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

                                    FORM 10-K

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

For the fiscal year ended DECEMBER 31, 2007

                                       OR

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

For the transition period from                  to
                               ----------------    -----------------

                         Commission File Number 0-13649

                             BERKSHIRE BANCORP INC.
             (Exact name of registrant as specified in its charter)

DELAWARE                                             94-2563513
(State or other jurisdiction of                      (I.R.S. employer
incorporation or organization)                       identification number)

160 BROADWAY, NEW YORK, NEW YORK                     10038
(Address of principal executive offices)             (Zip Code)

Registrant's telephone number, including area code: (212) 791-5362

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

       Title of Each Class               Name of Each Exchange on Which Traded
--------------------------------------   -------------------------------------
COMMON STOCK, PAR VALUE $.10 PER SHARE    THE NASDAQ STOCK MARKET LLC
                                          (THE NASDAQ GLOBAL MARKET)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X]    No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.    [X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer, or a smaller reporting company. See
the definitions of "large accelerated  filer,"  "accelerated  filer" and smaller
reporting company" in Rule 12b-2 of the Exchange Act.) (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 in
Rule 12b-2 of the Act. Yes [ ]    No [X]

Aggregate   market  value  of  voting  and  non-voting   common  stock  held  by
non-affiliates of the Registrant as of June 30, 2007: $56,945,930.

Number of shares of Common Stock outstanding as of March 24, 2008: 7,054,183.

DOCUMENTS INCORPORATED BY REFERENCE: None

<PAGE>

FORWARD-LOOKING  STATEMENTS.  STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT
ARE NOT BASED ON HISTORICAL FACT MAY BE "FORWARD-LOOKING  STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE  SECURITIES  LITIGATION REFORM ACT OF 1995. WORDS SUCH AS
"BELIEVE",  "MAY", "WILL",  "EXPECT",  "ESTIMATE",  "ANTICIPATE",  "CONTINUE" OR
SIMILAR TERMS  IDENTIFY  FORWARD-LOOKING  STATEMENTS.  A WIDE VARIETY OF FACTORS
COULD CAUSE THE ACTUAL RESULTS AND  EXPERIENCES  OF BERKSHIRE  BANCORP INC. (THE
"COMPANY")  TO DIFFER  MATERIALLY  FROM THE RESULTS  EXPRESSED OR IMPLIED BY THE
COMPANY'S FORWARD-LOOKING  STATEMENTS.  SOME OF THE RISKS AND UNCERTAINTIES THAT
MAY AFFECT  OPERATIONS,  PERFORMANCE,  RESULTS OF THE  COMPANY'S  BUSINESS,  THE
INTEREST RATE SENSITIVITY OF ITS ASSETS AND LIABILITIES, AND THE ADEQUACY OF ITS
LOAN LOSS  ALLOWANCE,  INCLUDE,  BUT ARE NOT  LIMITED TO: (I)  DETERIORATION  IN
LOCAL,  REGIONAL,  NATIONAL OR GLOBAL  ECONOMIC  CONDITIONS  WHICH COULD RESULT,
AMONG OTHER THINGS, IN AN INCREASE IN LOAN DELINQUENCIES, A DECREASE IN PROPERTY
VALUES,  OR A CHANGE  IN THE  HOUSING  TURNOVER  RATE;  (II)  CHANGES  IN MARKET
INTEREST  RATES OR CHANGES IN THE SPEED AT WHICH MARKET  INTEREST  RATES CHANGE;
(III) CHANGES IN LAWS AND REGULATIONS AFFECTING THE FINANCIAL SERVICES INDUSTRY;
(IV) CHANGES IN COMPETITION;  (V) CHANGES IN CONSUMER PREFERENCES;  (VI) CHANGES
IN BANKING  TECHNOLOGY;  (VII)  ABILITY TO MAINTAIN  KEY MEMBERS OF  MANAGEMENT;
(VIII)  POSSIBLE   DISRUPTIONS  IN  THE  COMPANY'S  OPERATIONS  AT  ITS  BANKING
FACILITIES;  (IX) COST OF COMPLIANCE WITH NEW CORPORATE GOVERNANCE REQUIREMENTS;
AND OTHER  FACTORS  REFERRED TO IN THE SECTIONS OF THIS ANNUAL  REPORT  ENTITLED
"BUSINESS" AND "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."

         CERTAIN INFORMATION  CUSTOMARILY  DISCLOSED BY FINANCIAL  INSTITUTIONS,
SUCH AS ESTIMATES OF INTEREST RATE SENSITIVITY AND THE ADEQUACY OF THE LOAN LOSS
ALLOWANCE, ARE INHERENTLY  FORWARD-LOOKING  STATEMENTS BECAUSE, BY THEIR NATURE,
THEY REPRESENT ATTEMPTS TO ESTIMATE WHAT WILL OCCUR IN THE FUTURE.

         THE  COMPANY  CAUTIONS  READERS NOT TO PLACE  UNDUE  RELIANCE  UPON ANY
FORWARD-LOOKING  STATEMENT  CONTAINED  IN THIS  ANNUAL  REPORT.  FORWARD-LOOKING
STATEMENTS  SPEAK ONLY AS OF THE DATE THEY WERE MADE AND THE COMPANY  ASSUMES NO
OBLIGATION TO UPDATE OR REVISE ANY SUCH STATEMENTS UPON ANY CHANGE IN APPLICABLE
CIRCUMSTANCES.

                                     PART I

ITEM 1. BUSINESS

         GENERAL.  Berkshire  Bancorp  Inc., a Delaware  corporation,  is a bank
holding  company  registered  under  the  Bank  Holding  Company  Act  of  1956.
References  herein to  "Berkshire",  the "Company" or "we" and similar  pronouns
shall  be  deemed  to refer  to  Berkshire  Bancorp  Inc.  and its  consolidated
subsidiaries  unless  the  context  otherwise  requires.  Berkshire's  principal
activity  is  the  ownership  and   management  of  its  indirect   wholly-owned
subsidiary,  The  Berkshire  Bank  (the  "Bank"),  a New  York  State  chartered
commercial bank. The Bank is owned through Berkshire's  wholly-owned subsidiary,
Greater American Finance Group, Inc. ("GAFG").

         We file annual,  quarterly and current  reports,  proxy  statements and
other information with the Securities and Exchange  Commission (the "SEC").  You
may read and copy our  reports or other  filings  made with the SEC at the SEC's
Public Reference Room, located at 450 Fifth Street, N.W., Washington,  DC 20549.
You can also access information that we file electronically on the SEC's website
at WWW.SEC.GOV.

         We do not presently  have a website.  However,  as soon as  practicable
after filing with or furnishing to the SEC, we will provide at no cost, paper or
electronic copies of our Annual Reports on Form 10-K,  Quarterly Reports on Form
10-Q,  Current  Reports on Form 8-K and  amendments to those  reports.  Requests
should be directed to:

         Berkshire Bancorp Inc.
         Investor Relations
         160 Broadway, First Floor
         New York, NY 10038

                                       2
<PAGE>

         TRUST PREFERRED SECURITIES.  As of May 18 2004, the Company established
Berkshire  Capital Trust I, a Delaware  statutory trust,  ("BCTI").  The Company
owns all the common  capital  securities  of BCTI.  BCTI issued $15.0 million of
preferred capital securities to investors in a private  transaction and invested
the proceeds,  combined with the proceeds from the sale of BCTI's common capital
securities,  in the Company  through the purchase of $15.464  million  aggregate
principal  amount of Floating  Rate  Junior  Subordinated  Debentures  (the 2004
"Debentures")  issued by the Company.  The 2004  Debentures,  the sole assets of
BCTI,  mature on July 23, 2034 and bear interest at a floating rate, three month
LIBOR plus 2.70%, currently 7.85%.

         On April 1, 2005, the Company established Berkshire Capital Trust II, a
Delaware  statutory  trust,  ("BCTII").  The Company owns all the common capital
securities of BCTII.  BCTII issued $7.0 million of preferred capital  securities
to investors in a private  transaction and invested the proceeds,  combined with
the proceeds from the sale of BCTII's common capital securities,  in the Company
through the purchase of $7.217 million  aggregate  principal  amount of Floating
Rate  Junior  Subordinated  Debentures  (the  "2005  Debentures")  issued by the
Company.  The 2005 Debentures,  the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating  rate,  three month LIBOR plus 1.95%,  currently
6.96%.  See Note A of Notes to  Consolidated  Financial  Statements  for further
discussion of Trust Preferred Securities.

         BUSINESS OF THE BANK - GENERAL.  The Bank's principal business consists
of gathering  deposits  from the general  public and  investing  those  deposits
primarily  in loans,  debt  obligations  issued by the U.S.  Government  and its
agencies,  debt  obligations  of  business  corporations,   and  mortgage-backed
securities. The Bank currently operates from seven deposit-taking offices in New
York City, four deposit-taking offices in Orange and Sullivan Counties, New York
and one deposit-taking office in Ridgefield, NJ.

                     BRANCH LOCATIONS OF THE BERKSHIRE BANK
                                DECEMBER 31, 2007
                 --------------------------------------------------
                  4 East 39th Street      2 South Church Street
                  New York, NY            Goshen, NY

                  5 Broadway              214 Harriman Drive
                  New York, NY            Goshen, NY

                  5010 13th Avenue        80 Route 17M
                  Brooklyn, NY            Harriman, NY

                  1421 Kings Highway      60 Main Street
                  Brooklyn, NY            Bloomingburg, NY

                  4917 16th Avenue        1119 Avenue J
                  Brooklyn, NY            Brooklyn, NY

                  600 Broad Avenue        210 Pinehurst Avenue
                  Ridgefield, NJ          New York, NY 10033


         In September  2005, the Bank entered into a Branch Purchase and Deposit
Assumption   Agreement  (the   "Agreement")   with  the  Oritani   Savings  Bank
("Oritani"),  a New Jersey  Chartered  Savings  Bank.  Pursuant to the Agreement
which  closed in May 2006,  the Bank (i)  assumed  certain  commercial  checking
account deposit  liabilities,  (ii) purchased  certain fixed assets and the real
property of this Oritani  bank branch  located in  Ridgefield,  New Jersey for a
cash purchase  price of $850,000 and (iii) opened a branch of The Berkshire Bank
at the Ridgefield, New Jersey location.

         In  August  2005,  the  Bank  formed   Berkshire  1031  Exchange,   LLC
("Berkshire  1031"), a wholly owned limited  liability  company.  Berkshire 1031
will act as a qualified intermediary in connection with tax free exchanges under
Section  1031 of the  Internal  Revenue  Code of 1986,  as amended.  A qualified
intermediary is an individual or business entity that assists owners of property
who  wish  to  exchange  their  property  for  property  of a  "like-kind"  in a
transaction  that is tax free in whole or part for  federal  (and in some  cases
state) income tax

                                       3
<PAGE>

purposes. In accordance with detailed procedures set forth in federal income tax
regulations,  Berkshire  1031 will  assist the owner in the sale of the  owner's
property  and the  purchase  of  replacement  property  so that the  transaction
qualifies as a non-taxable exchange of property.

