period they are established.

Short-Term Borrowings
(dollars in thousands)                                 December 31
                                               2006        2005        2004
                                             --------------------------------
Federal Home Loan Bank Advances
 Average interest rate
    At year end                                  4.97%       4.90%       4.29%
    For the year                                 5.00%       4.69%       3.90%
Average amount outstanding during the year   $ 71,471    $ 67,793    $ 74,954
Maximum amount outstanding at any month      $ 90,403    $ 75,536    $100,680
Amount outstanding at year end               $ 87,093    $ 71,016    $ 79,213

ITEM 1A.  RISK FACTORS

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

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

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

   o  problem assets and foreclosures may increase;
   o  demand for the Bank's products and services may decline;
   o  low cost or non-interest bearing deposits may decrease; and,
   o  collateral for loans made by the Bank, especially real estate, may decline
      in value, in turn reducing  customers'  borrowing  power, and reducing the
      value of assets and collateral associated with the Bank's existing loans.

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

                                       11
<page>

         The Company is dependent on key  personnel  and the loss of one or more
of those key  personnel  may  materially  and  adversely  affect  the  Company's
prospects.

Competition  for qualified  employees  and personnel in the banking  industry is
intense and there are a limited  number of qualified  persons with knowledge of,
and experience in, the banking  industry within the communities the Bank serves.
The Company's and the Bank's  success  depends to a significant  degree upon the
ability to attract and retain qualified management,  loan origination,  finance,
administrative,  marketing  and  technical  personnel  and  upon  the  continued
contributions  of  management  and  personnel.  The loss of the  services of the
senior  executive  management team members or other key executives  could have a
material adverse effect on the Company's business,  financial condition, results
of operations and cash flows.

         The Bank's business is subject to interest rate risk.

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

         Certain types of loans have a higher degree of risk.

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

         The ability to attract deposits may effect Bank's growth.

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

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

A source of risk arises from the  possibility  that  losses  could be  sustained
because  borrowers,  guarantors,  and  related  parties  may fail to  perform in
accordance with the terms of their loans and leases. The underwriting and credit
monitoring  policies and procedures that the Company has adopted to address this
risk may not prevent unexpected losses that could have a material adverse effect
on the Company's business,  financial condition,  results of operations and cash
flows.  Unexpected

                                       12
<page>

losses may arise from a wide  variety of specific or systemic  factors,  many of
which are beyond the Company's ability to predict, influence or control.

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

         Banks rely on  communications,  information,  operating  and  financial
control systems  technology from third-party  service  providers,  and banks may
suffer an  interruption  in those  systems that may result in lost  business and
banks  may not be able to  obtain  substitute  providers  on  terms  that are as
favorable if bank's  relationships  with bank's existing  service  providers are
interrupted.

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

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

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

         The  Company  and  the  Bank  are  subject  to   extensive   government
regulation.

The  operations of the Company and the Bank are subject to extensive  regulation
by federal, state and local governmental  authorities and are subject to various
laws  and  judicial  and  administrative  decisions  imposing  requirements  and
restrictions  on part or all of the  operations  of the  Company  and the  Bank.
Because  the  Company's  and  the  Bank's  business  is  highly  regulated,  the
applicable laws,  rules and regulations are subject to regular  modification and
change.  The Company cannot be

                                       13
<page>

certain  that laws,  rules and  regulations  will not be adopted in the  future,
which could make  compliance  much more  difficult  or  expensive,  or otherwise
adversely  affect the Company's and the Bank's  business,  financial  condition,
results of operations or cash flows.

         The Company may be exposed to risk of  environmental  liabilities  with
respect to properties to which the Bank takes title.

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

         Customer Information may be obtained and used fraudulently.

Risk of theft of customer information  resulting from security breaches by third
parties exposes the Company to reputation risk and potential  monetary loss. The
Company has exposure to fraudulent  use of its customers'  personal  information
resulting  from its general  business  operations  and through  customer  use of
financial  instruments,  such as debit cards. If a breach in security does occur
and the financial  data of customers is  compromised,  the Company will react as
quickly as possible to protect  customer  accounts and limit potential losses to
the Company.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

The Bank  serves its  customers  from its six (6)  offices  which are located in
Canaan,  Lakeville,  Salisbury and Sharon,  Connecticut  and Sheffield and South
Egremont,  Massachusetts.  The Bank's trust and investment  services division is
located in a separate building adjacent to the main office of the Bank.

The Bank leases the  following  properties:  a branch  office at 51 Main Street,
South  Egremont,  Massachusetts;  a branch office at 73 Main Street,  Sheffield,
Massachusetts; and the Bank has agreed to assume a short term lease for space in
a  supermarket  which is  located  in Mount  Vernon,  New York.  Such  branch is
expected to be acquired from NYCB later in 2007. (See "Business" above).

The  following  table  includes  all  property  owned by the Bank,  but does not
include Other Real Estate Owned.


                       OFFICES                  LOCATION
                     Main Office            5 Bissell Street
                Lakeville, Connecticut

                 Trust and Investment      19 Bissell Street
                  Services division      Lakeville, Connecticut

                   Salisbury Office          18 Main Street
                Salisbury, Connecticut

                    Sharon Office             29 Low Road
                 Sharon, Connecticut

                  Canaan Operations          94 Main Street
                 Canaan, Connecticut

                    Canaan Office           100 Main Street
                 Canaan, Connecticut

                                       14
<page>

ITEM 3.  LEGAL PROCEEDINGS

Other than routine litigation incidental to its business,  there are no material
legal  proceedings  pending to which the Company,  Bank, or their properties are
subject.

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the Company's 2006 fiscal year.

PART II

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

Market Information

The Company's  common stock is traded on The American  Stock  Exchange under the
symbol "SAL".  The following table presents the high and low sales prices of the
Company's common stock.

<table>
<caption>
                                    2006 Quarters                      2005 Quarters
                         ---------------------------------   ---------------------------------
                          4th      3rd      2nd      1st      4th      3rd       2nd      1st
                         ---------------------------------   ---------------------------------

                      <c>      <c>      <c>      <c>      <c>      <c>      <c>      <c>
Range of Stock prices:
     High                $39.25   $39.70   $39.50   $38.25   $40.20   $40.70   $40.80   $43.50
     Low                 $37.50   $37.50   $35.50   $36.50   $37.90   $35.60   $36.50   $39.00
</table>

Holders

There  were  approximately  733  holders  of record of the  common  stock of the
Company as of March 9, 2007.  This  number  includes  brokerage  firms and other
financial  institutions  which hold stock in their  name,  but which is actually
owned by third parties.

Dividends

Dividends are currently  declared four times a year, and the Company  expects to
follow such practices in the future.  During the year 2006, the Company declared
a cash  dividend  each  quarter of $.26 per share.  Dividends  for the year 2006
totaled  $1.04 per share which  compared to total  dividends  of $1.00 that were
declared in the year 2005. At their February 28, 2007 meeting,  the Directors of
the Company  declared a cash dividend of $.27 per share for the first quarter of
2007. The dividend will be paid on April 30, 2007 to  shareholders  of record as
of March 30, 2007.  Payments of all dividends  are dependent  upon the condition
and earnings of the Company.  The Company's  ability to pay dividends is limited
by the prudent banking  principles  applicable to all bank holding companies and
by  the  provisions  of  Connecticut   Corporate  law,  which  provide  that  no
distribution  may be made by a  company  if,  after  giving it  effect:  (1) the
company  would  not be able to pay its  debts as they  become  due in the  usual
course of business or (2) the company's  total assets would be less than the sum
of its total  liabilities  plus amounts  needed to satisfy any  preferred  stock
rights.  The following table presents cash dividends  declared per share for the
last two years:

                            2006 Quarters                  2005 Quarters
                  ------------------------------   -----------------------------
                    4th     3rd     2nd     1st     4th     3rd     2nd    1st
                  ------------------------------   -----------------------------
Cash dividends
    declared       $0.26   $0.26   $0.26   $0.26   $0.25   $0.25   $0.25   $0.25

The dividends  paid to  shareholders  of the Company are funded  primarily  from
dividends  received by the Company  from the Bank.  Reference  should be made to
Note  13  of  the  Consolidated   Financial  Statements  for  a  description  of
restrictions on the ability of the Bank to pay dividends to the Company.

                                       15
<page>

                Securities Authorized for Issuance Under Equity
                  Compensation Plans (as of December 31, 2006)

                     Recent Sales of Unregistered Securities

The  shareholders  of the Company voted to approve the Directors  Stock Retainer
Plan (the "Plan") at the 2001 Annual Meeting of Shareholders.  The Plan provides
non-employee directors of the Company with shares of Common Stock as a component
of their compensation for services as non-employee directors. The maximum number
of shares of Common  Stock  that may be issued  pursuant  to the plan is 15,000.
Each year a grant under the Plan consists of 120 shares of Common Stock for each
non-employee  director  who served for  twelve  months and a prorated  number of
shares to reflect the number of months served for any new non-employee director.
On May 10,  2006,  840 shares were issued  pursuant to the Plan.  The next grant
date under the Plan will immediately  precede the Annual Meeting of Shareholders
which is to be held on May 16, 2007, and will be in the amount of 120 shares per
director.  All such  issuances  shall be  exempt  from  registration  under  the
Securities Act of 1933, as amended pursuant to Section 3(a)(2) and Section 4(2),
as they are transactions by a bank not involving any public offering.


                                       16
<page>

Stock Price Performance Graph
-----------------------------

         Set forth below is a line graph with an explanatory table comparing the
yearly  percentage  change in the  cumulative  total  stockholder  return on the
Company's Common Stock,  based on the market price of the Company's Common Stock
and assuming reinvestment of dividends,  with the total return of the AMEX Major
Market  Index and the SNL Bank Index for Banks with total  assets more than $250
million and less than $500 million.  The calculation of total cumulative  return
assumes a $100  investment in the  Company's  Common Stock and each of the other
indices on December 31, 2001.

                  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
           AMONG SALISBURY BANCORP, INC., THE AMEX MAJOR MARKET INDEX
                       AND THE SNL $250M-$500M BANK INDEX

                                     [GRAPH]

<table>
<caption>
                                                    As of
                         ------------------------------------------------------------
Index                     12/31/01  12/31/02  12/31/03  12/31/04  12/31/05  12/31/06
-------------------------------------------------------------------------------------

                         <c>       <c>       <c>       <c>       <c>       <c>
Salisbury Bancorp, Inc.     100.00    126.96    184.34    211.08    189.20    192.39
AMEX Major Market Index     100.00     87.77    108.87    119.80    115.78    137.82
SNL Bank $250M-$500M        100.00    128.95    186.31    211.46    224.51    234.58

</table>

                                       17
<page>

ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

<table>
<caption>
                                                            At or For the Years Ended December 31
                                                   2006          2005        2004        2003        2002
                                                 ---------     --------    --------    --------    --------

                                                 <c>          <c>         <c>         <c>         <c>
                                                        (dollars in thousands except per share data)
Statement of Condition Data:

Loans, Net                                       $ 252,464     $215,989    $201,978    $139,563    $135,632
Allowance For Loan Losses                            2,474        2,626       2,512       1,664       1,458
Investments                                        161,231      151,168     184,286     147,021     138,435
Total Assets                                       450,340      402,922     423,101     311,100     293,107
Deposits                                           313,586      287,271     298,842     218,457     211,037
Borrowings                                          87,093       71,016      79,213      60,897      51,891
Shareholders' Equity                                44,349       41,442      40,700      28,850      27,345
Nonperforming Assets                                   963          773       2,267         685       1,400

Statement of Income Data:

Interest and Fees on Loans                       $  15,687     $ 13,320    $  9,592    $  9,226    $  9,677
Interest and Dividends on Securities
                  and Other Interest Income          8,043        7,496       6,959       6,423       6,481
Interest Expense                                    10,459        7,352       5,659       5,613       6,898
                                                 ---------     --------    --------    --------    --------
Net Interest and Dividend Income                    13,271       13,464      10,892      10,036       9,260
(Benefit) Provision for Loan Losses                    (87)         210         250         313         300
Trust Department Income                              1,981        1,571       1,411       1,252       1,100
Other Income                                         2,085        2,084       1,854       1,674       1,388
Net Gain on Sales of Securities                        517        1,210       1,490       1,058         634
Other Expenses                                      12,245       12,444      10,603       8,599       7,775
                                                 ---------     --------    --------    --------    --------

Pre Tax Income                                       5,696        5,675       4,794       5,108       4,307
Income Taxes                                         1,442        1,114         775       1,268       1,108
                                                 ---------     --------    --------    --------    --------

Net Income                                       $   4,254     $  4,561    $  4,019    $  3,840    $  3,199
                                                 =========     ========    ========    ========    ========

Per Share Data:

Earnings per common share                        $    2.53     $   2.71    $   2.67    $   2.70    $   2.25
Earnings per common share, assuming dilution     $    2.53     $   2.71    $   2.67    $   2.70    $   2.25
Cash Dividends Declared per share                $    1.04     $   1.00    $   0.96    $   0.92    $   0.88
Book Value (at year end)                         $   26.33     $  24.61    $  24.19    $  20.26    $  19.21

Selected Statistical Data:

Return on Average Assets                              1.02%        1.12%       1.14%       1.24%       1.13%
Return on Average Shareholders' Equity                9.83%       10.81%      12.34%      13.47%      12.63%
Dividend Payout Ratio                                41.11%       36.90%      35.96%      34.07%      39.11%
Average Shareholders' Equity to Average Assets       10.37%       10.38%       9.20%       9.21%       8.92%
Net Interest Spread                                   2.93%        3.35%       3.22%       3.37%       3.21%
Net Interest Margin                                   3.67%        3.89%       3.63%       3.80%       3.80%

</table>

                                       18
<page>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS            Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATION                   and Subsidiary

The following  provides  Management's  comments on the  financial  condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"),  a Connecticut
corporation,  which is the holding company for Salisbury Bank and Trust Company,
(the "Bank").  The Company's sole subsidiary is the Bank, which has six (6) full
service offices located in the towns of North Canaan,  Lakeville,  Salisbury and
Sharon, Connecticut and South Egremont and Sheffield, Massachusetts, and a Trust
and Investment Services Division located in Lakeville,  Connecticut. The Company
and the Bank were formed in 1998 and 1848,  respectively.  In order to provide a
foundation for building shareholder value and servicing  customers,  the Company
remains  committed  to  investing  in  the  technological  and  human  resources
necessary to  developing  new  personalized  financial  products and services in
order to better serve both current and future  customers in the tri-state  area.
On October 3, 2006,  the Bank  announced that it had entered into a purchase and
assumption agreement to acquire certain assets and liabilities of a small branch
of New York Community Bank in Mount Vernon,  New York. The acquisition  received
state and federal regulatory approvals and makes it possible for the Company and
the Bank to establish additional offices in New York State subject to regulatory
approvals.  The  following  discussion  should be read in  conjunction  with the
Company's  consolidated  financial  statements and the notes to the consolidated
financial  statements  that are  presented as part of this Annual Report on Form
10-K.

RESULTS OF OPERATION
--------------------

Comparison of the Years Ended December 31, 2006 and 2005
--------------------------------------------------------

Overview
--------

The reported earnings for the Company totaled  $4,254,000 in 2006, a decrease of
$307,000 or 6.73% over year 2005  earnings of  $4,561,000.  Earnings per average
share  outstanding  totaled $2.53 in 2006. This compares to earnings per average
share  outstanding  of $2.71 in 2005 and $2.67 in 2004. The decrease in earnings
per share is primarily  attributable to an increase in interest expense due to a
higher level of deposits and to a decrease in noninterest income;  specifically,
reduced  income from gains in  securities  transactions  when  comparing the two
periods. The Company's gains on sale of  available-for-sale  securities amounted
to $517,000 in 2006 compared to $1,210,000 for the year 2005. Total  noninterest
expense for the period ending December 31, 2006 totaled  $12,245,000.  This is a
decrease of $199,000 or 1.60% when comparing the  corresponding  period in 2005.
This  decrease is primarily  the result of  management's  continuing  efforts to
control operating expenses.

The Company's assets at December 31, 2006 totaled $450,340,000 compared to total
assets of  $402,922,000 at December 31, 2005. New business  development  efforts
have resulted in the growth of net loans outstanding which totaled  $252,464,000
at December 31, 2006. This compares to net loans  outstanding of $215,989,000 at
December 31, 2005 and  represents  an increase of  $36,475,000  or 16.89%.  This
growth was funded by an  increase in deposits as well as an increase in advances
from the Federal Home Loan Bank of Boston. Deposits at December 31, 2006 totaled
$313,586,000  and  compared to total  deposits of  $287,271,000  at December 31,
2005.  Approximately  $19.5  million of this  growth is the result of the Bank's
decision to begin using  brokered  deposits  as part of a growth  strategy.  The
remaining  growth  is  primarily  the  result  of  the  Company's  new  business
development plan.  Advances from the Federal Home Loan Bank totaled  $87,093,000
at December 31, 2006 which compared to advances totaling $71,016,000 at December
31, 2005.  The Bank  continues  to monitor the quality of the loan  portfolio to
ensure  that  loan  quality  will not be  sacrificed  for  growth  or  otherwise
compromise the Company's  objectives.  Nonperforming  loans totaled  $963,000 at
December  31, 2006 as  compared  to  nonperforming  loans  totaling  $773,000 at
December 31, 2005. This represents an increase of $190,000 or 24.58%, but is not
considered to be indicative  of any trend as the level of  non-performing  loans
remains less than one-half of one percent (1%) of total loans.

The Company is "well  capitalized".  The Company's  risk-based capital ratios at
December 31, 2006,  which includes the  risk-weighted  assets and capital of the
Bank, were 14.28% for Tier 1 capital and 15.28% for total capital. The Company's
leverage ratio was 8.43% at December 31, 2006. This compares to a Tier 1 capital
ratio at December  31,  2005 of 14.58%,  a total  capital  ratio of 15.76% and a
Company  leverage  ratio  of  8.27%.  As a  result  of the  Company's  financial
performance,  the Board of Directors  increased total dividends  declared on the
Company's  common stock to $1.04 per share in 2006. This compares to a $1.00 per
share dividend  declared in 2005 and a $.96 per share dividend that was declared
in 2004.

                                       19
<page>

Critical Accounting Estimates
-----------------------------

In preparing the Company's financial statements,  management selects and applies
numerous accounting policies.  In applying these policies,  management must make
estimates and  assumptions.  The accounting  policy that is most  susceptible to
critical  estimates  and  assumptions  is the  allowance  for loan  losses.  The
determination  of an appropriate  provision is based on a  determination  of the
probable amount of credit losses in the loan portfolio.  Many factors  influence
the amount of future loan losses, relating to both the specific  characteristics
of the loan portfolio and general  economic  conditions  nationally and locally.
While management  carefully considers these factors in determining the amount of
the  allowance  for loan losses,  future  adjustments  may be  necessary  due to
changed  conditions,  which could have an adverse impact on reported earnings in
the future. (See "Provisions and Allowance for Loan Losses".)

Net Interest and Dividend Income
--------------------------------

The Company earns income from two basic  sources.  The primary source is through
the management of its financial assets and liabilities and involves  functioning
as a financial  intermediary.  The Company  accepts  funds from  depositors  and
borrows  funds and either lends the funds to borrowers or invests those funds in
various types of securities. The second source is fee income, which is discussed
in the noninterest income section of this analysis.

Net interest  income is the  difference  between the interest and fees earned on
loans,  interest and  dividends  earned on  securities  (the  Company's  earning
assets) and the interest expense paid on deposits and borrowed funds,  primarily
in the form of  advances  from the Federal  Home Loan Bank.  The amount by which
interest  income will exceed interest  expense  depends on two factors:  (1) the
volume or  balance  of  earning  assets  compared  to the  volume or  balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those  interest-earning  assets  compared  with the interest  rate paid on those
interest-bearing deposits and borrowed funds. For this discussion,  net interest
income is presented on a fully  taxable-equivalent  ("FTE") basis.  FTE interest
income restates  reported  interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.

(dollars in thousands)                           December 31,
                                           2006        2005        2004
                                       --------    --------    --------
Interest and Dividend Income
(financial statements)                 $ 23,730    $ 20,816    $ 16,551

Tax Equivalent Adjustment                 1,072       1,200       1,182
                                       --------    --------    --------
       Total Interest and Dividend
       Income (on an FTE basis)          24,802      22,016      17,733

Interest Expense                        (10,459)     (7,352)     (5,659)
                                       --------    --------    --------

Net Interest and Dividend Income-FTE   $ 14,343    $ 14,664    $ 12,074
                                       ========    ========    ========

The Company's  2006 total  interest and dividend  income on an FTE basis for the
period ended December 31, 2006  increased  $2,786,000 or 12.65% when compared to
the same period in 2005. The increase is primarily  attributable  to an increase
in earning assets as well an economic  environment  experiencing  an increase in
interest rates.

