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

                                    FORM 10-Q

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

               For the Quarterly period ended: September 30, 2008

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

           For the transition period from ___________ to ___________.

                         Commission File Number: 0-28815

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

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

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

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

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

                                 Yes |X|   No |_|

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

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

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

                                 Yes |_|   No |X|

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock,  as of the latest  practicable  date:  2,356,875  shares of Common
Stock, par value $.01 per share, were outstanding at November 10, 2008.


                                       1
<PAGE>

                     FIRST LITCHFIELD FINANCIAL CORPORATION
                                    FORM 10-Q
                                      INDEX

                                                                            Page
                                                                            ----

Part I - Financial Information

      Item 1 - Financial Statements

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

      Consolidated Statements of Operations - Three and Nine months ended
      September 30, 2008 and 2007 (unaudited ..............................    4

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

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

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

      Item 2 - Management's Discussion and Analysis of Financial
      Condition and Results of Operations .................................   21

      Item 3 - Quantitative and Qualitative Disclosures about
      Market Risk [not applicable] ........................................   35

      Item 4 - Controls and Procedures ....................................   35

Part II - Other Information

      Item 1 - Legal Proceedings ..........................................   36

      Item 1A - Risk Factors [not applicable ..............................   36

      Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds    36

      Item 3 - Defaults Upon Senior Securities ............................   36

      Item 4 - Submission of Matters to a Vote of Security Holders ........   36

      Item 5 - Other Information ..........................................   36

      Item 6 - Exhibits ...................................................   37

Signatures ................................................................   38


                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>
                                                                                     September 30,      December 31,
                                                                                         2008               2007
                                                                                     -------------      -------------
<S>                                                                                  <C>                <C>
ASSETS
     Cash and due from banks                                                         $   7,044,119      $  10,876,445
     Interest - bearing accounts due from banks                                                  4         10,620,749
                                                                                     -------------      -------------
                                                       CASH AND CASH EQUIVALENTS         7,044,123         21,497,194
                                                                                     -------------      -------------
     Securities:
        Available for sale securities, at fair value                                   104,918,031        128,979,548
        Held to maturity securities (fair value $30,915-2008 and $33,712-2007)              31,233             34,185
                                                                                     -------------      -------------
                                                                TOTAL SECURITIES       104,949,264        129,013,733
                                                                                     -------------      -------------

     Federal Home Loan Bank stock, at cost                                               5,427,600          5,067,400
     Federal Reserve Bank stock, at cost                                                   225,850            225,850
     Other restricted stock, at cost                                                       100,000             95,000
     Loan and lease receivables, net of allowance for loan and
     lease
        losses of  $2,267,102 -2008, $2,151,622 -2007
                                                            NET LOANS AND LEASES       351,737,145        327,475,371
     Premises and equipment, net                                                         7,335,512          7,758,761
     Deferred income taxes                                                               2,701,093          1,327,535
     Accrued interest receivable                                                         2,300,474          2,609,606
     Cash surrender value of insurance                                                  10,319,819         10,020,540
     Due from broker for security sales                                                 11,643,821                 --
     Other assets                                                                        2,753,736          2,562,639
                                                                                     -------------      -------------

                                                                    TOTAL ASSETS     $ 506,538,437      $ 507,653,629
                                                                                     =============      =============
LIABILITIES
     Deposits:                                                                                  --
        Noninterest bearing                                                          $  68,243,431      $  70,564,267
        Interest bearing                                                               272,483,672        265,053,397
                                                                                     -------------      -------------
                                                                  TOTAL DEPOSITS       340,727,103        335,617,664

     Federal Home Loan Bank advances                                                    87,941,000         91,500,000
     Repurchase agreements with financial institutions                                  26,450,000         21,550,000
     Repurchase agreements with customers                                               13,269,417         14,142,773
     Junior subordinated debt issued by unconsolidated trust                            10,104,000         10,104,000
     Collateralized borrowings                                                           1,389,170          1,699,336
     Capital lease obligation                                                            1,070,154          1,083,567
     Accrued expenses and other liabilities                                              5,476,419          3,593,677
                                                                                     -------------      -------------

                                                               TOTAL LIABILITIES       486,427,263        479,291,017
                                                                                     -------------      -------------
     Minority interest                                                                      50,000             50,000
     Commitments and contingencies
SHAREHOLDERS' EQUITY
     Preferred stock $.00001 par value; 1,000,000 shares authorized, no shares
     outstanding Common stock $.01 par value
        Authorized - 5,000,000 shares
        2008 - Issued - 2,506,622 shares, outstanding - 2,356,875 shares
        2007 - Issued - 2,501,229 shares, outstanding - 2,368,200 shares                    25,036             25,012
     Additional paid-in capital                                                         27,887,443         27,858,841
     (Accumulated deficit) retained earnings                                            (2,763,538)         2,623,110
     Less: Treasury stock at cost- 149,747 as of 9/30/08, 133,029 as of 12/31/07        (1,154,062)          (926,964)
     Accumulated other comprehensive loss, net of taxes                                 (3,933,705)        (1,267,387)
                                                                                     -------------      -------------
                                                      TOTAL SHAREHOLDERS' EQUITY        20,061,174         28,312,612
                                                                                     -------------      -------------

                                      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     $ 506,538,437      $ 507,653,629
                                                                                     =============      =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
                                                                                 Three Months Ended           Nine Months Ended
                                                                                    September 30,               September 30,
                                                                                 2008          2007          2008            2007
                                                                             -----------    ----------   ------------    -----------
<S>                                                                          <C>            <C>          <C>             <C>
INTEREST AND DIVIDEND INCOME
     Interest and fees on loans and leases                                   $ 5,363,809    $5,341,401   $ 16,200,748    $15,539,697
                                                                             -----------    ----------   ------------    -----------

     Interest and dividends on securities:
        Mortgage-backed securities                                               991,860       629,956      2,647,249      1,964,187
        US Treasury and other securities                                         397,073       531,737      1,325,699      1,630,486
        State and municipal securities                                           279,144       339,347        905,529      1,016,157
        Corporate bonds and other securities                                      65,299       102,842        285,075        473,168
                                                                             -----------    ----------   ------------    -----------
         Total interest on securities                                          1,733,376     1,603,882      5,163,552      5,083,998
     Other interest income                                                        43,482       168,062        210,868        367,511
                                                                             -----------    ----------   ------------    -----------
                                   TOTAL INTEREST AND DIVIDEND INCOME          7,140,667     7,113,345     21,575,168     20,991,206
                                                                             -----------    ----------   ------------    -----------

INTEREST EXPENSE
     Interest on deposits:
        Savings                                                                  173,193       237,267        479,079        567,347
        Money market                                                             363,373       627,841      1,185,540      1,677,674
        Time certificates of deposit                                           1,130,642     1,529,945      3,976,610      4,825,888
                                                                             -----------    ----------   ------------    -----------
                                           TOTAL INTEREST ON DEPOSITS          1,667,208     2,395,053      5,641,229      7,070,909
     Interest on Federal Home Loan Bank advances                               1,013,339       786,727      3,035,762      2,313,874
     Interest on repurchase agreements                                           398,077       347,706      1,147,314      1,081,193
     Interest on subordinated debt                                               137,523       200,582        453,284        596,478
     Interest on collateralized borrowings                                        25,418        31,230         80,221         64,403
     Interest on capital lease obligation                                         14,220        14,453         42,837         43,528
                                                                             -----------    ----------   ------------    -----------
                                               TOTAL INTEREST EXPENSE          3,255,785     3,775,751     10,400,647     11,170,385
                                                                             -----------    ----------   ------------    -----------
                                                  NET INTEREST INCOME          3,884,882     3,337,594     11,174,521      9,820,821
PROVISION FOR LOAN AND LEASE LOSSES                                              155,000            --        367,000        105,000
                                                                             -----------    ----------   ------------    -----------
                                  NET INTEREST INCOME AFTER PROVISION
                                            FOR LOAN AND LEASE LOSSES          3,729,882     3,337,594     10,807,521      9,715,821
                                                                             -----------    ----------   ------------    -----------
NONINTEREST (LOSS) INCOME
     Banking service charges and fees                                            417,803       337,469      1,143,723        984,135
     Trust                                                                       319,049       350,071        992,142      1,020,307
     (Losses) gains on available for sale securities                          (6,720,523)       33,982     (6,687,682)        19,632
     Other                                                                       176,143       168,779        534,224        487,598
                                                                             -----------    ----------   ------------    -----------
                                      TOTAL NONINTEREST (LOSS) INCOME         (5,807,528)      890,301     (4,017,593)     2,511,672
                                                                             -----------    ----------   ------------    -----------
NONINTEREST EXPENSE
     Salaries                                                                  1,650,937     1,511,962      4,968,276      4,646,686
     Employee benefits                                                           406,287       383,699      1,298,126      1,192,766
     Net occupancy                                                               293,833       306,956        898,056        843,869
     Equipment                                                                   151,144       131,883        465,528        467,938
     Legal fees                                                                   85,703        24,128        203,323        155,379
     Directors fees                                                               51,175        50,275        151,475        158,728
     Computer services                                                           259,291       211,226        746,378        668,597
     Supplies                                                                     58,020        42,988        148,449        127,567
     Commissions, services and fees                                               70,393        88,120        314,431        318,374
     Postage                                                                      40,056        33,898        113,676        101,012
     Advertising                                                                 170,839        98,540        465,209        268,456
     Other                                                                       515,352       497,011      1,602,865      1,340,318
                                                                             -----------    ----------   ------------    -----------
                                            TOTAL NONINTEREST EXPENSE          3,753,030     3,380,686     11,375,792     10,289,690
                                                                             -----------    ----------   ------------    -----------

                                    (LOSS) INCOME BEFORE INCOME TAXES         (5,830,676)      847,209     (4,585,864)     1,937,803
(BENEFIT) PROVISION FOR INCOME TAXES                                            (404,786)      169,373       (274,945)       275,307
                                                                             -----------    ----------   ------------    -----------
                                                    NET (LOSS) INCOME        $(5,425,890)   $  677,836   $ (4,310,919)   $ 1,662,496
                                                                             ===========    ==========   ============    ===========
(LOSS) INCOME PER SHARE
                                    BASIC NET (LOSS) INCOME PER SHARE        $     (2.30)   $     0.29   $      (1.82)   $      0.70
                                                                             ===========    ==========   ============    ===========
                                  DILUTED NET (LOSS) INCOME PER SHARE        $     (2.30)   $     0.29   $      (1.82)   $      0.70
                                                                             ===========    ==========   ============    ===========
DIVIDENDS PER SHARE                                                          $      0.15    $     0.15   $       0.45    $      0.45
                                                                             ===========    ==========   ============    ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       4
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

<TABLE>
<CAPTION>
                                                                           Retained                    Accumulated
                                                            Additional     Earnings                       Other          Total
                                               Common         Paid-In    (Accumulated)    Treasury    Comprehensive   Shareholders'
                                                Stock         Capital       Deficit)       Stock           Loss          Equity
                                             -----------    -----------   -----------    -----------  -------------   -------------
<S>                                          <C>            <C>           <C>            <C>            <C>            <C>
Nine months ended September 30, 2007
Balance, December 31, 2006                   $    23,724    $25,840,623   $ 3,953,216    $  (794,756)   $(2,816,613)   $ 26,206,194
Comprehensive income:
Net income                                            --             --     1,662,496             --                      1,662,496
Other comprehensive income, net of taxes:
   Net unrealized holding gain on
    available for sale securities                     --             --            --             --        439,268         439,268
Other comprehensive income                                                                                                  439,268
Total comprehensive income                                                                                                2,101,764
Cash dividends declared: $0.45 per share              --             --    (1,016,334)            --             --      (1,016,334)
Stock options exercised - 5,346 shares                54         44,053            --             --             --          44,107
Tax benefit on stock options exercised                --         20,498            --             --             --          20,498
                                             -----------    -----------   -----------    -----------    -----------    ------------
Balance, September 30, 2007                  $    23,778    $25,905,174   $ 4,599,378    $  (794,756)   $(2,377,345)   $ 27,356,229
                                             ===========    ===========   ===========    ===========    ===========    ============