         PRINCIPAL LOAN TYPES.  The Bank's  principal loan types are residential
and commercial mortgage loans and commercial  non-mortgage loans, both unsecured
and secured by personal  property.  The Bank's  revenues come  principally  from
interest on loans and investment securities. The Bank's primary sources of funds
are deposits,  borrowings and proceeds from  principal and interest  payments on
loans and investment securities.

         OPERATING  PLAN. The Bank's  operating plan  concentrates  on obtaining
deposits from a variety of businesses,  professionals  and retail  customers and
investing those funds in  conservatively  underwritten  loans. Due to the Bank's
underwriting  criteria,  its deposits have  significantly  exceeded the level of
satisfactory  loans  available for investment in recent years.  Hence,  the Bank
has, in recent years,  invested a portion of its available  funds in investment,
mortgage-backed and auction rate securities.

         MARKET AREA. The Bank draws its customers principally from the New York
City  metropolitan  area and the Villages of Goshen and  Harriman,  New York and
their surrounding communities,  representing most of Orange County, NY. The Bank
also has a branch in Bloomingburg, New York, just over the border between Orange
and Sullivan  Counties.  Predominantly  rural with  numerous  small towns,  many
residents of Orange and Sullivan  Counties work in New York City.  Consequently,
the health of the economy in the New York City  metropolitan  area has, and will
continue to have a direct  effect on the economic  well being of  residents  and
businesses  in these  counties.  With the  completion  of the  transaction  with
Oritani in May 2006,  the Bank's  market area expanded into northern New Jersey.
From time to time, the Bank may make loans or accept deposits from outside these
areas, but such transactions  generally  represent  outgrowths of existing local
customer relationships.

         COMPETITION.  The Bank's  principal  competitors for deposits are other
commercial banks, savings banks, savings and loan associations and credit unions
in the Bank's  market areas,  as well as money market  mutual  funds,  insurance
companies,  securities brokerage firms and other financial institutions, many of
which are substantially  larger in size than the Company. The Bank's competition
for loans comes  principally from commercial banks,  savings banks,  savings and
loan associations,  mortgage bankers,  finance companies and other institutional
lenders.  Many of the institutions which compete with the Bank have much greater
financial and marketing resources than the Bank. The Bank's principal methods of
competition  include loan and deposit pricing,  maintaining  close ties with its
local communities, the quality of the personal service it provides, the types of
business services it provides, and other marketing programs.

         OPERATIONS OF THE BANK.  Reference is made to the information set forth
in Item 7 herein  ("Management's  Discussion and Analysis of Financial Condition
and Results of Operations")  for information as to various aspects of the Bank's
operations, activities and conditions.

         SUBSIDIARY  ACTIVITIES.  The Bank is permitted under New York State law
and federal law to own subsidiaries for certain limited  purposes,  generally to
engage in activities  which are permissible for a subsidiary of a national bank.
The Bank has two subsidiaries,  Berkshire Agency, Inc., a company engaged in the
title insurance  agency  business,  and Berkshire 1031, a company that acts as a
qualified  intermediary in connection with tax free exchanges under Section 1031
of the Internal Revenue Service Code.

         REGULATION.  Berkshire is a bank holding  company under federal law and
registered  as such with the  Federal  Reserve.  The Bank is a  commercial  bank
chartered  under the laws of New York State.  It is subject to regulation at the
state  level by the New York  Superintendent  of Banks and the New York  Banking
Board,  while at the federal level its primary  regulator is the Federal Deposit
Insurance Corporation (the "FDIC").

                                       4
<PAGE>

         Both Berkshire and the Bank are subject to extensive  state and federal
regulation of their  activities.  The following  discussion  summarizes  certain
banking laws and regulations  that affect  Berkshire and the Bank.  Proposals to
change these laws and  regulations are frequently  proposed in Congress,  in the
New York  State  legislature,  and  before  state and  federal  bank  regulatory
agencies.  The  likelihood and timing of any changes and the impact such changes
might have on the Company are  impossible  to determine  with any  certainty.  A
change in applicable  laws or  regulations,  or a change in the way such laws or
regulations  are  interpreted  by  regulatory  agencies  or  courts,  may have a
material  impact on the business,  operations  and earnings of the Company,  the
nature and effect of which cannot be predicted.

         BANK HOLDING COMPANY  REGULATION.  The Federal Reserve is authorized to
make regular  examinations  of the Company and its nonbank  subsidiaries.  Under
federal law and Federal Reserve regulations, the activities in which the Company
and its nonbank subsidiaries may engage are limited. The Company may not acquire
direct or indirect  ownership or control of more than 5% of the voting shares of
any  company,  including  a bank,  without  the prior  approval  of the  Federal
Reserve, except as specifically authorized under federal law and Federal Reserve
regulations.  The Company,  subject to the approval of the Federal Reserve,  may
acquire more than 5% of the voting shares of non-banking  corporations  if those
corporations  engage in  activities  which the  Federal  Reserve  deems to be so
closely  related to banking or managing or  controlling  banks as to be a proper
incident  thereto.  These  limitations  also  apply to  activities  in which the
Company engages directly rather than through a subsidiary.

         The  Federal  Reserve has  enforcement  powers over the Company and its
non-bank  subsidiaries.  This allows the Federal Reserve, among other things, to
stop  activities  that  represent  unsafe or  unsound  practices  or  constitute
violations  of  law,  rules,  regulations,   administrative  orders  or  written
agreements with a federal bank regulator.  These powers may be exercised through
the issuance of cease-and-desist orders, the imposition of civil money penalties
or other actions.

         FEDERAL RESERVE CAPITAL REQUIREMENTS. The Federal Reserve requires that
the Company, as a bank holding company,  must maintain certain minimum ratios of
capital to assets.  The Federal  Reserve's  regulations  divide capital into two
categories.  Primary capital includes common equity, surplus, undivided profits,
perpetual preferred stock, mandatory convertible instruments,  the allowance for
loan and lease  losses,  contingency  and other capital  reserves,  and minority
interests in equity accounts of  consolidated  subsidiaries.  Secondary  capital
includes  limited-life  preferred stock,  subordinated  notes and debentures and
certain unsecured long term debt.

         The Federal  Reserve  requires that bank holding  companies  maintain a
minimum ratio of primary  capital to total assets of 5.5% and a minimum level of
total capital (primary plus secondary  capital) equal to 6% of total assets.  In
calculating capital ratios, the allowance for loan losses,  which is a component
of primary capital,  is added back in determining total assets.  Certain capital
components,  such as debt and  perpetual  preferred  stock,  are  includable  as
capital only if they satisfy certain definitional tests.

         The Company must also meet a risk-based capital standard.  Capital, for
the  risk-based  capital  requirement,  is  divided  into  Tier  I  capital  and
Supplementary capital, determined as discussed below in connection with the FDIC
capital  requirements imposed on the Bank. The Federal Reserve requires that the
Bank  maintain a ratio of total  capital  (defined as Tier I plus  Supplementary
capital)  to  risk-weighted  assets of at least 8%, of which at least 4% must be
Tier I capital.  Risk weighted assets are also determined in a manner comparable
to the determination of risk-weighted assets under FDIC regulations as discussed
below.

         At December  31, 2007 and 2006,  the  Company met the  definition  of a
"well capitalized" bank holding company.

         INTER-STATE BANKING. Bank holding companies may generally acquire banks
in any state. Federal law also permits a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting  bank if both states have
not opted out of interstate  branching;  permits a bank to acquire branches from
an  out-of-state  bank if the law of the state  where the  branches  are located

                                       5
<PAGE>

permits the interstate  branch  acquisition;  and permits banks to establish and
operate  new  interstate  branches  whenever  the  host  state  opts-in  to that
authority.  Bank  holding  companies  and  banks  that  want to  engage  in such
activities must be adequately capitalized and managed.

         The New York Banking Law generally  authorizes  interstate branching in
New York as a result of a merger, purchase of assets or similar transaction.  An
out of state  bank may not first  enter New York by  opening a new branch in New
York,  but once a branch is acquired as  described  in the  preceding  sentence,
additional new branches may be opened state wide.

         REGULATION OF THE BANK. In general,  the powers of the Bank are limited
to the  express  powers  described  in the  New  York  Banking  Law  and  powers
incidental  to the  exercise  of those  express  powers.  The Bank is  generally
authorized to accept deposits and make loans on terms and conditions  determined
to be acceptable to the Bank. Loans may be unsecured, secured by real estate, or
secured by personal property. The Bank may also invest assets in bonds, notes or
other debt  securities  which are not in default and certain  limited classes of
equity  securities  including  certain  publicly traded equity  securities in an
amount  aggregating  not more than 2% of assets or 20% of capital.  The Bank may
also engage in a variety of other  traditional  activities for commercial banks,
such as the issuance of letters of credit.

         The  exercise  of these  state-authorized  powers  is  limited  by FDIC
regulations  and  other  federal  laws  and  regulations.  In  particular,  FDIC
regulations  limit the investment  activities of  state-chartered,  FDIC-insured
banks such as the Bank.

         Under  FDIC  regulations,  the  Bank  generally  may  not  directly  or
indirectly acquire or retain any equity investment that is not permissible for a
national  bank. In addition,  the Bank may not directly or indirectly  through a
subsidiary,  engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities  would pose no
risk to the applicable  FDIC  insurance fund and the Bank is in compliance  with
applicable regulatory capital requirements.  FDIC regulations permit real estate
investments under certain circumstances. The Bank does not engage in real estate
investing activity.

         LOANS TO ONE BORROWER.  With certain exceptions,  the Bank may not make
loans or other  extensions of credit to a single  borrower,  or certain  related
groups of borrowers,  in an aggregate  amount in excess of 15% of the Bank's net
worth,  plus an additional 10% of the Bank's net worth if such amount is secured
by certain types of readily marketable collateral.  In addition, the Bank is not
permitted  to make a mortgage  loan in excess of 15% of capital  stock,  surplus
fund and undivided profits.

         FDIC CAPITAL  REQUIREMENTS.  The FDIC  requires  that the Bank maintain
certain  minimum  ratios of  capital to assets.  The FDIC's  regulations  divide
capital  into two tiers.  The first  tier  ("Tier I")  includes  common  equity,
retained earnings,  certain non-cumulative  perpetual preferred stock (excluding
auction rate issues) and minority  interests in equity  accounts of consolidated
subsidiaries,  minus  goodwill  and other  intangible  assets  (except  mortgage
servicing  rights and  purchased  credit card  relationships  subject to certain
limitations).  Supplementary  ("Tier II") capital  includes,  among other items,
cumulative  perpetual  and long-term  limited-life  preferred  stock,  mandatory
convertible  securities,  certain hybrid capital instruments,  term subordinated
debt and the allowance for loan, subject to certain  limitations,  less required
deductions.