Interest  expense  on  deposits  in  2006  increased  $2,715,000  or  65.09%  to
$6,886,000  compared  to  $4,171,000  for the  corresponding  period in 2005 and
$2,739,000  in 2004.  The increase is primarily  attributable  to an increase in
deposits as well as an interest rate  environment  that was on the rise for most
of the year as a result of Federal Reserve actions. Interest expense for Federal
Home Loan Bank  advances  increased  $392,000 to  $3,573,000 in 2006 compared to
$3,181,000 in 2005 and $2,920,000 in 2004. The increase was primarily the result
of an increase in advances during the year.  Competition  remains aggressive and
interest  margins  continue  to be  pressured.  As a result,  net  interest  and
dividend  income  on an FTE  basis  decreased  $321,000  or 2.19%  over 2005 and
totaled  $14,343,000  for the year ended  December  31, 2006 and compared to net
interest and dividend  income on an FTE basis of $14,664,000  for the year ended
December 31, 2005 and $12,074,000 for the year ended 2004.

Net  interest  margin  is  net  interest  and  dividend  income  expressed  as a
percentage  of average  earning  assets.  It is used to measure  the  difference
between the  average  rate of interest  and  dividends  earned on assets and the
average rate of interest that must be paid to support those assets.  To maintain
its net  interest  margin,  the  Company  must manage the  relationship

                                       20
<page>

between  interest  earned and paid. The Company's 2006 net interest margin on an
FTE basis was 3.67%.  This compares to a net interest  margin of 3.89% for 2005.
The following table reflects average balances, interest earned or paid and rates
for the three years ended  December  31, 2006,  2005 and 2004.  The average loan
balances  include both non-accrual and  restructured  loans.  Interest earned on
loans also includes fees on loans such as late charges that are not deemed to be
material.  Interest earned on tax exempt securities in the table is presented on
a fully  taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in
performing  these  calculations.  Actual  tax exempt  income  earned in 2006 was
$2,080,000  with a yield of 4.41%.  Actual  tax  exempt  income in 2005  totaled
$2,329,000  with a yield of 4.44%  and in 2004  actual  tax  exempt  income  was
$2,294,000 with a yield of 4.68%.



                                       21
<page>
<table>
<caption>

YIELD ANALYSIS
                           ---------------------------------------------------------------------------------------------------------
Average Balances, Interest Earned/Paid and Rates
                                                                     Years Ended December 31
                           ---------------------------------------------------------------------------------------------------------
(dollars in thousands)                    2006                                2005                                2004
                           ---------------------------------------------------------------------------------------------------------
                                        INTEREST                            INTEREST                            INTEREST
                            AVERAGE      EARNED/       YIELD    AVERAGE      EARNED/      YIELD     AVERAGE      EARNED/      YIELD
                            BALANCE       PAID         RATE     BALANCE       PAID        RATE      BALANCE       PAID         RATE

                        <c>          <c>            <c>     <c>          <c>            <c>     <c>          <c>            <c>

ASSETS
Interest-Earning Assets:
Loans                      $ 229,704    $  15,687      6.83%   $ 208,786    $  13,320      6.38%   $ 160,382    $   9,592      5.98%
Taxable Securities         $ 111,635    $   5,883      5.27%   $ 112,746    $   5,097      4.52%   $ 117,535    $   4,613      3.92%
Tax-Exempt Securities*     $  47,215    $   3,152      6.68%   $  52,435    $   3,529      6.73%   $  49,017    $   3,475      7.09%
Federal Funds              $   1,154    $      56      4.85%   $   1,840    $      48      2.61%   $   3,455    $      39      1.13%
Other Interest-Earning     $     703    $      24      3.41%   $   1,096    $      22      2.01%   $   1,809    $      14      0.77%
                           ----------------------              ----------------------              ----------------------
Total Interest-Earning
  Assets                   $ 390,411    $  24,802      6.35%   $ 376,903    $  22,016      5.84%   $ 332,198    $  17,733      5.34%
                                        ---------                           ---------                           ---------
Allowance for Loan
  Losses                   ($  2,603)                          ($  2,652)                          ($  1,952)
Cash & Due From
  Banks                    $   6,949                           $   8,189                           $   7,987
Premises, Equipment        $   6,388                           $   6,432                           $   3,865
Net unrealized loss
  on AFS Securities        ($  4,106)                          ($  2,127)                          ($    412)
Other Assets               $  20,348                           $  19,707                           $  12,330
                           ---------                           ---------                           ---------
Total Average Assets       $ 417,387                           $ 406,452                           $ 354,016
                           =========                           =========                           =========

LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing
  Liabilities:
NOW/Money Market
  Deposits                 $  79,356    $   1,812      2.28%   $  81,602    $   1,229      1.51%   $  62,681    $     382      0.61%
Savings Deposits           $  48,882    $     640      1.31%   $  59,466    $     456      0.77%   $  54,596    $     373      0.68%
Time Deposits              $ 106,395    $   4,434      4.17%   $  86,794    $   2,486      2.86%   $  75,241    $   1,984      2.64%
Borrowed Funds             $  71,471    $   3,573      5.00%   $  67,793    $   3,181      4.69%   $  74,954    $   2,920      3.90%
                           ----------------------              ----------------------              ----------------------
Total Interest-Bearing
  Liabilities              $ 306,104    $  10,459      3.42%   $ 295,655    $   7,352      2.49%   $ 267,472    $   5,659      2.12%
                                        ---------                           ---------                           ---------
Demand Deposits            $  65,151                           $  65,591                           $  51,649
Other Liabilities          $   2,842                           $   3,008                           $   2,329
Shareholders' Equity       $  43,290                           $  42,198                           $  32,566
                           ---------                           ---------                           ---------
Total Liabilities and
  Shareholders' Equity     $ 417,387                           $ 406,452                           $ 354,016
                           =========                           =========                           =========
Net Interest Income                     $  14,343                           $  14,664                           $  12,074
                                        =========                           =========                           =========
Net Interest Spread                                    2.93%                               3.35%                               3.22%
Net Interest Margin                                    3.67%                               3.89%                               3.63%

</table>

    * Presented on a fully taxable equivalent ("FTE") basis


                                       22
<page>

Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)

<table>
<caption>

(dollars in thousands)                       2006  over 2005                  2005 over 2004
                                      -----------------------------    -----------------------------
                                      Volume      Rate       Total     Volume      Rate       Total
                                      -----------------------------    -----------------------------

                                      <c>         <c>       <c>         <c>       <c>          <c>
Increase (decrease) in:
Interest and dividend income on:
   Loans                              $ 1,335    $ 1,032    $ 2,367    $ 2,895    $   833    $ 3,728
   Taxable investment securities          (50)       836        786       (188)       672        484
   Tax-exempt investment securities      (351)       (26)      (377)       242       (188)        54
   Other interest earning                 (26)        36         10        (23)        40         17
Total interest and dividend income    $   908    $ 1,878    $ 2,786    $ 2,926    $ 1,357    $ 4,283
                                      -------    -------    -------    -------    -------    -------

Interest expense on:
   NOW/Money Market deposits          $   (34)   $   617    $   583    $   115    $   732    $   847
   Savings deposits                       (81)       265        184         33         50         83
   Time deposits                          561      1,387      1,948        305        197        502
   Borrowed funds                         172        220        392       (279)       540        261
                                      -------    -------    -------    -------    -------    -------
Total interest expense                $   618    $ 2,489    $ 3,107    $   174    $ 1,519    $ 1,693
                                      -------    -------    -------    -------    -------    -------

Net interest and dividend income      $   290    $  (611)   $  (321)   $ 2,752    $  (162)   $ 2,590
                                      =======    =======    =======    =======    =======    =======
</table>

Noninterest Income
------------------

Noninterest  income totaled  $4,583,000 for the year ended December 31, 2006 and
compared to $4,865,000 for the year ended December 31, 2005.  This is a decrease
of $282,000 or 5.80%. Gains on sales of available-for-sale  securities decreased
$693,000 or 57.27%.  This decrease is primarily the result of movement in market
rates during the year.  The yield curve  remained flat and at times was inverted
during  the year  which  limited  opportunities  to  generate  gains on sales of
available-for-sale  securities.  Trust and investment  services income increased
$410,000 to  $1,981,000  primarily  as a result of the  efforts of new  business
development. Service charges on deposit accounts totaled $707,000 for 2006. This
is an increase of $65,000 or 10.12% when  compared to total  service  charges of
$642,000 in 2005. The increase can be attributed to an increase in the number of
deposit accounts.  Mortgage refinancing remained active during 2006. Competition
in the secondary  mortgage market continues to be very aggressive.  Other income
has remained  relatively  consistent  when comparing the year 2006 to 2005. This
category  of income  primarily  consists  of fees  associated  with  transaction
accounts  and in  addition,  fees related to the  origination  and  servicing of
mortgage loans as well as gains reflecting the sale of mortgage loans.

Noninterest Expense
-------------------

Overall,  noninterest  expense  decreased  1.60% for the year ended December 31,
2006 as compared to the corresponding period in 2005. Professional fees however,
increased  $248,000  or 80.78%.  The  Company's  trust and  investment  services
division teamed with Bradley Foster and Sargent, Inc, an independent  investment
advisory firm which assists in providing a broader scope of highly  personalized
professional  investment  services to clients.  In addition,  there were several
projects  that  required  the  services  of  consultants  during  the year  that
influenced the increase in  professional  fees.  Other  increases in noninterest
expenses are  attributable  to normal volumes of business.  The decreases in the
noninterest expenses listed in the table below are all primarily attributable to
management's continuing efforts to control operating expenses.

The  components  of  noninterest  expense  and the changes in the period were as
follows (amounts in thousands):

                                           2006      2005   $ Change   % Change
 -------------------------------------------------------------------------------

Salaries and employee benefits           $ 7,151   $ 7,355   $  (204)    (2.77)%
Occupancy expense                            752       728        24      3.30
Equipment expense                            787       777        10      1.29
Data processing                            1,134     1,014       120     11.83
Insurance                                    154       148         6      4.05
Printing and stationery                      240       278       (38)   (13.67)
Professional fees                            555       307       248     80.78
Legal expense                                151       264      (113)   (42.80)
Amortization of core deposit intangible      164       164         0       .00
Other expense                              1,157     1,409      (252)   (17.89)
                                         -------   -------   -------
             Total noninterest expense   $12,245   $12,444   $  (199)    (1.60)
                                         =======   =======   =======

                                       23
<page>

Income Taxes
------------

In 2006, the Company's income tax provision totaled  $1,442,000 that reflects an
effective  tax rate of  25.32%.  This  compares  to an income tax  provision  of
$1,114,000 and an effective tax rate of 19.63% for the same period in 2005. This
increase is primarily attributable to an increase in taxable income.

Net Income
----------

Overall,  net income  totaled  $4,254,000  for the year ended December 31, 2006.
This compares to net income of $4,561,000  for the year ended December 31, 2005.
This is a decrease  of  $307,000 or 6.73% and  represents  earnings  per average
share outstanding of $2.53.  Earnings per average share outstanding for the year
ended December 31, 2005 was $2.71.

RESULTS OF OPERATION

Comparison of the Years Ended December 31, 2005 and 2004
--------------------------------------------------------

Overview
--------

The earnings for the Company were $4,561,000 in 2005, an increase of $542,000 or
13.49%  over year 2004  earnings  of  $4,019,000.  Earnings  per  average  share
outstanding  were $2.71 in 2005.  This  compared to earnings  per average  share
outstanding  of $2.67 in 2004 and $2.70 in 2003.  The  increase in earnings  per
share  was  primarily  the  result  of the  increased  base of  earnings  assets
following  consummation of the Company's acquisition of Canaan National Bancorp,
Inc. on September 10, 2004.

The Company's  assets at December 31, 2005 were  $402,922,000  compared to total
assets of  $423,101,000  at  December  31,  2004.  The  decrease  was  primarily
attributable to a reduction in the securities  portfolio.  During the year 2005,
net loans  outstanding  increased  $14,011,000 or 6.94% and total  $215,989,000.
This compared to net loans outstanding of $201,978,000 at December 31, 2004. The
Bank monitored the quality of the loan portfolio to ensure that loan quality was
not sacrificed  for growth or otherwise  compromised  the Company's  objectives.
Nonperforming   loans  were  $773,000  at  December  31,  2005  as  compared  to
nonperforming  loans of $2,267,000 at December 31, 2004.  This was a decrease of
$1,494,000 or 65.90%.  Deposits at December 31, 2005 were $287,271,000  compared
to total deposits of $298,842,000 at December 31, 2004,  representing a decrease
of $11,571,000.

The Bank was "well  capitalized".  The Company's  risk-based  capital  ratios at
December 31, 2005,  which included the  risk-weighted  assets and capital of the
Salisbury Bank and Trust Company,  were 14.58% for Tier 1 capital and 15.76% for
total capital. The Company's leverage ratio was 8.27% at December 31, 2005. This
compared  to a Tier 1 capital  ratio at  December  31,  2004 of 11.12%,  a total
capital ratio of 12.13% and a Company  leverage  ratio of 7.22%.  As a result of
the Company's  financial  performance,  the Board of Directors  increased  total
dividends  declared on the  Company's  common  stock to $1.00 per share in 2005.
This compared to a $.96 per share dividend declared in 2004 and a $.92 per share
dividend that was declared in 2003.

Net Interest and Dividend Income
--------------------------------

For  this   discussion,   net   interest   income  is   presented   on  a  fully
taxable-equivalent ("FTE") basis. FTE interest income restates reported interest
income on tax exempt loans and  securities as if such interest were taxed at the
applicable State and Federal income tax rates for all periods presented.

(dollars in thousands)                            December 31,
                                          2005        2004        2003
                                        --------------------------------
Interest and Dividend Income
(financial statements)                  $ 20,816    $ 16,551    $ 15,650

Tax Equivalent Adjustment                  1,200       1,182       1,075
                                        --------    --------    --------
       Total Interest and Dividend
       Income (on an FTE basis)           22,016      17,733      16,725

Interest Expense                          (7,352)     (5,659)     (5,613)
                                        --------    --------    --------
Net Interest and Dividend  Income-FTE   $ 14,664    $ 12,074    $ 11,112
                                        ========    ========    ========

                                       24
<page>

The  Company's  2005  total  interest  and  dividend  income  on an FTE basis of
$22,016,000  was  $4,283,000 or 24.15% more than the total interest and dividend
on an FTE basis of $17,733,000 in 2004. The increase was primarily  attributable
to an increase in earning assets as well an economic environment  experiencing a
slow increase in interest rates.

Interest  expense  on  deposits  in  2005  increased  $1,432,000  or  52.28%  to
$4,171,000  compared  to  $2,739,000  for the  corresponding  period in 2004 and
$2,866,000  in 2003.  Interest  expense  for  Federal  Home Loan  Bank  advances
increased  $261,000 to  $3,181,000  in 2005  compared to  $2,920,000 in 2004 and
$2,747,000  in 2003.  The  increase was  primarily  the result of an increase in
advances during the year. Although  competition remained aggressive and interest
margins  continued to be pressured,  net interest and dividend  income on an FTE
basis  increased  $2,590,000  or 21.45%  over 2004 and  totaled  $14,664,000  at
December 31, 2005  compared to net interest and dividend  income on an FTE basis
of $12,074,000 at December 31, 2004 and $11,112,000 in 2003.

The Company's 2005 net interest margin on an FTE basis was 3.89%.  This compared
to a net interest margin of 3.63% for 2004. Actual tax exempt income in 2005 was
$2,329,000  with a yield of 4.44%.  Actual  tax  exempt  income in 2004  totaled
$2,294,000  with a yield of 4.68%  and in 2003  actual  tax  exempt  income  was
$2,086,000 with a yield of 4.78%.


                                       25
<page>
<table>
<caption>

YIELD ANALYSIS
                           ---------------------------------------------------------------------------------------------------------
Average Balances, Interest Earned/Paid and Rates
                                                                      Years Ended December 31
                           ---------------------------------------------------------------------------------------------------------
(dollars in thousands)                     2005                                2004                                2003
                           ---------------------------------------------------------------------------------------------------------
                                         INTEREST                            INTEREST                            INTEREST
                            AVERAGE       EARNED/       YIELD    AVERAGE      EARNED/      YIELD     AVERAGE      EARNED/      YIELD
                            BALANCE        PAID         RATE     BALANCE       PAID         RATE     BALANCE       PAID        RATE

                         <c>          <c>            <c>     <c>          <c>            <c>     <c>          <c>           <c>

ASSETS
Interest-Earning Assets:
Loans                       $ 208,786    $  13,320      6.38%   $ 160,382    $   9,592      5.98%   $ 142,752    $   9,226     6.46%
Taxable Securities          $ 112,746    $   5,097      4.52%   $ 117,535    $   4,613      3.92%   $ 101,931    $   4,299     4.22%
Tax-Exempt Securities*      $  52,435    $   3,529      6.73%   $  49,017    $   3,475      7.09%   $  43,603    $   3,161     7.25%
Federal Funds               $   1,840    $      48      2.61%   $   3,455    $      39      1.13%   $   3,125    $      29     0.93%
Other Interest-Earning      $   1,096    $      22      2.01%   $   1,809    $      14      0.77%   $   1,359    $      10     0.74%
                            ----------------------              ----------------------              ----------------------
Total Interest-Earning
  Assets                    $ 376,903    $  22,016      5.84%   $ 332,198    $  17,733      5.34%   $ 292,770    $  16,725     5.71%
                                         ---------                           ---------                           ---------
Allowance for Loan
  Losses                    ($  2,652)                          ($  1,952)                          ($  1,468)
Cash & Due From
  Banks                     $   8,189                           $   7,987                           $   6,425
Premises, Equipment         $   6,432                           $   3,865                           $   3,000
Net unrealized (loss)gain
  on AFS Securities         ($  2,127)                          ($    412)                          $   2,316
Other Assets                $  19,707                           $  12,330                           $   6,403
                            ---------                           ---------                           ---------
Total Average Assets        $ 406,452                           $ 354,016                           $ 309,446
                            =========                           =========                           =========

LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing
  Liabilities:
NOW/Money Market
  Deposits                  $  81,602    $   1,229      1.51%   $  62,681    $     382      0.61%   $  59,521    $     363     0.61%
Savings Deposits            $  59,466    $     456      0.77%   $  54,596    $     373      0.68%   $  45,975    $     450     0.98%
Time Deposits               $  86,794    $   2,486      2.86%   $  75,241    $   1,984      2.64%   $  68,898    $   2,054     2.98%
Borrowed Funds              $  67,793    $   3,181      4.69%   $  74,954    $   2,920      3.90%   $  65,282    $   2,746     4.21%
                            ----------------------              ----------------------              ----------------------
Total Interest-Bearing
  Liabilities               $ 295,655    $   7,352      2.49%   $ 267,472    $   5,659      2.12%   $ 239,676    $   5,613     2.34%
                                         ---------                           ---------                           ---------
Demand Deposits             $  65,591                           $  51,649                           $  38,998
Other Liabilities           $   3,008                           $   2,329                           $   2,130
Shareholders' Equity        $  42,198                           $  32,566                           $  28,642
                            ---------                           ---------                           ---------
Total Liabilities and
  Shareholders' Equity      $ 406,452                           $ 354,016                           $ 309,446
                            =========                           =========                           =========
Net Interest Income                      $  14,664                           $  12,074                           $  11,112
                                         =========                           =========                           =========
Net Interest Spread                                     3.35%                               3.22%                              3.37%
Net Interest Margin                                     3.89%                               3.63%                              3.80%

</table>

    * Presented on a fully taxable equivalent ("FTE") basis

                                       26
<page>

Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)

<table>
<caption>

dollars in thousands)                         2005  over 2004                2004 over 2003
                                       -----------------------------   ----------------------------
                                       Volume      Rate       Total    Volume     Rate       Total
                                       -----------------------------   ----------------------------

                                        <c>       <c>          <c>      <c>       <c>        <c>
Increase (decrease) in:
Interest and dividend income on:
   Loans                               $ 2,895    $   833    $ 3,728   $ 1,139   $  (773)   $   366
   Taxable investment securities          (188)       672        484       658      (344)       314
   Tax-exempt investment securities        242       (188)        54       393       (79)       314
   Other interest earning                  (23)        40         17         6         8         14
                                       -------    -------    -------   -------   -------    -------
Total interest and dividend income $     2,926    $ 1,357    $ 4,283   $ 2,196   $(1,188)   $ 1,008
                                       -------    -------    -------   -------   -------    -------

Interest expense on:
   NOW/Money Market deposits           $   115    $   732    $   847   $    19   $     0         19
   Savings deposits                         33         50         83        84      (161)       (77)
   Time deposits                           305        197        502       189      (259)       (70)
   Borrowed funds                         (279)       540        261       407      (233)       174
                                       -------    -------    -------   -------   -------    -------
Total interest expense                 $   174    $ 1,519    $ 1,693   $   699   $  (653)   $    46
                                       -------    -------    -------   -------   -------    -------

Net interest and dividend income $       2,752    $  (162)   $ 2,590   $ 1,497   $  (535)   $   962
                                       =======    =======    =======   =======   =======    =======
</table>

Noninterest Income
------------------

Noninterest  income increased  $110,000 or 2.31% and totaled  $4,865,000 for the
year ended  December  31,  2005 as  compared  to  $4,755,000  for the year ended
December 31, 2004. Trust and investment  services income  increased  $160,000 to
$1,571,000  primarily  as a result of the efforts of new  business  development.
Service  charges on deposit  accounts  totaled  $642,000  for 2005.  This was an
increase of $21,000 or 3.38% when compared to total service  charges of $621,000
in  2004.  The  increase  was  attributed  to an  increase  in  deposit  account
transactions.  Gains on sales and writedowns of  available-for-sale  securities,
net totaled  $1,210,000 in 2005 and represented a decrease of $280,000 or 18.79%
compared  to  $1,490,000  in  2004.  This  decrease  reflected  a  writedown  of
approximately  $182,000,  however,  that was primarily attributed to movement in
the market which resulted in fewer  opportunities for the Company to enhance the
return from the securities portfolio and at the same time realize gains on sales
of available-for-sale securities. Mortgage refinancing was active during 2005 as
rates remained  attractive to consumers.  Competition in the secondary  mortgage
market  was very  aggressive.  Gains on  sales  of loans  held-for-sale  totaled
$270,000  in 2005  compared  to  $304,000  in 2004,  representing  a decrease of
11.18%. Other income and loan commissions however,  increased $243,000 or 26.16%
to $1,172,000  in 2005 compared to $929,000 in 2004.  The increase was primarily
attributable  to the  increase  in fees earned  from  activity in the  secondary
mortgage market due to the change of investors.