Nine months ended September 30, 2008
Balance, December 31, 2007                   $    25,012    $27,858,841   $ 2,623,110    $  (926,964)   $(1,267,387)   $ 28,312,612
Adoption of EITF 06-4 as of January 1, 2008           --             --       (12,272)            --             --         (12,272)
Comprehensive loss:
Net loss                                              --             --    (4,310,919)            --                     (4,310,919)
Other comprehensive loss, net of taxes:
   Net unrealized holding loss on
    available for sale securities                     --             --            --             --     (2,129,230)     (2,129,230)
   Net actuarial loss and prior service
    cost for pension benefits                         --             --            --             --       (537,088)       (537,088)
Other comprehensive loss                                                                                                 (2,666,318)
Total comprehensive loss                                                                                                 (6,977,237)
Cash dividends declared: $0.45 per share              --             --    (1,063,457)            --                     (1,063,457)
Purchase of treasury shares                           --             --            --       (227,098)            --        (227,098)
Stock options exercised - 1,893 shares                19         20,464            --             --             --          20,483
Tax benefit on stock options exercised                --          2,025            --             --             --           2,025
Restricted stock grants and expense                    5          6,113            --             --             --           6,118
Balance, September 30, 2008                  $    25,036    $27,887,443   $(2,763,538)   $(1,154,062)   $(3,933,705)   $ 20,061,174
                                             ===========    ===========   ===========    ===========    ===========    ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                         Nine months ended September 30,
                                                                                             2008               2007
                                                                                         ------------      ------------
<S>                                                                                      <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income                                                                        $ (4,310,919)     $  1,662,496
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
               (Accretion) amortization of discounts and premiums
                 on investment securities, net                                               (124,184)          135,456
               Provision for loan losses                                                      367,000           105,000
               Depreciation and amortization                                                  550,204           557,804
               Loss on impairment write-down of available for sale
               securities                                                                   6,946,098                --
               Losses (gains) on sale of available for sale securities                       (258,416)          (19,632)
               Loss on sale of repossessed assets                                              26,275                --
               Loans originated for sale                                                   (2,124,000)       (4,911,000)
               Proceeds from sales of loans held for sale                                   2,143,887         5,818,499
               Gains on sales of loans held for sale                                          (19,887)          (25,316)
               Loss on disposals of bank premises and equipment                                 2,188               888
               Stock based compensation                                                         6,118                --
               Decrease (increase) in accrued interest receivable                             309,132          (188,507)
               Increase in other assets                                                      (250,504)         (179,294)
               Increase in cash surrender value of insurance                                 (299,279)         (285,666)
               Increase in deferred loan origination costs                                    (90,048)          (29,781)
               Decrease in accrued expenses and other liabilities                          (1,024,395)          (45,370)
                                                                                         ------------      ------------
                   Net cash provided by operating activities                                1,849,270         2,595,577
                                                                                         ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
               Proceeds from maturities and principal payments                             29,370,830         7,800,193
               Purchases                                                                  (58,903,339)       (1,000,000)
               Proceeds from sales                                                         43,804,423        16,295,820
Held to maturity mortgage-backed securities:
               Proceeds from maturities and principal payments                                  2,952             4,985
Increase in due from broker for security sales                                            (11,643,821)               --
Purchase of restricted stock                                                                   (5,000)          (15,000)
Purchase of Federal Home Loan Bank stock                                                     (360,200)         (180,700)
Redemption of Federal Home Loan Bank stock                                                         --            10,500
Net increase in loans and leases                                                          (22,637,407)      (19,725,198)
Purchase of bank premises and equipment                                                      (129,143)         (858,989)
Proceeds from sale of repossessed assets                                                      214,532                --
                                                                                         ------------      ------------
               Net cash (used in) provided by investing activities                        (20,286,173)        2,331,611
                                                                                         ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings, money market and demand deposits                                  11,907,339        13,255,898
Net decrease in certificates of deposit                                                    (6,797,900)      (20,191,388)
Proceeds from Federal Home Loan Bank advances                                                      --        90,000,000
Repayments on Federal Home Loan Bank advances                                              (4,500,000)      (86,500,000)
Net decrease in Federal Home Loan Bank overnight borrowings                                   941,000          (464,000)
Net increase (decrease) in repurchase agreements with financial institutions                4,900,000       (18,650,000)
Net decrease in repurchase agreements with customers                                         (873,356)       (2,783,240)
Net decrease in collateralized borrowings                                                    (310,166)               --
Principal repayments on capital lease obligation                                              (13,413)          (12,722)
Purchase of treasury shares                                                                  (227,098)               --
Proceeds from the exercise of stock options                                                    20,483            44,107
Tax benefit of stock options exercised                                                          2,025            20,498
Dividends paid on common stock                                                             (1,065,082)       (1,014,632)
                                                                                         ------------      ------------
               Net cash provided by (used in) financing activities                          3,983,832       (26,295,479)
                                                                                         ------------      ------------
               Net decrease in cash and cash equivalents                                  (14,453,071)      (21,368,291)
CASH AND CASH EQUIVALENTS, at beginning of period                                          21,497,194        29,197,637
                                                                                         ------------      ------------
CASH AND CASH EQUIVALENTS, at end of period                                              $  7,044,123      $  7,829,346
                                                                                         ============      ============
SUPPLEMENTAL INFORMATION Cash paid during the period for:
               Interest on deposits and borrowings                                       $ 10,523,661      $ 11,201,056
                                                                                         ============      ============
               Income taxes                                                              $      1,000      $        500
                                                                                         ============      ============
Non cash investing and financing activities:
               Accrued dividends declared                                                $    353,603      $    338,902
                                                                                         ============      ============
               Transfer of loans  to repossessed assets                                  $    181,400      $     82,017
                                                                                         ============      ============
               Increase in leases and other liabilities for
                                                                                         ============      ============
               equipment payable related to financed leases                              $  2,082,719      $         --
                                                                                         ============      ============
               Increase in liabilities and decrease in retained earnings for
               adoption of EITF 06-4                                                     $     12,272      $         --
                                                                                         ============      ============
               Change in other liabilities related to the unfunded pension liability     $    813,770      $         --
                                                                                         ============      ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

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

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

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

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

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                       September 30, 2008
                                                         ----------------------------------------------
                                                             Net                             Per Share
                                                            Loss               Shares          Amount
                                                         -----------         ---------      -----------
<S>                                                      <C>                 <C>            <C>
      Basic Net Loss Per Share
            Loss available to common shareholders        $(5,425,890)        2,358,267      $     (2.30)
                                                                                            ===========
      Effect of Dilutive Securities
            Options Outstanding                                   --                --
      Diluted Net Loss Per Share
            Loss available to common shareholders
            plus assumed conversions                     -----------       -----------
                                                         $(5,425,890)        2,358,267      $     (2.30)
                                                         ===========       ===========      ===========

<CAPTION>
                                                                       Three Months Ended
                                                                       September 30, 2007
                                                         ----------------------------------------------
                                                             Net                             Per Share
                                                            Loss               Shares          Amount
                                                         -----------         ---------      -----------
<S>                                                      <C>                 <C>            <C>
      Basic Net Income Per Share
            Income available to common shareholders      $   677,836         2,371,972      $      0.29
                                                                                            ===========
      Effect of Dilutive Securities
            Options Outstanding                                   --             2,643
      Diluted Net Income Per Share
            Income available to common shareholders
            plus assumed conversions                     -----------       -----------
                                                         $   677,836         2,374,615      $      0.29
                                                         ===========       ===========      ===========
</TABLE>


                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                                        Nine Months Ended
                                                                        September 30, 2008
                                                         -------------------------------------------------
                                                              Net                              Per Share
                                                             Loss              Shares            Amount
                                                         ------------       ------------      ------------
<S>                                                      <C>                   <C>            <C>
      Basic Net Loss Per Share
            Loss available to common shareholders        $ (4,310,919)         2,364,904      $      (1.82)
                                                                                              ============
      Effect of Dilutive Securities
            Options Outstanding                                    --                536
      Diluted Net Loss Per Share
            Loss available to common shareholders
            plus assumed conversions                     ------------       ------------
                                                         $ (4,310,919)         2,365,440      $      (1.82)
                                                         ============       ============      ============

<CAPTION>
                                                                         Nine Months Ended
                                                                        September 30, 2007
                                                         -------------------------------------------------
                                                              Net                              Per Share
                                                             Loss              Shares            Amount
                                                         ------------       ------------      ------------
<S>                                                      <C>                   <C>            <C>
      Basic Net Income Per Share
            Income available to common shareholders      $  1,662,496          2,370,515      $       0.70
                                                                                              ============
      Effect of Dilutive Securities
            Options Outstanding                                    --              4,009
      Diluted Net Income Per Share
            Income available to common shareholders
            plus assumed conversions                     ------------       ------------
                                                         $  1,662,496          2,374,524      $       0.70
                                                         ============       ============      ============
</TABLE>

      For the three months and nine months  ended  September  30,  2008,  common
      stock  equivalents  existing at September 30, 2008 have been excluded from
      the  computation  of the net loss per share  because the inclusion of such
      equivalents is anti-dilutive.

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

<TABLE>
<CAPTION>
                                                                                                  Three Months Ended
                                                                                                  September 30, 2008
                                                                                    ---------------------------------------------
                                                                                    Before-Tax          Tax           Net-of-Tax
                                                                                      Amount           Effect            Amount
                                                                                    -----------       ---------       -----------
<S>                                                                                 <C>               <C>             <C>
      Unrealized holding gains arising during the period                            $(5,602,610)      $ 194,688       $(5,407,922)

     Less: reclassification adjustment for amounts recognized in net loss            6,720,523        (574,778)        6,145,745
                                                                                    -----------       ---------       -----------

      Unrealized holding losses on available for sale securities, net of taxes        1,117,913        (380,090)          737,823
      Net pension loss, net of taxes                                                   (334,418)        113,702          (220,716)
                                                                                    -----------       ---------       -----------
      Total other comprehensive income of taxes                                     $   783,495       $(266,388)      $   517,107
                                                                                    ===========       =========       ===========

<CAPTION>
                                                                                                  Three Months Ended
                                                                                                  September 30, 2007
                                                                                    ---------------------------------------------
                                                                                    Before-Tax          Tax           Net-of-Tax
                                                                                      Amount           Effect            Amount
                                                                                    -----------       ---------       -----------
<S>                                                                                 <C>               <C>             <C>

      Unrealized holding losses arising during the period                           $ 1,907,394       $(648,514)      $ 1,258,880
      Add: reclassification adjustment for amounts recognized in net income             (33,982)         11,554           (22,428)
                                                                                    -----------       ---------       -----------

      Unrealized holding gains on available for sale securities, net of taxes       $ 1,873,412       $(636,960)      $ 1,236,452
                                                                                    ===========       =========       ===========
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Nine Months Ended
                                                                                                 September 30, 2008
                                                                                    -----------------------------------------------
                                                                                    Before-Tax           Tax             Net-of-Tax
                                                                                       Amount           Effect             Amount
                                                                                    -----------       -----------       -----------
<S>                                                                                 <C>               <C>               <C>
      Unrealized holding losses arising during the period                           $(9,913,788)      $ 1,660,488       $(8,253,300)
      Less: reclassification adjustment for amounts recognized in net loss            6,687,682          (563,612)        6,124,070
                                                                                    -----------       -----------       -----------