         The FDIC  requires  that the  highest  rated  banks  maintain  a Tier I
leverage  ratio (Tier I capital to adjusted  total assets) of at least 3.0%. All
other banks subject to FDIC capital requirements must maintain a Tier I leverage
ratio of 4.0% to 5.0% or more. As of December 31, 2007 and 2006, the Bank's Tier
I leverage capital ratio was 9.7% and 10.9%, respectively.

         The Bank must also meet a risk-based  capital standard.  The risk-based
standard  requires  the Bank to maintain  total  capital  (defined as Tier I and
Supplementary capital) to risk-weighted assets of at least 8%, of which at least
4% must be Tier I capital.  In determining the amount of  risk-weighted  assets,

                                       6
<PAGE>

all  assets,  plus  certain  off-balance  sheet  assets,  are  multiplied  by  a
risk-weight of 0% to 100%,  based on the risks the FDIC believes are inherent in
the type of asset. As of December 31, 2007 and 2006, the Bank maintained a 13.9%
and 18.6% Tier I risk-based capital ratio and a 14.5% and 19.3% total risk-based
capital ratio, respectively.

         In addition to the foregoing regulatory capital requirements,  the FDIC
Improvements Act of 1991 created a "prompt corrective  action" framework,  under
which decreases in a depository  institution's  capital category trigger various
supervisory actions.  Pursuant to implementing  regulations adopted by the FDIC,
for purposes of the prompt  corrective  action  provisions,  a  state-chartered,
nonmember bank, such as the Bank, is deemed to be well  capitalized if it has: a
total risk-based  capital ratio of 10% or greater;  a Tier I risk-based  capital
ratio of 6% or greater;  and a leverage  ratio of 5% or greater.  As of December
31, 2007 and 2006, the Bank met the definition of a "well capitalized" financial
institution.

         COMMUNITY  REINVESTMENT ACT. The Bank must, under federal law, meet the
credit needs of its community, including low and moderate income segments of its
community. The FDIC is required, in connection with its examination of the Bank,
to assess  whether the Bank has satisfied this  requirement.  Failure to satisfy
this requirement could adversely affect certain  applications which the Bank may
make, such as branch  applications,  merger  applications,  and applications for
permission to purchase branches.  In the case of Berkshire,  the Federal Reserve
will  assess  the  record  of  each  subsidiary  bank  in  considering   certain
applications by Berkshire.  The New York Banking Law contains similar provisions
applicable  to the  Bank.  As of the  most  recent  Community  Reinvestment  Act
examinations  by the FDIC and the New York State  Banking  Department,  the Bank
received "satisfactory" ratings.

         DIVIDENDS  FROM THE  BANK TO THE  COMPANY.  One  source  of  funds  for
Berkshire to pay  dividends to its  stockholders  is dividends  from the Bank to
Berkshire.  Under  the New York  Banking  Law,  the Bank  may pay  dividends  to
Berkshire, without regulatory approval, equal to its net profits for the year in
which the payment is made, plus retained net profits for the two previous years,
subject to certain  limits  not  generally  relevant.  The Bank's  retained  net
profits  for the 2006 and  2007  calendar  years  totaled  approximately  $11.93
million.

         Under  federal law, the Bank may not make any capital  distribution  to
Berkshire,  including any dividend or repurchase of the Bank's stock,  if, after
making such  distribution,  the Bank fails to meet the required  minimum capital
ratio  requirements  discussed below. The FDIC may prohibit the Bank from paying
dividends  if, in its opinion,  the payment of  dividends  would  constitute  an
unsafe or unsound practice.

         TRANSACTIONS WITH RELATED PARTIES.  The Company, its direct non-banking
subsidiaries  and other  companies  controlled by  stockholders  who control the
Company are  affiliates,  within the meaning of the Federal  Reserve Act, of the
Bank and its  subsidiaries.  The Bank's authority to engage in transactions with
its  "affiliates" is limited by Sections 23A and 23B of the Federal Reserve Act.
Section 23A limits the  aggregate  amount of  transactions  with any  individual
affiliate  to 10% of the  capital  and  surplus of the Bank and also  limits the
aggregate  amount  of  transactions  with all  affiliates  to 20% of the  Bank's
capital  and  surplus.  Extensions  of credit to  affiliates  must be secured by
certain  specified  collateral,  and the  purchase  of low  quality  assets from
affiliates   is  generally   prohibited.   Section  23B  provides  that  certain
transactions  with affiliates,  including loans and asset purchases,  must be on
terms and under circumstances,  including credit standards, that are at least as
favorable  to  the  Bank  as  those   prevailing  at  the  time  for  comparable
transactions  with  non-affiliated  companies.  In  the  absence  of  comparable
transactions,  such  transactions may only occur under terms and  circumstances,
including  credit  standards,  that in good  faith  would be offered to or would
apply to non-affiliated companies.

         In accordance with banking regulations,  the Bank may make loans to its
and the Company's directors,  executive officers, and 10% stockholders,  as well
as to entities controlled by them, subject to specific federal and state limits.
Among other things, these loans must (a) be made on terms that are substantially
the  same  as,  and  follow  credit  underwriting  procedures  that are not less
stringent

                                       7
<PAGE>

than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve  more than the normal  risk of  repayment  or present  other
unfavorable  features and (b) not exceed  certain  limitations  on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the Bank's capital. In addition, extensions
of credit in excess of certain  limits must be  approved by the Bank's  Board of
Directors. However, the Bank may make loans to executive officers, directors and
principal  stockholders on preferential terms,  provided the extension of credit
is made pursuant to a benefit or compensation program of the Bank that is widely
available  to  employees  of the  Bank  or its  affiliates  and  does  not  give
preference  to any insider over other  employees of the Bank or  affiliate.  The
Bank has no such benefit or compensation programs.

         ENFORCEMENT.  The  FDIC and the  Banking  Department  have  enforcement
authority  over the Bank.  The  Superintendent  may order the Bank to appear and
explain an apparent  violation  of law, to  discontinue  unauthorized  or unsafe
practices and to keep prescribed books and accounts.  If any director or officer
of the Bank has  violated  any law,  or has  continued  unauthorized  or  unsafe
practices in  conducting  the business of the Bank after having been notified by
the Superintendent to discontinue such practices, the New York Banking Board may
remove the  individual  from office after notice and an opportunity to be heard.
The  Superintendent  also may take  over  control  of the Bank  under  specified
statutory criteria.

         The FDIC's  enforcement  authority  includes,  among other things,  the
ability to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers.  As indicated above, the FDIC is required to take
prompt action to correct  deficiencies  in banks which do not satisfy  specified
FDIC capital ratio requirements.  Dividends,  other capital distributions or the
payment  of  management  fees  to any  controlling  person  are  prohibited  if,
following such  distribution or payment,  a bank would be  undercapitalized.  An
undercapitalized  bank must file a plan to restore  its  capital  within 45 days
after   being   notified   that   it  is   undercapitalized.   Undercapitalized,
significantly  undercapitalized and critically undercapitalized institutions are
subject to  increasing  prohibitions  on permitted  activities,  and  increasing
levels of  regulatory  supervision,  based upon the  severity  of their  capital
problems.  The  FDIC  is  required  to  monitor  closely  the  condition  of  an
undercapitalized  bank. Enforcement action taken by the FDIC can escalate to the
appointment of a conservator or receiver of a critically undercapitalized bank.

         INSURANCE OF ACCOUNTS.  Deposit insurance  premiums payable to the FDIC
are based upon the perceived risk of the institution to the FDIC insurance fund.
The FDIC assigns an  institution  to one of three capital  categories:  (a) well
capitalized,  (b) adequately capitalized or (c) undercapitalized.  The FDIC also
assigns  an  institution  to one of  three  supervisory  categories  based on an
evaluation by the  institution's  primary federal regulator and information that
the FDIC considers  relevant to the  institution's  financial  condition and the
risk posed to the deposit insurance funds.  Deposit insurance premiums depend on
an institution's capital and supervisory  categories.  At present, the Bank pays
no deposit insurance premium based upon its risk-based categorization.


         However,  the Bank must pay a share of the cost of the bonds  issued in
the  late  1980s  to  recapitalize  the now  defunct  Federal  Savings  and Loan
Insurance Corporation.  The Bank must pay an annual assessment for this purpose,
which for fiscal 2007 and 2006 was equal to 0.0122% and  0.0127%,  respectively,
of its insured  deposits  and which is recorded as a deposit  insurance  premium
expense for financial statement purposes.  Beginning in 2008, the assessment was
revised to 0.0507% of the Bank's insured deposits.

         RESERVE  REQUIREMENTS.  The  Bank  must  maintain  non-interest-earning
reserves  against its transaction  accounts  (primarily NOW and regular checking
accounts).  The Bank is generally able to satisfy reserve requirements with cash
on hand and other  non-interest  bearing  deposits  which it maintains for other
purposes,  so the reserve requirements do not impose a material financial burden
on the Bank.

         GOVERNMENTAL  POLICIES.  Our earnings are significantly affected by the
monetary and fiscal policies of governmental authorities,  including the Federal
Reserve. Among the instruments of monetary policy used by the Federal Reserve

                                       8
<PAGE>

to implement  these  objectives are  open-market  operations in U.S.  Government
securities  and  Federal  funds,  changes in the  discount  rate on member  bank
borrowings  and changes in reserve  requirements  against  member bank deposits.
These  instruments  of  monetary  policy  are used in  varying  combinations  to
influence the overall  level of bank loans,  investments  and deposits,  and the
interest  rates  charged on loans and paid for  deposits.  The  Federal  Reserve
frequently uses these instruments of monetary policy, especially its open-market
operations  and the discount  rate, to influence the level of interest rates and
to affect the  strength of the  economy,  the level of inflation or the price of
the dollar in foreign  exchange  markets.  The monetary  policies of the Federal
Reserve  have had a  significant  effect on the  operating  results  of  banking
institutions in the past and are expected to continue to do so in the future. It
is not  possible to predict the nature of future  changes in monetary and fiscal
policies, or the effect which they may have on our business and earnings.

         PERSONAL  HOLDING COMPANY  STATUS.  For the fiscal years ended December
31, 2007,  2006 and 2005,  the Company has been deemed to be a Personal  Holding
Company (a "PHC"),  as defined in the Internal Revenue Code. As a PHC, we may be
required to pay an additional income tax or issue a dividend to our shareholders
in an  amount  based  upon the PHC  Internal  Revenue  Code  formulas,  which is
primarily  based upon net income.  No such  dividend  was required to be paid in
fiscal 2007, 2006 and 2005. (See Dividends in Item 5).

         EMPLOYEES.  On March 21, 2008, Berkshire had one full time employee and
the Bank employed  approximately  100 full time and 5 part time  employees.  The
Bank's  employees are not represented by a collective  bargaining  unit, and the
Bank considers its relationship with its employees to be good.


ITEM 1A.  RISK FACTORS.

         Our  business  faces  significant  risks.  These  risks  include  those
described below and may include additional risks and uncertainties not presently
known  to us or that we  currently  deem  immaterial.  Our  business,  financial
condition and results of operations  could be materially  adversely  affected by
any of these risks, and the trading price of our common stock could decline.