Noninterest Expense
-------------------

Noninterest  expense  increased  17.36% for the year ended  December 31, 2005 as
compared to the  corresponding  period in 2004. The increases in the noninterest
expenses  listed below were  primarily  attributed to the Company's  growth as a
result of the merger with Canaan  National  Bancorp,  Inc. The decrease in other
expense  was a  reflection  of  non-recurring  expenses  in 2004  related to the
conversion  of  the  Company's  core  processing   system.   The  components  of
noninterest  expense and the  changes in the period were as follows  (amounts in
thousands):

                                            2005      2004   $ Change   % Change
 -------------------------------------------------------------------------------
Salaries and employee benefits            $ 7,355   $ 5,971   $ 1,384     23.18%
Occupancy expense                             728       482       246     51.04
Equipment expense                             777       600       177     29.50
Data processing                             1,014       887       127     14.32
Insurance                                     148       122        26     21.31
Printing and stationery                       278       262        16      6.11
Professional fees                             307       279        28     10.04
Legal expense                                 264       173        91     52.60
Amortization of core deposit intangible       164       101        63     62.38
Other expense                               1,409     1,726      (317)   (18.37)
                                          -------   -------   -------
             Total noninterest expense    $12,444   $10,603   $ 1,841     17.36
                                          =======   =======   =======

                                       27
<page>

Income Taxes
------------

In 2005, the Company's income tax provision totaled $1,114,000 that reflected an
effective  tax rate of  19.63%.  This  compared  to an income tax  provision  of
$775,000 and an effective  tax rate of 16.16% for the same period in 2004.  This
increase was primarily attributed to an increase in taxable income.

Net Income
----------

Overall,  net income was $4,561,000  for the year ended December 31, 2005.  This
compared to net income of $4,019,000 for the year ended December 31, 2004.  This
was an increase of $542,000 or 13.49% and represented earnings per average share
outstanding of $2.71.  Earnings per average share outstanding for the year ended
December 31, 2004 was $2.67. The increase in net income was primarily the result
of an increase in earning assets  resulting from the merger with Canaan National
Bancorp, Inc.

FINANCIAL CONDITION
-------------------
Comparison of December 31, 2006 and 2005
----------------------------------------

Total assets at December 31, 2006 were $450,340,000  compared to $402,922,000 at
December 31, 2005. This is an increase of 11.77%.  The increase is primarily the
result of an increase in loans and the securities  portfolio that were funded by
an increase in deposits and advances from the Federal Home Loan Bank of Boston.

Securities Portfolio
--------------------

The Company  manages the securities  portfolio in accordance with the investment
policy  adopted by the Board of Directors.  The primary  objectives  are to earn
interest and dividend income,  provide  liquidity to meet cash flow needs and to
manage interest rate risk and  asset-quality  diversifications  to the Company's
assets. The securities  portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2006, the securities  portfolio,  including Federal
Home  Loan  Bank of Boston  stock,  totaled  $161,231,000.  This  represents  an
increase of $10,063,000 or 6.66% over year-end 2005.

Securities     are     classified     in     the     portfolio     as     either
securities-available-for-sale  or  securities-held-to-maturity.  Securities  for
which the Company has the ability and positive intent to hold until maturity are
reported as held-to-maturity.  These securities are carried at cost adjusted for
amortization  of premiums and accretion of discounts.  Securities  that are held
for indefinite  periods of time and which  management  intends to use as part of
its  asset/liability  management  strategy,  or that may be sold in  response to
changes in interest  rates,  changes in  prepayment  risk,  increases in capital
requirements  or other similar  factors,  are classified as  available-for-sale.
These  securities  are stated at fair value in the  financial  statements of the
Company. Temporary differences between available-for-sale  securities' amortized
cost and fair market value (accumulated other comprehensive  income or loss when
net of tax) are not included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized.  The cost basis
of  individual  securities  is written  down to estimated  fair value  through a
charge to earnings when  decreases in value below  amortized cost are considered
to be other than temporary.  This other than temporary  impairment is charged to
securities gain on the Company's financial statements. At December 31, 2006, the
unrealized  loss  (accumulated  other   comprehensive   loss)  net  of  tax  was
$1,190,000.  This  compares to an  unrealized  loss net of tax of  $2,601,000 at
December 31, 2005.  The Company  monitors the market value  fluctuations  of its
securities  portfolio on a monthly basis as well as associated credit ratings to
determine potential impairment of a security.

Federal Funds Sold
------------------

Federal  funds sold at  December  31,  2006  totaled  $1,000,000.  There were no
federal  funds sold at December 31,  2005.  This  represents a normal  operating
range of funds for daily cash needs.

Lending
-------

New business development during the year coupled with an increase in loan demand
resulted in an increase in net loans outstanding to $252,464,000 at December 31,
2006, as compared to  $215,989,000  at December 31, 2005. This is an increase of
$36,475,000  or 16.89%.  Although the largest  dollar  volumes of loan  activity
continues to be in the  residential  mortgage  area,  the Company  offers a wide
variety of loan types and terms along with competitive pricing to customers.  At
December 31, 2006,  the  portfolio  also  included  $12,000,000  in Term federal
funds, which are short term loans to other financial institutions. The Company's
credit  function is designed to ensure  adherence  to prudent  credit  standards
despite  competition for loans in the Company's market area.

                                       28
<page>

The following table  represents the composition of the loan portfolio  comparing

<table>
<caption>
                                             December 31, 2006   December 31, 2005
                                             -----------------   -----------------
                                                     (amounts in thousands)

                                                  <c>                <c>
Commercial, financial and agricultural            $  16,465          $  15,354
Real Estate-construction and land development        21,169             18,814
Real Estate-residential                             145,395            135,619
Real Estate-commercial                               50,859             40,889
Consumer                                              8,816              7,900
Term federal funds                                   12,000                  0
Other                                                    69                 47
                                                  ---------          ---------
                                                    254,773            218,623
Deferred costs, net                                     168                  0
Unearned income                                          (3)                (8)
Allowance for loan losses                            (2,474)            (2,626)
                                                  ---------          ---------
                  Net  loans                      $ 252,464          $ 215,989
                                                  =========          =========
</table>

Provisions and Allowance for Loan Losses
----------------------------------------

Total loans outstanding at of December 31, 2006 were  $254,773,000.  Included in
the aforementioned  figure is $12,000,000 in Term federal funds, which are short
term loans to other financial institutions and which are netted from total loans
for purposes of analysis of the ALLL. As a result, loans outstanding at December
31, 2006 was  $242,773,000  net of term federal funds sold compared to net loans
outstanding  of  $218,623,000  at  December  31,  2005.  This is an  increase of
$24,150,000 or 11.05%. This growth can be attributed primarily to an increase in
both  residential  and commercial  real estate loan demand as well as the Bank's
new  business  development  program.  Approximately  90% of the  Company's  loan
portfolio continues to be real estate secured.

Credit risk is inherent in the business of extending loans. The Company monitors
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Company's objectives. Because of the risk associated
with extending loans the Company  maintains an allowance or reserve for loan and
lease losses through charges to earnings.  The Company evaluates the adequacy of
the allowance on a monthly basis.  Such  evaluations are based on assessments of
credit  quality and trends  within the  portfolio  and "risk rating" of loans by
senior  management,  which is  reviewed by the  Company's  Loan  Committee  on a
regular  basis.  Loans are  initially  risk rated when  originated.  If there is
deterioration in the credit quality, the risk rating is adjusted accordingly.

The  Allowance  for Loan and Lease  Losses  (ALLL) at December  31, 2006 totaled
$2,474,000  representing 256.91% of nonperforming loans of $963,000 and 1.02% of
total loans  outstanding  net of term federal funds sold or  $242,773,000.  This
compares to an ALLL of  $2,626,000  which is 339.72% of  nonperforming  loans of
$773,000 and 1.20% of total loans  outstanding of  $218,623,000  at December 31,
2005.  Management  reduced the  allowance  by $87,488 that had  previously  been
expensed through the loan loss provision from prior years. This was justified by
positive  trends in the loan portfolio and low levels of  delinquencies  and net
charge-offs as well as low levels of classified and nonperforming loans.

A separate  component  that is evaluated is the  Allowance for Off Balance Sheet
Commitments  which totaled  $36,000 as of December 31, 2006.  The two allowances
combined  brought  the  total  ALLL  to  $2,510,000  or  1.03%  of  total  loans
outstanding. The December 31, 2005 comparison included $134,000 in the Allowance
for Off Balance Sheet Commitments bringing the total combined ALLL to $2,760,000
or 1.26% of total loans.  A total of $132,000 in loans were  charged-off  during
the 2006 year  compared  to  $134,000  during  2005.  Recoveries  of  previously
charged-off  loans totaled  $67,000  during the 2006 year compared to $39,000 in
recoveries for 2005.

The allowance also includes a component  resulting  from the  application of the
measurement  criteria of Statements of Financial  Accounting  Standards No. 114,
Accounting by Creditors for  Impairment of a Loan ("SFAS 114").  Impaired  loans
receive  individual  evaluation of the allowance  necessary on a monthly  basis.
Loans to be considered  for  impairment are defined in the Company's Loan Policy
as  commercial  loans  with  balances   outstanding  of  $100,000  or  more  and
residential  real estate mortgages with balances of $300,000 or more. Such loans
are considered impaired when it is probable that the Company will not be able to
collect all principal and interest due according to the terms of the note.

Any such  commercial  loan and/or  residential  mortgage will be considered  for
impairment under any of the following

                                       29
<page>

circumstances:

      1.    Non-accrual status;
      2.    Loans over 90 days delinquent;
      3.    Troubled debt restructures consummated after December 31, 1994;
      4.    Loans  classified as "doubtful",  meaning that they have weaknesses,
            which  make  collection  or  liquidation  in full,  on the  basis of
            currently   existing   facts,   conditions,   and   values,   highly
            questionable and improbable.

The  individual  allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's  effective  interest rate
or the  fair  value  of the  collateral  if the  loan is  collateral  dependent.
Specifically  identifiable and quantifiable  losses are immediately  charged off
against the allowance.

In addition, a risk of loss factor is applied in evaluating  categories of loans
as part of the periodic  analysis of the  Allowance  for Loan and Lease  Losses.
This  analysis  reviews the  allocations  of the  different  categories of loans
within the  portfolio  and  considers  historical  loan  losses and  delinquency
balances as well as recent delinquent percentage trends.

The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management  recognizes the higher risk involved
in such  loans.  Concentrations  of credit and local  economic  factors are also
evaluated on a periodic basis.  Historical  averages of net losses by loan types
are examined as well as trends by type. The Bank's loan mix over the same period
of time is also analyzed.  A loan loss  allocation is made for each type of loan
multiplied by the loan mix  percentage  for each loan type to produce a weighted
average factor.

While management estimates loan losses using the best available information,  no
assurances  can be given that  future  additions  to the  allowance  will not be
necessary  based on changes  in  economic  and real  estate  market  conditions,
identification  of  additional  problem  loans or other  factors.  Additionally,
despite  the  excellent   overall   quality  of  the  loan  portfolio  and  with
expectations of the Company to continue to grow its existing  portfolio,  future
additions  to the  allowance  may be  necessary  to  maintain  adequate  reserve
coverage.  Overall, management is of the opinion that the ALLL is adequate as of
December 31, 2006.

Deposits
--------

The Company offers a variety of deposit  accounts with a range of interest rates
and  terms.   Deposits  at  year-end  2006  totaled  $313,586,000   compared  to
$287,271,000   at  year-end   2005.   The  Company   continues  its  efforts  to
competitively price products and develop and maintain  relationship banking with
its  customers.  The flow of deposits  is  influenced  significantly  by general
economic  conditions,  changes in money market rates,  prevailing interest rates
and the aggressive competition from nonbanking entities.  During the year, there
was a change in the mix of deposits.

Demand, NOW and savings balances which are lower cost core deposits,  decreased,
and were replaced  primarily by time deposits  which as illustrated by the table
below, results in a significant increase in interest expense.

The average  daily amount of deposits by category and the average  rates paid on
such deposits are summarized in the following table:

(dollars in thousands)                   Year ended December 31
                              2006               2005                 2004
                      ---------------------------------------------------------
                       Average             Average           Average
                       Balance    Rate     Balance   Rate     Balance    Rate
                      ---------------------------------------------------------
Demand                $ 65,151                               $ 65,591  $ 51,649
NOW                     25,090     .26%     27,767    .25%     23,797       .01%
Money Market            54,266    3.22%     53,835   2.15%     38,884       .83%
Savings                 48,882    1.31%     59,466    .77%     54,596       .68%
Time                   106,395    4.17%     86,794   2.86%     75,241      2.64%
                      --------            --------           --------
                      $299,784    2.29%   $293,453   1.42%   $244,167      1.12%
                      ========            ========           ========

                                       30
<page>

Maturities of time  certificates of deposits of $100,000 or more  outstanding at
December 31 are summarized as follows:

(dollars in thousands)                         December 31
                                        2006      2005       2004
                                       ---------------------------

Three months or less                   $12,045   $ 9,763   $ 9,540
Over three months through six months     8,946     1,057     1,011
Over six months through one year        24,791     8,774     7,517
Over one year                            9,533     8,069    14,887
                                       -------   -------   -------

Total                                  $55,315   $27,663   $32,955
                                       =======   =======   =======

Borrowings
----------

As part of its  operating  strategy,  the  Company  utilizes  advances  from the
Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase  interest income.  These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of  maturities.  At December  31,  2006,  the Company had  $87,093,000  in
outstanding  advances from the Federal Home Loan Bank compared to $71,016,000 at
December 31, 2005.  Management  expects that it will  continue  this strategy of
supplementing  deposit  growth  with  advances  from  Federal  Home Loan Bank of
Boston.

Interest Rate Risk
------------------

Interest rate risk is the most  significant  market risk  affecting the Company.
Interest  rate risk is defined as an exposure  to a movement  in interest  rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing  liabilities
mature or reprice on a different basis than earning assets.

The Bank's  assets and  liabilities  are  managed in  accordance  with  policies
established  and  reviewed  by  the  Bank's  Board  of  Directors.   The  Bank's
Asset/Liability   Management   Committee  monitors  asset  and  deposit  levels,
developments  and trends in interest  rates,  liquidity and capital.  One of the
primary  financial  objectives  is to manage  interest rate risk and control the
sensitivity  of  earnings  to changes in  interest  rates in order to  prudently
improve  net  interest  income and  manage  the  maturities  and  interest  rate
sensitivities of assets and liabilities.

The Bank uses  asset/liability  modeling  software to develop scenario  analyses
which  measure  the impact that  changing  interest  rates have on net  interest
income.  These model simulations are projected out over a two year time horizon,
assuming  proportional  upward and downward  interest rate movements of 100, 200
and 300 basis points. Simulations are projected out in two ways:

         (1)  using  the same  balance  sheet as the Bank had on the  simulation
         date, and

         (2) using a growing  balance sheet based on recent growth  patterns and
         strategies.

As interest rates rise or fall, these  simulations  incorporate  expected future
lending  rates,  current and  expected  future  funding  sources  and cost,  the
possible  exercise of options,  changes in prepayment  rates,  and other factors
which may be important in determining the future growth of net interest  income.
The  rates we earn on our  assets  and the rates we pay on our  liabilities  are
generally fixed for a contractual period of time. Imbalance in these contractual
maturities can create  significant  earnings  volatility because market interest
rates  change over time.  In a period of rising  interest  rates,  the  interest
income  earned on assets may not  increase  as rapidly as the  interest  paid on
liabilities.  In a period of declining interest rates the interest income earned
on assets may decrease more rapidly than the interest paid on liabilities.  This
would primarily be attributed to accelerated prepayments on loans and securities
that are significantly influenced by movements in market rates.

The net interest margin may be adversely  affected by several possible  interest
rate  environments.  Foremost,  a continued  flat or inverted  yield curve which
results in shorter  term  market  interest  rates that equal or exceed  those of
longer   term  rates.   This  could   further   increase   the  Bank's  cost  of
interest-bearing  liabilities  that  continue  to  outpace  its yield on earning
assets resulting in additional net interest rate spread compression.

                                       31
<page>

Liquidity
---------

Liquidity is the ability to raise funds on a timely basis at an acceptable  cost
in  order  to meet  cash  needs.  Adequate  liquidity  is  necessary  to  handle
fluctuation in deposit levels,  to provide for customers'  credit needs,  and to
take advantage of investment  opportunities  as they are presented.  The Company
manages  liquidity  primarily  with readily  marketable  investment  securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company  is a member of the  Federal  Home Loan Bank of Boston  that  provides a
source of available borrowings for liquidity.

At  December  31,  2006,  the  Company  had  approximately  $60,046,000  in loan
commitments outstanding. Management believes that the current level of liquidity
is ample to meet the  Company's  needs  for  both the  present  and  foreseeable
future.

Capital
-------

At December  31,  2006,  the Company had  $44,349,000  in  shareholders'  equity
compared to  $41,442,000  at December 31, 2005.  This  represents an increase of
$2,907,000 or 7.01%. Several components contributed to the change since December
2005. Earnings for the year totaled $4,254,000. Securities in the portfolio that
are classified as available-for-sale  are adjusted to fair value monthly and the
unrealized  losses or gains are not included in earnings,  but are reported as a
net  amount  (less  expected  tax) as a  separate  component  of  capital  until
realized.  Market fluctuations of fair value of the securities  portfolio during
2006 resulted in other comprehensive income net of tax totaling $1,411,000.  The
initial  application  of SFAS No.  158,  as defined  below in recent  accounting
pronouncements,  resulted in other  comprehensive loss, net of tax of $1,038,000
in 2006.  The Company  declared  dividends  in 2006  resulting  in a decrease in
capital of  $1,751,000.  The Company issued 840 new shares of common stock under
the terms of the Director  Stock Retainer Plan during the second quarter of 2006
which resulted in an increase in capital of $32,000.

Under current regulatory definitions, the Company and the Bank are considered to
be "well capitalized" for capital adequacy purposes.  As a result, the Bank pays
the lowest federal deposit  insurance  deposit  premiums  possible.  One primary
measure of capital  adequacy  for  regulatory  purposes is based on the ratio of
risk-based  capital to risk weighted  assets.  This method of measuring  capital
adequacy  helps to  establish  capital  requirements  that are  sensitive to the
differences  in risk  associated  with  various  assets.  It takes into  account
off-balance  sheet  exposure in  assessing  capital  adequacy  and it  minimizes
disincentives to holding liquid,  low risk assets. At year-end 2006, the Company
had a  risk-based  capital  ratio of 15.28%  compared to 15.76% at December  31,
2005.  Maintaining  strong  capital is essential  to bank safety and  soundness.
However,  the effective  management  of capital  resources  requires  generating
attractive  returns on equity to build value for shareholders  while maintaining
appropriate levels of capital to fund growth,  meet regulatory  requirements and
be consistent  with prudent  industry  practices.  Management  believes that the
capital  ratios of the  Company  and Bank are  adequate  to continue to meet the
foreseeable capital needs of the institution.