      Unrealized holding losses on available for sale securities, net of taxes       (3,226,106)        1,096,876        (2,129,230)
      Net pension loss, net of taxes                                                   (813,770)          276,682          (537,088)
                                                                                    -----------       -----------       -----------
      Total other comprehensive loss, net of taxes                                  $(4,039,876)      $ 1,373,558       $(2,666,318)
                                                                                    ===========       ===========       ===========

<CAPTION>
                                                                                                  Nine Months Ended
                                                                                                  September 30, 2007
                                                                                    -----------------------------------------------
                                                                                    Before-Tax           Tax             Net-of-Tax
                                                                                       Amount           Effect             Amount
                                                                                    -----------       -----------       -----------
<S>                                                                                 <C>               <C>               <C>
      Unrealized holding gains arising during the period                            $   685,190       $  (232,965)      $   452,225
      Add: reclassification adjustment for amounts recognized in net income             (19,632)            6,675           (12,957)
                                                                                    -----------       -----------       -----------

      Unrealized holding gains on available for sale securities, net of taxes       $   665,558       $  (226,290)      $   439,268
                                                                                    ===========       ===========       ===========
</TABLE>


                                       9
<PAGE>

5.    The Company's  subsidiary,  The First  National  Bank of  Litchfield  (the
      "Bank") has a  noncontributory  defined  benefit pension plan (the "Plan")
      that covers  substantially  all employees  who have  completed one year of
      service  and have  attained  age 21.  The  benefits  are based on years of
      service  and the  employee's  compensation  during  the last five years of
      employment.  The Bank's  funding  policy was to contribute  amounts to the
      Plan sufficient to meet the minimum funding  requirements set forth in the
      Employee  Retirement  Income  Security Act of 1974,  plus such  additional
      amounts as the Bank may determine to be appropriate from time to time. The
      actuarial  information has been calculated using the projected unit credit
      method.  The  increase in net  actuarial  pension loss for the nine months
      ended  September  30, 2008 is due to changes in market value of the Plan's
      investments since December 31, 2007. During the first quarter of 2005, the
      Bank's  pension  plan was  curtailed  as the  Bank's  Board  of  Directors
      approved the cessation of benefit  accruals under the Plan effective April
      30, 2005.

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

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

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

                                                2008            2007
                                             ---------       ---------
        Service cost                         $      --       $      --
        Interest cost                          138,919         138,126
        Expected return on plan assets        (151,090)       (150,186)
        Amortization of unrealized loss         44,437          50,856
                                             ---------       ---------
        Net periodic benefit cost            $  32,266       $  38,796
                                             =========       =========

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

        line of credit        $    941,000   @    2.51%
        due      10/02/2009      6,000,000   @    4.50%
        due      11/30/2009      5,000,000   @    3.95%
        due       6/24/2010      5,000,000   @    4.15%
        due      11/02/2010     10,000,000   @    4.45%
        due       5/29/2012      5,000,000   @    4.32%
        due       9/04/2012      5,000,000   @    4.38%
        due      11/02/2012      2,000,000   @    4.70%
        due       5/02/2014      7,000,000   @    4.59% , callable 5/3/2010
        due       8/20/2014      7,000,000   @    4.25% , callable 8/20/2009
        due       5/05/2016     10,000,000   @    4.53% , callable 11/5/2008
        due       3/23/2017     10,000,000   @    4.29% , callable 3/23/2009
        due       7/20/2017     10,000,000   @    4.29% , callable 10/22/2008
        due      11/20/2017      5,000,000   @    4.29% , callable 11/19/2012
                              ------------
                      Total   $ 87,941,000
                              ============


                                       10
<PAGE>

      As of  September  30,  2008,  the Bank  had  borrowings  under  repurchase
      agreements with financial  institutions totaling $26,450,000.  This amount
      includes borrowings:

            due   2/25/2009     3,950,000 @   3.20%
            due   3/12/2013    12,500,000 @   3.19% , callable 3/12/2011
            due   5/23/2013    10,000,000 @   3.64% , callable 5/23/2011
                             ------------
                      Total  $ 26,450,000
                             ============

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

<TABLE>
<CAPTION>
                                                                             For the three months ended September 30,
                                                                    ---------------------------------------------------------
                                                                                2008                             2007
                                                                    --------------------------       ------------------------
<S>                                                                 <C>                   <C>        <C>                   <C>
(Benefit) provision for income taxes at statutory Federal rate      $(1,982,430)          (34)%      $   288,051           34%
Increase (decrease) resulting from:
      Tax exempt income                                                (148,249)           (3)          (149,518)         (18)
      Nondeductible interest expense                                     10,423            --             15,555            2
      Increase in valuation allowance                                 1,710,200            30                 --           --
      Other                                                               5,270            --             15,285            2
                                                                    -----------       -------        -----------       ------
Benefit provision for income taxes                                  $  (404,786)           (7)%      $   169,373           20%
                                                                    ===========       =======        ===========       ======

<CAPTION>
                                                                              For the nine months ended September 30,
                                                                    ---------------------------------------------------------
                                                                                2008                             2007
                                                                    --------------------------       ------------------------
<S>                                                                 <C>                   <C>        <C>                   <C>
(Benefit) provision for income taxes at statutory Federal rate      $(1,559,194)          (34)%      $   658,853           34%
Increase (decrease) resulting from:
      Tax exempt income                                                (477,969)          (11)          (444,728)         (23)
      Nondeductible interest expense                                     36,207             1             45,370            2
      Increase in valuation allowance                                 1,710,200            37                 --           --
      Other                                                              15,811             1             15,812            1
                                                                    -----------       -------        -----------       ------
Benefit provision for income taxes                                  $  (274,945)           (6)%      $   275,307           14%
                                                                    ===========       =======        ===========       ======
</TABLE>

During the three and nine months ended September 30, 2008, the Company  incurred
a $5,030,000  loss from the  other-than-temporary  impairment  of Fannie Mae and
Freddie Mac preferred stock and auction rate preferred  securities  holding such
stock. As of September 30, 2008, these losses were considered capital losses for
Federal income tax purposes, which are only deductible if such losses are offset
against  capital gains.  Because the Company did not have any such capital gains
in the tax carryback period, and because there were no tax strategies  available
to  generate  future  capital  gains to utilize  such  losses,  a  deferred  tax
valuation  allowance of $1,710,200 was recorded,  which represents the amount of
deferred tax benefit related to the impairment losses.

Subsequent to September 30, 2008, the passage of the Federal Emergency  Economic
Stabilization Act changed the Federal tax laws to allow the deductions of losses
related  to  Fannie  Mae and  Freddie  Mac  preferred  stock  and  auction  rate
securities  holding  such  stock to be treated as  ordinary  losses for  Federal
Income tax  purposes.  Therefore,  the Company  expects to reverse the valuation
allowance and recognize the $1,710,200  deferred tax benefit of these impairment
losses in the fourth quarter of 2008.


                                       11
<PAGE>

8. The amortized cost,  gross  unrealized  gains,  gross  unrealized  losses and
approximate fair values of securities which are classified as available for sale
and held to maturity at September 30, 2008 and December 31, 2007 are as follows:

<TABLE>
<CAPTION>
      AVAILABLE FOR SALE                                                          September 30, 2008
                                                           -------------------------------------------------------------------
                                                                                Gross             Gross
                                                             Amortized       Unrealized         Unrealized            Fair
                                                               Cost             Gains             Losses              Value
                                                           ------------      -----------       ------------       ------------
<S>                                                        <C>               <C>               <C>                <C>
      Debt Securities:
           U.S. Treasury securities                        $  4,120,554      $    13,899       $         --       $  4,134,453
           U.S. Government Agency securities                 21,500,000           80,698            (39,693)        21,541,005
           State and Municipal Obligations                   19,933,926            4,273         (2,009,044)        17,929,155
           Corporate and Other Bonds                          2,975,085               --           (926,521)         2,048,564
                                                           ------------      -----------       ------------       ------------
                                                             48,529,565           98,870         (2,975,258)        45,653,177
                                                           ------------      -----------       ------------       ------------
      Mortgage-Backed Securities:
           GNMA                                                 551,242               --            (11,881)           539,361
           FNMA                                              46,672,962            5,254         (1,210,147)        45,468,069
           FHLMC                                             10,529,932            2,698           (247,389)        10,285,241
                                                           ------------      -----------       ------------       ------------
                                                             57,754,136            7,952         (1,469,417)        56,292,671
                                                           ------------      -----------       ------------       ------------

      Money Market mutual fund                                   26,336               --                 --             26,336
      Marketable Equity Securities                            3,000,002               --            (54,155)         2,945,847
                                                           ------------      -----------       ------------       ------------

      Total available for sale securities                  $109,310,039      $   106,822       $ (4,498,830)      $104,918,031
                                                           ============      ===========       ============       ============

<CAPTION>
                                                                                  December 31, 2007
                                                           -------------------------------------------------------------------
                                                                                Gross             Gross
                                                             Amortized       Unrealized         Unrealized            Fair
                                                               Cost             Gains             Losses              Value
                                                           ------------      -----------       ------------       ------------
<S>                                                        <C>               <C>               <C>                <C>
      Debt Securities:
           U.S. Treasury securities                        $  4,007,040      $    62,179       $         --       $  4,069,219
           U.S. Government Agency securities                 30,992,780            8,895           (106,435)        30,895,240
           State and Municipal Obligations                   31,190,175          364,035            (49,871)        31,504,339
           Corporate and Other Bonds                          4,898,731               --           (445,731)         4,453,000
                                                           ------------      -----------       ------------       ------------
                                                             71,088,726          435,109           (602,037)        70,921,798
                                                           ------------      -----------       ------------       ------------
      Mortgage-Backed Securities:
           GNMA                                                 674,447               --            (16,521)           657,926
           FNMA                                              40,041,144          221,704           (996,597)        39,266,251
           FHLMC                                             12,311,134           61,541           (295,091)        12,077,584
                                                           ------------      -----------       ------------       ------------
                                                             53,026,725          283,245         (1,308,209)        52,001,761
                                                           ------------      -----------       ------------       ------------

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

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

<CAPTION>
      HELD TO MATURITY                                                             September 30, 2008
                                                           -------------------------------------------------------------------
                                                                                Gross             Gross
                                                             Amortized       Unrealized         Unrealized            Fair
                                                               Cost             Gains             Losses              Value
                                                           ------------      -----------       ------------       ------------
<S>                                                        <C>               <C>               <C>                <C>

      Mortgage-Backed Securities:
           GNMA                                            $     31,233      $        --       $       (318)      $     30,915
                                                           ============      ===========       ============       ============

<CAPTION>
                                                                                   December 31, 2007
                                                           -------------------------------------------------------------------
                                                                                Gross             Gross
                                                             Amortized       Unrealized         Unrealized            Fair
                                                               Cost             Gains             Losses              Value
                                                           ------------      -----------       ------------       ------------
<S>                                                        <C>               <C>               <C>                <C>
      Mortgage-Backed Securities:
           GNMA                                            $     34,185      $        --       $       (473)      $     33,712
                                                           ============      ===========       ============       ============
</TABLE>


                                       12
<PAGE>

      During  both the three and nine  months  ended  September  30,  2008,  the
      Company recorded losses for the other-than-temporary impairment of certain
      investments  in  Fannie  Mae  and  Freddie  Mac   preferred/auction   rate
      securities  holding  such  stock,  and  trust  preferred  debt  securities
      aggregating $6,946,098.