WE  OPERATE  IN THE  HIGHLY  COMPETITIVE  BANKING  INDUSTRY  AND THERE CAN BE NO
ASSURANCE THAT WE WILL BE ABLE TO COMPETE SUCCESSFULLY.

         Our ability to maintain our history of strong financial performance and
return on investment to shareholders may depend in part on our ability to expand
our  scope of  available  financial  services  as  needed  to meet the needs and
demands of our customers.  Our business model focuses on using superior customer
service to provide  traditional  banking  services to a growing  customer  base.
However,  we operate in an  increasingly  competitive  environment  in which our
competitors  now  include  securities   dealers,   brokers,   mortgage  bankers,
investment  advisors  and  finance  and  insurance  companies  who seek to offer
one-stop financial services to their customers that may include services that we
have not been  able or  allowed  to offer to our  customers  in the  past.  This
increasingly  competitive  environment  is  primarily  a result  of  changes  in
regulation,   changes  in  technology  and  product  delivery  systems  and  the
accelerating pace of consolidation among financial services providers. We cannot
assure  you that we will be able to  continue  to compete  successfully  in this
environment  without  expanding the scope of financial  services we provide,  or
that if we need to expand the scope of services that we provide, that we will be
able to do so successfully.

OUR FUTURE  SUCCESS  DEPENDS ON OUR ABILITY TO COMPETE  EFFECTIVELY  IN A HIGHLY
COMPETITIVE MARKET AND GEOGRAPHIC AREA.

         We face substantial  competition in all phases of our operations from a
variety of different competitors. We encounter competition from other commercial
banks,  savings and loan associations,  mutual savings banks,  credit unions and
other financial institutions. Our competitors, including credit unions, consumer
finance companies,  factors,  insurance companies and money market mutual funds,
compete with lending and deposit-gathering services offered by us. There is very
strong  competition for financial  services in the New York state areas in which
we currently conduct our business. This geographic area includes offices of many
of the largest  financial  institutions  in the world.  Many of those  competing
institutions have much greater  financial and marketing  resources than we have.

                                       9
<PAGE>

Due to their size, many competitors can achieve larger economies of scale and as
a result may offer a broader  range of products and  services  than we do. If we
are unable to offer  competitive  products  and  services,  our  earnings may be
negatively affected.  Some of the financial services organizations with which we
compete are not subject to the same degree of  regulation  as is imposed on bank
holding companies like ourselves and on federally insured financial institutions
like our banking  subsidiary,  The Berkshire  Bank.  As a result,  these nonbank
competitors  have  certain  advantages  over  us in  accessing  funding  and  in
providing various  services.  The banking business in our current primary market
area is very  competitive,  and the level of  competition  we face may  increase
further, which may limit our asset growth and profitability.

ECONOMIC  CONDITIONS  EITHER  NATIONALLY  OR  LOCALLY  IN  AREAS  IN  WHICH  OUR
OPERATIONS ARE CONCENTRATED MAY BE LESS FAVORABLE THAN EXPECTED.

         Deterioration   in  local,   regional,   national  or  global  economic
conditions   could  result  in,  among  other   things,   an  increase  in  loan
delinquencies,  a decrease in property values, a change in housing turnover rate
or a reduction in the level of bank deposits.  Particularly,  a weakening of the
real estate or employment  market in our primary market areas could result in an
increase in the number of  borrowers  who default on their loans and a reduction
in the value of the collateral securing their loans, which in turn could have an
adverse effect on our profitability.  Substantially all of our real estate loans
are   collateralized   by  properties   located  in  these  market  areas,   and
substantially  all of our loans are made to  borrowers  who live in and  conduct
business in these market areas.  Any material  economic  deterioration  in these
market areas could have an adverse impact on our profitability.

CHANGES IN INTEREST RATES COULD REDUCE OUR INCOME AND CASH FLOWS.

         Our income  and cash flow and the value of our  assets and  liabilities
depend to a great extent on the difference  between the interest rates earned on
interest-earning  assets  such  as  loans  and  investment  securities,  and the
interest  rates  paid  on  interest-bearing  liabilities  such as  deposits  and
borrowings.  These rates are highly  sensitive to many factors  which are beyond
our  control,  including  general  economic  conditions  and policies of various
governmental and regulatory agencies,  in particular,  the Board of Governors of
the Federal Reserve System.  Changes in monetary  policy,  including  changes in
interest  rates,  will influence the  origination  of loans,  the returns on our
portfolio of investment securities and the amounts paid on deposits. If the rate
of interest we pay on deposits and other borrowings increases more than the rate
of interest we earn on loans and other investments, our net interest income, and
therefore our earnings,  could be adversely affected. Our earnings could also be
adversely  affected  if the rates on our loans and other  investments  fall more
quickly than those on our deposits and other borrowings.

DUE TO THE RECENT DOWNTURN IN THE MARKET,  CERTAIN OF THE INVESTMENT  SECURITIES
WE OWN MAY TAKE LONGER TO AUCTION THAN INITIALLY ANTICIPATED.

          Our portfolio of investment  securities includes marketable investment
grade auction rate securities.  Recently, certain auction rate securities failed
to auction due to market imbalances. As a result of this failure, the fair value
of these  securities,  while  maintaining  their  investment  grade  rating  and
interest  payments,  could be  negatively  impacted in the  future.  We have the
ability to hold these available for sale securities to maturity,  (predominately
20 years after December 31, 2007) thereby  recovering our  investment.  While we
believe that such negative  impact would be temporary  due to market  conditions
and that our carrying  values are  appropriate,  there are no assurances  that a
successful  auction will occur or that we can sell these securities  outside the
auction process, if necessary, without sustaining a loss.

WE OPERATE IN A HIGHLY  REGULATED  ENVIRONMENT;  CHANGES IN LAWS AND REGULATIONS
AND ACCOUNTING PRINCIPLES MAY ADVERSELY AFFECT US.

         We are subject to extensive state and federal regulation,  supervision,
and legislation  which govern almost all aspects of our  operations.  These laws
may change from time to time and are  primarily  intended for the  protection of
customers,  depositors,  and the  deposit  insurance  funds.  The  impact of any
changes to these laws may  negatively  impact our ability to expand our services
and to increase the value of our business. Regulatory authorities have extensive
discretion in the exercise of their  supervisory  and enforcement  powers.  They
may,

                                       10
<PAGE>

among  other  things,   impose  restrictions  on  the  operation  of  a  banking
institution,   the  classification  of  assets  by  such  institution  and  such
institution's  allowance  for  loan  losses.   Regulatory  and  law  enforcement
authorities  also have wide  discretion and extensive  enforcement  powers under
various  consumer  protection,  civil  rights  and  other  laws,  including  the
Gramm-Leach-Blilely  Act, the Bank Secrecy  Act, the  Truth-in-Lending  Act, the
Equal  Credit  Opportunity  Act,  the  Fair  Housing  Act  and the  Real  Estate
Settlement  Procedures Act. These laws also permit private  individual and class
action  lawsuits  and provide  for the  recovery  of  attorneys  fees in certain
instances. Any changes to these laws or any applicable accounting principles may
negatively  impact our results of operations and financial  condition.  While we
cannot predict what effect any presently  contemplated  or future changes in the
laws or regulations or their  interpretations would have, these changes could be
materially adverse to our investors and stockholders.

WE ARE REQUIRED TO MAINTAIN AN ALLOWANCE  FOR LOAN  LOSSES.  THESE  RESERVES ARE
BASED ON  MANAGEMENT'S  JUDGMENT AND MAY HAVE TO BE ADJUSTED IN THE FUTURE.  ANY
ADJUSTMENT TO THE ALLOWANCE FOR LOAN LOSSES,  WHETHER DUE TO REGULATORY CHANGES,
ECONOMIC  CONDITIONS OR OTHER  FACTORS,  MAY AFFECT OUR FINANCIAL  CONDITION AND
EARNINGS.

          We maintain an allowance for loan losses at a level believed  adequate
by  management to absorb losses  specifically  identifiable  and inherent in the
loan  portfolio.  In  conjunction  with an internal  loan review  function  that
operates  independently of the lending  function,  management  monitors the loan
portfolio to identify risks on a timely basis so that an  appropriate  allowance
can be  maintained.  Based on an  evaluation of the loan  portfolio,  management
presents a periodic review of the loan loss reserve to the board of directors of
the Bank,  indicating  any changes in the reserve  since the last review and any
recommendations as to adjustments in the reserve.  In making its evaluation,  in
addition to the factors  discussed  below,  management  considers the results of
recent  regulatory  examinations,  which  typically  include  a  review  of  the
allowance for loan losses as an integral part of the examination process.

         In establishing the allowance,  management  evaluates  individual large
classified loans and nonaccrual  loans, and determines an aggregate  reserve for
those loans based on that  review.  An allowance  for the  remainder of the loan
portfolio is also  determined  based on historical  loss  experience  within the
components  of the  portfolio.  These  allocations  may be  modified  if current
conditions  indicate  that loan  losses may differ from  historical  experience,
based on economic factors and changes in portfolio mix and volume.

         In  addition,  a portion of the  allowance  is  established  for losses
inherent  in the loan  portfolio  which  have not  been  identified  by the more
quantitative processes described above. This determination inherently involves a
higher degree of subjectivity,  and considers risk factors that may not have yet
manifested  themselves  in historical  loss  experience.  Those factors  include
changes in levels  and  trends of  charge-offs,  delinquencies,  and  nonaccrual
loans,  trends in volume and terms of loans,  changes in underwriting  standards
and practices,  portfolio mix, tenure of loan officers and management,  entrance
into new geographic markets, changes in credit concentrations,  and national and
local  economic  trends and  conditions.  While the allowance for loan losses is
maintained at a level believed to be adequate by management for estimated losses
in the loan portfolio,  determination of the allowance is inherently subjective,
as it requires estimates, all of which may be susceptible to significant change.
Changes  in these  estimates  may impact  the  provisions  charged to expense in
future periods. Federal and state regulatory authorities, as an integral part of
their  examination  process,  review our loans and allowance for loan losses. We
cannot assure you that we will not increase the allowance for loan losses or the
regulators  will not  require us to  increase  this  allowance.  Either of these
occurrences could negatively impact Berkshire Bancorp's results of operations.

IT MAY BE DIFFICULT  FOR A THIRD PARTY TO ACQUIRE US AND THIS COULD  DEPRESS OUR
COMMON STOCK PRICE.

         Under our amended and restated  certificate of  incorporation,  we have
authorized 2,000,000 shares of preferred stock, which the board of directors may
issue with terms, rights, preferences and designations as the board of directors
may  determine  and  without  any  vote of the  shareholders,  unless  otherwise
required  by law.  Issuing  the  preferred  stock,  depending  upon the  rights,
preferences and

                                       11
<PAGE>

designations  set by the board of  directors,  may  delay,  deter,  or prevent a
change in control of the Company.