Impact of Inflation and Changing Prices
---------------------------------------

The Company's  consolidated financial statements are prepared in conformity with
accounting  principles  generally accepted in the United States of America which
require the measurement of financial condition and operating results in terms of
historical dollars without  considering changes in the relative purchasing power
of money,  over  time,  due to  inflation.  Unlike  most  industrial  companies,
virtually all of the assets and liabilities of the Company are monetary and as a
result,  interest  rates  tend  to  have  a  greater  impact  on  the  Company's
performance  than do the  effects  of  general  levels  of  inflation.  Although
interest  rates do not  necessarily  move in the same direction or with the same
magnitude as the prices of goods and services,  inflation  could impact earnings
in future periods.

Recent Accounting Pronouncements
--------------------------------

In February 2006, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 155,  "Accounting  for Certain  Hybrid  Instruments"  (SFAS No. 155),  which
permits,  but does not require,  fair value  accounting for any hybrid financial
instrument that contains an embedded  derivative  that would  otherwise  require
bifurcation in accordance with SFAS 133. The statement also subjects  beneficial
interests issued by securitization vehicles to the requirements of SFAS No. 133.
The  statement is effective as of January 1, 2007.  The adoption of SFAS No. 155
is not expected to have a material impact on the Company's  financial  condition
and results of operations.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial  Assets- an amendment of FASB Statement No. 140" (SFAS No. 156).  SFAS
No. 156 requires an entity to recognize a servicing asset or servicing liability

                                       32
<page>

each time it undertakes  an obligation to service a financial  asset by entering
into a servicing contract in specific  situations.  Additionally,  the servicing
asset or servicing liability shall be initially measured at fair value; however,
an  entity  may elect the  "amortization  method"  or "fair  value  method"  for
subsequent balance sheet reporting  periods.  SFAS No. 156 is effective as of an
entity's first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the  beginning of an entity's  fiscal year,  provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year.  The Company does not expect the adoption of
this statement to have a material impact on its financial condition,  results of
operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value under generally  accepted  accounting  principles (GAAP) and enhances
disclosures  about fair value  measurements.  SFAS No. 157 retains the  exchange
price notion and  clarifies  that the exchange  price is the price that would be
received  for an asset or paid to  transfer a  liability  (an exit  price) in an
orderly  transaction  between market  participants on the measurement date. SFAS
No. 157 is effective for the Company's consolidated financial statements for the
year beginning on January 1, 2008, with earlier adoption  permitted.  Management
is currently  evaluating  the effect of SFAS No. 157 on the Company's  financial
condition and results of operations. The Company does not expect the adoption of
this statement to have a material impact on its financial  condition and results
of operations.

In September  2006,  the FASB issued SFAS No. 158,  "Employer's  Accounting  for
Defined  Benefit Pension and other  Postretirement  Plans - an amendment of FASB
Statements No 87, 88, 106 and 132(R)"  (SFAS No. 158).  SFAS No. 158 requires 1)
the  recognition of an asset or liability for the  over-funded  or  under-funded
status of a defined  benefit plan,  2) the  recognition  of actuarial  gains and
losses and prior service  costs and credits in other  comprehensive  income,  3)
measurement of plan assets and benefit  obligations as of the employer's balance
sheet date, rather than at interim  measurement dates as currently allowed,  and
4) disclosure of additional  information  concerning  actuarial gains and losses
and prior service costs and credits  recognized in other  comprehensive  income.
This  statement is effective for financial  statements  with fiscal years ending
after  December 15, 2006. The adoption of this Statement did not have a material
impact on the  Company's  financial  position,  results of  operations,  or cash
flows.

Off-Balance Sheet Arrangements
------------------------------

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing  needs of its customers.  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
operations, or liquidity. (See Note 11 to the Financial Statements).

Forward Looking Statements
--------------------------

This Annual  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 the Bank,  may include  forward-looking
statements relating to such matters as:

(a)      assumptions  concerning  future  economic and business  conditions  and
         their  effect on the economy in general and on the markets in which the
         Company and the Bank do business, and
(b)      expectations  for  increased  revenues and earnings for the Company and
         Bank through  growth  resulting  from  acquisitions,  attraction of new
         deposit and loan  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 Act of
1995.

The Company  notes that a variety of factors  could cause the actual  results or
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations described or implied by such forward-looking  statements. The risks
and uncertainties  that may effect the operation,  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;

                                       33
<page>

(b)      changes in the legislative and regulatory  environment  that negatively
         impact the Company and Bank through increased operating expenses;
(c)      increased   competition   from  other   financial   and   non-financial
         institutions;
(d)      the impact of technological advances; and
(e)      other risks  detailed from time to time in the  Company's  filings with
         the Securities and Exchange Commission.

Such  developments  could have an adverse impact on the Company's and the Bank's
financial position and results of operations.

Statement of Management's Responsibility
----------------------------------------

Management is responsible for the integrity and objectivity of the  consolidated
financial  statements  and other  information  appearing in this Form 10-K.  The
consolidated  financial  statements  were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required.  To fulfill their  responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls.  These controls include the selection
and training of management and supervisory personnel;  an organization structure
providing for  delegation of authority and  establishment  or  responsibilities;
communication of requirements for compliance with approved  accounting,  control
and  business  practices  throughout  the  organization;  business  planning and
review;  and a program of  internal  audit.  Management  believes  the  internal
accounting  controls  in  use  provide  reasonable  assurance  that  assets  are
safeguarded,  that  transactions  are executed in accordance  with  management's
authorization  and that  financial  records  are  reliable  for the  purpose  of
preparing financial  statements.  Shatswell,  MacLeod and Company, P.C. has been
engaged to provide an  independent  opinion on the fairness of the  consolidated
financial statements. Their report appears in this Annual Report on Form 10-K.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

The main  components  of market risk for the Company are credit  risk,  interest
rate  risk and  liquidity  risk.  The  Company  manages  interest  rate risk and
liquidity  risk through an ALCO  Committee  comprised of outside  Directors  and
senior   management.   The  committee   monitors   compliance  with  the  Bank's
Asset/Liability  Policy which establishes  guidelines to meet various applicable
regulatory  rules and statutes,  measures the various risks facing the bank on a
consistent  basis  and  coordinates  the  management  of  the  bank's  financial
position.  Model  simulation is used to measure  earnings  volatility under both
rising and falling interest rate scenarios. The Company's interest rate risk and
liquidity position has not significantly changed from year-end 2006.

                                       34
<page>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements
------------------------------------------

Report of Independent Registered Public
  Accounting Firm, March 14, 2007.......................................  F-1

Consolidated Balance Sheets at December 31, 2006 and 2005...............  F-2

Consolidated Statements of Income for the Years Ended
 December 31, 2006, 2005 and 2004.......................................  F-3

Consolidated Statements of Changes in Shareholders' Equity
 for the Years Ended December 31, 2006, 2005 and 2004...................  F-4

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 2006, 2005 and 2004.......................................  F-5

Notes to Consolidated Financial Statements for the
 Years Ended December 31, 2006, 2005 and 2004...........................  F-7

Salisbury Bancorp, Inc. (parent company only)
 Balance Sheet at December 31, 2006 and 2005............................  F-27

 Statements of Income for the Years Ended
  December 31, 2006, 2005 and 2004......................................  F-27

 Statements of Cash Flows for the Years Ended
  December 31, 2006, 2005 and 2004......................................  F-28

Quarterly Results of Operations (unaudited).............................  F-29

<page>

                [SHATSWELL, MACLEOD & COMPANY, P.C. LETTERHEAD]

To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------

We have  audited  the  accompanying  consolidated  balance  sheets of  Salisbury
Bancorp,  Inc. and  Subsidiary  as of December 31, 2006 and 2005 and the related
consolidated  statements  of income,  changes in  shareholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 2006.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated financial statements are free of material misstatement. The Company
is not  required  to  have,  nor were we  engaged  to  perform,  an audit of its
internal control over financial reporting.  Our audit included  consideration of
internal  control  over  financial  reporting  as a basis  for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness  of the Company's  internal  control
over  financial  reporting.  Accordingly,  we express no such opinion.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2006 and 2005, and the
consolidated  results of their  operations  and their cash flows for each of the
years in the  three-year  period ended  December 31, 2006,  in  conformity  with
accounting principles generally accepted in the United States of America.

                                          /s/ Shatswell, MacLeod & Company, P.C.
                                          SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts
March 14, 2007

                                      F-1
<page>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------

                           December 31, 2006 and 2005
                           --------------------------
<table>
<caption>

ASSETS                                                                                 2006              2005
------                                                                            -------------    -------------

                                                                               <c>              <c>
Cash and due from banks                                                           $   8,988,609    $   8,431,844
Interest-bearing demand deposits with other banks                                       568,693          652,807
Money market mutual funds                                                             1,199,881        1,119,724
Federal Funds sold                                                                    1,000,000                0
                                                                                  -------------    -------------
           Cash and cash equivalents                                                 11,757,183       10,204,375
Investments in available-for-sale securities (at fair value)                        156,492,547      145,608,297
Investments in held-to-maturity securities (fair values of $74,818 and $147,202
   as of December 31, 2006 and 2005, respectively)                                       74,931          146,856
Federal Home Loan Bank stock, at cost                                                 4,663,700        5,413,200
Loan held-for-sale                                                                      304,000                0
Loans, less allowance for loan losses of $2,474,118 and $2,626,170 as of
   December 31, 2006 and 2005, respectively                                         252,464,430      215,989,149
Investment in real estate                                                                75,000           75,000
Premises and equipment                                                                6,135,546        6,451,979
Goodwill                                                                              9,509,305        9,509,305
Core deposit intangible                                                               1,493,499        1,657,715
Accrued interest receivable                                                           2,483,547        2,362,924
Cash surrender value of life insurance policies                                       3,554,995        3,424,186
Other assets                                                                          1,330,987        2,079,307
                                                                                  -------------    -------------
           Total assets                                                           $ 450,339,670    $ 402,922,293
                                                                                  =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
   Noninterest-bearing                                                            $  70,502,249    $  63,995,665
   Interest-bearing                                                                 243,084,032      223,275,537
                                                                                  -------------    -------------
           Total deposits                                                           313,586,281      287,271,202
Federal Home Loan Bank advances                                                      87,093,402       71,015,614
Due to broker 1,579,611                                                                       0
Other liabilities                                                                     3,731,195        3,193,154
                                                                                  -------------    -------------
           Total liabilities                                                        405,990,489      361,479,970
                                                                                  -------------    -------------
Shareholders' equity:
   Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
     and outstanding, 1,684,181 shares in 2006 and 1,683,341 shares in 2005             168,418          168,334
   Paid-in capital                                                                   13,099,881       13,068,045
   Retained earnings                                                                 33,602,991       31,100,702
   Accumulated other comprehensive loss                                              (2,522,109)      (2,894,758)
                                                                                  -------------    -------------
           Total shareholders' equity                                                44,349,181       41,442,323
                                                                                  -------------    -------------
           Total liabilities and shareholders' equity                             $ 450,339,670    $ 402,922,293
                                                                                  =============    =============
</table>

        The accompanying notes are an integral part of these consolidated
                              financial statements.

                                      F-2
<page>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------
<table>
<caption>
                                                                            2006           2005           2004
                                                                       ------------    ------------   ------------

                                                                       <c>             <c>            <c>
Interest and dividend income:
   Interest and fees on loans                                          $ 15,686,978    $ 13,319,930   $  9,592,478
   Interest on debt securities:
     Taxable                                                              5,604,866       4,814,993      4,499,725
     Tax-exempt                                                           2,079,981       2,329,414      2,293,706
   Dividends on equity securities                                           277,356         282,534        112,008
   Other interest                                                            80,412          69,512         53,101
                                                                       ------------    ------------   ------------
         Total interest and dividend income                              23,729,593      20,816,383     16,551,018
                                                                       ------------    ------------   ------------
Interest expense:
   Interest on deposits                                                   6,885,893       4,171,360      2,738,680
   Interest on Federal Home Loan Bank advances                            3,573,052       3,180,591      2,920,316
                                                                       ------------    ------------   ------------
         Total interest expense                                          10,458,945       7,351,951      5,658,996
                                                                       ------------    ------------   ------------
         Net interest and dividend income                                13,270,648      13,464,432     10,892,022
(Benefit) provision for loan losses                                         (87,488)        210,000        250,000
                                                                       ------------    ------------   ------------
         Net interest and dividend income after (benefit) provision
           for loan losses                                               13,358,136      13,254,432     10,642,022
                                                                       ------------    ------------   ------------
Noninterest income:
   Trust department income                                                1,980,500       1,571,311      1,410,814
   Loan commissions                                                         117,298         260,997        239,139
   Service charges on deposit accounts                                      707,431         642,268        620,771
   Gain on sales and writedown of available-for-sale securities, net        517,326       1,209,724      1,489,905
   Gain on sales of loans held-for-sale                                     357,628         270,061        304,354
   Other income                                                             902,394         910,743        690,198
                                                                       ------------    ------------   ------------
         Total noninterest income                                         4,582,577       4,865,104      4,755,181
                                                                       ------------    ------------   ------------
Noninterest expense:
   Salaries and employee benefits                                         7,150,746       7,355,316      5,970,639
   Occupancy expense                                                        751,670         728,302        482,516
   Equipment expense                                                        786,637         776,729        600,127
   Data processing                                                        1,134,078       1,013,785        886,618
   Conversion expense                                                             0               0        464,484
   Insurance                                                                154,562         148,317        121,959
   Printing and stationery                                                  239,617         277,640        261,898
   Professional fees                                                        554,686         306,753        278,709
   Legal expense                                                            151,414         263,575        173,333
   Amortization of core deposit intangible                                  164,216         164,416        101,109
   Other expense                                                          1,157,534       1,408,949      1,261,921
                                                                       ------------    ------------   ------------
         Total noninterest expense                                       12,245,160      12,443,782     10,603,313
                                                                       ------------    ------------   ------------
         Income before income taxes                                       5,695,553       5,675,754      4,793,890
Income taxes                                                              1,441,935       1,114,413        774,948
                                                                       ------------    ------------   ------------
         Net income                                                    $  4,253,618    $  4,561,341   $  4,018,942
                                                                       ============    ============   ============

Earnings per common share                                              $       2.53    $       2.71   $       2.67
                                                                       ============    ============   ============
</table>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-3
<page>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
           ----------------------------------------------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------
<table>
<caption>
                                            Number                                              Accumulated
                                              of                                                    Other
                                            Shares       Common         Paid-in      Retained   Comprehensive
                                            Issued        Stock         Capital      Earnings   (Loss) Income       Total
                                         ------------  ------------  ------------  ------------  ------------   ------------

                                       <c>        <c>           <c>           <c>           <c>            <c>
Balance, December 31, 2003                  1,424,078  $    142,408  $  2,327,151  $ 25,694,836  $    685,817   $ 28,850,212
Comprehensive income:
   Net income                                                                         4,018,942
   Other comprehensive loss, net of
     tax effect                                                                                    (1,408,496)
       Comprehensive income                                                                                        2,610,446
Shares issued for merger                      257,483        25,748    10,672,670                                 10,698,418
Issuance of 840 shares for Directors'
      fees                                        840            84        31,752                                     31,836
Dividends declared ($.96 per share)                                                  (1,491,312)                  (1,491,312)
                                         ------------  ------------  ------------  ------------  ------------   ------------
Balance, December 31, 2004                  1,682,401       168,240    13,031,573    28,222,466      (722,679)    40,699,600
Comprehensive income:
   Net income                                                                         4,561,341
   Other comprehensive loss, net of tax
     effect                                                                                        (2,172,079)
       Comprehensive income                                                                                        2,389,262
Issuance of 940 shares for Directors'
     fees                                                                     940            94        36,472         36,566
Dividends declared ($1.00 per share)                                                 (1,683,105)                  (1,683,105)
                                         ------------  ------------  ------------  ------------  ------------   ------------
Balance, December 31, 2005                  1,683,341       168,334    13,068,045    31,100,702    (2,894,758)    41,442,323
Comprehensive income:
   Net income                                                                         4,253,618
   Other comprehensive income, net of
     tax effect                                                                                       372,649
       Comprehensive income                                                                                        4,626,267
Issuance of 840 shares for Directors'
     fees                                         840            84        31,836                                     31,920
Dividends declared ($1.04 per share)                                                               (1,751,329)    (1,751,329)
                                         ------------  ------------  ------------  ------------  ------------   ------------
Balance, December 31, 2006                  1,684,181  $    168,418  $ 13,099,881  $ 33,602,991  $ (2,522,109)  $ 44,349,181
                                         ============  ============  ============  ============  ============   ============
<caption>

Reclassification disclosure for the years ended December 31:

                                                                                        2006           2005         2004
                                                                                     -----------   -----------   -----------

                                                                                     <c>         <c>           <c>
Unrealized holding gains (losses) on available-for-sale securities
   Net unrealized holding gains (losses) on available-for-sale securities            $ 2,654,494   $(1,547,214)  $(1,106,610)
   Reclassification adjustment for net realized gains in net income                     (517,326)   (1,209,724)   (1,489,905)
                                                                                     -----------   -----------   -----------
                                                                                       2,137,168    (2,756,938)   (2,596,515)
Income tax (expense) benefit                                                            (726,637)      878,763     1,011,343
                                                                                     -----------   -----------   -----------
     Unrealized holding gains (losses) on available-for-sale securities, net of tax    1,410,531    (1,878,175)   (1,585,172)
                                                                                     -----------   -----------   -----------
Adjustment to initially apply SFAS No. 158                                            (1,572,548)            0             0
Minimum pension liability adjustment                                                           0      (445,309)      289,396
Income tax benefit (expense)                                                             534,666       151,405      (112,720)
                                                                                     -----------   -----------   -----------
     SFAS No. 158 pension liability or minimum pension liability, net of tax          (1,037,882)     (293,904)      176,676
                                                                                     -----------   -----------   -----------
     Other comprehensive income (loss), net of tax                                   $   372,649   $(2,172,079)  $(1,408,496)
                                                                                     ===========   ===========   ===========
<caption>

Accumulated  other  comprehensive  loss consists of the following as of December
31:

                                                                                         2006          2005          2004
                                                                                     -----------   -----------   -----------

                                                                                  <c>           <c>           <c>
Net unrealized holding losses on available-for-sale securities, net of taxes         $(1,190,323)  $(2,600,854)  $  (722,679)
SFAS No. 158 pension liability, net of taxes                                          (1,331,786)            0             0
Minimum pension liability adjustment, net of taxes                                             0      (293,904)            0
                                                                                     -----------   -----------   -----------
Accumulated other comprehensive loss                                                 $(2,522,109)  $(2,894,758)  $  (722,679)
                                                                                     ===========   ===========   ===========
</table>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<page>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------
<table>
<caption>
                                                                               2006            2005            2004
                                                                           ------------    ------------    ------------

                                                                            <c>             <c>             <c>
Cash flows from operating activities:
   Net income                                                              $  4,253,618    $  4,561,341    $  4,018,942
   Adjustments to reconcile net income to net cash provided by
     operating activities:
       Amortization of securities, net                                           34,953         302,781         289,214
       Gain on sales and writedown of available-for-sale securities, net       (517,326)     (1,209,724)     (1,489,905)
       (Benefit) provision for loan losses                                      (87,488)        210,000         250,000
       Change in loans held-for-sale                                           (304,000)        375,000        (100,000)
       Change in deferred loan costs, net                                      (168,573)              0               0
       (Decrease) increase in unearned income on loans                           (4,913)        (10,473)         18,529
       Net decrease (increase) in mortgage servicing rights                      78,715          83,471         (41,253)
       Write-off of equipment                                                         0               0           9,399
       Depreciation and amortization                                            538,449         529,238         357,645
       Amortization of core deposit intangible                                  164,216         164,416         101,109
       Amortization of fair value adjustment on loans                           112,712         184,256         266,986
       Accretion of fair value adjustments on deposits and borrowings          (134,217)       (154,287)        (51,429)
       (Increase) decrease in interest receivable                              (111,012)       (110,482)         84,056
       Deferred tax expense                                                     396,418          67,273         143,691
       (Increase) decrease in prepaid expenses                               (1,031,510)         14,242         270,965
       Increase in cash surrender value of insurance policies                  (130,809)       (130,638)       (139,607)
       Decrease (increase) in income tax receivable                             181,005         336,288         (53,889)
       Increase in other assets                                                 (91,796)        (53,742)        (71,917)
       Decrease in accrued expenses                                            (243,196)       (268,051)       (750,246)
       Increase in interest payable                                             257,975          42,822          57,465
       (Decrease) increase in other liabilities                                 (57,050)         59,445         367,956
       Issuance of shares for Directors' fees                                    31,920          36,566          31,836
                                                                           ------------    ------------    ------------