      At September 30, 2008,  gross  unrealized  holding losses on available for
      sale and held to maturity securities totaled $4,499,148. Of the securities
      with unrealized losses,  there were twenty-nine  securities that have been
      in a continuous  unrealized loss position for a period of twelve months or
      more.  The unrealized  losses on these  securities  totaled  $1,166,870 at
      September 30, 2008. Management does not believe that the unrealized losses
      on U.S. Government Agency debt securities,  and mortgage-backed securities
      are other than temporary as the losses are due primarily to changes in the
      interest rate  environment.  The  unrealized  holding  losses on state and
      municipal  obligations  is mostly a result  of the  market's  reaction  to
      insurer downgrades and is not reflective of the issuer's underlying credit
      strength. Management considers the issuers to be financially sound and the
      Company is receiving  and expects to continue to receive  timely  interest
      and principal  payments.  Unrealized holding losses on Corporate and other
      bonds  are  due to  both  changes  in  interest  rates  as well as lack of
      liquidity currently in the financial markets. Management believes that the
      lack  of  liquidity  in  these  securities  is due to the  turmoil  in the
      financial  industry.  Investors are reluctant to acquire these  securities
      amidst weak forecasts for this sector of the economy.  Management believes
      these  unrealized  losses to be temporary until such time as those markets
      have  stabilized.  The Company has both the intent and the ability to hold
      these securities until maturity or until the fair value fully recovers. In
      addition,  Management  considers  the  issuers  of  the  securities  to be
      financially  sound  and that the  Company  will  receive  all  contractual
      principal and interest related to these  investments.  As a result,  it is
      anticipated that these  unrealized  losses will not have a negative impact
      on future earnings or a permanent effect on capital.  However,  Management
      periodically  evaluates  investment  alternatives  to properly  manage the
      overall balance sheet.  The timing of sales and  reinvestments is based on
      various factors,  including Management's evaluation of interest rate risks
      and liquidity needs. In addition,  Management  periodically  evaluates the
      credit  worthiness of all issuers and future  changes to those issuers may
      warrant a change in circumstances that would cause an impairment charge.

9.    A summary of the Bank's loan and lease portfolio at September 30, 2008 and
      December 31, 2007 is as follows:

<TABLE>
<CAPTION>
                                                                                 2008                 2007
                                                                            -------------        -------------
<S>                                                                         <C>                  <C>
         Real estate--residential mortgage                                  $ 190,518,998        $ 189,556,668
         Real estate--commercial mortgage                                      59,192,882           55,752,240
         Real estate--construction                                             35,963,046           34,808,984
         Commercial Loans                                                      43,636,144           33,641,679
         Commercial Leases (net of unearned discount of $1,810,313 )           18,586,319            8,634,199
         Installment                                                            5,380,896            6,519,812
         Other                                                                     92,449               99,357
                                                                            -------------        -------------
                                                TOTAL LOANS AND LEASES        353,370,734          329,012,939
         Net deferred loan origination costs                                      535,719              445,671
         Premiums on purchased loans                                               97,794              168,383
         Allowance for loan and lease losses                                   (2,267,102)          (2,151,622)
                                                                            -------------        -------------
                                                  NET LOANS AND LEASES      $ 351,737,145        $ 327,475,371
                                                                            =============        =============
</TABLE>


                                       13
<PAGE>

10.   A summary of the Bank's  deposits at  September  30, 2008 and December 31,
      2007 is as follows:

                                                      2008            2007
                                                  ------------    ------------

         Noninterest bearing:
           Demand                                 $ 68,243,431    $ 70,564,267
                                                  ------------    ------------
         Interest bearing:
           Savings                                  61,714,216      56,344,878
           Money market                             87,597,543      78,738,706
           Time certificates of deposit in
             denominations of $100,000 or more      43,392,850      52,345,036
           Other time certificates of deposit
                                                    79,779,063      77,624,777
                                                  ------------    ------------
           Total Interest bearing deposits         272,483,672     265,053,397
                                                  ------------    ------------
                            TOTAL DEPOSITS        $340,727,103    $335,617,664
                                                  ============    ============

      Included in deposits as of  September  30, 2008 and  December 31, 2007 are
      approximately  $9,801,436  and  $6,538,000,   respectively,   of  brokered
      deposits which have varying maturities through September 2009 and December
      2008, respectively.

11.   During 2007 the Company approved a restricted stock plan (the "2007 Plan")
      for senior management. As of December 31, 2007, no restricted stock awards
      had been  granted.  On  February  15,  2008,  the  Company  granted  3,500
      restricted  stock awards to senior  management  from the 2007 Plan.  These
      awards  vest  ratably  over a five-year  period,  or earlier if the senior
      manager ceases to be a senior manager for any reason other than cause, for
      example,  retirement. The holders of these awards participate fully in the
      rewards of stock ownership of the Company,  including  voting and dividend
      rights.  The senior managers are not required to pay any  consideration to
      the Company for the restricted stock awards. The Company measured the fair
      value of the awards  based on the  average of the high price and low price
      at which the  Company's  common  stock  traded  on the date of the  grant.
      Compensation expense related to these awards for the three and nine months
      ended September 30, 2008 was $2,294 and $6,118 respectively.

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

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

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

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


                                       14
<PAGE>

12.   The Company has two operating  segments for purposes of reporting business
      line results: Community Banking and Leasing. The Community Banking segment
      is defined as all the operating  results of the Bank. The Leasing  segment
      is defined as the results of First Litchfield Leasing Corporation. Because
      First  Litchfield  Leasing  Corporation  is a relatively  new  subsidiary,
      methodologies and organizational  hierarchies are newly developed and will
      be subject to periodic  review and revision.  The  following  presents the
      operating  results and total  assets for the segments of the Company as of
      and for the three  months and nine  months  ended  September  30, 2008 and
      2007,  respectively.  The  Company  uses an internal  reporting  system to
      generate  information by operating segment.  Estimates and allocations are
      used for noninterest expenses and income taxes. The Company uses a matched
      maturity funding concept to allocate  interest expense to First Litchfield
      Leasing  Corporation.  The matched  maturity  funding concept utilizes the
      origination  date and the maturity date of the lease to assign an interest
      expense to each lease.

<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                                         September 30, 2008
                                                ---------------------------------------------------------------------
                                                  Community                            Elimination       Consolidated
                                                   Banking            Leasing            Entries             Total
                                                -------------      -------------      -------------     -------------
<S>                                             <C>                <C>                <C>               <C>
      Net interest income                       $   3,713,276      $     171,606      $          --     $   3,884,882
      Provision for credit losses                     119,909             35,091                 --           155,000
                                                -------------      -------------      -------------     -------------

      Net interest income after provision           3,593,367            136,515                 --         3,729,882
      Noninterest (loss) income                    (5,811,556)             4,028                 --        (5,807,528)
      Noninterest expense                           3,672,156             80,874                 --         3,753,030
                                                -------------      -------------      -------------     -------------

      (Loss) income before income taxes            (5,890,345)            59,669                 --        (5,830,676)
      Income tax (benefit) provision                 (423,034)            18,248                 --          (404,786)
                                                -------------      -------------      -------------     -------------

      Net (loss) income                         $  (5,467,311)     $      41,421      $          --     $  (5,425,890)
                                                =============      =============      =============     =============

      Total assets as of September 30, 2008     $ 484,358,599      $  22,179,838      $          --     $ 506,538,437
                                                =============      =============      =============     =============

<CAPTION>
                                                                         Three Months Ended
                                                                         September 30, 2007
                                                ---------------------------------------------------------------------
                                                  Community                            Elimination       Consolidated
                                                   Banking            Leasing            Entries             Total
                                                -------------      -------------      -------------     -------------
<S>                                             <C>                <C>                <C>               <C>
      Net interest income                       $   3,259,081      $      78,512      $          --     $   3,337,593
      Provision for credit losses                     (18,203)            18,203                 --                --
                                                -------------      -------------      -------------     -------------

      Net interest income after provision           3,277,284             60,309                 --         3,337,593
      Noninterest income                              890,301                 --                 --           890,301
      Noninterest expense                           3,306,043             74,642                 --         3,380,685
                                                -------------      -------------      -------------     -------------

      Income (loss) before income taxes               861,542            (14,333)                --           847,209
      Income tax provision (benefit)                  211,090            (41,717)                --           169,373
                                                -------------      -------------      -------------     -------------

      Net income                                $     650,452      $      27,384      $          --     $     677,836
                                                =============      =============      =============     =============

      Total assets as of September 30, 2007     $ 467,492,051      $   9,501,221      $          --     $ 476,993,272
                                                =============      =============      =============     =============
</TABLE>


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                         Nine Months Ended
                                                                        September 30, 2008
                                                ---------------------------------------------------------------------
                                                  Community                            Elimination      Consolidated
                                                   Banking            Leasing            Entries             Total
                                                -------------      -------------      -------------     -------------
<S>                                             <C>                <C>                <C>               <C>
      Net interest income                       $  10,708,773      $     465,748      $          --     $  11,174,521
      Provision for credit losses                     280,226             86,774                 --           367,000
                                                -------------      -------------      -------------     -------------

      Net interest income after provision          10,428,547            378,974                 --        10,807,521
      Noninterest (loss) income                    (4,021,621)             4,028                 --        (4,017,593)
      Noninterest expense                          11,119,124            256,668                 --        11,375,792
                                                -------------      -------------      -------------     -------------

      (Loss) income before income taxes            (4,712,198)           126,334                 --        (4,585,864)
      Income tax (benefit) provision                 (313,270)            38,325                 --          (274,945)
                                                -------------      -------------      -------------     -------------

      Net (loss) income                         $  (4,398,928)     $      88,009      $          --     $  (4,310,919)
                                                =============      =============      =============     =============

      Total assets as of September 30, 2008     $ 484,358,599      $  22,179,838      $          --     $ 506,538,437
                                                =============      =============      =============     =============

<CAPTION>
                                                                         Nine Months Ended
                                                                         September 30, 2007
                                                ---------------------------------------------------------------------
                                                  Community                            Elimination      Consolidated
                                                   Banking            Leasing            Entries             Total
                                                -------------      -------------      -------------     -------------
<S>                                             <C>                <C>                <C>               <C>
      Net interest income                       $   9,663,820      $     157,001      $          --     $   9,820,821
      Provision for credit losses                      36,268             68,732                 --           105,000
                                                -------------      -------------      -------------     -------------

      Net interest income after provision           9,627,552             88,269                 --         9,715,821
      Noninterest income                            2,511,672                 --                 --         2,511,672
      Noninterest expense                          10,047,504            242,186                 --        10,289,690
                                                -------------      -------------      -------------     -------------

      Income (loss) before income taxes             2,091,720           (153,917)                --         1,937,803
      Income tax (benefit) provision                  364,911            (89,604)                --           275,307
                                                -------------      -------------      -------------     -------------

      Net income (loss)                         $   1,726,809      $     (64,313)     $          --     $   1,662,496
                                                =============      =============      =============     =============

      Total assets as of September 30, 2007     $ 467,492,051      $   9,501,221      $          --     $ 476,993,272
                                                =============      =============      =============     =============
</TABLE>

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

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


                                       16
<PAGE>

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

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

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

              Fair Value Measurements at September 30, 2008, Using

<TABLE>
<CAPTION>
                                                             Quoted Prices in                               Significant
                                           September        Active Markets for     Significant Other       Unobservable
                                            30, 2008         Identical Assets      Observable Inputs           Inputs
                                             Total               (Level 1)             (Level 2)              (Level 3)
                                        --------------      ------------------     -----------------       --------------
<S>                                     <C>                   <C>                    <C>                   <C>
Assets:
     Available for sale securities      $  104,918,031        $    4,134,453         $  100,783,578        $           --
                                        ==============        ==============         ==============        ===============
</TABLE>

      U.S. Treasury securities, with a carrying value of $4,134,453 at September
      30,  2008,  are the only  assets  whose  fair  values  are  measured  on a
      recurring basis using Level 1 inputs (active market quotes).