         In addition,  we have authorized  10,000,000  shares of common stock of
which  approximately   7,700,000  shares  have  been  issued  and  approximately
7,000,000 shares are outstanding.  The price of our common stock may be volatile
at times  since our common  stock is thinly  traded and one  individual  owns or
controls  more than 50% of our  outstanding  shares.  It may be difficult  for a
stockholder  to sell a significant  number of shares at a time and at a price of
their  choosing or for a third party to purchase  sufficient  shares on the open
market to cause a change in control of the Company,  all of which could  depress
the price of Berkshire Bancorp's common stock.

         In addition, federal and state banking laws may restrict the ability of
the  stockholders to approve a merger or business  combination or obtain control
of the Company.  This may tend to make it more  difficult  for  shareholders  to
replace existing management or may prevent shareholders from receiving a premium
for their shares of our common stock.

OUR COMMON  STOCK IS NOT  INSURED BY ANY  GOVERNMENTAL  AGENCY  AND,  THEREFORE,
INVESTMENT IN THEM INVOLVES RISK.

         Our  securities  are not deposit  accounts or other  obligation  of any
bank, and are not insured by the FDIC, or any other governmental agency, and are
subject to investment risk, including the possible loss of principal.


ITEM 1B.  UNRESOLVED STAFF COMMENTS.

         Not Applicable


ITEM 2. PROPERTIES.

         The following are Berkshire's and the Bank's principal facilities as of
March 21, 2008:

<TABLE>
<CAPTION>
                                           Approximate  Approximate
                                           Floor Area   Annual        Lease
Location              Operations           (Sq. Ft.)    Rent          Expiration
------------          -----------------    ---------    ----------    ----------
<S>                   <C>                    <C>        <C>           <C>
New York, NY          Executive Offices      1,500      $  18,000     (1)(3)
New York, NY          Main Bank Office
                       and Bank Branch       9,729      Owned         March 2013
Brooklyn, NY          Bank Branch            4,500      $ 200,418     March 2013
Brooklyn, NY          Bank Branch            2,866      $  59,130     March 2013
Brooklyn, NY          Bank Branch            2,592      $ 108,212     December 2012
Brooklyn, NY          Bank Branch            1,640      $  72,000     June 2015
New York, NY          Bank Branch            9,924      $ 353,315     June 2010 (2)(3)
New York, NY          Bank Branch            3,300      $  60,000     November 2016 (2)(3)
Goshen, NY            Bank Branch           10,680      Owned
Harriman, NY          Bank Branch            1,623      Owned
Bloomingburg, NY      Bank Branch            1,530      $  20,871     August 2010
Ridgefield, NJ        Bank Branch            6,120      Owned
</TABLE>
---------------
(1)      Rented on a month to month  basis  from a company  affiliated  with Mr.
         Moses Marx, a director of the Company.
(2)      Leased  from a company  affiliated  with Mr.  Marx,  a director  of the
         Company.
(3)      Management  believes the annual rent paid is  comparable  to the annual
         rent  that  would  be  paid  to  non-affiliated  parties  in a  similar
         commercial transaction for similar commercial space.

ITEM 3. LEGAL PROCEEDINGS.

         In the ordinary  course of  operations,  the Bank is a party to routine
litigation  involving  claims  incidental  to its banking  business.  Management
believes that no current  litigation,  threatened or pending, to which we or our
assets are a party, poses a substantial likelihood of potential loss or exposure
which would have a material adverse effect on the financial condition or results
of our operations.

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

Not Applicable.

                                       12
<PAGE>

                                     PART II

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

         The Company's Common Stock trades on the Nasdaq Global Market under the
symbol BERK. The following table sets forth, for the periods indicated, the high
and low sales prices for the Company's Common Stock as reported by NASDAQ.

FISCAL YEAR ENDED DECEMBER 31, 2007              HIGH       LOW
-----------------------------------             ------     ------
January 1, 2007 to March 31, 2007                16.60      15.54
April 1, 2007 to June 30, 2007                   16.34      14.90
July 1, 2007 to September 30, 2007               18.23      14.86
October 1, 2007 to December 31, 2007             16.49      14.89

FISCAL YEAR ENDED DECEMBER 31, 2006              HIGH       LOW
-----------------------------------             ------     ------
January 1, 2006 to March 31, 2006                17.35      14.82
April 1, 2006 to June 30, 2006                   17.23      15.18
July 1, 2006 to September 30, 2006               17.00      15.31
October 1, 2006 to December 31, 2006             17.12      15.14

         As of the close of business on March 20, 2008, there were 1,035 holders
of record of the Company's Common Stock.

DIVIDENDS

         For the fiscal  years  ended  December  31,  2007,  2006 and 2005,  the
Company has been deemed to be a PHC, as defined in the Internal Revenue Code. As
a PHC, we may be required to pay an additional income tax or issue a dividend to
our  shareholders  in an amount  based upon  applicable  Internal  Revenue  Code
formulas,  which is  primarily  based  upon net  income.  No such  dividend  was
required to be paid in fiscal 2007, 2006 and 2005.

         On March 23, 1999,  the Board of  Directors  adopted a policy of paying
regular cash dividends in respect of the Common Stock of the Company, payable in
equal semi-annual installments.  Pursuant to said policy, the Board of Directors
declared and the Company paid cash dividends as follows:

                                                                PER SHARE
DECLARATION DATE     RECORD DATE           PAYMENT DATE           AMOUNT
-------------------  ------------------    -----------------   ------------

March 21, 2005       April 22, 2005        April 29, 2005              $.07

October 7, 2005      October 21, 2005      October 28, 2005            $.08

March 9, 2006        April 18, 2006        April 27, 2006              $.08

October 10, 2006     October 20, 2006      October 27, 2006            $.08

April 2, 2007        April 18, 2007        April 26, 2007              $.09

October 3, 2007      October 18, 2007      October 25, 2007            $.09

         The declaration, payment and amount of such dividends in the future are
within  the  discretion  of the  Board of  Directors  and will  depend  upon our
earnings, capital requirements, financial condition and other relevant factors.

         On May 15,  2003,  The  Company's  Board of  Directors  authorized  the
purchase of up to an additional  450,000  shares of its Common Stock in the open
market, from time to time, depending upon prevailing market conditions,  thereby
increasing  the maximum  number of shares  which may be purchased by the Company
from 1,950,000 shares of Common Stock to 2,400,000 shares of Common Stock. Since
1990 through  December 31, 2006,  the Company has purchased a total of 1,898,909
shares of its Common  Stock.  During  fiscal year 2007 we did not  purchase  any
shares, and at December 31, 2007 there were 501,091 shares of Common Stock which
may yet be purchased under our stock repurchase plan.

EQUITY COMPENSATION PLANS

See  Part  III,  Item  12  for  information   concerning  the  Company's  equity
compensation plans.

                                       13
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

Not Applicable

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

         The following  discussion  and analysis is intended to provide a better
understanding of the consolidated  financial condition and results of operations
of Berkshire  Bancorp Inc. and  subsidiaries for the fiscal years ended December
31, 2007,  2006 and 2005.  All  references to earnings per share,  unless stated
otherwise, refer to earnings per diluted share. The discussion should be read in
conjunction with the consolidated  financial statements and related notes (Notes
located in Item 8 herein).  Reference  is also made to Part I, Item 1 "Business"
herein.

SEGMENTS

         Management  has  determined  that the Company  through its wholly owned
bank subsidiary,  the Bank, operates in one business segment, community banking.
The Bank's principal  business activity consists of gathering  deposits from the
general  public and  investing  those  deposits in  residential  and  commercial
mortgage loans and commercial  non-mortgage loans, both unsecured and secured by
personal  property.  In  addition,  the  Bank  invests  those  deposits  in debt
obligations issued by the U.S. Government,  its agencies,  business corporations
and mortgage-backed securities.

GENERAL

TRUST PREFERRED SECURITIES. As of May 18 2004, the Company established BCTI. The
Company  owns all the common  capital  securities  of BCTI.  BCTI  issued  $15.0
million of preferred  capital  securities to investors in a private  transaction
and invested the  proceeds,  combined  with the proceeds from the sale of BCTI's
common  capital  securities,  in the  Company  through  the  purchase of $15.464
million  aggregate  principal  amount of the Floating  Rate Junior  Subordinated
Debentures issued by the Company. The 2004 Debentures,  the sole assets of BCTI,
mature on July 23, 2034 and bear interest at a floating rate,  three month LIBOR
plus 2.70%, currently 7.85%.

         On April 1, 2005, the Company  established  BCTII. The Company owns all
the common capital  securities of BCTII.  BCTII issued $7.0 million of preferred
capital  securities  to  investors  in a private  transaction  and  invested the
proceeds,  combined  with the proceeds from the sale of BCTII's  common  capital
securities,  in the Company  through the  purchase of $7.217  million  aggregate
principal  amount  of the  2005  Debentures  issued  by the  Company.  The  2005
Debentures,  the sole assets of BCTII,  mature on May 23, 2035 and bear interest
at a floating rate, three month LIBOR plus 1.95%, currently 6.96%. See Note A of
Notes to  Consolidated  Financial  Statements for a further  discussion of Trust
Preferred Securities.

BRANCH PURCHASE

         In September  2005, the Bank entered into an Agreement with Oritani,  a
New Jersey Chartered  Savings Bank.  Pursuant to the Agreement,  which closed on
May 12, 2006, the Bank (i) assumed certain  commercial  checking account deposit
liabilities  and (ii)  purchased  certain  fixed assets and the real property of
this Oritani bank branch located in  Ridgefield,  New Jersey for a cash purchase
price of $850,000.  Following the closing of the transaction,  the Bank opened a
branch of The Berkshire Bank at the Ridgefield, New Jersey location.

NEW SUBSIDIARY

         In August 2005, the Bank formed  Berkshire 1031, a wholly owned limited
liability  company.  Berkshire  1031  will act as a  qualified  intermediary  in
connection  with tax free exchanges  under Section 1031 of the Internal  Revenue
Code of 1986, as amended. A qualified  intermediary is an individual or business
entity that assists  owners of property who wish to exchange  their property for
property of a "like-kind" in a transaction that is tax free in whole or part for
federal  (and in some cases  state)  income tax  purposes.  In  accordance  with
detailed procedures set forth in federal income tax regulations,  Berkshire 1031

                                       14
<PAGE>

will assist the owner in the sale of the owner's  property  and the  purchase of
replacement property so that the transaction qualifies as a non-taxable exchange
of property.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

         The  accounting  and  reporting  policies of the Company  conform  with
accounting  principles  generally  accepted in the United  States of America and
general  practices within the financial  services  industry.  The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America  requires  management to make  estimates and the
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.

         The Company  considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than any of its other
significant  accounting  policies.  The  allowance for loan losses is calculated
with the objective of  maintaining a reserve level  believed by management to be
sufficient to absorb estimated credit losses.  Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires  material  estimates,  including,  among  others,  expected  default
probabilities,  loss given  default,  the amounts and timing of expected  future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience.  The process also considers  economic  conditions,  uncertainties in
estimating losses and inherent risks in the loan portfolio. All of these factors
may be susceptible to significant  change.  To the extent actual outcomes differ
from management estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.