   Net cash provided by operating activities                                  3,168,091       5,029,742       3,569,547
                                                                           ------------    ------------    ------------

Cash flows from investing activities:
   Redemption of Federal Home Loan Bank stock                                   860,200               0          56,300
   Purchases of Federal Home Loan Bank stock                                   (110,700)              0        (351,000)
   Purchases of available-for-sale securities                               (83,058,698)    (87,783,193)   (124,520,785)
   Proceeds from sales of available-for-sale securities                      62,356,620      83,572,466      98,347,353
   Proceeds from maturities of available-for-sale securities                 14,007,603      34,328,155      32,998,864
   Proceeds from maturities of held-to-maturity securities                       71,691          71,272          10,968
   Loan originations and principal collections, net                         (36,142,073)    (12,432,343)     (8,191,577)
   Purchases of loans                                                          (252,000)     (2,001,184)              0
   Recoveries of loans previously charged off                                    67,054          39,094          28,302
   Capital expenditures                                                        (207,787)     (1,017,056)     (1,003,263)
   Proceeds from sale of equipment                                                    0               0             436
   Cash and cash equivalents acquired from Canaan National
     Bancorp, Inc. net of expenses paid of $309,419                                   0               0       2,487,705
   Cash paid to Canaan National Bancorp, Inc. shareholders                            0               0      (6,020,163)
                                                                           ------------    ------------    ------------

   Net cash (used in) provided by investing activities                      (42,408,090)     14,777,211      (6,156,860)
                                                                           ------------    ------------    ------------
</table>

                                      F-5
<page>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------
                                   (continued)
<table>
<caption>
                                                                           2006           2005           2004
                                                                       ------------   ------------   ------------

                                                                     <c>             <c>            <c>
Cash flows from financing activities:
   Net (decrease) increase in demand deposits, NOW and
     savings accounts                                                    (5,638,393)    (8,516,596)     6,920,818
   Net increase (decrease) in time deposits                              31,957,486     (3,029,964)    (2,141,902)
   Federal Home Loan Bank advances                                       25,000,000     10,000,000      5,000,000
   Principal payments on advances from Federal Home Loan Bank           (10,460,009)    (1,346,521)    (6,140,973)
   Net change in short-term advances from Federal Home Loan Bank          1,668,000    (16,720,945)             0
   Decrease in other borrowed funds                                               0              0        (86,863)
   Dividends paid                                                        (1,734,277)    (1,666,046)    (1,415,074)
                                                                       ------------   ------------   ------------

   Net cash provided by (used in) financing activities                   40,792,807    (21,280,072)     2,136,006
                                                                       ------------   ------------   ------------

Net increase (decrease) in cash and cash equivalents                      1,552,808     (1,473,119)      (451,307)
Cash and cash equivalents at beginning of year                           10,204,375     11,677,494     12,128,801
                                                                       ------------   ------------   ------------
Cash and cash equivalents at end of year                               $ 11,757,183   $ 10,204,375   $ 11,677,494
                                                                       ============   ============   ============

Supplemental disclosures:
   Interest paid                                                       $ 10,335,187   $  7,463,416   $  5,652,960
   Income taxes paid                                                        864,512        710,852        685,000
   Transfer from equipment to other assets                                                                  2,815

Canaan National Bancorp, Inc. merger:
   Cash and cash equivalents acquired                                                                $  2,797,124
   Available-for-sale securities                                                                       42,776,284
   Federal Home Loan Bank stock                                                                         1,291,200
   Federal Reserve Bank stock                                                                              56,300
   Net loans acquired                                                                                  54,787,421
   Fixed assets acquired                                                                                2,355,970
   Accrued interest receivable                                                                            460,550
   Other assets acquired                                                                                1,173,549
   Core deposit intangible                                                                              1,191,279
                                                                                                     ------------
                                                                                                      106,889,677

   Deposits assumed                                                                                    75,613,508
   Federal Home Loan Bank borrowings assumed                                                           19,500,346
   Other borrowings assumed                                                                                86,863
   Other liabilities assumed                                                                            1,812,381
                                                                                                     ------------
                                                                                                       97,013,098

   Net assets acquired                                                                                  9,876,579

   Merger costs                                                                                        17,028,000
                                                                                                     ------------

     Goodwill                                                                                        $  7,151,421
                                                                                                     ============
</table>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-6
<page>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------

NOTE 1 - NATURE OF OPERATIONS
-----------------------------

Salisbury  Bancorp,  Inc.  (Bancorp)  is  a  Connecticut  corporation  that  was
organized on April 24, 1998 to become a holding  company,  under which Salisbury
Bank and Trust Company (Bank) operates as its wholly-owned  subsidiary.  Bancorp
and the Bank are referred to together as the (Company).

The  Bank is a state  chartered  bank  which  was  incorporated  in 1874  and is
headquartered  in  Lakeville,  Connecticut.  The Bank operates its business from
four banking  offices  located in Connecticut and two banking offices located in
Massachusetts.  The Bank is engaged  principally  in the business of  attracting
deposits from the general public and investing those deposits in residential and
commercial real estate,  consumer and small business loans. The Bank also offers
a full complement of trust and investment services.

As described in Note 15, on September  10, 2004 Canaan  National  Bancorp,  Inc.
merged with and into the Company.

NOTE 2 - ACCOUNTING POLICIES
----------------------------

The  accounting  and  reporting  policies of the Company  conform to  accounting
principles  generally  accepted in the United States of America and  predominant
practices within the banking  industry.  The consolidated  financial  statements
were prepared using the accrual basis of accounting.  The significant accounting
policies are summarized below to assist the reader in better  understanding  the
consolidated financial statements and other data contained herein.

         USE OF ESTIMATES:

         The  preparation of financial  statements in conformity with accounting
         principles  generally accepted in the United States of America requires
         management to make estimates and  assumptions  that affect the reported
         amounts of assets and liabilities  and disclosure of contingent  assets
         and  liabilities  at the  date  of the  financial  statements  and  the
         reported amounts of revenues and expenses during the reporting  period.
         Actual results could differ from the estimates.

         BASIS OF PRESENTATION:

         The  consolidated  financial  statements  include  the  accounts of the
         Bancorp  and its  wholly-owned  subsidiary,  the Bank,  and the  Bank's
         wholly-owned  subsidiaries,  SBT Realty, Inc., and SBT Mortgage Service
         Corporation (the "PIC"). SBT Realty,  Inc. holds and manages bank owned
         real estate  situated in New York state.  The PIC operates as a passive
         investment company and services residential mortgages.  All significant
         intercompany  accounts and  transactions  have been  eliminated  in the
         consolidation.

         CASH AND CASH EQUIVALENTS:

         For purposes of reporting cash flows, cash and cash equivalents include
         cash on hand,  cash items,  due from  banks,  interest  bearing  demand
         deposits with other banks,  money market mutual funds and federal funds
         sold.

         Cash  and due from  banks as of  December  31,  2006 and 2005  includes
         $650,000 and $649,000,  respectively,  which is subject to  withdrawals
         and usage  restrictions  to satisfy  the  reserve  requirements  of the
         Federal Reserve Board.

                                      F-7
<page>

         SECURITIES:

         Investments  in  debt  securities  are  adjusted  for  amortization  of
         premiums and accretion of discounts so as to  approximate  the interest
         method. Gains or losses on sales of investment  securities are computed
         on a specific identification basis.

         The Company  classifies  debt and equity  securities  into one of three
         categories:  held-to-maturity,  available-for-sale  or  trading.  These
         security  classifications  may be modified after acquisition only under
         certain specified conditions. In general,  securities may be classified
         as  held-to-maturity  only if the Company has the  positive  intent and
         ability to hold them to  maturity.  Trading  securities  are defined as
         those  bought and held  principally  for the purpose of selling them in
         the  near  term.   All  other   securities   must  be   classified   as
         available-for-sale.

               --   Held-to-maturity securities are carried at amortized cost in
                    the consolidated  balance sheets.  Unrealized  holding gains
                    and losses are not  included  in  earnings  or in a separate
                    component of capital. They are merely disclosed in the notes
                    to the consolidated financial statements.

               --   Available-for-sale  securities  are carried at fair value on
                    the consolidated  balance sheets.  Unrealized  holding gains
                    and losses are not  included in earnings but are reported as
                    a net amount (less expected tax) in a separate  component of
                    capital until realized.

               --   Trading   securities  are  carried  at  fair  value  on  the
                    consolidated  balance sheets.  Unrealized  holding gains and
                    losses for trading  securities  are  included  in  earnings.
                    During the three years ended  December  31, 2006 the Company
                    did not classify any securities as trading.

         Declines in the fair value of held-to-maturity  and  available-for-sale
         securities  below their cost that are deemed to be other than temporary
         are reflected in earnings as realized losses.

         LOANS:

         Loans  receivable  that  management  has the intent and ability to hold
         until maturity or payoff,  are reported at their outstanding  principal
         balances  adjusted for any  charge-offs,  the allowance for loan losses
         and any  deferred  fees or costs  on  originated  loans or  unamortized
         premiums or discounts on purchased loans.

         Interest on loans is recognized on a simple interest basis.

         Residential real estate loans are generally placed on nonaccrual status
         when reaching 90 days past due or in the process of foreclosure.  Lines
         of credit  secured by real estate 90 days past due or in the process of
         foreclosure are placed on nonaccrual status. Secured consumer loans are
         written  down to  realizable  value and  unsecured  consumer  loans are
         charged-off  upon  reaching  120 or 180 days past due  depending on the
         type of loan.  Commercial  real estate  loans and  commercial  business
         loans  and  leases  which  are 90 days or more  past due are  generally
         placed on nonaccrual status, unless secured by sufficient cash or other
         assets immediately  convertible to cash. When a loan has been placed on
         nonaccrual  status,  previously  accrued  and  uncollected  interest is
         reversed  against  interest on loans. A loan can be returned to accrual
         status when  collectibility of principal is reasonably  assured and the
         loan has performed for a period of time, generally six months.

         Cash  receipts of interest  income on  impaired  loans are  credited to
         principal  to  the  extent  necessary  to  eliminate  doubt  as to  the
         collectibility  of the net carrying  amount of the loan. Some or all of
         the cash receipts of interest income on impaired loans is recognized as
         interest  income if the  remaining  net carrying  amount of the loan is
         deemed to be fully collectible.  When recognition of interest income on
         an impaired loan on a cash basis is  appropriate,  the amount of income
         that is  recognized is limited to that which would have been accrued on
         the net carrying amount of the loan at the  contractual  interest rate.
         Any cash  interest  payments  received  in  excess of the limit and not
         applied to reduce the net  carrying  amount of the loan are recorded as
         recoveries of charge-offs until the charge-offs are fully recovered.

                                      F-8
<page>

         ALLOWANCE FOR LOAN LOSSES:

         The allowance for loan losses is established as losses are estimated to
         have occurred  through a provision for loan losses charged to earnings.
         Loan losses are charged against the allowance when management  believes
         the  uncollectibility  of  a  loan  balance  is  confirmed.  Subsequent
         recoveries, if any, are credited to the allowance.

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

         A loan is considered  impaired when,  based on current  information and
         events,  it is  probable  that the Bank will be unable to  collect  the
         scheduled  payments of principal or interest  when due according to the
         contractual  terms  of  the  loan  agreement.   Factors  considered  by
         management in determining impairment include payment status, collateral
         value,  and the  probability  of  collecting  scheduled  principal  and
         interest payments when due. Loans that experience insignificant payment
         delays and payment shortfalls generally are not classified as impaired.
         Management  determines the  significance  of payment delays and payment
         shortfalls on a case-by-case  basis,  taking into  consideration all of
         the circumstances surrounding the loan and the borrower,  including the
         length of the delay,  the reasons for the delay,  the borrower's  prior
         payment  record,  and the amount of the  shortfall  in  relation to the
         principal and interest  owed.  Impairment is measured on a loan by loan
         basis for commercial and construction loans by either the present value
         of  expected  future  cash flows  discounted  at the  loan's  effective
         interest rate, the loan's obtainable market price, or the fair value of
         the collateral if the loan is collateral  dependent.  The Bank does not
         separately  identify  individual  consumer  and  residential  loans for
         impairment  disclosures,   but  instead  evaluates  smaller  groups  of
         homogeneous loans collectively for impairment.

         PREMISES AND EQUIPMENT:

         Premises  and   equipment   are  stated  at  cost,   less   accumulated
         depreciation  and  amortization.   Cost  and  related   allowances  for
         depreciation  and  amortization  of premises and  equipment  retired or
         otherwise disposed of are removed from the respective accounts with any
         gain  or  loss  included  in  income  or  expense.   Depreciation   and
         amortization  are calculated  principally on the  straight-line  method
         over the estimated useful lives of the assets. Estimated lives are 3 to
         99 years for buildings and 2 to 20 years for furniture and equipment.

         OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:

         Other  real  estate  owned   includes   properties   acquired   through
         foreclosure and properties  classified as in-substance  foreclosures in
         accordance with Statement of Financial  Accounting Standards (SFAS) No.
         15,   "Accounting   by  Debtors  and   Creditors   for  Troubled   Debt
         Restructuring."  These  properties  are carried at the lower of cost or
         estimated fair value less  estimated  costs to sell. Any writedown from
         cost to estimated  fair value  required at the time of  foreclosure  or
         classification as in-substance  foreclosure is charged to the allowance
         for loan losses. Expenses incurred in connection with maintaining these
         assets and subsequent writedowns are included in other expense.

         In  accordance  with  SFAS  No.  114,   "Accounting  by  Creditors  for
         Impairment  of a Loan,"  the  Bank  classifies  loans  as  in-substance
         repossessed  or  foreclosed  if the Bank or its  subsidiaries  receives
         physical possession of the debtor's assets regardless of whether formal
         foreclosure  proceedings  take  place.  As of  December  31,  2006  and
         December  31,  2005,  the  Company  does not have any other real estate
         owned.

         ADVERTISING:

         The Bank directly  expenses costs  associated with  advertising as they
         are incurred.

                                      F-9
<page>

         INCOME TAXES:

         The  Company  recognizes  income  taxes  under the asset and  liability
         method.  Under this  method,  deferred tax assets and  liabilities  are
         established for the temporary  differences between the accounting basis
         and the tax basis of the Company's  assets and liabilities at tax rates
         expected  to be in effect when the  amounts  related to such  temporary
         differences are realized or settled.

         FAIR VALUES OF FINANCIAL INSTRUMENTS:

         SFAS No. 107, "Disclosures About Fair Value of Financial  Instruments,"
         requires  that  the  Company  disclose  estimated  fair  value  for its
         financial  instruments.  Fair value methods and assumptions used by the
         Company in estimating its fair value disclosures are as follows:

         Cash and cash equivalents: The carrying amounts reported in the balance
         sheets for cash and cash  equivalents  approximate  those  assets' fair
         values.

         Securities  (including  mortgage-backed  securities):  Fair  values for
         securities  are based on quoted  market  prices,  where  available.  If
         quoted market prices are not available, fair values are based on quoted
         market prices of comparable instruments.

         Loans  held-for-sale:  Fair values of mortgage loans  held-for-sale are
         based on  commitments  on hand  from  investors  or  prevailing  market
         prices.

         Loans receivable:  For variable-rate  loans that reprice frequently and
         with no  significant  change in credit  risk,  fair values are based on
         carrying  values.  The fair values for other loans are estimated  using
         discounted  cash flow analyses,  using interest rates  currently  being
         offered for loans with similar  terms to  borrowers  of similar  credit
         quality.

         Accrued  interest  receivable:  The carrying amount of accrued interest
         receivable approximates its fair value.

         Deposit  liabilities:  The  fair  values  disclosed  for  interest  and
         non-interest checking,  passbook savings and money market accounts are,
         by  definition,  equal to the amount payable on demand at the reporting
         date  (i.e.,  their  carrying  amounts).  Fair  values  for  fixed-rate
         certificates  of deposit are  estimated  using a  discounted  cash flow
         calculation  that applies  interest  rates  currently  being offered on
         certificates to a schedule of aggregated expected monthly maturities on
         time deposits.

         Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
         advances are  estimated  using a discounted  cash flow  technique  that
         applies  interest  rates  currently  being  offered  on  advances  to a
         schedule of aggregated expected monthly maturities on Federal Home Loan
         Bank advances.

         Due to broker:  The carrying amount of due to broker  approximates  its
         fair value.

         Off-balance  sheet  instruments:  The  fair  value  of  commitments  to
         originate loans is estimated using the fees currently  charged to enter
         similar  agreements,  taking into  account the  remaining  terms of the
         agreements and the present creditworthiness of the counterparties.  For
         fixed-rate loan commitments and the unadvanced  portion of loans,  fair
         value also considers the difference  between current levels of interest
         rates and the committed  rates.  The fair value of letters of credit is
         based  on fees  currently  charged  for  similar  agreements  or on the
         estimated  cost to terminate  them or otherwise  settle the  obligation
         with the counterparties at the reporting date.

         STOCK BASED COMPENSATION:

         Bancorp has a stock-based plan to compensate non-employee directors for
         their  services.  This  plan  is  more  fully  described  in  Note  14.
         Compensation  cost for these  services is reflected in net income in an
         amount equal to the fair value on the date of issuance of the shares of
         Bancorp common stock issued to the directors.

                                      F-10
<page>

         EARNINGS PER SHARE (EPS):

         Basic  EPS  excludes  dilution  and  is  computed  by  dividing  income
         available  to common  shareholders  by the  weighted-average  number of
         common  shares  outstanding  for the period.  Weighted  average  common
         shares  outstanding  were  1,683,893  in  2006,  1,683,031  in 2005 and
         1,503,373 in 2004.  Diluted EPS reflects the  potential  dilution  that
         could occur if securities or other contracts to issue common stock were
         exercised or converted into common stock or resulted in the issuance of
         common  stock that then shared in the  earnings of the entity.  Diluted
         EPS is not presented  because there were no common stock equivalents in
         the three year period ended December 31, 2006.

         RECENT ACCOUNTING PRONOUNCEMENTS:

         In February  2006,  the  Financial  Accounting  Standards  Board (FASB)
         issued SFAS No. 155,  "Accounting for Certain Hybrid Instruments" (SFAS
         No. 155),  which permits,  but does not require,  fair value accounting
         for  any  hybrid   financial   instrument  that  contains  an  embedded
         derivative that would otherwise require  bifurcation in accordance with
         SFAS 133. The statement also subjects  beneficial  interests  issued by
         securitization  vehicles  to the  requirements  of SFAS  No.  133.  The
         statement is effective as of January 1, 2007.  The adoption of SFAS No.
         155  is not  expected  to  have  a  material  impact  on the  Company's
         financial condition and results of operations.

         In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing
         of Financial  Assets- an amendment of FASB Statement No. 140" (SFAS No.
         156). SFAS No. 156 requires an entity to recognize a servicing asset or
         servicing  liability each time it undertakes an obligation to service a
         financial  asset by  entering  into a  servicing  contract  in specific
         situations.  Additionally,  the servicing asset or servicing  liability
         shall be initially measured at fair value; however, an entity may elect
         the "amortization method" or "fair value method" for subsequent balance
         sheet  reporting  periods.  SFAS No. 156 is effective as of an entity's
         first fiscal year beginning after September 15, 2006. Early adoption is
         permitted as of the beginning of an entity's fiscal year,  provided the
         entity  has not yet  issued  financial  statements,  including  interim
         financial  statements,  for any period of that fiscal year. The Company
         does not  expect  the  adoption  of this  statement  to have a material
         impact on its financial condition, results of operations or cash flows.

         In  September   2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
         Measurements"  (SFAS  No.  157).  SFAS  No.  157  defines  fair  value,
         establishes  a  framework  for  measuring  fair value  under  generally
         accepted  accounting  principles (GAAP) and enhances  disclosures about
         fair value measurements. SFAS No. 157 retains the exchange price notion
         and  clarifies  that the  exchange  price is the  price  that  would be
         received  for an asset or paid to transfer a liability  (an exit price)
         in  an  orderly   transaction   between  market   participants  on  the
         measurement   date.  SFAS  No.  157  is  effective  for  the  Company's
         consolidated  financial statements for the year beginning on January 1,
         2008,  with  earlier  adoption   permitted.   Management  is  currently
         evaluating  the  effect  of SFAS  No.  157 on the  Company's  financial
         condition and results of operations.
         The Company  does not expect the  adoption of this  statement to have a
         material impact on its financial condition and results of operations.