      The fair values of U. S. Government and agency mortgaged backed securities
      and debt  securities,  State and Municipal  obligations,  other  corporate
      bonds,  and certain equity  securities are measured on a recurring  basis,
      using Level 2 inputs of observable market data on similar securities.  The
      carrying value of these  securities  totaled  $100,783,578 as of September
      30, 2008.

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


                                       17
<PAGE>

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

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

      Also in February 2008, the FASB issued FSP FAS 157-1,  Application of FASB
      Statement  No.  157  to  FASB  Statement  No.  13  and  Other   Accounting
      Pronouncements  That Address Fair Value Measurements for Purposes of Lease
      Classification  or Measurement  under  Statement 13," which clarified that
      Statement 157 does not apply to Statement 13, "Accounting for Leases," and
      other  pronouncements that address fair value measurements for purposes of
      lease classification or measurement. The scope exception does not apply to
      assets acquired and liabilities assumed in a business combination that are
      required  to be  measured at fair value  under  Statement  141,  "Business
      Combinations,"  regardless  of whether  those assets and  liabilities  are
      related to leases.

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

      In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value
      of a  Financial  Asset When the Market for That Asset Is Not Active  ("FSP
      157-3"),  which was effective  upon issuance  including  prior periods for
      which financial statements have not been issued.

      FSP 157-3  applies to  financial  assets  within  the scope of  accounting
      pronouncements   that  require  or  permit  fair  value   measurements  in
      accordance  with SFAS 157 and clarifies the  application of SFAS 157, in a
      market  that is not active and  provides  an  example  to  illustrate  key
      considerations in determining the fair value of a financial asset when the
      market for that financial  asset is not active.  The Company  adopted this
      FSP for its  September  30,  2008  financial  statements.  The  impact  of
      adoption on the Company's financial statements was not material.


                                       18
<PAGE>

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

14.   In September  2006, the FASB ratified  Emerging Issues Task Force ("EITF")
      Issue No. 06-4,  "Accounting for Deferred  Compensation and Postretirement
      Benefits   Associated  with   Endorsement   Split-Dollar   Life  Insurance
      Arrangements"  ("EITF  06-4"),  and in March 2007,  the FASB ratified EITF
      Issue No. 06-10,  "Accounting for Collateral Assignment  Split-Dollar Life
      Insurance  Arrangements"  ("EITF  06-10").  EITF  06-4  requires  deferred
      compensation  or  postretirement  benefit  aspects of an  endorsement-type
      split-dollar life insurance arrangement to be recognized as a liability by
      the employer and states the obligation is not  effectively  settled by the
      purchase of a life  insurance  policy.  The liability for future  benefits
      should be recognized based on the substantive agreement with the employee,
      which may be either to  provide a future  death  benefit or to pay for the
      future  cost  of the  life  insurance.  EITF  06-10  provides  recognition
      guidance for  postretirement  benefit  liabilities  related to  collateral
      assignment   split-dollar   life  insurance   arrangements,   as  well  as
      recognition  and  measurement of the associated  asset on the basis of the
      terms  of  the   collateral   assignment   split-dollar   life   insurance
      arrangement.  EITF 06-4 and EITF  06-10 are  effective  for  fiscal  years
      beginning after December 15, 2007. The adoption of EITF 06-4 or EITF 06-10
      resulted in a decrease to retained earnings of $12,272.

15.   Recent Accounting Pronouncements

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

      In September 2006, the FASB issued SFAS No.158,  Employers' Accounting for
      Defined Benefit Pension and Other  Postretirement  Plans - an amendment of
      FASB  Statements No. 87, 88, 106 and 132(R) (SFAS 158).  SFAS 158 requires
      an employer to recognize the overfunded or underfunded status of a defined
      benefit  postretirement  plan as an asset or a  liability  in its  balance
      sheet and to recognize  changes in that funded status in the year in which
      the changes occur through  accumulated  other  comprehensive  income.  The
      Company  adopted the  recognition  provisions of this  standard  effective
      December  31,  2006.  SFAS 158 also  requires  an  employer to measure the
      funded status of a plan as of the employer's  year-end reporting date. The
      Company's  non-contributory  pension  plan was frozen in May of 2005.  The
      measurement  date provisions of SFAS 158 are effective for the Company for
      the year ending December 31, 2008. Management does not expect the adoption
      of the  measurement  date provisions of SFAS 158 to have a material impact
      on the Company's financial position or results of operations.

      In December 2007, the Financial  Accounting  Standards  Board (the "FASB")
      issued SFAS No. 141(R),  "Business  Combinations,"  ("SFAS  141(R)") which
      replaces SFAS 141. SFAS 141(R)


                                       19
<PAGE>

      establishes  principles and requirements for how an acquirer in a business
      combination  recognizes  and  measures  in its  financial  statements  the
      identifiable assets acquired, the liabilities assumed, and any controlling
      interest;  recognizes  and  measures  goodwill  acquired  in the  business
      combination  or a gain  from  a  bargain  purchase;  and  determines  what
      information  to disclose to enable users of the  financial  statements  to
      evaluate the nature and financial effects of the business combination. FAS
      141(R) is effective  for  acquisitions  by the Company  taking place on or
      after  January 1, 2009.  Early  adoption  is  prohibited.  Accordingly,  a
      calendar  year-end  company is  required to record and  disclose  business
      combinations following existing accounting guidance until January 1, 2009.
      The  Company  will  assess the impact of SFAS  141(R) if and when a future
      acquisition occurs.

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

      In June 2008,  the FASB  issued  FASB Staff  Position  (FSP) EITF  03-6-1,
      Determining   Whether   Instruments   Granted   in   Share-Based   Payment
      Transactions  Are  Participating  Securities.  This FSP addresses  whether
      instruments granted in share-based payment  transactions are participating
      securities  prior to vesting  and,  therefore,  need to be included in the
      earnings  allocation  in  computing  earnings  per share  (EPS)  under the
      two-class  method  described in paragraphs 60 and 61 of FASB Statement No.
      128,  Earnings  per  Share.  This FSP  shall be  effective  for  financial
      statements  issued for fiscal years beginning after December 15, 2008, and
      interim periods within those years.  All  prior-period  EPS data presented
      shall be adjusted retrospectively (including interim financial statements,
      summaries of earnings,  and selected  financial  data) to conform with the
      provisions of this FSP. Early  application  is not permitted.  The Company
      does not expect  this FSP to have a  significant  effect on the  Company's
      financial statements.

16.   Reclassifications

      Certain  2007  amounts  have been  reclassified  to conform  with the 2008
      presentation, and such reclassifications had no effect on net income.


                                       20
<PAGE>

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

GENERAL

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

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

On June 26, 2003, the Company formed First Litchfield  Statutory Trust I for the
purpose of issuing  trust  preferred  securities  and  investing the proceeds in
subordinated  debentures issued by the Company,  and on June 26, 2003, the first
series of trust preferred  securities were issued.  During the second quarter of
2006, the Company formed a second  statutory trust,  First Litchfield  Statutory
Trust II ("Trust II").  The Company owns 100% of Trust II's common stock.  Trust
II exists for the sole purpose of issuing  trust  securities  and  investing the
proceeds in subordinated  debentures issued by the Company.  In June 2006, Trust
II issued its first series of trust preferred securities.

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

FINANCIAL CONDITION

Total  assets as of  September  30, 2008 were  $506,538,437,  and  substantially
unchanged from total assets of $507,653,629 at December 31, 2007.

Net loans and leases increased  $24,261,774  over the year-end 2007 amount.  Net
loans and leases as of September 30, 2008 were $351,737,145,  as compared to the
year-end 2007 level of $327,475,371.


                                       21
<PAGE>

Consistent  with  Management's  strategy  to migrate to a more  profitable  loan
composition,  commercial  loan and lease  growth  was  strong  during  the third
quarter of 2008. Leases,  net of unearned income,  were $18,586,319 at September
30, 2008,  which was an increase of $9,952,120 from the year-end 2007 balance of
$8,634,199.  Commercial  loans  totaled  $43,636,144,  which is an  increase  of
$9,994,465,  from year-end  2007.  Growth in  commercial  loans has been in both
lines of credit and in term  financing and continues to be a result of the sales
development  and commercial  calling  initiatives for traditional and contiguous
markets.  The residential  mortgage loan portfolio totaled  $190,518,998,  which
substantially unchanged from year-end 2007.

As of September 30, 2008, the securities portfolio totaled  $104,949,264,  which
is a 18.65% decrease from the year-end 2007 balance. During the first quarter of
2008 the Company had executed a leverage  strategy whereby  $25,000,000 of fixed
rate mortgage  backed  securities  were purchased and funded by borrowings  from
repurchase  agreements.  During  the  third  quarter  of 2008 the  Company  sold
approximately $35,000,000 in investment securities. These sales were executed to
increase  liquidity as well as to decrease the total assets of the Bank in order
to ensure capital adequacy as of September 30, 2008.  Additionally,  the Company
wrote down for other than temporary impairment ("OTTI") $5,030,000 of the Bank's
investments  in  Fannie  Mae  and  Freddie  Mac  preferred   stock/auction  rate
securities  holding such stock  holdings  during the third  quarter.  During the
third quarter the Company also recorded an OTTI loss of $1,916,100 on the Bank's
investment in a pooled trust preferred security.

The due from  broker for  security  sales  totaled  $11,643,821,  as a result of
securities  traded on September 30, 2008 and proceeds not received until October
2008.

Cash  and  cash  equivalents  totaled   $7,044,123,   which  is  a  decrease  of
$14,453,071,  or 67.23% from  year-end  2007.  During  2008,  funds  temporarily
invested in interest bearing  correspondent  bank balances at year-end were used
to pay down wholesale borrowings as well as to fund loan growth.

Total  liabilities  were  $486,427,263  as of September  30, 2008,  which was an
increase of $7,136,246  from total  liabilities of  $479,291,017  as of year-end
2007.  Total  deposits  increased by  $5,109,439,  or 1.52% from their  year-end
levels. Money market deposits increased by $8,858,837,  or 11.25% as a result of
higher  balances held for the Bank's trust  customers as well as increased money
market  balances due to a third quarter rate  promotion.  Time  certificates  of
deposit totaled  $123,171,913 as of September 30, 2008,  which was a decrease of
5.23%,  or  $6,797,900  from  year-end  2007.  The decrease in time  deposits is
reflective  of the  customer's  desire for  liquidity  and the  shifting  of the
reinvestment of maturing certificate of deposits into the money market deposits.

As  of  September  30,  2008,   repurchase  agreements  with  customers  totaled
$13,269,417,  which was a decrease of $873,356  from the year-end  2007 balance.
Because  these  accounts  represent  overnight  investments  by  commercial  and
municipal  cash  management  customers,  fluctuations  in the  balances of these
accounts are reflective of the temporary nature of these funds. During the third
quarter of 2008,  advances under Federal Home Loan Bank borrowings  decreased by
$3,559,000, while repurchase agreements with financial institutions increased by
$4,900,000 as a result of the first quarter leverage strategy discussed above.