         With the  adoption  of  Statement  of  Financial  Accounting  Standards
("SFAS") No. 142 ("SFAS No. 142") on January 1, 2002,  the Company  discontinued
the  amortization  of  goodwill  resulting  from  acquisitions.  Goodwill is now
subject to impairment testing at least annually to determine whether write-downs
of the recorded  balances are necessary.  The Company tests for impairment based
on the  goodwill  maintained  at the Bank. A fair value is  determined  for each
reporting  unit  based  on at  least  one  of  three  various  market  valuation
methodologies.  If the fair  values of the  reporting  units  exceed  their book
values,  no write-down of recorded  goodwill is necessary.  If the fair value of
the reporting unit is less, an expense may be required on the Company's books to
write down the related goodwill to the proper carrying value. As of December 31,
2007,  the  Company  completed  its annual  testing,  which  determined  that no
impairment charge was necessary.

         The Company  recognizes  deferred  tax assets and  liabilities  for the
future tax effects of temporary  differences,  net operating loss  carryforwards
and tax credits.  Deferred tax assets are subject to management's judgment based
upon  available  evidence  that future  realization  is more likely than not. If
management  determines  that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the  recorded  value of the net  deferred tax asset to the
expected realizable amount.











                                       15
<PAGE>

DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

         FISCAL  YEAR ENDED  DECEMBER  31,  2007  COMPARED  TO FISCAL YEAR ENDED
DECEMBER 31, 2006. Net income was $5.35 million,  or $.76 per diluted share, for
the fiscal year ended December 31, 2007,  compared to $4.88 million, or $.70 per
diluted share,  for the fiscal year ended December 31, 2006. Net loans and total
assets  increased by  approximately  17% and 18%,  respectively,  and investment
securities  increased by approximately  16%.  Stockholders'  equity increased by
approximately  7% to $124.26  million  in fiscal  2007 from  $115.78  million in
fiscal 2006.


                                      FISCAL YEAR ENDED DECEMBER 31,
                          ------------------------------------------------------
                             2007                       2006              %
                                                                      INC/(DEC)
                            (In millions, except per share data and percentages)
TOTAL ASSETS                     $1,120.5               $948.7              18%
Loans, net                          430.6                367.2              17%
Investment Securities               599.4                515.2              16%
TOTAL LIABILITIES                   996.3                832.9              20%
Deposits                            853.2                681.5              25%
Borrowings                          131.1                138.1             (5)%
STOCKHOLDERS' EQUITY                124.3                115.8               7%

TOTAL INCOME                         60.2                 51.9              16%
Interest Income                      58.5                 48.2              21%
TOTAL EXPENSE                        52.1                 42.8              22%
Interest Expense                     37.8                 29.2              29%
Net Interest Income                  20.7                 19.0               9%
NET INCOME                            5.4                  4.9              10%
Diluted Income Per Share               .76                  .70              9%
BANK BRANCHES                        12                   11                  -









                                       16
<PAGE>

         FISCAL  YEAR ENDED  DECEMBER  31,  2006  COMPARED  TO FISCAL YEAR ENDED
DECEMBER 31, 2005. Net income was $4.88 million,  or $.70 per diluted share, for
the fiscal year ended December 31, 2006,  compared to $5.54 million, or $.80 per
diluted share,  for the fiscal year ended December 31, 2005. Net loans increased
by  approximately  20%.  Investment  securities  and total  assets  decreased by
approximately 14% and 3%, respectively.


                                      FISCAL YEAR ENDED DECEMBER 31,
                          ------------------------------------------------------
                             2006                       2005              %
                                                                      INC/(DEC)
                            (In millions, except per share data and percentages)
TOTAL ASSETS                        $948.7               $977.7             (3)%
Loans, net                           367.2                305.9              20%
Investment Securities                515.2                600.0            (14)%
TOTAL LIABILITIES                    832.9                868.7             (4)%
Deposits                             681.5                680.3               0%
Borrowings                           138.1                178.9            (23)%
STOCKHOLDERS' EQUITY                 115.8                109.0               6%

TOTAL INCOME                          51.9                 46.3              12%
Interest Income                       48.2                 45.1               7%
TOTAL EXPENSE                         42.8                 35.5              21%
Interest Expense                      29.2                 22.4              30%
Net Interest Income                   19.0                 22.7            (16)%
NET INCOME                             4.9                  5.5            (11)%
Diluted Income Per Share                .70                  .80           (13)%
BANK BRANCHES                         11                   10                  -


NET INTEREST INCOME

         Net interest income,  represents the difference  between total interest
income   earned  on  earning   assets  and  total   interest   expense  paid  on
interest-bearing  liabilities.  The amount of interest  income is dependent upon
many  factors  including:  (i) the amount of  interest-earning  assets  that the
Company can maintain based upon its funding  sources;  (ii) the relative amounts
of interest-earning  assets versus interest-bearing  liabilities;  and (iii) the
difference between the yields earned on those assets and the rates paid on those
liabilities.  Non-performing  loans adversely affect net interest income because
they  must  still be  funded by  interest-bearing  liabilities,  but they do not
provide  interest  income.  Furthermore,  when we  designate  an  asset  as non-
performing,  all interest  which has been  accrued but not actually  received is
deducted from current period income, further reducing net interest income.








                                       17
<PAGE>




The Company's  average balances,  interest,  and average yields are set forth on
the following table (in thousands, except percentages):

<TABLE>
<CAPTION>
                                                  TWELVE MONTHS ENDED                        TWELVE MONTHS ENDED
                                                   DECEMBER 31, 2007                          DECEMBER 31, 2006
                                        ----------------------------------------   ----------------------------------------

                                                      INTEREST                                   INTEREST
                                        AVERAGE         AND          AVERAGE       AVERAGE         AND           AVERAGE
                                        BALANCE       DIVIDENDS     YIELD/RATE     BALANCE       DIVIDENDS     YIELD/RATE
                                        -------       ---------     ----------     -------       ---------     ----------
<S>   <C>                               <C>           <C>                 <C>      <C>           <C>                 <C>
INTEREST-EARNING ASSETS:
Loans (1)                               $  389,520    $ 29,804             7.65%   $ 327,210     $ 23,844             7.29%
Investment securities                      558,742      27,178             4.86      550,443       24,027             4.37
Other (2)(5)                                31,678       1,553             4.90        8,509          350             4.11
                                        ----------    --------             ----    ---------     --------             ----
Total interest-earning assets              979,940      58,535             5.97      886,162       48,221             5.44
Noninterest-earning assets                  46,070                         ----       46,882                          ----
                                        ----------                                 ---------
Total Assets                            $1,026,010                                 $ 933,044
                                        ==========                                 =========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits                  291,049      10,338             3.55      206,745        5,283             2.56
Time deposits                              449,754      21,745             4.83      410,729       17,276             4.21
Other borrowings                           103,112       5,710             5.54      144,722        6,627             4.58
                                        ----------    --------             ----    ---------     --------             ----
Total interest-bearing
 liabilities                               843,915      37,793             4.48      762,196       29,186             3.83
                                                      --------             ----                  --------             ----

Demand deposits                             50,647                                    47,890
Noninterest-bearing liabilities             12,285                                     9,731
Stockholders' equity (5)                   119,163                                   113,227
                                        ----------                                 ---------

Total liabilities and
 stockholders' equity                   $1,026,010                                 $ 933,044
                                        ==========                                 =========

Net interest income                                   $ 20,742                                   $ 19,035
                                                      ========                                   ========

Interest-rate spread (3)                                                  1.49%                                      1.61%
                                                                          ====                                       ====

Net interest margin (4)                                                   2.12%                                      2.15%
                                                                          ====                                       ====

Ratio of average interest-earning
assets to average interest bearing
liabilities                                   1.16                                      1.16
                                        ==========                                 =========
</TABLE>


                                                  DECEMBER 31, 2005
                                        ---------------------------------------

                                                      INTEREST
                                        AVERAGE         AND         AVERAGE
                                        BALANCE       DIVIDENDS    YIELD/RATE
                                        -------       ---------    ----------
INTEREST-EARNING ASSETS:
Loans (1)                               $ 287,178     $ 19,399           6.76%
Investment securities                     648,829       25,355           3.91
Other (2)(5)                               10,765          302           2.81
                                        ---------     --------           ----
Total interest-earning assets             946,772       45,056           4.76
Noninterest-earning assets                 44,497                        ----
                                        ---------
Total Assets                            $ 991,269
                                        =========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits                 264,130        4,639            1.76
Time deposits                             338,834        9,552            2.82
Other borrowings                          225,657        8,208            3.64
                                        ---------     --------            ----
Total interest-bearing
 liabilities                              828,621       22,399            2.70
                                                      --------            ----

Demand deposits                            44,739
Noninterest-bearing liabilities             8,310
Stockholders' equity (5)                  109,599
                                        ---------

Total liabilities and
 stockholders' equity                   $ 991,269
                                        =========

Net interest income                                   $ 22,657
                                                      ========

Interest-rate spread (3)                                                 2.06%
                                                                         ====

Net interest margin (4)                                                  2.39%
                                                                         ====

Ratio of average interest-earning
assets to average interest bearing
liabilities                                  1.14
                                        =========


----------------------
(1)      Includes nonaccrual loans.
(2)      Includes interest-bearing  deposits,  federal funds sold and securities
         purchased under agreements to resell.
(3)      Interest-rate  spread  represents  the  difference  between the average
         yield on  interest-earning  assets  and the  average  cost of  interest
         bearing liabilities.
(4)      Net interest  margin is net interest  income as a percentage of average
         interest-earning assets.
(5)      Average  balances for  Berkshire  Bancorp Inc.  (parent only) have been
         calculated on a monthly basis.

                                       18
<PAGE>

         Changes in net interest  income may also be analyzed by segregating the
volume  and rate  components  of  interest  income  and  interest  expense.  The
following  tables set forth certain  information  regarding  changes in interest
income and  interest  expense of the Company for the years  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information is provided on changes  attributable  to (1) changes in rate (change
in rate  multiplied by prior volume),  (2) changes in volume  (changes in volume
multiplied  by prior  rate)  and (3)  changes  in  rate-volume  (change  in rate
multiplied by change in volume) (in thousands):


                                 TWELVE MONTHS ENDED DECEMBER 31, 2007
                                                 VERSUS
                                 TWELVE MONTHS ENDED DECEMBER 31, 2006
                                        INCREASE (DECREASE) DUE TO
                              --------------------------------------------------

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

Interest-earning assets:
 Loans                               $ 1,228           $ 4,732          $ 5,960
 Investment securities                 2,777               374            3,151
 Other                                    79             1,124            1,203
                                     -------           -------          -------
Total                                  4,084             6,230           10,314
                                     -------           -------          -------

Interest-bearing
 liabilities:
Deposit accounts:
 Interest bearing deposits             2,461             2,594            5,055
 Time deposits                         2,717             1,752            4,469
 Other borrowings                      1,220            (2,137)            (917)
                                     -------           -------          -------
Total                                  6,398             2,209            8,607
                                     -------           -------          -------

Net interest income                  $(2,314)          $ 4,021          $ 1,707
                                     =======           =======          =======




                                 TWELVE MONTHS ENDED DECEMBER 31, 2006
                                                 VERSUS
                                 TWELVE MONTHS ENDED DECEMBER 31, 2005
                                        INCREASE (DECREASE) DUE TO
                              --------------------------------------------------

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

Interest-earning assets:
 Loans                               $ 1,600           $ 2,845          $ 4,445
 Investment securities                 2,723            (4,051)          (1,328)
 Other                                   120               (72)              48
                                     -------           -------          -------
Total                                  4,443            (1,278)           3,165
                                     -------           -------          -------

Interest-bearing
 liabilities:
Deposit accounts:
 Interest bearing deposits             1,802            (1,158)             644
 Time deposits                         5,400             2,324            7,724
 Other borrowings                      1,805            (3,386)          (1,581)
                                     -------           -------          -------
Total                                  9,007            (2,220)           6,787
                                     -------           -------          -------

Net interest income                  $(4,564)          $   942          $(3,622)
                                     =======           =======          =======

                                       19
<PAGE>

PROVISION FOR LOAN LOSSES.