         In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting
         for  Defined  Benefit  Pension  and  other  Postretirement  Plans  - an
         amendment of FASB Statements No 87, 88, 106 and 132(R)" (SFAS No. 158).
         SFAS No. 158 requires 1) the  recognition  of an asset or liability for
         the  over-funded or  under-funded  status of a defined benefit plan, 2)
         the  recognition of actuarial  gains and losses and prior service costs
         and  credits in other  comprehensive  income,  3)  measurement  of plan
         assets and benefit obligations as of the employer's balance sheet date,
         rather than at interim  measurement dates as currently allowed,  and 4)
         disclosure of additional  information  concerning  actuarial  gains and
         losses  and  prior  service  costs  and  credits  recognized  in  other
         comprehensive   income.  This  statement  is  effective  for  financial
         statements  with fiscal  years ending  after  December  15,  2006.  The
         adoption  of this  Statement  did not  have a  material  impact  on the
         Company's financial position, results of operations, or cash flows.

                                      F-11
<page>

NOTE 3 - INVESTMENTS IN SECURITIES
----------------------------------

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets  according to management's  intent.  The amortized cost of securities and
their approximate fair values are as follows as of December 31:

<table>
<caption>
                                                     Amortized         Gross         Gross
                                                       Cost         Unrealized     Unrealized        Fair
                                                       Basis           Gains         Losses          Value
                                                   ------------    ------------   ------------   ------------

                                                <c>             <c>            <c>            <c>
Available-for-sale securities:
   December 31, 2006:
     Equity securities                             $      3,031    $    178,395   $          0   $    181,426
     U.S. government agencies preferred stock         2,975,000               0        462,900      2,512,100
     Debt securities issued by the U.S. Treasury
       and other U. S. government corporations
       and agencies                                  55,323,358          23,343      1,200,395     54,146,306
     Debt securities issued by states of the
       United States and political subdivisions
       of the states                                 44,891,148         379,553         34,667     45,236,034
     Money market mutual funds                        1,199,881               0              0      1,199,881
     Mortgage-backed securities                      55,103,530         191,698        878,547     54,416,681
                                                   ------------    ------------   ------------   ------------
                                                    159,495,948         772,989      2,576,509    157,692,428
     Money market mutual funds included in
       cash and cash equivalents                     (1,199,881)                                   (1,199,881)
                                                   ------------    ------------   ------------   ------------
                                                   $158,296,067    $    772,989   $  2,576,509   $156,492,547
                                                   ============    ============   ============   ============

   December 31, 2005:
     Equity securities                             $      3,031    $    145,058   $          0   $    148,089
     U.S. government agencies preferred stock        13,292,628          99,660        946,300     12,445,988
     Debt securities issued by the U.S. Treasury
       and other U. S. government corporations
       and agencies                                  52,390,332               0      1,874,694     50,515,638
     Debt securities issued by states of the
       United States and political subdivisions
       of the states                                 41,550,010          75,980        293,765     41,332,225
     Money market mutual funds                        1,119,724               0              0      1,119,724
     Mortgage-backed securities                      42,312,984          15,325      1,161,952     41,166,357
                                                   ------------    ------------   ------------   ------------
                                                    150,668,709         336,023      4,276,711    146,728,021
     Money market mutual funds included in
       cash and cash equivalents                     (1,119,724)                                   (1,119,724)
                                                   ------------    ------------   ------------   ------------
                                                   $149,548,985    $    336,023   $  4,276,711   $145,608,297
                                                   ============    ============   ============   ============

Held-to-maturity securities:
   December 31, 2006:
     Mortgage-backed securities                    $     74,931    $          0   $        113   $     74,818
                                                   ============    ============   ============   ============


   December 31, 2005:
     Mortgage-backed securities                    $    146,856    $        346   $          0   $    147,202
                                                   ============    ============   ============   ============
</table>

                                      F-12
<page>

The scheduled  maturities of debt  securities were as follows as of December 31,
2006:

<table>
<caption>
                                     Available-For-Sale       Held-To-Maturity
                                     ------------------ ---------------------------
                                                         Amortized
                                             Fair          Cost            Fair
                                            Value          Basis          Value
                                         ------------   ------------   ------------

                                      <c>            <c>            <c>
Due after five years through ten years   $ 17,966,906   $          0   $          0

Due after ten years                        81,415,434              0              0
Mortgage-backed securities                 54,416,681         74,931         74,818
                                         ------------   ------------   ------------
                                         $153,799,021   $     74,931   $     74,818
                                         ============   ============   ============
</table>

During 2006,  proceeds from sales of  available-for-sale  securities amounted to
$62,356,620.  Gross  realized  gains and gross  realized  losses on those  sales
amounted to $724,286 and  $206,960,  respectively.  During 2005,  proceeds  from
sales of available-for-sale  securities amounted to $83,572,466.  Gross realized
gains and gross  realized  losses on those  sales  amounted  to  $1,427,881  and
$35,657,  respectively.  During 2004, proceeds from sales of  available-for-sale
securities  amounted to  $98,347,353.  Gross  realized  gains and gross realized
losses on those sales amounted to $1,577,110 and $87,205,  respectively. The tax
provision applicable to these net realized gains amounted to $175,891,  $473,356
and $580,318, respectively. In 2005, a write down of $182,500 was recorded on an
available-for-sale security as management had deemed this particular security to
be other than temporarily impaired.

There were no securities of issuers whose aggregate carrying amount exceeded 10%
of shareholders' equity as of December 31, 2006.

Total carrying  amounts of $55,251,654  and  $38,612,787 of debt securities were
pledged to secure Federal Home Loan Bank advances, public deposits, treasury tax
and loan and for other  purposes as required by law as of December  31, 2006 and
2005, respectively.

The aggregate fair value and unrealized losses of securities that have been in a
continuous  unrealized  loss position for less than twelve months and for twelve
months or more, and are temporarily impaired,  are as follows as of December 31,
2006:

<table>
<caption>
                                                 Less than 12 Months            12 Months or Longer                 Total
                                             ---------------------------   ---------------------------   ---------------------------
                                                Fair         Unrealized        Fair        Unrealized        Fair       Unrealized
                                                Value          Losses          Value         Losses          Value         Losses
                                             ------------   ------------   ------------   ------------   ------------   ------------

                                            <c>                <c>        <c>               <c>         <c>               <c>
U.S. government agencies preferred
   stock                                     $          0   $          0   $  2,512,100   $    462,900   $  2,512,100   $    462,900
Debt securities issued by the U.S.
   Treasury and other U. S. government
   corporations and agencies                      792,581         57,553     49,159,124      1,142,842     49,951,705      1,200,395
Debt securities issued by states of the
   United States and political
   subdivisions of the states                   1,809,175         12,100      2,094,013         22,567      3,903,188         34,667
Mortgage-backed securities                     13,486,446         54,270     27,940,134        824,390     41,426,580        878,660
                                             ------------   ------------   ------------   ------------   ------------   ------------

     Total temporarily impaired securities   $ 16,088,202   $    123,923   $ 81,705,371   $  2,452,699   $ 97,793,573   $  2,576,622
                                             ============   ============   ============   ============   ============   ============
</table>

                                      F-13
<page>

Securities  exhibiting  unrealized  losses are  analyzed to  determine  that the
impairments  are not  other-than-temporary  and  the  following  information  is
considered.  U.S. Government  securities are backed by the full faith and credit
of the United States and therefore bear no credit risk. U.S. Government agencies
securities,  which have a significant impact in financial markets,  have minimal
credit risk.  All  investments  maintain a credit rating of at least  investment
grade  by one of the  nationally  recognized  rating  agencies.  Mortgage-backed
securities are issued by federal government  agencies or by private issuers with
minimum  security  ratings of AAA. The unrealized  losses in the above table are
attributable to changes in market interest rates. As Company  management has the
ability to hold securities until  anticipated  recovery to cost basis occurs, no
declines are deemed to be other than temporary.

NOTE 4 - LOANS
--------------

Loans consisted of the following as of December 31:

                                                      2006             2005
                                                 -------------    -------------
Commercial, financial and agricultural           $  16,464,762    $  15,354,328
Real estate - construction and land development     21,169,024       18,814,408
Real estate - residential                          145,394,844      135,618,937
Real estate - commercial                            50,859,332       40,889,007
Consumer                                             8,815,789        7,899,912
Term federal funds                                  12,000,000                0
Other                                                   69,367           46,783
                                                 -------------    -------------
                                                   254,773,118      218,623,375
Deferred costs, net                                    168,573                0
Unearned income                                         (3,143)          (8,056)
Allowance for loan losses                           (2,474,118)      (2,626,170)
                                                 -------------    -------------
           Net loans                             $ 252,464,430    $ 215,989,149
                                                 =============    =============

Certain  directors and executive  officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2006.
Total  loans to such  persons  and their  companies  amounted  to $681,984 as of
December 31, 2006.  During 2006,  principal  advances of $366,942  were made and
repayments totaled $411,177.

Changes in the  allowance  for loan  losses  were as follows for the years ended
December 31:

<table>
<caption>
                                                 2006           2005           2004
                                             -----------    -----------    -----------

                                          <c>            <c>            <c>
Balance at beginning of period               $ 2,626,170    $ 2,511,546    $ 1,664,274
(Benefit) provision for loan losses              (87,488)       210,000        250,000
Recoveries of loans previously charged off        67,054         39,094         28,302
Loans charged off                               (131,618)      (134,470)       (69,742)
Allowance related to business combination              0              0        638,712
                                             -----------    -----------    -----------
Balance at end of period                     $ 2,474,118    $ 2,626,170    $ 2,511,546
                                             ===========    ===========    ===========
</table>

The  following  table  sets forth  information  regarding  nonaccrual  loans and
accruing loans 90 days or more overdue as of December 31:

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

Total nonaccrual loans                             $886,377   $693,726
                                                   ========   ========

Accruing loans which are 90 days or more overdue   $ 77,525   $ 78,663
                                                   ========   ========

                                      F-14
<page>

Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:

<table>
<caption>
                                                                             2006                          2005
                                                                  ---------------------------   ---------------------------
                                                                  Recorded       Related        Recorded       Related
                                                                  Investment     Allowance      Investment     Allowance
                                                                  In Impaired    For Credit     In Impaired    For Credit
                                                                  Loans          Losses         Loans          Losses
                                                                  ------------   ------------   ------------   ------------

                                                               <c>            <c>            <c>            <c>
Loans for which there is a related allowance for credit losses    $          0   $          0   $          0   $          0

Loans for which there is no related allowance for credit losses              0              0              0              0
                                                                  ------------   ------------   ------------   ------------

           Totals                                                 $          0   $          0   $          0   $          0
                                                                  ============   ============   ============   ============

Average recorded investment in impaired loans during the
   year ended December 31                                         $          0                  $     73,133
                                                                  ============                  ============

Related amount of interest income  recognized during the time,
   in the year ended December 31, that the loans were impaired

           Total recognized                                       $          0                  $      6,665
                                                                  ============                  ============
           Amount recognized using a cash-basis method of
              accounting                                          $          0                  $      6,665
                                                                  ============                  ============
</table>

In 2006, 2005 and 2004 the Bank capitalized  mortgage  servicing rights totaling
$147,353, $73,849 and $112,187,  respectively,  and amortized $225,732, $164,178
and $66,019,  respectively. The balance of capitalized mortgage servicing rights
included  in other  assets  at  December  31,  2006 and  2005 was  $336,185  and
$414,900,  respectively.  On  September  10,  2004  the Bank  acquired  mortgage
servicing  rights of  $392,256,  exclusive  of $2,388  in  valuation  allowance,
through the acquisition of Canaan National Bancorp, Inc.

Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:

                                      2006        2005
                                   --------    --------
Balance, beginning of year         $  1,115    $  7,973
Additions                            19,392      16,077
Reductions                          (19,056)    (22,935)
                                   --------    --------
Balance, end of year               $  1,451    $  1,115
                                   ========    ========

The fair value of the mortgage  servicing rights was $671,145 and $525,209 as of
December 31, 2006 and 2005, respectively.

Loans  serviced  for others are not  included in the  accompanying  consolidated
balance  sheets.  The unpaid  principal  balance  of  mortgage  and other  loans
serviced for others was  $49,117,195  and  $49,567,721  at December 31, 2006 and
2005, respectively.

                                      F-15
<page>

NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------

The following is a summary of premises and equipment as of December 31:

                                               2006           2005
                                            -----------    -----------
Land                                        $   775,844    $   775,844
Buildings                                     5,721,601      5,629,513
Furniture and equipment                       2,786,494      2,696,510
                                            -----------    -----------
                                              9,283,939      9,101,867
Accumulated depreciation and amortization    (3,148,393)    (2,649,888)
                                            -----------    -----------
                                            $ 6,135,546    $ 6,451,979

NOTE 6 - DEPOSITS
-----------------

The aggregate  amount of time deposit  accounts in  denominations of $100,000 or
more  as of  December  31,  2006  and  2005  was  $55,315,326  and  $27,662,727,
respectively.

The aggregate  amount of brokered time deposits as of December 31, 2006 and 2005
was $19,538,000 and $0, respectively. Brokered time deposits are not included in
time deposit accounts in denominations of $100,000 or more above.

For time deposits as of December 31, 2006,  the scheduled  maturities  for years
ended December 31 are as follows:

                      2007                      $ 98,395,827
                      2008                        10,090,092
                      2009                         2,606,025
                      2010                         2,105,190
                      2011                         7,164,220
                                                ------------
                                                $120,361,354

Certain  directors and executive  officers of the Company and companies in which
they have a significant  ownership  interest  were  customers of the Bank during
2006. Total deposits of such persons and their companies  amounted to $1,372,156
and $1,739,823 as of December 31, 2006 and 2005, respectively.

NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
----------------------------------------

Advances  consist of funds  borrowed  from the Federal  Home Loan Bank of Boston
(FHLB).

Maturities  of advances  from the FHLB for the five fiscal  years  ending  after
December 31, 2006, and thereafter, are summarized as follows:

                     2007                      $16,589,044
                     2008                       11,577,699
                     2009                        1,320,213
                     2010                       21,202,309
                     2011                       10,794,029
                     Thereafter                 25,295,450
                     Fair value adjustment         314,658
                                               -----------
                                               $87,093,402

                                      F-16
<page>

As of December 31, 2006, the following advances from the FHLB were redeemable at
par at the option of the FHLB:

     MATURITY DATE            OPTIONAL REDEMPTION DATE             AMOUNT
     -------------            ------------------------             ------
         1/25/2010       1/25/2007 and quarterly thereafter     $19,000,000
         4/27/2009       1/26/2007 and quarterly thereafter         500,000
         4/27/2009       1/26/2007 and quarterly thereafter         500,000
          2/8/2010        2/7/2007 and quarterly thereafter         600,000
         2/28/2011       2/26/2007 and quarterly thereafter      10,000,000
        12/15/2010       3/15/2007 and quarterly thereafter         800,000
        12/16/2013       3/15/2007 and quarterly thereafter      10,000,000
        12/20/2010       3/20/2007 and quarterly thereafter         500,000
          3/1/2011        3/1/2007 and quarterly thereafter         500,000
        12/12/2016      12/12/2007 and quarterly thereafter      15,000,000


The  advances  also  include  $400,000  borrowed  in 2002 at  4.37%  which  is a
Knock-out  Advance  with a Strike  Rate of 7%. If the  three  month  LIBOR  rate
exceeds the Strike Rate of 7% on January 8, 2007 and quarterly  thereafter,  the
FHLB will require that this  borrowing  become due  immediately  upon the Strike
Date as defined in the contract.  As of December 31, 2006, the three month LIBOR
was 5.36%. The maturity date is April 9, 2007.

Amortizing  advances  are being repaid in equal  monthly  payments and are being
amortized  from  the  date of the  advance  to the  maturity  date  on a  direct
reduction basis.

Borrowings from the FHLB are secured by a blanket lien on qualified  collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties,  certain  unencumbered  investment  securities  and other  qualified
assets.

At December  31,  2006,  the interest  rates on FHLB  advances  ranged from 2.66
percent to 6.30 percent.  At December 31, 2006,  the weighted  average  interest
rate on FHLB advances was 4.97 percent.

NOTE 8 - EMPLOYEE BENEFITS
--------------------------

The  Bank  has  an  insured  noncontributory  defined  benefit  retirement  plan
available  to employees  eligible as to age and length of service.  Benefits are
based  on a  covered  employee's  final  average  compensation,  primary  social
security benefit and credited service. The Bank makes annual contributions which
meet the Employee Retirement Income Security Act minimum funding requirements.

In 2006 the plan was  amended,  effective  September  1, 2006,  to provide  that
employees  hired or rehired on or after  September  1, 2006 are not  eligible to
participate in the plan.

                                      F-17
<page>

The following tables set forth  information about the plan as of December 31 and
the years then ended, using a measurement date of December 31:

<table>
<caption>
                                                                  2006           2005           2004
                                                              -----------    -----------    -----------

                                                               <c>            <c>            <c>
Change in projected benefit obligation:
   Benefit obligation at beginning of year                    $ 5,495,706    $ 4,108,971    $ 2,762,015
   Adjustment                                                           0              0        960,236
   Actuarial (gain) loss                                         (128,601)       783,390        (12,650)
   Service cost                                                   430,035        466,570        259,513
   Interest cost                                                  318,310        290,825        220,533
   Benefits paid                                                  (87,521)      (154,050)       (80,676)
                                                              -----------    -----------    -----------
       Benefit obligation at end of year                        6,027,929      5,495,706      4,108,971
                                                              -----------    -----------    -----------

Change in plan assets:
   Plan assets at estimated fair value at beginning of year     3,370,954      2,839,515      1,787,563
   Actual return on plan assets                                   392,231         94,489        140,306
   Contributions                                                1,341,000        591,000        992,322
   Benefits paid                                                  (87,521)      (154,050)       (80,676)
                                                              -----------    -----------    -----------
       Fair value of plan assets at end of year                 5,016,664      3,370,954      2,839,515
                                                              -----------    -----------    -----------

Funded status                                                  (1,011,265)    (2,124,752)    (1,269,456)
Unrecognized net loss                                                 N/A      2,330,482      1,503,149
Unrecognized prior service cost                                       N/A          2,696          3,589
Unamortized net obligation existing at date of adoption of
   SFAS No. 87                                                        N/A              0          2,771
Additional minimum liability                                          N/A       (448,005)             0
                                                              -----------    -----------    -----------
     (Funded status) (accrued) prepaid benefit cost,
     respectively, included in the balance sheet              $(1,011,265)   $  (239,579)   $   240,053
                                                              ===========    ===========    ===========
</table>

Amounts recognized in accumulated other  comprehensive  loss, before tax effect,
consist of:

                                                               December 31, 2006
                                                               -----------------
Unrecognized net loss                                                 $2,016,054
Unrecognized prior service cost                                            1,803
                                                                      ----------
                                                                      $2,017,857
                                                                      ==========

The $960,236  adjustment  made to the 2004 beginning of year  projected  benefit
obligation  is a result of a change in  calculation  methodology  from the prior
actuary to the current actuary,  hired by the Bank in April 2004,  including the
effect of reflecting salary increases in the  determination of liabilities.  The
adjustment  also  includes   liability  gains  and  losses  due  to  demographic
experience.  Net periodic cost for the year ended  December 31, 2004 of $490,190
includes  additional  amortization  of the transition  obligation and additional
amortization  of prior  service  cost in the  amounts  of $46,921  and  $89,172,
respectively,  as a result of this  adjustment.  Net  income  for the year ended
December 31, 2004 was reduced by $83,085, net of tax benefit of $53,008, related
to this adjustment.

The following table illustrates the incremental  effect of applying SFAS No. 158
on individual line items in the balance sheet as of December 31, 2006.

<table>
<caption>
                                          Before                          After
                                        Application                     Application
                                            of                              of
                                       SFAS No. 158    Adjustments     SFAS No. 158
                                       ------------    ------------    ------------

                                    <c>             <c>             <c>
Prepaid benefit cost                   $  1,006,592    $ (1,006,592)   $          0
Deferred income tax asset                         0           5,635           5,635
Total Assets                            451,340,627      (1,000,957)    450,339,670
Liability for pension benefits                    0       1,011,265       1,011,265
Deferred income tax liability              (680,436)        680,436               0
Total liabilities                       405,659,660         330,829     405,990,489
Accumulated other comprehensive loss     (1,190,323)     (1,331,786)     (2,522,109)
Total shareholders' equity               45,680,967      (1,331,786)     44,349,181

</table>

                                      F-18
<page>

The accumulated benefit obligation for the plan was $4,179,551 and $3,610,533 at
December 31, 2006 and 2005, respectively.