Shareholders'  equity  totaled  $20,061,174 as of September 30, 2008 as compared
with $28,312,612 as of December 31, 2007. The decrease in  shareholders'  equity
of  $8,251,438  is due  primarily to the OTTI losses taken on available for sale
securities  in the third  quarter of 2008.  These  losses  net of taxes  totaled
$6,294,626.  Additionally,  the  change in the  Company's  unrealized  losses on
available for sale securities during 2008 reduced equity by $2,129,230.


                                       22
<PAGE>

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

Summary

Net loss for the Company for the third quarter of 2008 totaled $5,425,890 versus
net income of $677,836 for the third quarter of 2007. Basic and diluted loss per
share for the third  quarter  of 2008 were  both  $2.30,  compared  to basic and
diluted income per share of $.29 for the third quarter of 2007.

The decrease in net income is due  primarily to the OTTI losses on available for
sale  securities  resulting  from the OTTI  losses on Freddie Mac and Fannie Mae
securities recorded during the third quarter,  when the United States Government
placed Fannie Mae and Freddie Mac into conservatorship. As a result, the Company
had to take a  $5,030,000  write  down of Freddie  Mac and Fannie Mae  preferred
stock during the quarter ended September 30, 2008. No tax benefit was recognized
as a result of these charges for the quarter ended  September 30, 2008,  because
applicable law at the time required financial  institutions to treat the loss as
a capital loss. On October 3, 2008, the Emergency Economic  Stabilization Act of
2008 was enacted, which includes a provision that permits financial institutions
to recognize  losses  relating to the Freddie Mac and Fannie Mae preferred stock
as an ordinary loss,  thereby  allowing a tax benefit for both tax and financial
reporting purposes. Therefore, a tax benefit of approximately $1,710,200 was not
recognized  in the quarter ended  September 30, 2008,  and will be recognized in
the quarter ending December 31, 2008.  This tax benefit,  had it been recognized
in the same  quarter as the losses  were taken,  would have added  approximately
$.73 to the Company's  book value and reduced the third quarter loss by $.73 per
share. (See Footnote 7 of the Consolidated Financial Statements.)

Additionally  during the third  quarter the  Company  recorded an OTTI loss on a
pooled trust  preferred  security as a result of this security being  downgraded
below investment grade. This loss, net of taxes, totaled $1,264,626.

Net Interest Income

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

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

                                               2008             2007
                                           -----------      -----------
        Interest and dividend income       $ 7,140,667      $ 7,113,345
        Tax-equivalent adjustments (1)         156,436          152,617
        Interest expense                    (3,255,785)      (3,775,752)
                                           -----------      -----------
        Net interest income                $ 4,041,318      $ 3,490,210
                                           ===========      ===========


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


                                       23
<PAGE>

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

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

<TABLE>
<CAPTION>
                                          Three months ended September 30, 2008       Three months ended September 30, 2007
                                          -------------------------------------       -------------------------------------
                                                          Interest                                     Interest
                                            Average        Earned/      Yield/        Average          Earned/        Yield/
                                            Balance         Paid         Rate         Balance            Paid          Rate
                                            -------         ----         ----         -------            ----          ----
<S>                                      <C>             <C>             <C>       <C>                <C>               <C>
Assets
Interest Earning Assets:
Loans and leases                         $ 348,266,000   $5,367,408      6.16%     $ 312,731,000      $5,342,576        6.83%
Investment securities                      155,762,000    1,886,213      4.84%       135,343,000       1,755,324        5.19%
Other interest earning assets                9,603,000       43,482      1.81%        15,006,000         168,062        4.48%
                                         -------------   ----------                -------------      ----------
Total interest earning assets              513,631,000    7,297,103      5.68%       463,080,000       7,265,962        6.28%
                                         -------------   ----------     -----      -------------      ----------       -----
Allowance for loan and
  lease losses                              (2,222,000)                               (2,125,000)
Cash and due from banks                     11,310,000                                11,650,000
Premises and equipment                       7,440,000                                 7,867,000
Net unrealized losses on
  securities                                (6,955,000)                               (3,721,000)
Other assets                                18,117,000                                17,878,000
                                         -------------                             -------------
Total Average Assets                     $ 541,321,000                             $ 494,629,000
                                         =============                             =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                         $  64,474,000      173,193      1.07%     $  60,801,000         237,267        1.56%
Money Market deposits                       80,602,000      363,373      1.80%        79,767,000         627,841        3.15%
Time deposits                              131,370,000    1,130,642      3.44%       133,759,000       1,529,945        4.58%
Borrowed funds                             163,604,000    1,588,577      3.88%       120,523,000       1,380,699        4.58%
                                         -------------   ----------                -------------      ----------
Total interest bearing liabilities         440,050,000    3,255,785      2.96%       394,850,000       3,775,752        3.82%
                                                         ----------     -----                         ----------       -----
Demand deposits                             72,097,000                                68,565,000
Other liabilities                            4,446,000                                 4,844,000
Shareholders' Equity                        24,728,000                                26,370,000
                                         -------------                             -------------
Total liabilities and equity             $ 541,321,000                             $ 494,629,000
                                         =============                             =============

Net interest income                                      $4,041,318                                   $3,490,210
                                                         ==========                                   ==========
Net interest spread                                                      2.72%                                          2.45%
                                                                        =====                                          =====
Net interest margin                                                      2.99%                                          2.82%
                                                                        =====                                          =====
</TABLE>


                                       24
<PAGE>

RATE/VOLUME ANALYSIS

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the three months ended September 30, 2008 when compared to the three
months ended  September 30, 2007 in net interest  income arising from changes in
interest  rates and from asset and liability  volume mix. The change in interest
attributable  to both rate and volume has been  allocated  to the changes in the
rate and the volume on a pro rata basis.

                                               09/30/08 Compared to 09/30/07
                                                 Increase (Decrease) Due to
                                                 --------------------------

                                               Volume       Rate       Total
                                             ---------   ---------   ---------
      Interest earned on:
      Loans and leases                       $ 575,148   $(550,316)  $  24,832
      Investment securities                    252,626    (121,737)    130,889
      Other interest earning assets            (46,932)    (77,648)   (124,580)
                                             ---------   ---------   ---------
      Total interest earning assets            780,842    (749,701)     31,141
                                             ---------   ---------   ---------
      Interest paid on:
      Deposits                                  18,361    (746,206)   (727,845)
      Borrowed money                           440,797    (232,919)    207,878
                                             ---------   ---------   ---------
      Total interest bearing liabilities       459,158    (979,125)   (519,967)
                                             ---------   ---------   ---------

      Increase in net interest income        $ 321,684   $ 229,424   $ 551,108
                                             =========   =========   =========

Tax-equivalent  net  interest  income  for the  third  quarter  of 2008  totaled
$4,041,318,  an increase of $551,108,  or 15.79% from the third quarter of 2007.
Both the increase in the volume of earning assets as well as increased  interest
margin  contributed  to the  improvement in net interest  income.  The effect of
increased volume of earning assets over interest bearing  liabilities  increased
net interest income by $321,684. Also, the Company was able to decrease its cost
of deposit  interest  to a greater  degree than the  interest  earned on earning
assets which resulted in $229,424 in additional net interest income.

Average earning assets for the third quarter of 2008 totaled $513,631,000, which
was  $50,551,000  or 10.92%  higher than  average  earning  assets for the third
quarter  of  2007  which  totaled  $463,080,000.  This  increase  in  loans  and
investments,   net  of  increased  volume  of  interest   bearing   liabilities,
contributed to an additional $368,616 in net interest income.  Average loans and
leases increased by $35,535,000,  or 11.36%, while average investments increased
by  $20,419,000  or 15.09%.  The  increase in earning  assets came from  organic
growth in commercial  leasing and lending as well as increases in the securities
portfolio strategically designed to take advantage of the steepened yield curve.

The tax  equivalent net interest  margin  improved 17 basis points from 2.82% in
the third quarter of 2007 to 2.99% for the third quarter of 2008.  Funding costs
decreased by 86 basis points while the tax  equivalent  yield on earning  assets
decreased by 57 basis  points.  The  significant  drop in interest  rates by the
Federal  Open Market  Committee of the Federal  Reserve (the "FOMC")  during the
first quarter allowed management to similarly adjust its deposit rates. Although
yields on  earning  assets  are  subject to  similar  declines,  the  structural
repricing  intervals  for many  earning  assets  will not occur until later this
year.  Also,  many  interest  earning  assets are  priced  off of longer  market
indices,  which were not as dramatically impacted by the FOMC decreases.  Retail
deposits  is  the  primary  source  of  the  Company's   funding  and  therefore
competition  for these  deposits  remains the biggest threat to the net interest
margin.


                                       25
<PAGE>

Provision for Loan and Lease Losses

The  provision  for loan and lease losses for the third  quarter of 2008 totaled
$155,000,  which is an increase of $155,000 from the third quarter of 2007 which
had no  provision.  The  provision  for  loan and  lease  losses  is  determined
quarterly  based on the  calculation of the allowance for loan and lease losses.
(See discussion of the Allowance for Loan and Lease Losses.)

During the third  quarter of 2008,  the  Company  recorded  net  charge-offs  of
$121,476 compared to third quarter 2007 net charge-offs of $6,313. The change in
the  level  of  charge-offs  from  2007 to 2008  is due to one  commercial  loan
charge-off in 2008 and higher  levels of  charge-off  activity from the consumer
automobile loan  portfolio,  which the Bank purchased in 2006. The change in the
level  of  charge-offs  from  2007 to 2008 is  considered  by  Management  to be
reflective of a weakening consumer credit environment.

Noninterest (Loss) Income

Noninterest loss for the third quarter of 2008 totaled $5,807,528,  versus third
quarter  2007 income of  $890,301.  The  decrease in  noninterest  income is the
direct result of the  $6,946,098  OTTI write down of the Bank's  investments  in
Fannie Mae and Freddie Mac preferred  stock/auction rate securities holding such
stock holdings,  as well as a pooled trust preferred security,  during the third
quarter.

During  September of 2008,  the United States  Government  placed two government
sponsored entities, Fannie Mae and Freddie Mac into conservatorship. This action
caused  the  Bank's  unrealized  market  losses in Fannie  Mae and  Freddie  Mac
preferred stock and auction rate security holding such stock to be considered as
OTTI  and  resulted  in  the  Bank's  complete  write  down  of  the  $5,030,000
investments.  Additionally  the Bank  recorded an OTTI loss of $1,916,100 on its
holding of a pooled trust  preferred  security as a result of this  instrument's
credit rating being  downgraded to less than investment  grade.  Also during the
third quarter of 2008,  $35,000,000  in sales of available  for sale  securities
were sold for the purpose of shortening the duration of the portfolio as well as
to  deleverage  the balance  sheet to ensure  capital  adequacy at September 30,
2008. These sales resulted in net gains of $215,300.

Trust income totaled  $319,049,  which  represented  8.2% of noninterest  income
decreased  $31,022 or 8.9% from  $350,071 at September  30,  2007.  The weakened
economic and market  conditions  continue to put  pressure on wealth  management
income.  Income from banking service  charges and fees increased by $80,334,  or
23.80%, from the third quarter of 2007. This increase is due primarily to higher
levels of deposit service charges, cash management, and master money interchange
fees.  Other  noninterest  income  totaled  $176,143,  which was an  increase of
$7,364,  or 4.36% from the third  quarter of 2007.  This increase is a result of
the increase in the cash surrender value of bank owned life insurance.