         The  allowance  for loan  losses  is the  estimated  amount  considered
necessary to cover credit losses  inherent in the loan  portfolio at the balance
sheet date. The allowance is  established  through the provision for loan losses
that is charged  against  income.  In determining the allowance for loan losses,
management  makes  significant   estimates  and  therefore  has  identified  the
allowance as a critical  accounting  policy. The methodology for determining the
allowance  for loan  losses  is  considered  a  critical  accounting  policy  by
management due to the high degree of judgment involved,  the subjectivity of the
assumptions utilized,  and the potential for changes in the economic environment
that could  result in changes to the amount of the recorded  allowance  for loan
losses.

          The allowance for loan losses has been  determined in accordance  with
accounting  principles  generally  accepted  in the  United  States of  America,
principally   Statement  of  Financial   Accounting  Standard  ("SFAS")  No.  5,
"Accounting for  Contingencies"  and SFAS No. 114,  "Accounting by Creditors for
Impairment of a Loan, an amendment to FASB Statements No. 5 and 15," as amended.
Under the above accounting principles,  we are required to maintain an allowance
for probable losses at the balance sheet date. We are responsible for the timely
and periodic  determination of the amount of the allowance required.  Management
believes that the  allowance  for loan losses is adequate to cover  specifically
identifiable  losses,  as well as estimated losses inherent in our portfolio for
which certain losses are probable but not specifically identifiable.

         Management  performs a  quarterly  evaluation  of the  adequacy  of the
allowance for loan losses. The analysis of the allowance for loan losses has two
components: specific and general allocations.  Specific allocations are made for
loans  determined  to be impaired.  Impairment  is measured by  determining  the
present  value of expected  future cash flows or, as a practical  expedient  for
collateral-dependent loans, the fair value of the collateral adjusted for market
conditions  and  selling   expenses.   The  Bank  considers  its  investment  in
one-to-four  family real estate loans and consumer  loans to be smaller  balance
homogeneous  loans and  therefore  excluded  from  separate  identification  for
evaluation  of  impairment.  These  homogeneous  loan groups are  evaluated  for
impairment   on  a  collective   basis  under  SFAS  No.  5,   "Accounting   for
Contingencies".

         The general allocation is determined by segregating the remaining loans
by type of loan, risk weighting (if applicable) and payment history.  Management
also analyzes historical loss experience,  delinquency trends,  general economic
conditions,  geographic concentrations,  and industry and peer comparisons. This
analysis  establishes factors that are applied to the loan segments to determine
the amount of the general allocations.  This evaluation is inherently subjective
as it  requires  material  estimates  that  may be  susceptible  to  significant
revisions  based upon  changes in economic  and real estate  market  conditions.
Actual loan losses may be significantly  more than the allowance for loan losses
management has  established  which could have a material  negative effect on the
Company's financial results.

         On a  quarterly  basis,  the Bank's  management  committee  reviews the
current  status of various  loan assets in order to evaluate the adequacy of the
allowance  for loan  losses.  In this  evaluation  process,  specific  loans are
analyzed to determine their  potential risk of loss.  This process  includes all
loans,  concentrating on non-accrual and classified  loans.  Each non-accrual or
classified loan is evaluated for potential loss exposure.  Any shortfall results
in a  recommendation  of a  specific  allowance  if the  likelihood  of  loss is
evaluated as probable.  To determine  the adequacy of collateral on a particular
loan,  an estimate of the fair market  value of the  collateral  is based on the
most current appraised value available.  This appraised value is then reduced to
reflect estimated liquidation expenses.

         The Company's  primary  lending  emphasis has been the  origination  of
commercial and residential mortgages and commercial and consumer loans and lines
of credit.  The bank also  originates home equity loans and home equity lines of
credit.  These  activities  resulted in a loan  concentration  in commercial and
residential  mortgages.  As a  substantial  amount  of  our  loan  portfolio  is
collateralized  by real estate,  appraisals of the underlying  value of property
securing loans are critical in determining the amount of the allowance  required

                                       20
<PAGE>

for specific  loans.  Assumptions for appraisal  valuations are  instrumental in
determining the value of properties.  Overly optimistic  assumptions or negative
changes to assumptions  could  significantly  impact the valuation of a property
securing a loan and the related allowance determined. The assumptions supporting
such  appraisals  are carefully  reviewed by  management  to determine  that the
resulting  values  reasonably  reflect amounts  realizable on the related loans.
Based on the composition of our loan portfolio,  management believes the primary
risks are increases in interest rates, a decline in the economy,  generally, and
a decline in real estate market values in the New York  metropolitan  area.  Any
one or  combination  of these  events may  adversely  affect our loan  portfolio
resulting in increased delinquencies, loan losses and future levels of loan loss
provisions.  Management  believes  the  allowance  for loan losses  reflects the
inherent credit risk in our portfolio, the level of our non-performing loans and
our charge-off experience.

         Although  management  believes that we have  established and maintained
the allowance for loan losses at adequate levels,  additions may be necessary if
future  economic  and other  conditions  differ  substantially  from the current
operating environment.  Although management uses the best information available,
the level of the allowance  for loan losses  remains an estimate that is subject
to significant judgment and short-term change. In addition,  the Federal Deposit
Insurance Corporation,  New York State Banking Department,  and other regulatory
bodies,  as an integral part of their  examination  process,  will  periodically
review our allowance for loan losses.  Such agencies may require us to recognize
adjustments to the allowance based on its judgments about information  available
to them at the time of their examination.

         For the fiscal years ended  December 31, 2007 and 2006, we  charged-off
loans of zero and  $42,000,  respectively,  and  recovered  loans of $56,000 and
$137,000,  respectively.  All  amounts  recovered  in fiscal  2007 and 2006 were
returned to the allowance for loan losses.










                                       21
<PAGE>

RESULTS OF  OPERATIONS  FISCAL YEAR ENDED  DECEMBER 31, 2007  COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 2006.

GENERAL.  References to per share amounts below, unless stated otherwise,  refer
to diluted shares.

NET  INCOME.  Net income for the fiscal year ended  December  31, 2007 was $5.35
million, or $.76 per share, as compared to $4.88 million, or $.70 per share, for
the fiscal year ended December 31, 2006.

         The Company's net income is largely  dependent on interest rate levels,
the  demand for the  Company's  loan and  deposit  products  and the  strategies
employed to manage the  interest  rate and other  risks  inherent in the banking
business. The difference between the yield on short-term,  3 month U.S. Treasury
Notes,  and long-term,  10 year U.S.  Treasury  Bonds,  referred to as the yield
curve is at  historic  lows.  Inflation  fighting  actions  taken by the Federal
Reserve Board during 2007 have moved  short-term  rates up while long-term rates
have remained  relatively  flat. The Company's rising cost of funds in 2007, the
rates paid on deposits  and  borrowings,  has not been matched by the ability to
safely increase the yields on interest-earning assets.

NET INTEREST  INCOME.  The Company's  primary  source of revenue is net interest
income,  or the difference  between  interest income on earning assets,  such as
loans and  investment  securities,  and  interest  expense  on  interest-bearing
liabilities such as deposits and borrowings.

         For the fiscal  year ended  December  31,  2007,  net  interest  income
increased by  approximately  $1.70 million to $20.74 million from $19.04 million
for the fiscal year ended  December 31, 2006. The year over year increase in net
interest  income was the result of the $93.78  million  increase  in the average
amount of total  interest-earning  assets,  including $62.31 million increase in
the  average  amount  of  higher   yielding  loans  as  a  percentage  of  total
interest-earning  assets,  the 53 basis point  increase  in the  average  yields
earned on total  interest-earning  assets and the $41.61 million decrease in the
average amount of borrowed funds during fiscal 2007 compared to 2006.  Partially
offsetting  these factors was the $123.60 million  increase in  interest-bearing
and time deposits,  and the 65 basis point increase in the average rates paid on
the average  amount of total  interest-bearing  liabilities  during  fiscal 2007
compared to fiscal 2006.

         The Company's  interest-rate spread, the difference between the average
yield  on  interest-earning  assets  and the  average  cost of  interest-bearing
liabilities,  narrowed by 12 basis points to 1.49% during fiscal 2007 from 1.61%
during fiscal 2006.

NET INTEREST  MARGIN.  Net interest  margin  declined by 3 basis points to 2.12%
during  fiscal 2007 from 2.15% during  fiscal 2006. We seek to secure and retain
customer deposits with competitive products and rates, and to make strategic use
of the prevailing  interest rate  environment to borrow funds at what we believe
to be attractive  rates. We invest such deposits and borrowed funds in a prudent
mix  of  fixed  rate  and  adjustable  rate  loans,  investment  securities  and
short-term  interest-earning assets which provided an aggregate average yield of
5.97% and 5.44% in fiscal 2007 and 2006, respectively. The small decrease in net
interest  margin is  primarily  due to the  substantial  increase in the average
amount of total  interest-earning  assets during the fiscal year ended  December
31, 2007.

         The  average  amount of loans  increased  by $62.31  million to $389.52
million  during fiscal 2007 from $327.21  million  during  fiscal 2006,  and the
average yield on such loans increased by 36 basis points to 7.65% in fiscal 2007
from 7.29% in fiscal 2006. The average amount of investment securities increased
by $8.30  million to  $558.74  million in fiscal  2007 from  $550.44  million in
fiscal 2006.  The average  yield on investment  securities  improved by 49 basis
points,  to  4.86% in 2007  from  4.37% in 2006.  The  average  amount  of other
interest-earning assets, primarily cash and short-term investments, increased by
$23.16 million to $31.68 million in 2007 from $8.52 million in 2006 and returned
an average  yield of 4.90% and 4.11% during the fiscal years ended  December 31,
2007 and 2006, respectively.