Amounts recognized in the balance sheets as of December 31, 2005 consist of:

Accrued benefit cost                            $(239,579)
Additional minimum liability                     (448,005)
Intangible asset                                    2,696
Accumulated other comprehensive loss              445,309
                                                ---------
       Net amount recognized                    $(239,579)
                                                =========

The  discount  rate  used in  determining  the  actuarial  present  value of the
projected benefit obligation was 6.0% for 2006 and 2005. The rate of increase in
future  compensation levels was based on the following graded table for 2006 and
2005:

                       AGE                          RATE
                       ---                          ----
                       25                          4.75%
                       35                          4.25%
                       45                          3.75%
                       55                          3.25%
                       65                          3.00%

Components of net periodic cost are as follows for the years ended December 31:

<table>
<caption>
                                                                               2006           2005           2004
                                                                           -----------    -----------    -----------

                                                                        <c>            <c>            <c>
Service cost                                                               $   430,035    $   466,570    $   259,513
Interest cost on benefit obligation                                            318,310        290,825        220,533
Expected return on assets                                                     (295,598)      (236,062)      (196,448)
Amortization of transition obligation                                                0          2,771         55,593
Amortization of prior service cost                                                 893            893         90,064
Recognized net loss                                                             89,194         97,630         60,935
                                                                           -----------    -----------    -----------
       Net periodic benefit cost                                               542,834        622,627        490,190
                                                                           -----------    -----------    -----------

Other changes in plan assets and benefit obligations recognized in other
       comprehensive loss:
Net actuarial loss                                                           2,016,054              0              0
Prior service cost                                                               1,803              0              0
                                                                           -----------    -----------    -----------
Total recognized in other comprehensive loss                                 2,017,857              0              0
                                                                           -----------    -----------    -----------
Total recognized in net periodic cost and other comprehensive loss         $ 2,560,691    $   622,627    $   490,190
                                                                           ===========    ===========    ===========
</table>

The  estimated  net loss and prior  service  cost that  will be  amortized  from
accumulated  other  comprehensive  loss into net periodic  benefit cost over the
year ended December 31, 2007 are $77,101 and $893, respectively.

The discount rate used to determine the net periodic  benefit cost was 6.00% for
2006,  2005 and 2004; and the expected  return on plan assets was 7.50% for 2006
and 7.50% for 2005 and 7.25% for 2004.

The  graded  table  was  also  used  for the rate of  compensation  increase  in
determining the net periodic benefit cost in 2006, 2005 and 2004.

Pension  expense is  calculated  based upon a number of  actuarial  assumptions,
including an expected  long-term  rate of return on pension plan assets of 7.50%
for 2006. In developing the expected long-term rate of return assumption,  asset
class  return  expectations  were  evaluated  as  well  as  long-term  inflation
assumptions,   and  historical   returns  based  on  the  current  target  asset
allocations of 60% equity and 40% fixed income.  The Bank regularly  reviews the
asset  allocations  and  periodically  rebalances  investments  when  considered
appropriate.  While all future  forecasting  contains  some level of  estimation
error, the Bank believes that 7.50% falls within a range of reasonable long-term
rate of return  expectations for pension plan assets.  The Bank will continue to
evaluate the actuarial assumptions,  including expected rate of return, at least
annually, and will adjust as necessary.

                                      F-19
<page>

Plan Assets:

The pension plan investments are co-managed by the Trust and Investment Services
division of the Bank and Bradley Foster and Sargent, Inc. The investments in the
plan are reviewed and approved by the Trust  Committee.  The asset allocation of
the plan is a balanced  allocation.  Debt  securities  are timed to mature  when
employees  are due to  retire.  Debt  securities  are  laddered  for  coupon and
maturity.  Equities are put in the plan to achieve a balanced  allocation and to
provide   growth  of  the   principal   portion  of  the  plan  and  to  provide
diversification.  The Trust  Committee  reviews the  policies  of the plan.  The
prudent investor rule and applicable ERISA  regulations  apply to the management
of the funds and investment selections.

The Bank's pension plan asset allocations by asset category are as follows:

<table>
<caption>
                                                    December 31, 2006          December 31, 2005
                                                 -----------------------    -----------------------
               Asset Category                    Fair Value     Percent     Fair Value     Percent
----------------------------------------------   ----------   ----------    ----------   ----------

                                              <c>                <c>     <c>                <c>
Equity securities                                $2,537,994         50.6%   $  987,888         29.4%
U.S. Government treasury and agency securities    1,480,289         29.5     1,319,226         39.1
Corporate bonds                                      23,040          0.5        23,632          0.7
Mutual funds                                        200,503          4.0       583,354         17.3
Money market mutual funds                           672,228         13.4       344,620         10.2
Certificates of deposit                             102,610          2.0       112,234          3.3
                                                 ----------   ----------    ----------   ----------
         Total                                   $5,016,664        100.0%   $3,370,954        100.0%
                                                 ==========   ==========    ==========   ==========
</table>

There were no  securities  of the Bancorp and related  parties  included in plan
assets as of December 31, 2006 and 2005.

Based on current data and assumptions, the following benefits are expected to be
paid for each of the following five years and, in the aggregate,  the five years
thereafter:

                  2007                            $   171,000
                  2008                                 90,000
                  2009                                123,000
                  2010                                205,000
                  2011                                195,000
                  2012 - 2016                       4,260,000

The Bank expects to make a contribution of $670,000 in 2007.

The Bank  adopted a 401(k)  Plan  effective  in 2000.  Under  the Plan  eligible
participants   may  contribute  a  percentage  of  their  pay,  subject  to  IRS
limitations.  The Bank may make  discretionary  contributions  to the Plan.  The
Bank's contribution  expense in the years ended December 31, 2006, 2005 and 2004
amounted  to   approximately   $93,000,   $91,212  and  $60,000,   respectively.
Discretionary contributions vest in full after five years.

In 2006 the 401(k) Plan was amended,  effective  September  1, 2006,  to provide
that  employees  hired or rehired  after  September  1, 2006 are not eligible to
participate  in the plan.  The  Company  will be  establishing,  not later  than
September  1, 2007,  a second  401(k) Plan to provide a  discretionary  match to
employees  hired or rehired,  on or after  September 1, 2006 who satisfy certain
eligibility requirements.

Fourteen of the Bank's officers have a change in control agreement ("agreement")
with the Bank. The agreements provide that if, within twelve (12) months after a
"change-in-control"  has  occurred,  the officer's  employment  terminates or is
reassigned under defined circumstances, then the Bank and/or its successor shall
pay the officer a lump sum amount equal to the officer's  most recent  aggregate
base salary paid in the twelve (12) month period  immediately  preceding  his or
her  termination or reassignment  less amounts  previously paid from the date of
"change in control."

                                      F-20
<page>

NOTE 9 - INCOME TAXES

The components of income tax expense are as follows for the years ended December
31:

                                      2006         2005         2004
                                   ----------   ----------   ----------
Current:
   Federal                         $  990,839   $  986,976   $  631,007
   State                               54,678       60,164          250
                                   ----------   ----------   ----------
                                    1,045,517    1,047,140      631,257
                                   ----------   ----------   ----------
Deferred:
   Federal                            217,852       12,873      131,788
   State                                    0            0       11,903
   Change in valuation allowance      178,566       54,400            0
                                   ----------   ----------   ----------
                                      396,418       67,273      143,691
                                   ----------   ----------   ----------
     Total income tax expense      $1,441,935   $1,114,413   $  774,948
                                   ==========   ==========   ==========

The reasons for the  differences  between the statutory  federal income tax rate
and the  effective  tax rates are  summarized  as  follows  for the years  ended
December 31:
                                              2006       2005       2004
                                             ------     ------     ------
                                               % of       % of       % of
                                             Income     Income     Income
                                             ------     ------     ------
Federal income tax at statutory rate           34.0%      34.0%      34.0%
Increase (decrease) in tax resulting from:
   Tax-exempt income                          (13.6)     (15.8)     (18.2)
   Other items                                  1.2        (.3)       0.2
State tax, net of federal tax benefit           0.6        0.7        0.2
Change in valuation allowance                   3.1        1.0        0.0
                                             ------     ------     ------
       Effective tax rates                     25.3%      19.6%      16.2%
                                             ======     ======     ======

The Company had gross deferred tax assets and gross deferred tax  liabilities as
follows as of December 31:

<table>
<caption>
                                                                     2006           2005
                                                                  -----------    -----------

                                                                     <c>          <c>
Deferred tax assets:
   Allowance for loan losses                                      $   619,233    $   704,341
   Interest on non-performing loans                                    15,402          8,385
   Accrued deferred compensation                                       26,288         22,429
   Post-retirement benefits                                            22,440         27,880
   Other real estate owned property writedown                          22,101         22,101
   Capital loss carryforward                                          398,191         89,250
   Mark to market purchase accounting adjustments                       8,373        323,515
   Preferred stock amortization                                             0          3,991
   SFAS No. 158 pension liability                                     686,071              0
   Minimum pension liability                                                0        151,405
   Net unrealized holding loss on available-for-sale securities       613,197      1,339,834
                                                                  -----------    -----------
           Gross deferred tax assets                                2,411,296      2,693,131
           Valuation allowance                                       (260,166)       (81,600)
                                                                  -----------    -----------
                                                                    2,151,130      2,611,531
Deferred tax liabilities:
Deferred loan costs, net                                              (57,315)             0
   Core deposit intangible asset                                     (646,483)      (633,725)
   Accelerated depreciation                                          (985,152)      (998,515)
   Discount accretion                                                       0           (189)
   Mortgage servicing rights                                         (114,304)      (141,067)
   Prepaid pension                                                   (342,241)      (244,011)
                                                                  -----------    -----------

           Gross deferred tax liabilities                          (2,145,495)    (2,017,507)
                                                                   ----------     ----------

Net deferred tax asset                                            $     5,635    $   594,024
                                                                  ===========    ===========
</table>

                                      F-21
<page>

A  valuation  allowance  is  provided  when it is more likely than not that some
portion of the gross  deferred  tax asset will not be realized.  Management  has
determined that certain deferred tax assets require a valuation allowance.

As of  December  31,  2006,  the Company  had no  operating  loss and tax credit
carryovers for tax purposes.

NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------------

The Bank entered  into an agreement  with a third party in which the third party
is to provide the Bank with account processing  services and other miscellaneous
services.  Under the agreement,  the Bank is obligated to pay monthly processing
fees  through  August  5,  2010.  In the event the Bank  chooses  to cancel  the
agreement  prior to the end of the contract term a lump sum termination fee will
have to be paid.  The fee shall be  calculated as the average  monthly  billing,
exclusive of pass through  costs for the past twelve  months,  multiplied by the
number of months and any portion of a month remaining in the contract term.

NOTE 11 - FINANCIAL INSTRUMENTS
-------------------------------

The Bank 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.  These
financial instruments include commitments to originate loans, standby letters of
credit  and  unadvanced  funds on loans.  The  instruments  involve,  to varying
degrees,  elements  of credit  risk in excess of the  amount  recognized  in the
balance sheets. The contract amounts of those instruments  reflect the extent of
involvement the Bank has in particular classes of financial instruments.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for loan  commitments  and standby letters of
credit is represented by the contractual amounts of those instruments.  The Bank
uses the same credit policies in making commitments and conditional  obligations
as it does for on-balance sheet instruments.

Commitments  to originate  loans are  agreements to lend to a customer  provided
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future  cash   requirements.   The  Bank  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed necessary by the Bank upon extension of credit,  is based on management's
credit  evaluation  of the  borrower.  Collateral  held varies,  but may include
secured interests in mortgages, accounts receivable,  inventory, property, plant
and equipment and income producing properties.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee  the  performance  by a customer  to a third  party.  The credit  risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers. As of December 31, 2006 and 2005, the
maximum  potential  amount of the Bank's  obligation  was $12,800  and  $21,900,
respectively,   for  financial  and  standby  letters  of  credit.   The  Bank's
outstanding  letters of credit generally have a term of less than one year. If a
letter  of  credit  is  drawn  upon,  the Bank may  seek  recourse  through  the
customer's  underlying line of credit.  If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.

The estimated fair values of the Bank's financial instruments,  all of which are
held or issued for purposes  other than  trading,  are as follows as of December
31:

<table>
<caption>
                                               2006                         2005
                                   ---------------------------   ---------------------------
                                     Carrying        Fair          Carrying        Fair
                                      Amount         Value          Amount         Value
                                   ------------   ------------   ------------   ------------

                                   <c>            <c>            <c>            <c>
Financial assets:
   Cash and cash equivalents       $ 11,757,183   $ 11,757,183   $ 10,204,375   $ 10,204,375
   Available-for-sale securities    156,492,547    156,492,547    145,608,297    145,608,297
   Held-to-maturity securities           74,931         74,818        146,856        147,202
   Federal Home Loan Bank stock       4,663,700      4,663,700      5,413,200      5,413,200
   Loans held-for-sale                  304,000        307,071              0              0
    Loans, net                      252,464,430    250,312,089    215,989,149    215,652,000
   Accrued interest receivable        2,483,547      2,483,547      2,362,924      2,362,924
</table>

                                      F-22
<page>
<table>
<caption>
                                     2006                         2005
                         ---------------------------   ---------------------------
                           Carrying        Fair          Carrying        Fair
                            Amount         Value          Amount         Value
                         ------------   ------------   ------------   ------------

                      <c>            <c>            <c>            <c>
Financial liabilities:
   Deposits              $313,586,281   $313,560,974   $287,271,202   $287,598,000
   FHLB advances           87,093,402     87,478,836     71,015,614     71,362,000
    Due to broker           1,579,611      1,579,611              0              0
</table>

The  carrying  amounts of  financial  instruments  shown in the above  table are
included  in the  consolidated  balance  sheets  under the  indicated  captions.
Accounting policies related to financial instruments are described in Note 2.

The amounts of financial  instrument  liabilities with off-balance  sheet credit
risk are as follows as of December 31:

                                                     2006          2005
                                                 -----------   -----------
Commitments to originate loans                   $10,540,525   $ 3,242,137
Standby letters of credit                             12,800        21,900
Unadvanced portions of loans:
   Home equity                                    26,599,791    24,847,998
   Commercial lines of credit                      8,642,393     8,495,283
   Construction                                    7,322,201     4,521,483
   Consumer                                        6,928,313     6,837,017
                                                 -----------   -----------
                                                 $60,046,023   $47,965,818

There is no material  difference  between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.

NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
---------------------------------------------------------

Most of the Bank's business  activity is with customers  located in northwestern
Connecticut  and  nearby  New  York  and  Massachusetts   towns.  There  are  no
concentrations   of   credit   to   borrowers   that   have   similar   economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and nearby New
York and Massachusetts towns.

NOTE 13 - REGULATORY MATTERS
----------------------------

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier 1  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2006  and  2005,  that  the  Company  and the Bank  meet  all  capital  adequacy
requirements to which they are subject.

                                      F-23
<page>

As of December 31, 2006, the most recent  notification  from the Federal Deposit
Insurance  Corporation  categorized  the  Bank as  well  capitalized  under  the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized the Bank must maintain minimum total  risk-based,  Tier 1 risk-based
and Tier 1 leverage  ratios as set forth in the  table.  The  Company's  and the
Bank's actual capital amounts and ratios are also presented in the table.  There
are no conditions or events since that  notification  that  management  believes
have changed the Bank's category.

<table>
<caption>

                                                                                                   To Be Well
                                                                                                   Capitalized Under
                                                                            For Capital            Prompt Corrective
                                                        Actual           Adequacy Purposes         Action Provisions
                                                   ----------------      -----------------         -----------------
                                                   Amount     Ratio       Amount       Ratio       Amount       Ratio
                                                   ------     -----       ------       -----       ------       -----

                                                 <c>        <c>         <c>           <c>        <c>           <c>
                                                                      (Dollar amounts in thousands)
As of December 31, 2006:
   Total Capital (to Risk Weighted Assets)
     Consolidated                                  $38,030    15.28%      $19,914       >8.0%          N/A
                                                                                        -
     Salisbury Bank and Trust Company               37,295    14.98        19,929       >8.0       $24,911      >10.0%
                                                                                        -                       -

   Tier 1 Capital (to Risk Weighted Assets)
     Consolidated                                   35,555    14.28         9,957       >4.0           N/A
                                                                                        -
     Salisbury Bank and Trust Company               34,785    13.97         9,964       >4.0        14,946       >6.0
                                                                                        -                        -

   Tier 1 Capital (to Average Assets)
     Consolidated                                   35,555     8.43        16,879       >4.0           N/A
                                                                                        -
     Salisbury Bank and Trust Company               34,785     8.26        16,848       >4.0        21,060       >5.0
                                                                                        -                        -

As of December 31, 2005:
   Total Capital (to Risk Weighted Assets)
     Consolidated                                   34,058    15.76        17,801       >8.0           N/A
                                                                                        -
     Salisbury Bank and Trust Company               34,492    15.53        17,771       >8.0        22,213      >10.0
                                                                                        -                       -

   Tier 1 Capital (to Risk Weighted Assets)
     Consolidated                                   32,432    14.58         8,900       >4.0           N/A
                                                                                        -
     Salisbury Bank and Trust Company               31,732    14.29         8,885       >4.0        13,328       >6.0
                                                                                        -                        -

   Tier 1 Capital (to Average Assets)
     Consolidated                                   32,432     8.27        15,687       >4.0           N/A
                                                                                        -
     Salisbury Bank and Trust Company               31,732     8.11        15,649       >4.0        19,562       >5.0
                                                                                        -                        -
</table>

The declaration of cash dividends is dependent on a number of factors, including
regulatory  limitations,  and the  Company's  operating  results  and  financial
condition.  The stockholders of Bancorp will be entitled to dividends only when,
and if,  declared  by the  Bancorp's  Board of  Directors  out of funds  legally
available  therefore.  The  declaration  of future  dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.

Under  Connecticut law, the Bank may pay dividends only out of net profits.  The
Connecticut  Banking  Commissioner's  approval is required for dividend payments
which  exceed the current  year's net profits and  retained net profits from the
preceding two years. As of December 31, 2006, the Bank may declare  dividends to
Bancorp in an amount not to exceed $1,797,009.

                                      F-24
<page>

NOTE 14 - DIRECTORS STOCK RETAINER PLAN
---------------------------------------

At the 2001 annual  meeting  the  shareholders  of Bancorp  voted to approve the
"Directors Stock Retainer Plan of Salisbury  Bancorp,  Inc." (the "Plan").  This
Plan  provides  non-employee  directors of the Company with shares of restricted
stock of Bancorp as a component of their compensation for services as directors.
The maximum number of shares of stock that may be issued pursuant to the Plan is
15,000. The first grant date under this Plan preceded the 2002 annual meeting of
stockholders.  Each director whose term of office begins with or continues after
the date the Plan was approved by the  stockholders  is issued an "annual  stock
retainer"  consisting of 120 shares of fully vested  restricted  common stock of
Bancorp.  In 2006,  2005 and 2004, 840, 940 and 840 shares,  respectively,  were
issued under the Plan and the related  compensation expense amounted to $31,920,
$36,566 and $31,836, respectively.

NOTE 15 - MERGER AND ACQUISITIONS
---------------------------------

On October 3, 2006 the Bank  entered into a Purchase  and  Assumption  Agreement
with New York  Community  Bank to acquire  certain  assets and  liabilities of a
small branch of New York Community Bank.  Management  expects the transaction to
be completed in the second quarter of 2007.

On September 10, 2004, Canaan National Bancorp,  Inc. ("Canaan National") merged
(the  "Merger")  with and into the Company.  Under the terms of the Merger,  the
shareholders  of Canaan  National  received  a total of  $6,020,163  in cash and
257,483  shares of Bancorp  common  stock in  exchange  for all shares of Canaan
National  Bancorp,  Inc.  stock.  The value of the  257,483  shares  issued  was
$10,698,418  and was  determined  based on the September 10, 2004 closing market
price of $41.55 of Bancorp's common stock.

The  Merger  was  accounted  for  using  the  purchase   method  of  accounting.
Accordingly,  the assets acquired and liabilities  assumed have been recorded by
the Company at their fair values at the consummation  date. During the appraisal
process,  an identifiable  intangible  asset of $1,191,279 was calculated and is
being amortized to expense over a period of 12 years.  Goodwill recorded totaled
$7,151,421  and will be analyzed  for  impairment  on at least an annual  basis.
Financial  statement  amounts for Canaan  National are included in the Company's
consolidated  financial  statements beginning on the acquisition date. A summary
of net assets acquired is included in the  supplemental  disclosures in the cash
flow statement.