Noninterest Expense

Third quarter 2008 noninterest expense totaled $3,753,030, increasing 11.01%, or
$372,344  from the third  quarter  2007  expense  of  $3,380,686.  Increases  in
noninterest  expenses are reflected in staffing,  advertising,  exam,  audit and
consulting fees.  Increased salary and benefits  expenses were due to additional
compliance  personnel and an increased emphasis on commercial and small business
development.  Advertising  expense  totaled  $170,839,  which was an increase of
$72,299, or 73.37% increase from the third quarter of 2007. This increase is due
primarily to the Bank's  image  campaign  which was  launched  during the fourth
quarter of 2007 as well as product and publicity promotions.


                                       26
<PAGE>

Other noninterest  expenses totaled $515,352 which is an increase of $18,341, or
3.69% from the third  quarter of 2007.  The majority of the increase is a result
of  higher  2008  costs  for exam and audit  fees as they  relate to  regulatory
reporting compliance and internal audit initiatives.

Income Taxes

The Company  recorded a tax benefit of $404,786  for the third  quarter of 2008.
This benefit  compares to the third quarter of 2007  provision of $169,373.  The
third quarter expected tax benefit did not relate  proportionately to the pretax
loss due to the  Company's  inability to consider its loss on the Fannie Mae and
Freddie Mac OTTI  write-down as ordinary  income as of September 30, 2008.  With
the October 2008 passage of the Emergency Economic Stabilization Act, banks with
Fannie Mae or Freddie Mac preferred  shares and auction rate securities  holding
such shares can treat their losses as ordinary losses for tax purposes. Pursuant
to this change,  the Company  will  recognize  the tax benefit of  approximately
$1,710,000 in the fourth quarter of 2008.

RESULTS OF  OPERATIONS - NINE MONTHS ENDED  SEPTEMBER  30, 2008 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2007

Summary

Net loss for the Company for the nine months  ended  September  30, 2008 totaled
$4,310,919 versus earnings of $1,662,496 for the nine months ended September 30,
2007.  Basic and diluted loss per share for the nine months ended  September 30,
2008 were both $1.82, compared to basic and diluted income per share of $.70 for
the nine months ended  September 30, 2007. The 2008 net loss is due primarily to
the OTTI loss on available for sale securities in the third quarter of 2008.

Net Interest Income

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

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

                                              2008               2007
                                          ------------      ------------
       Interest and dividend income       $ 21,575,168      $ 20,991,206
       Tax-equivalent adjustments (1)          515,164           457,927
       Interest expense                    (10,400,647)      (11,170,385)
                                          ------------      ------------
       Net interest income                $ 11,689,685      $ 10,278,748
                                          ============      ============

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


                                       27
<PAGE>

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

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

<TABLE>
<CAPTION>
                                          Nine months ended September 30, 2008              Nine months ended September 30, 2007
                                         ------------------------------------------      -----------------------------------------
                                                              Interest                                      Interest
                                             Average           Earned/       Yield/         Average          Earned/       Yield/
                                             Balance            Paid          Rate          Balance           Paid          Rate
                                             -------            ----          ----          -------           ----          ----
<S>                                      <C>                <C>                <C>       <C>              <C>                <C>
Assets
Interest Earning Assets:
Loans and leases                         $ 341,230,000      $  16,209,373      6.33%     $ 307,283,000    $  15,542,370      6.74%
Investment securities                      150,686,000          5,670,091      5.02%       145,397,000        5,539,252      5.08%
Other interest earning assets               10,967,000            210,868      2.56%        10,096,000          367,511      4.85%
                                         -------------      -------------                -------------    -------------
Total interest earning assets              502,883,000         22,090,332      5.86%       462,776,000       21,449,133      6.18%
                                         -------------      -------------    ------      -------------    -------------    ------
Allowance for loan and
  lease losses                              (2,184,000)                                     (2,131,000)
Cash and due from banks                     11,388,000                                      13,464,000
Premises and equipment                       7,586,000                                       7,655,000
Net unrealized losses on
  securities                                (3,473,000)                                     (3,129,000)
Other assets                                16,943,000                                      17,350,000
                                         -------------                                   -------------
Total Average Assets                     $ 533,143,000                                   $ 495,985,000
                                         =============                                   =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                         $  59,062,000            479,079      1.08%     $  55,325,000          567,347      1.37%
Money Market deposits                       81,332,000          1,185,540      1.94%        75,971,000        1,677,674      2.94%
Time deposits                              135,138,000          3,976,610      3.92%       139,763,000        4,825,888      4.60%
Borrowed funds                             157,692,000          4,759,418      4.02%       124,959,000        4,099,476      4.37%
                                         -------------      -------------                -------------    -------------
Total interest bearing liabilities         433,224,000         10,400,647      3.20%       396,018,000       11,170,385      3.76%
                                                            -------------    ------                       -------------    ------
Demand deposits                             68,055,000                                      68,661,000
Other liabilities                            4,864,000                                       4,672,000
Shareholders' Equity                        27,000,000                                      26,634,000
                                         -------------                                   -------------
Total liabilities and equity             $ 533,143,000                                   $ 495,985,000
                                         =============                                   =============
Net interest income                                         $  11,689,685                                 $  10,278,748
                                                            =============                                 =============
Net interest spread                                                            2.66%                                         2.42%
                                                                             ======                                       =======
Net interest margin                                                            2.92%                                         2.76%
                                                                             ======                                       =======
</TABLE>


                                       28
<PAGE>

RATE/VOLUME ANALYSIS

The following table, which is presented on a tax-equivalent  basis, reflects the
changes for the nine months ended  September  30, 2008 when compared to the nine
months ended  September 30, 2007 in net interest  income arising from changes in
interest  rates and from asset and liability  volume mix. The change in interest
attributable  to both rate and volume has been  allocated  to the changes in the
rate and the volume on a pro rata basis.

<TABLE>
<CAPTION>
                                                   09/30/08 Compared to 09/30/07
                                                     Increase (Decrease) Due to
                                                     --------------------------
                                               Volume          Rate              Total
                                             ----------     -----------      -----------
<S>                                          <C>            <C>              <C>
      Interest earned on:
      Loans and leases                       $1,649,674     $  (982,671)     $   667,003
      Investment securities                     199,644         (68,805)         130,839
      Other interest earning assets              29,393        (186,036)        (156,643)
                                             ----------     -----------      -----------
      Total interest earning assets           1,878,711      (1,237,512)         641,199
                                             ----------     -----------      -----------

      Interest paid on:
      Deposits                                  114,895      (1,544,575)      (1,429,680)
      Borrowed money                          1,008,041        (348,099)         659,942
                                             ----------     -----------      -----------
      Total interest bearing liabilities      1,122,936      (1,892,674)        (769,738)
                                             ----------     -----------      -----------
      Increase in net interest income        $  755,775     $   655,162      $ 1,410,937
                                             ==========     ===========      ===========
</TABLE>

Tax-equivalent  net  interest  income for the first nine months of 2008  totaled
$11,689,685,  an increase of $1,410,937,  or 13.7% from the first nine months of
2007.  Both the  increase in the volume of earning  assets as well as  increased
interest  margin  contributed  to the  improvement in net interest  income.  The
effect of increased volume of earning assets over interest  bearing  liabilities
increased  net  interest  income by  $755,775.  Also,  the  Company  was able to
decrease  its cost of deposit  interest to a greater  degree  than the  interest
earned on earning  assets which  resulted in $655,162 in additional net interest
income.

Average  earning assets for the first nine months of 2008 totaled  $502,883,000,
which was $40,107,000,  or 8.7% higher than average earning assets for the first
nine months of 2007, which totaled $462,776,000. This increase in earning assets
was  predominately  in the loan and lease  portfolio  which on  average  totaled
$341,230,000,  an increase of $33,947,000 or 11.1%.  The increase in loan volume
contributed  $1,649,674 in additional interest income. For the first nine months
of 2008,  loans were 67.8% of earning assets compared to 66.3% for the same time
in 2007.  This higher  percentage of loans and leases to average  earning assets
contributed  to a more  profitable  mix of  earning  assets.  Growth in  average
earning assets was funded,  primarily by borrowings,  the interest expense which
offset some of the increased interest income.

The 2008 year to date net interest margin  increased by 16 basis points from the
same period in 2007.  Funding costs decreased by 56 basis points while the yield
on earning assets decreased by 32 basis points. The significant drop in interest
rates by the Federal Open Market  Committee of the Federal  Reserve (the "FOMC")
during the first  quarter  allowed  management  to similarly  adjust its deposit
rates. Since that time Management has been able to maintain its deposit balances
while keeping the costs of deposits down. Although yields on earning assets have
experienced  similar  declines,  the  structural  repricing  intervals  for many
earning assets are occurring later.  Additionally,  many interest earning assets
are priced off of longer market indices, which were not as dramatically impacted
by the FOMC  decreases.  Retail  deposits is the primary source of the Company's
funding and therefore  competition  for these deposits can adversely  affect the
net interest margin.


                                       29
<PAGE>

Provision for Loan and Lease Losses

The provision for loan and lease losses for the nine months ended  September 30,
2008 totaled  $367,000,  which is an increase of $262,000 from the provision for
the nine months ended  September  30,  2007.  The  provision  for loan and lease
losses is determined  quarterly  based on the  calculation  of the allowance for
loan and lease  losses.  (See  discussion  of the  Allowance  for Loan and Lease
Losses.)

During the first nine months of 2008,  the Company  recorded net  charge-offs of
$251,520  compared to 2007 net charge-offs for the same period totaling $94,393.
The  change  in the  level  of  charge-offs  from  2007  to  2008  is due to one
commercial loan charge-off in 2008 and higher levels of charge-off activity from
the  consumer  automobile  loan  portfolio  which  the Bank  purchased  in 2006.
Charge-off  activity for the first nine months of 2007 is also  attributable  to
consumer  automobile  loans as well as other consumer  loans.  While the amounts
represent a small volume by industry standards,  it is greater than the Bank has
previously  experienced  in recent years and may be indicative of adverse trends
in the economy and real estate markets.

Noninterest (Loss) Income

Year to date  noninterest  loss for the nine  months  ended  September  30, 2008
totaled  $4,017,593,  versus  income of  $2,511,672  for the nine  months  ended
September 30, 2007. The decrease in the year to date  noninterest  income is the
direct  result of the  $6,946,098  third  quarter  OTTI write down of the Bank's
investments  in  Freddie  Mac  and  Fannie  Mae  preferred   stock/auction  rate
securities holding such stock and a pooled trust preferred security.

For the first nine months of 2008, losses on securities totaled $6,687,682.  The
cause of this loss was the third quarter 2008  recognition of the OTTI losses of
$6,946,098  described  above.  Offsetting  some of this loss was $215,300 of net
gains  resulting  from the sales of  $35,000,000 of available for sale municipal
securities  sold for the purpose of shortening  the duration of the portfolio as
well as to ensure  capital  adequacy  as of  September  30,  2008.  The  Company
recorded  gains on the sales of available for sale  securities of $19,632 during
the first nine months of 2007. These sales were made for the purpose of reducing
interest rate risk and positioning earning assets for future profitability.

Trust income totaled $992,142,  which represented  47.21% of noninterest  income
and  decreased  $28,165,  or 2.76%  from the first  nine  months  of 2007.  This
decrease is the result of the weakened  economic and market  conditions.  Income
from banking service charges and fees increased by $159,588, or 16.22%, from the
first nine months of 2007.  This  increase is due  primarily to higher levels of
deposit service charges,  cash management,  and master money  interchange  fees.
Other noninterest income totaled $534,224,  which was an increase of $46,626, or
9.56% from the first nine months of 2007.

Noninterest Expense

Nine-month  noninterest  expense as of September  30, 2008 totaled  $11,375,792,
increasing  10.56%,  or  $1,086,102  from the same period in 2007.  Increases in
noninterest  expenses  are  reflected in staffing,  occupancy,  and  advertising
expenses.  Salaries and benefits  expense  increased  $426,950 or 7.31% from the
same  period  in  2007.  Increased  salary  and  benefits  expenses  were due to
additional  compliance  personnel and an increased  emphasis on  commercial  and
small  business  development.  Occupancy  costs totaled  $898,056,  which was an
increase of $54,187 or 6.42%,  which  reflects  increases due to a larger branch
network and its related maintenance costs. Advertising expense totaled


                                       30
<PAGE>

$465,209,  which was an increase of $196,753,  or 73.29%  increase from the nine
months ended  September  30, 2007.  This increase is due primarily to the Bank's
image campaign  which was launched  during the fourth quarter of 2007 as well as
product and publicity promotions.

Other noninterest  expenses totaled $1,602,865 which is an increase of $262,547,
or 19.59% from the first nine months of 2007.  The majority of the increase is a
result of higher 2008 costs for exam and audit fees as they relate to regulatory
reporting  compliance and internal audit  initiatives.  Also contributing to the
increase  were  costs for  placement  fees for key  personnel  during  the first
quarter of 2008.

Income Taxes

The  Company  recorded  an income tax  benefit for the first nine months of 2008
which totaled $274,945. This compares to the provision of $275,307 for the first
nine  months  of 2007.  The 2008 tax  benefit  is a result  of the  pretax  loss
recorded for the first nine months of 2008.  However because the loss related to
a $5 million OTTI write down on Fannie Mae and Freddie Mac  preferred  shares is
not  considered  ordinary  income,  no tax  benefit  related  to the loss can be
recognized  through  September  30,  2008.  With  the  passage  of the  Economic
Stabilization  Act, the Company will  recognize the tax benefit of the OTTI loss
during the fourth quarter of 2008. (See Footnote 7 of the Consolidated Financial
Statements.)

LIQUIDITY

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

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

As of September 30, 2008, the Company had  $132,400,947 in loan  commitments and
credit  lines  outstanding.  Because  some  commitments  are  expected to expire
without  being  drawn upon,  the total  commitment  amount does not  necessarily
represent  all future cash  requirements.  The funding of these  commitments  is
anticipated  to be met through  deposits,  loan and security  amortizations  and
maturities.

CAPITAL

Shareholders'  equity  totaled  $20,061,174 as of September 30, 2008 as compared
with $28,312,612 as of December 31, 2007. The decrease in  shareholders'  equity
of  $8,251,438  is due to the other  than  temporary  impairment  loss  taken on
available for sale securities during the third quarter of 2008. The loss, net of
taxes totaled $6,294,626.  Additionally,  the 2008 other comprehensive loss both
from the  unrealized  holding  losses from  available  for sale  securities  and
pension losses reduced equity by $2,666,318. From a regulatory perspective,  the
capital   ratios  of  the  Company  and  the  Bank  place  each  entity  in  the
"well-capitalized"  categories  under applicable  regulations.  On September 20,
2007,  the Company  approved a stock  repurchase  program to acquire in the next
twelve months up to an aggregate


                                       31
<PAGE>

of 30,000 shares of the Company's  outstanding Common Stock.  Shares repurchased
by the  Company  during  the first  nine  months  of 2008  totaled  16,718.  The
repurchase  program  expired  during  September  2008 and was not  renewed.  The
calculation  of all capital  ratios as of  September  30,  3008  include the tax
benefit of the OTTI loss related to the Company's  investments in Fannie Mae and
Freddie Mac preferred  stock/auction  rate securities  holding such stock. While
the tax  benefit  of  this  loss  was not  recognized  for  financial  reporting
purposes,  Federal bank  regulators  issued an  interagency  statement  formally
allowing financial  institutions to treat any losses this year of Fannie Mae and
Freddie  Mac  preferred  stock/auction  rate  securities  holding  such stock as
ordinary  losses,  rather than capital losses,  for federal income tax purposes,
and thereby  includable in  regulatory  capital  calculations.  During the third
quarter of 2008 the Company  increased  its  investment  in the Bank's equity by
$1,500,000.  This action was executed to insure the Bank  maintained  capital at
levels considered to be well capitalized by bank regulation.

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

<TABLE>
<CAPTION>
                                              Minimum
                                         Regulatory Capital         Well Capitalized        Actual
                                               Ratios                Capital Levels         Ratios
                                         ------------------          --------------         ------
<S>                                             <C>                                           <C>
The Company
       Leverage capital ratio                   4.00%                        N/A              6.31%

       Risk-based capital ratio                 4.00%                        N/A              9.57%

       Total risk-based capital ratio           8.00%                        N/A             10.21%

The Bank
       Leverage capital ratio                   4.00%                      5.00%              6.27%

       Risk-based capital ratio                 4.00%                      6.00%              9.48%

       Total risk-based capital ratio           8.00%                     10.00%             10.11%
</TABLE>

ALLOWANCE FOR LOAN AND LEASE LOSSES AND CRITICAL ACCOUNTING POLICIES

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

The Bank makes  provisions  for loan and lease  losses on a  quarterly  basis as
determined by a continuing  assessment of the adequacy of the allowance for loan
and lease  losses.  The Bank  performs an ongoing  review of loans and leases in
accordance  with an  individual  loan and lease rating  system to determine  the
required  allowance  for loan and lease losses at any given date.  The review of
loans and  leases  is  performed  to  estimate  potential  exposure  to  losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective  and is  based  on an  evaluation  of the  known  and  inherent  risk
characteristics  and size of the loan and lease  portfolios,  the  assessment of
current  economic and real estate  market  conditions,  estimates of the current
value of underlying collateral,  past loan and lease loss experience,  review of
regulatory  authority  examination reports and evaluations of impaired loans and
leases, and other relevant factors. Loans and leases, including those considered
impaired,  are


                                       32
<PAGE>

charged against the allowance for loan and lease losses when management believes
that the uncollectibility of principal is confirmed.  Any subsequent  recoveries
are  credited  to the  allowance  for loan and lease  losses when  received.  In
connection with the determination of the allowance for loan and lease losses and
the  valuation  of  foreclosed  real  estate,   management  obtains  independent
appraisals for significant properties, when considered necessary.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component relates to loans and leases that are classified as doubtful,
substandard  or  special  mention.  For  such  loans  and  leases  that are also
classified as impaired,  an allowance is established  when the  discounted  cash
flows (or collateral  value or observable  market price) of the impaired loan or
lease is lower  than the  carrying  value of that  loan or  lease.  The  general
component covers non-classified loans and leases and is based on historical loss
experience  adjusted  for  qualitative  factors.  An  unallocated  component  is
maintained to cover  uncertainties  that could affect  Management's  estimate or
probable losses. The unallocated  component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions.

There were no material changes in loan or lease  concentrations or loan or lease
quality that had a significant effect on the allowance for loan and lease losses
calculation at September 30, 2008. In addition,  there were no material  changes
in the estimation  methods and assumptions  used in the Company's  allowance for
loan and lease losses calculation,  and there were no material  reallocations of
the allowance among different parts of the loan or lease portfolio.

At September 30, 2008, the allowance for loan and lease losses was equivalent to
48% of total non-performing  assets as compared with 72% of total non-performing
assets at December 31, 2007. As of September 30, 2008, non-performing assets and
loans and  leases  were  $4,727,403  and  represented  1.34% of total  loans and
leases.  As of December  31,  2007,  non-performing  assets and loans and leases
totaled $2,962,185 and represented 0.90% of total loans and leases. The ratio of
the  allowance  for such loan and  lease  losses  to total  loans and  leases at
September 30, 2008 and December 31, 2007 was 0.64%. Changes in the allowance for
loan and lease losses for the nine month  periods  ended  September 30, 2008 and
2007 are as shown below:

<TABLE>
<CAPTION>
      For the nine months ended September 30,                       2008             2007
                                                                -----------      -----------
<S>                                                             <C>              <C>
      Balance at beginning of the year                          $ 2,151,622      $ 2,106,100

      Provision for loan and lease losses                           367,000          105,000
      Loans and leases charged off                                 (275,457)        (107,087)
      Recoveries of loans and leases previously charged-off          23,937           12,694
                                                                -----------      -----------

      Balance as of September 30,                               $ 2,267,102      $ 2,116,707
                                                                ===========      ===========
</TABLE>

The  increase  in the  allowance  was based upon  growth in the loan  portfolio,
uncertain economic conditions, concerns over further potential reduction in real
estate  values and the impact of the  prolonged  recession or economic  downturn
would have on the Bank's commercial and small business loan and lease portfolio.

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


                                       33
<PAGE>


<TABLE>
<CAPTION>
                                                       September 30, 2008     December 31, 2007
                                                       ------------------     -----------------

<S>                                                      <C>                     <C>
Nonaccrual loans and leases                              $     4,719,588         $   2,959,074
Other real estate owned                                               --                    --
                                                         ---------------         -------------
Total nonperforming assets                               $     4,719,588         $   2,959,074
                                                         ===============         =============
Loans and leases past due in excess of 90 days and
  accruing interest                                      $         7,815         $       3,111
                                                         ===============         =============
</TABLE>

POTENTIAL PROBLEM LOANS

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

OFF BALANCE SHEET ARRANGEMENTS

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

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

FORWARD-LOOKING STATEMENTS

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

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


                                       34
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

[Not required for smaller reporting company.]

ITEM 4 . CONTROLS AND PROCEDURES

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

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

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


                                       35
<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors. Not applicable

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

On September 20, 2007 the Company approved a stock repurchase program to acquire
in the twelve months following such date, up to an aggregate of 30,000 shares of
the  Company's  outstanding  Common Stock.  The  repurchase  program  expired on
September  20,  2008  and was not  renewed.  Shares  purchased  pursuant  to the
repurchase program in the third quarter of 2008, are shown below.

<TABLE>
<CAPTION>
                                      Issuer Purchases of Equity Securities
                                  (a)               (b)                   (c)                      (d)
                                                                    Total number of
                                                                      shares (or              Maximum number
                                                                        units)            (or approximate dollar
                              Total number                           purchased as            value) of shares
                               of shares       Average price       part of publicly      (or units) that may yet
                               (or units)     paid per share        announced plans       be purchased under the
         Period                purchased         (or unit)            or programs           plans or programs
-------------------------   ---------------   ----------------    -------------------    -----------------------
<S>                              <C>               <C>                   <C>                     <C>
    July 1-31, 2008              1,095             12.23                 1,095                   7,333 shares
                            ---------------   ----------------    -------------------    -----------------------
   August 1-31, 2008             2,313             11.96                 2,313                   5,019 shares
                            ---------------   ----------------    -------------------    -----------------------
  September 1-30, 2008              --                --                    --                       0 shares
                            ---------------   ----------------    -------------------    -----------------------
         Total                   3,408          $  12.04                 3,408                       0 shares
                            ---------------   ----------------    -------------------    -----------------------
</TABLE>

Item 3. Defaults Upon Senior Securities. None

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

Item 5. Other Information. None


                                       36
<PAGE>

Item 6. Exhibits

                                  EXHIBIT INDEX

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

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

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

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

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

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

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

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


                                       37
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2008                    FIRST LITCHFIELD FINANCIAL
                                            CORPORATION


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


Dated: November 14, 2008                      By:  /s/ Carroll A. Pereira
                                                ---------------------------
                                                  Carroll A. Pereira
                                                  Principal Financial and
                                                  Accounting Officer


                                       38