The following (unaudited) pro forma consolidated results of operations have been
prepared as if the  acquisition  of Canaan  National  had occurred at January 1,
2004:

                                                                   Year Ended
                                                                   ----------
                                                               December 31, 2004
                                                               -----------------
Gross revenues                                                    $25,291,875
Net income                                                        $ 4,870,000
Net income per share                                              $      2.89

The pro forma  information is presented for  informational  purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the  acquisition  been  consummated as of that time, nor is it
intended to be a projection of future results.

                                      F-25
<page>

NOTE 16 - GOODWILL AND INTANGIBLE ASSETS
----------------------------------------

The  Company's  assets as of  December  31,  2006 and 2005  include  goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001 and $7,151,421
of additional  goodwill from the merger with Canaan  National  Bancorp,  Inc. in
2004. Goodwill recognized in the 2004 merger is not deductible for tax purposes.

The Company evaluated its goodwill as of December 31, 2006 and 2005 and found no
impairment.

A summary of acquired amortizing intangible assets is as follows:

<table>
<caption>
                                                                As of December 31, 2006
                                                 ---------------------------------------------------
                                                      Gross                               Net
                                                     Carrying         Accumulated       Carrying
                                                      Amount         Amortization        Amount
                                                 ---------------   ---------------   ---------------

                                              <c>               <c>               <c>
Core deposit intangible-branch purchase          $       888,606   $       361,709   $       526,897

Core deposit intangible-Canaan National merger         1,191,279           224,677           966,602
                                                 ---------------   ---------------   ---------------

           Total                                 $     2,079,885   $       586,386   $     1,493,499
                                                 ===============   ===============   ===============
<caption>
                                                                As of December 31, 2005
                                                 ---------------------------------------------------
                                                      Gross                               Net
                                                     Carrying         Accumulated       Carrying
                                                      Amount         Amortization        Amount
                                                 ---------------   ---------------   ---------------

                                              <c>               <c>               <c>
Core deposit intangible-branch purchase          $       888,606   $       293,354   $       595,252

Core deposit intangible-Canaan National merger         1,191,279           128,816         1,062,463
                                                 ---------------   ---------------   ---------------

           Total                                 $     2,079,885   $       422,170   $     1,657,715
                                                 ===============   ===============   ===============
</table>

Aggregate amortization expense was $164,216, $164,416 and $101,109 in 2006, 2005
and 2004,  respectively.  Amortization  is being  calculated on a  straight-line
basis.

Estimated  amortization expense for each of the five years succeeding 2006 is as
follows:

           2007                                    $  164,216
           2008                                       164,216
           2009                                       164,216
           2010                                       164,216
           2011                                       164,216
                                                   ----------
                                                   $  821,080

NOTE 17 - RECLASSIFICATION
--------------------------

Certain amounts in the prior years have been  reclassified to be consistent with
the current year's statement presentation.

NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------

The following  condensed  financial  statements are for Salisbury Bancorp,  Inc.
(Parent  Company Only) and should be read in conjunction  with the  Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.

                                      F-26
<page>

                             SALISBURY BANCORP, INC.
                             -----------------------

                              (Parent Company Only)

                                 BALANCE SHEETS
                                 --------------

                           December 31, 2006 and 2005
                           --------------------------

ASSETS                                                     2006          2005
------                                                  -----------  -----------
Money market mutual funds                               $ 1,199,881  $ 1,119,724
Cash in Salisbury Bank and Trust Company                      2,494            0
                                                        -----------  -----------
                  Cash and cash equivalents               1,202,375    1,119,724
Investment in subsidiary                                 43,579,224   40,741,857
Other assets                                                  5,469        1,577
                                                        -----------  -----------
           Total assets                                 $44,787,068  $41,863,158
                                                        ===========  ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Dividends payable                                       $   437,887  $   420,835
                                                        -----------  -----------
           Total liabilities                                437,887      420,835
Total shareholders' equity                               44,349,181   41,442,323
                                                        -----------  -----------
           Total liabilities and shareholders' equity   $44,787,068  $41,863,158
                                                        ===========  ===========


                              STATEMENTS OF INCOME
                              --------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------
<table>
<caption>
                                                                     2006           2005           2004
                                                                 -----------    -----------    -----------

                                                              <c>            <c>            <c>
Dividend income from subsidiary                                  $ 1,800,000    $ 1,780,000    $ 7,510,000
Taxable interest on securities                                        34,435         24,068          4,375
                                                                 -----------    -----------    -----------
                                                                   1,834,435      1,804,068      7,514,375
                                                                 -----------    -----------    -----------

Legal expense 9,984                                                        0         10,500
Supplies and printing                                                  3,503          1,632          2,042
Other expense                                                         37,517         27,559         24,167
                                                                 -----------    -----------    -----------
                                                                      51,004         29,191         36,709
                                                                 -----------    -----------    -----------
Income before income tax benefit and equity in undistributed
   (distributed) net income of subsidiary                          1,783,431      1,774,877      7,477,666
Income tax benefit                                                    (5,469)        (1,577)        (5,647)
                                                                 -----------    -----------    -----------
Income before equity in undistributed (distributed) net
   income of subsidiary                                            1,788,900      1,776,454      7,483,313
Equity in undistributed (distributed) net income of subsidiary     2,464,718      2,784,887     (3,464,371)
                                                                 -----------    -----------    -----------
           Net income                                            $ 4,253,618    $ 4,561,341    $ 4,018,942
                                                                 ===========    ===========    ===========
</table>

                                      F-27
<page>

                             SALISBURY BANCORP, INC.
                             -----------------------

                              (Parent Company Only)

                            STATEMENTS OF CASH FLOWS
                            ------------------------

                  Years Ended December 31, 2006, 2005 and 2004
                  --------------------------------------------

<table>
<caption>
                                                                           2006           2005           2004
                                                                        -----------    -----------    -----------

                                                                               <c>       <c>           <c>
Cash flows from operating activities:
   Net income                                                           $ 4,253,618    $ 4,561,341    $ 4,018,942
   Adjustments to reconcile net income to net cash provided
     by operating activities:
       Equity in (undistributed) distributed net income of subsidiary    (2,464,718)    (2,784,887)     3,464,371
       (Increase) decrease in taxes receivable                               (3,892)         4,070         (5,647)
       Decrease in due from subsidiary                                            0              0         33,000
       Decrease in other assets                                                   0         29,837        189,807
       Decrease in other liabilities                                              0         (3,677)       (78,323)
       Issuance of shares for Directors' fees                                31,920         36,566         31,836
                                                                        -----------    -----------    -----------

   Net cash provided by operating activities                              1,816,928      1,843,250      7,653,986
                                                                        -----------    -----------    -----------

Cash flows from investing activities:
   Cash paid to Canaan National Bancorp, Inc. shareholders                        0              0     (6,020,163)
   Cash and cash equivalents acquired from Canaan National
     Bancorp, Inc., net of expenses paid of $309,419                              0              0        222,868
                                                                        -----------    -----------    -----------

   Net cash used in investing activities                                          0              0     (5,797,295)
                                                                        -----------    -----------    -----------

Cash flows from financing activities:
   Dividends paid                                                        (1,734,277)    (1,666,046)    (1,415,074)
                                                                        -----------    -----------    -----------

   Net cash used in financing activities                                 (1,734,277)    (1,666,046)    (1,415,074)
                                                                        -----------    -----------    -----------

Net increase in cash and cash equivalents                                    82,651        177,204        441,617
Cash and cash equivalents at beginning of year                            1,119,724        942,520        500,903
                                                                        -----------    -----------    -----------
Cash and cash equivalents at end of year                                $ 1,202,375    $ 1,119,724    $   942,520
                                                                        ===========    ===========    ===========

Supplemental disclosure:
   Liability assumed in merger with Canaan National Bancorp, Inc.       $         0    $         0    $    82,000

</table>

                                      F-28
<page>

NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------

Summarized quarterly financial data for 2006 and 2005 follows:

                                     (In thousands, except earnings per share)
                                                2006 Quarters Ended
                                      -------------------------------------
                                      March 31  June 30   Sept. 30  Dec. 31
                                      --------  -------   --------  -------

Interest and dividend income          $ 5,460   $ 5,789   $ 6,111   $ 6,369
Interest expense                        2,167     2,531     2,754     3,007
                                      -------   -------   -------   -------
   Net interest and dividend income     3,293     3,258     3,357     3,362
Benefit for loan losses                     0         0         0       (87)
Other income                            1,026     1,001     1,213     1,344
Other expense                           2,837     2,992     3,101     3,315
                                      -------   -------   -------   -------
   Income before income taxes           1,482     1,267     1,469     1,478
Income tax expense                        335       261       309       537
                                      -------   -------   -------   -------
   Net income                         $ 1,147   $ 1,006   $ 1,160   $   941
                                      =======   =======   =======   =======

Earnings per common share             $   .68   $   .60   $   .69   $   .56
                                      =======   =======   =======   =======

                                     (In thousands, except earnings per share)
                                                2005 Quarters Ended
                                      -------------------------------------
                                      March 31  June 30   Sept. 30  Dec. 31
                                      --------  -------   --------  -------

Interest and dividend income          $ 5,034   $ 5,069   $ 5,272   $ 5,441
Interest expense                        1,645     1,744     1,906     2,057
                                      -------   -------   -------   -------
   Net interest and dividend income     3,389     3,325     3,366     3,384
Provision (benefit) for loan losses        90        90        90       (60)
Other income                            1,389     1,226     1,275       975
Other expense                           3,026     2,965     3,068     3,385
                                      -------   -------   -------   -------
   Income before income taxes           1,662     1,496     1,483     1,034
Income tax expense                        333       188       352       241
                                      -------   -------   -------   -------
   Net income                         $ 1,329   $ 1,308   $ 1,131   $   793
                                      =======   =======   =======   =======

Earnings per common share             $   .79   $   .78   $   .67   $   .47
                                      =======   =======   =======   =======

                                      F-29
<page>

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

During the two (2) most recent fiscal  years,  the Company and the Bank have had
no changes in or disagreements  with  independent  accountants on accounting and
financial disclosure matters.

ITEM 9A. CONTROLS AND PROCEDURES

The Company's Chief  Executive  Officer and Chief  Financial  Officer  concluded
that, based upon an evaluation as of December 31, 2006, as required by 13a-15(b)
or 15d-15(b),the  Company's  disclosure  controls and procedures,  as defined in
ss.240.13a-15(e) or 15d-15(e), are effective to ensure that information required
to be  disclosed  by the Company in reports  that it files or submits  under the
Securities Exchange Act of 1934 is recorded, processed,  summarized and reported
within  the time  periods  specified  in the SEC  rules  and  forms.  Disclosure
controls and procedures  include,  without  limitation,  controls and procedures
designed to ensure that information  required to be disclosed is accumulated and
communicated  to  management,  including its Chief  Executive  Officer and Chief
Financial Officer, as appropriate,  to allow timely decisions regarding required
disclosure.  During the fourth  quarter ended  December 31, 2006,  there were no
changes in the Company's  internal  control over  financial  reporting that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information  regarding  Directors  and  Executive  Officers  of  the  Registrant
required by this Item  pursuant to Item 401 of  Regulation  S-K is omitted  from
this report on Form 10-K and is  contained  in the  Company's  Definitive  Proxy
Statement for the Annual Meeting of  Shareholders  to be held on May 16, 2007 to
be filed  within 120 days after the end of the fiscal year  covered by this Form
10-K, under the Sections  "Election of Directors" and "Executive  Officers," and
the information included therein is incorporated by reference.

Information  required  by this  Item  pursuant  to Item  405 of  Regulation  S-K
regarding  compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended,  is omitted  from this report on Form 10-K and is  contained  in the
Bank's  Definitive  Proxy Statement for the Annual Meeting of Shareholders to be
held on May 16,  2007 to be filed  within  120 days  after the end of the fiscal
year  covered  by this Form 10-K under the  Section  "Section  16(a)  Beneficial
Ownership  Reporting  Compliance,"  and  the  information  included  therein  is
incorporated by reference.

Information  required by this Item pursuant to Item  407(c)(3) of Regulation S-K
regarding  material  changes,  if any, to procedures by which  shareholders  may
recommend nominees to the Board, is omitted from this report on Form 10-K and is
contained in the Company's  Definitive Proxy Statement for the Annual Meeting of
Shareholders  to be held on May 16,  2007 to be filed  within 120 days after the
end of the fiscal year  covered by this Form 10-K,  under the Section  "Deadline
for Receipt of Shareholder  Proposals," and the information  included therein is
incorporated by reference.

Information  required by this Item pursuant to Item 407(d)(4) and Item 407(d)(5)
of Regulation S-K regarding the audit  committee and audit  committee  financial
expert(s),  respectively,  is  omitted  from  this  report  on Form  10-K and is
contained in the Company's  Definitive Proxy Statement for the Annual Meeting of
Shareholders  to be held on May 16,  2007 to be filed  within 120 days after the
end of the fiscal year covered by this Form 10-K , under the Section  "Corporate
Governance," and the information included therein is incorporated by reference.

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

The Company has adopted a Code of Ethics  that  applies to the  Company's  Chief
Executive Officer and Chief Financial  Officer. A copy of such Code of Ethics is
available  upon  request to any person,  without  charge,  by writing to John F.
Foley, Chief Financial Officer and Secretary, Salisbury Bancorp, Inc., 5 Bissell
Street, P. O. Box 1868, Lakeville, CT 06039.

                                       36
<page>

ITEM 11.  EXECUTIVE COMPENSATION

Information  required  by this  Item  pursuant  to Item  402 of  Regulation  S-K
regarding  Directors and  Executive  Compensation,  including  the  Compensation
Discussion & Analysis, is omitted from this report on Form 10-K and is contained
in  the  Company's   Definitive  Proxy  Statement  for  the  Annual  Meeting  of
Shareholders  to be held on May 16,  2007 to be filed  within 120 days after the
end of the fiscal  year  covered by this Form 10-K,  under the  Sections  "Board
Compensation" and "Executive Compensation," and the information included therein
is incorporated by reference.

Information  required by this Item pursuant to Item  407(e)(4) of Regulation S-K
is  omitted  from this  report on Form 10-K and is  contained  in the  Company's
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16,  2007 to be filed  within  120 days  after  the end of the  fiscal  year
covered by this Form 10-K, under the Section "Compensation  Committee Interlocks
and Insider Participation," and the information included therein is incorporated
by reference.

Information  required by this Item  pursuant to Item  407(e)(5)  is omitted from
this report on Form 10-K and is  contained  in the  Company's  Definitive  Proxy
Statement for the Annual Meeting of  Shareholders  to be held on May 16, 2007 to
be filed  within 120 days after the end of the fiscal year  covered by this Form
10-K,  under the Section  "Compensation  Committee  Report," and the information
included therein is incorporated by reference.

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

Information  required  by this  Item  pursuant  to Item  403 of  Regulation  S-K
regarding  Security  Ownership of Certain  Beneficial  Owners and  Management is
omitted  from  this  report  on Form  10-K  and is  contained  in the  Company's
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16,  2007 to be filed  within  120 days  after  the end of the  fiscal  year
covered by this Form  10-K,  under the  Section  "Security  Ownership,"  and the
information included therein is incorporated by reference.

Information  required by this Item  pursuant to Item  201(d) of  Regulation  S-K
regarding securities  authorized for issuance under equity compensation plans is
omitted  from  this  report  on Form  10-K  and is  contained  in the  Company's
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16,  2007 to be filed  within  120 days  after  the end of the  fiscal  year
covered  by  this  Form  10-K,  under  the  Section  "Equity  Compensation  Plan
Information," and the information included therein is incorporated by reference.

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

Information  required  by this  Item  pursuant  to Item  404 of  Regulation  S-K
regarding Certain  Relationships  and Related  Transactions is omitted from this
report on Form 10-K and is contained in the Company's Definitive Proxy Statement
for the Annual  Meeting of  Shareholders  to be held on May 16, 2007 to be filed
within  120 days  after the end of the  fiscal  year  covered by this Form 10-K,
under the Section  "Certain  Relationships  and Related  Transactions,"  and the
information included therein is incorporated by reference.

Information  required by this Item  pursuant to Item  407(a) of  Regulation  S-K
regarding the independence of directors is omitted from this report on Form 10-K
and is contained in the  Company's  Definitive  Proxy  Statement  for the Annual
Meeting of  Shareholders  to be held on May 16, 2007 to be filed within 120 days
after the end of the fiscal  year  covered by this Form 10-K,  under the Section
"Corporate  Governance," and the information included therein is incorporated by
reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information  required  by this  Item  regarding  Principal  Accounting  Fees and
Services  is  omitted  from this  report on Form  10-K and is  contained  in the
Company's  Definitive  Proxy Statement for the Annual Meeting of Shareholders to
be held on May 16, 2007 to be filed  within 120 days after the end of the fiscal
year  covered  by  this  Form  10-K,  under  the  Section   "Independent  Public
Accountants," and the information included therein is incorporated by reference.

Information required by this Item regarding  pre-approval policies for audit and
non-audit  services is omitted from this report on Form 10-K and is contained in
the Company's  Definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on May 16,  2007 to be filed  within  120 days  after  the end of the
fiscal  year  covered  by this Form 10-K,  under the

                                       37
<page>

Section  "Audit  Committee  Pre-Approval  of  Audit  and  Permissible  Non-Audit
Services of  Independent  Auditors,"  and the  information  included  therein is
incorporated by reference.

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)      The following documents are filed as part of this report on Form l0-K.

         1. Financial Statements:

                  The  financial  statements  filed as part of this  report  are
                  listed in the index appearing at Item 8.

         2. Financial Statement Schedules:

                  Such schedules are omitted  because they are  inapplicable  or
                  the  information  is  included in the  consolidated  financial
                  statements or notes thereto.

         3. Exhibits Required by Item 601 of Regulation S-K:

<table>
<caption>
            Exhibit No.      Description

                         <c>
            3.1              Certificate of Incorporation of Salisbury Bancorp, Inc. (1)
            3.2              Bylaws of Salisbury Bancorp, Inc., as amended (2)
            10               Pension Supplement Agreement with John F. Perotti (3)
            10.2             Form of Change in Control Agreement with Executive Officers (4)
            10.3             Director Stock Retainer Plan (5)
            11               Computation of Earnings per Share
            21               Subsidiaries of the Company
            31.1             Rule 13a-15(e) Certification
            31.2             Rule 13a-15(e) Certification
            32               Section 1350 Certifications
</table>

(1)  Exhibit  was  filed  on  April  23,  1998  as  Exhibit  3.1  to   Company's
     Registration  Statement  on Form S-4 (No.  333-50857)  and is  incorporated
     herein by reference.
(2)  Exhibit was filed on February  10,  2005 as Exhibit 3.2 to  Company's  Form
     8-K/A and is incorporated herein by reference.
(3)  Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's Registration
     Statement  on Form  S-4  (No.  333-50857)  and is  incorporated  herein  by
     reference.
(4)  Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the  Company's  Annual
     Report on Form 10-KSB/A for the fiscal year ended  December 31, 2002 and is
     incorporated  herein  by  reference.   Such  agreements  were  extended  on
     September 29, 2006 as set forth in the Company's  Form 8-K filed on October
     20, 2006.
(5)  Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the  Company's  Annual
     Report on Form 10KSB for the fiscal  year ended  December  31,  2002 and is
     incorporated herein by reference.

                                       38
<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, in Lakeville, Connecticut
on March 30, 2007.

                                           SALISBURY BANCORP, INC.

                                           By:   /s/ John F. Perotti
                                                 -------------------
                                                 John F. Perotti
                                                 Chairman and
                                                 Chief Executive Officer

                                           By:   /s/ John F. Foley
                                                 -----------------
                                                 John F. Foley
                                                 Chief Financial Officer,
                                                 Treasurer and Secretary

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

Signature                           Title                            Date
---------                           -----                            ----

 /s/ John F. Perotti                Chairman,                    March 30, 2007
------------------------------      Chief Executive Officer
 (John F. Perotti)                  and Director

  /s/ Louis E. Allyn, II            Director                     March 30, 2007
------------------------------
(Louis E. Allyn, II)

  /s/ John R. H. Blum               Director                     March 30, 2007
-----------------------------
(John R. H. Blum)

 /s/ Louise F. Brown                Director                     March 30, 2007
------------------------------
(Louise F. Brown)

  /s/ Richard J. Cantele, Jr.       Director                     March 30, 2007
------------------------------
(Richard J. Cantele, Jr.)

 /s/ Robert S. Drucker              Director                     March 30, 2007
------------------------------
(Robert S. Drucker)

/s/ Nancy F. Humphreys              Director                     March 30, 2007
-----------------------------
(Nancy F. Humphreys)

  /s/ Holly J. Nelson               Director                     March 30, 2007
 -----------------------------
(Holly J. Nelson)

 /s/ Michael A. Varet               Director                     March 30, 2007
------------------------------
(Michael A. Varet)

                                       39