                                       22
<PAGE>

INTEREST  INCOME.  Total interest  income for the fiscal year ended December 31,
2007  increased  by $10.32  million,  or 21.42%,  to $58.54  million from $48.22
million for the fiscal year ended  December 31,  2006.  The increase in interest
income in fiscal 2007 was  primarily  due to the increase in the average  yields
earned on  interest-earning  assets and the  increase in the  average  amount of
total  interest-earning  assets.  Loans  contributed  $29.80 million of interest
income in fiscal 2007, an increase of $5.96  million from the $23.84  million of
interest income contributed in fiscal 2006.  Investment  securities  contributed
$27.18  million of interest  income in fiscal 2007, a increase of $3.15  million
from the $24.03 million of interest income earned on securities in fiscal 2006.


                                FISCAL 2007                  FISCAL 2006
                         ---------------------------  --------------------------
                           INTEREST       % OF           INTEREST      % OF
                            INCOME        TOTAL           INCOME       TOTAL
                                     (In thousands, except percentages)
Loans                       $29,804       50.92%          $23,844      49.45%
Investment Securities        27,178       46.43            24,027      49.82
Other                         1,553        2.65               350       0.73
                            -------      ------           -------     ------
Total Interest Income       $58,535      100.00%          $48,221     100.00%


         Loans, which are inherently risky and therefore command a higher return
than our conservative portfolio of investment securities,  grew to 39.75% of our
total average interest-earning assets in fiscal 2007 from 36.92% in fiscal 2006.
While we actively seek to originate new loans with qualified  borrowers who meet
the Bank's underwriting  standards,  our long-term strategy has been to maintain
those standards,  sacrificing some current income to avoid possible large future
losses in the loan portfolio.

                                     FISCAL 2007                FISCAL 2006
                               -----------------------     ---------------------
                                 AVERAGE      % OF           AVERAGE      % OF
                                  AMOUNT      TOTAL           AMOUNT      TOTAL
                                         (In thousands, except percentages)
Loans                            $389,520     39.75%         $327,210     36.92%
Investment Securities             558,742     57.02           550,443     62.12
Other                              31,678      3.23             8,509       .96
                                 --------    ------          --------    ------
Total Interest-Earning Assets    $979,940    100.00%         $886,162    100.00%


INTEREST EXPENSE.  Total interest expense for the fiscal year ended December 31,
2007  increased  by $8.60  million,  or 29.46%,  to $37.79  million  from $29.19
million for the fiscal year ended  December 31,  2006.  The increase in interest
expense was  primarily  due to the  increase  in the  average  rate paid on such
liabilities,  4.48% and 3.83% in fiscal years 2007 and 2006,  respectively,  and
the $81.72  million  increase  in the average  amount of total  interest-bearing
liabilities during fiscal year 2007.  Partially offsetting these factors was the
$41.61 million  decrease in the average amount of other  borrowings  which carry
the highest  average rate of all  interest-bearing  liabilities.  As  short-term
rates moved higher during  fiscal year 2007,  interest  expense  increased as we
priced our deposit  products to meet the  competition  and the adjustable  rates
paid on other borrowings  increased as well. In April 2005 and May 2004, we sold
$7.22  million  and  $15.46  million,  respectively,  of  floating  rate  junior
subordinated  debentures  which mature in 2035 and 2034,  respectively.  The net
proceeds of said sales were used to augment  the Bank's  capital.  The  interest
expense on these debentures,  which is included in other  borrowings,  was $1.83
million and $1.77 million during fiscal 2007 and 2006, respectively.

                                FISCAL 2007                  FISCAL 2006
                         ---------------------------  --------------------------
                           INTEREST       % OF           INTEREST      % OF
                           EXPENSE        TOTAL          EXPENSE       TOTAL
                                     (In thousands, except percentages)
Interest-Bearing Deposits   $ 10,338      27.35%          $ 5,283      18.10%
Time Deposits                 21,745      57.54            17,276      59.19
Other Borrowings               5,710      15.11             6,627      22.71
                            --------     ------          --------     ------
Total Interest Expense      $ 37,793     100.00%          $29,186     100.00%

                                       23
<PAGE>

                                         FISCAL 2007            FISCAL 2006
                                   ----------------------  ---------------------
                                     AVERAGE      % OF       AVERAGE      % OF
                                      AMOUNT      TOTAL       AMOUNT      TOTAL
                                           (In thousands, except percentages)
Interest-Bearing Deposits            $291,049     34.49%     $206,745     27.12%
Time Deposits                         449,754     53.29       410,729     53.89
Other Borrowings                      103,112     12.22       144,722     18.99
                                     --------    ------      --------    ------
Total Interest-Bearing Liabilities   $843,915    100.00%     $762,196    100.00%


NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the fiscal year ended
December 31, 2007, total non-interest income decreased by $2.03 million to $1.66
million from $3.69 million for the fiscal year ended December 31, 2006. In 2006,
we  recorded  gains of $2.34  million  on the sales and  issuer  redemptions  of
investment securities.  In 2007, such gains amounted to $86,000. Service charges
on deposit accounts increased by $70,000 and other income increased by $146,000.

                                  FISCAL 2007             FISCAL 2006
                            ----------------------  ------------------------
                             NON-INTEREST   % OF    NON-INTEREST    % OF
                                INCOME      TOTAL      INCOME       TOTAL
                                    (In thousands, except percentages)
Service Charges on Deposits    $  658      39.66%       $  588     15.92%
Investment Securities gains        86       5.18         2,336     63.26
Other                             915      55.16           769     20.82
                               ------     ------        ------    ------
Total Non-Interest Income      $1,659     100.00%       $3,693    100.00%


NON-INTEREST  EXPENSE.  Non-interest  expense  includes  salaries  and  employee
benefits,  occupancy and equipment  expenses,  legal and  professional  fees and
other  operating  expenses  associated  with the  day-to-day  operations  of the
Company.  Total  non-interest  expense  for the year  ended  December  31,  2007
increased by  approximately  $740,000,  or 5.45%,  to $14.32 million from $13.58
million  for the  year  ended  December  31,  2006.  The  largest  component  of
non-interest  expense are  salaries  and employee  benefits  which  increased by
$490,000 to $8.97 million in fiscal 2007 from $8.48 million in fiscal 2006.  The
increase is primarily  due to the addition of personnel in our internal  control
and compliance departments.


                                  FISCAL 2007             FISCAL 2006
                            ----------------------  ------------------------
                             NON-INTEREST   % OF    NON-INTEREST    % OF
                               EXPENSE      TOTAL     EXPENSE       TOTAL
                                    (In thousands, except percentages)
Salaries and Employee Benefits  $ 8,971     62.66%     $ 8,481     62.44%
Net Occupancy Expense             2,050     14.32        1,961     14.44
Equipment Expense                    80      0.56          108      0.80
FDIC Assessment                      86      0.60           85      0.63
Data Processing Expense             417      2.91          366      2.69
Other                             2,714     18.95        2,581     19.00
                                -------    ------      -------    ------
Total Non-Interest Expense      $14,318    100.00%     $13,582    100.00%


PROVISION FOR INCOME TAX.  During the years ended December 31, 2007 and 2006, we
recorded  income tax expense of $2.37 million and $3.86  million,  respectively.
The tax provisions for federal, state and local taxes recorded for 2007 and 2006
represent effective tax rates of 30.72% and 44.14%, respectively. The decline in
the  effective  tax rate in 2007 compared to 2006 is primarily due to the Bank's
investment  in certain  securities  which carry a larger tax benefit  because of
their dividend payments.

                                       24
<PAGE>

RESULTS OF  OPERATIONS  FISCAL YEAR ENDED  DECEMBER 31, 2006  COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 2005.

GENERAL.  References to per share amounts below, unless stated otherwise,  refer
to diluted shares.

NET  INCOME.  Net income for the fiscal year ended  December  31, 2006 was $4.88
million, or $.70 per share, as compared to $5.54 million, or $.80 per share, for
the fiscal year ended December 31, 2005.

         The Company's net income is largely  dependent on interest rate levels,
the  demand for the  Company's  loan and  deposit  products  and the  strategies
employed to manage the  interest  rate and other  risks  inherent in the banking
business. The difference between the yield on short-term,  3 month U.S. Treasury
Notes,  and long-term,  10 year U.S.  Treasury  Bonds,  referred to as the yield
curve is at  historic  lows.  Inflation  fighting  actions  taken by the Federal
Reserve Board have moved short-term rates up while long-term rates have remained
relatively  flat.  The  Company's  rising cost of funds in 2006 on deposits  and
borrowings has not been matched by the ability to increase the yields on assets.

NET INTEREST  INCOME.  For the fiscal year ended December 31, 2006, net interest
income  decreased by $3.62 million to $19.04 million from $22.66 million for the
fiscal year ended December 31, 2005. The year over year decrease in net interest
income was the result of the 113 basis point  increase in the average  rate paid
on  interest-bearing  liabilities  to 3.83% in 2006  from  2.70% in 2005 and the
smaller, 68 basis point increase in the average yield earned on interest-earning
assets to 5.44% in 2006 from 4.76% in 2005. Also contributing to the decrease in
net interest  income was the $60.61  million  decrease in the average  amount of
interest-earning assets to $886.16 million in 2006 from $946.77 million in 2005.
Partially  offsetting  these  factors  was the $66.43  million  decrease  in the
average amount of  interest-bearing  liabilities to $762.20 million in 2006 from
$828.62 million in 2005.

         The Company's interest-rate spread narrowed by 45 basis points to 1.61%
in 2006 from  2.06% in 2005.  This  decline  is  primarily  due to the change in
deposit  mix,  the $71.90  million  increase  in higher cost CD's and the $57.39
million decrease in lower cost,  non-maturity  deposit accounts in 2006 compared
to 2005. If the current rate environment  continues,  we expect to see continued
pressure on the Company's interest-rate spread and net interest income.

NET INTEREST MARGIN. Net interest margin declined by 24 basis points to 2.15% in
fiscal  2006 from 2.39% in fiscal  2005.  We seek to secure and retain  customer
deposits with competitive  products and rates, while making strategic use of the
prevailing  interest rate  environment  to borrow funds at what we believe to be
attractive rates. We invest such deposits and borrowed funds in a prudent mix of
fixed rate and  adjustable  rate loans,  investment  securities  and  short-term
interest-earning  assets which  provide an aggregate  average yield of 5.44% and
4.76% in fiscal 2006 and 2005, respectively. The decrease in net interest margin
is primarily due to the decrease in net interest income, partially offset by the
decrease in average interest-earning assets.

         The  average  amount of loans  increased  by $40.03  million to $327.21
million in 2006 from  $287.18  million in 2005,  and the  average  yield on such
loans  increased by 53 basis points to 7.29% in fiscal 2006 from 6.76% in fiscal
2005. The average amount of investment securities decreased by $98.39 million to
$550.44  million in fiscal 2006 from $648.83 million in fiscal 2005. The average
yield on investment  securities  improved by 46 basis  points,  to 4.37% in 2006
from  3.91% in 2005.  The  average  amount  of  other  interest-earning  assets,
primarily cash and short-term  investments,  decreased by $2.26 million to $8.51
million in 2006 from $10.77  million in 2005 and  returned  an average  yield of
4.11% and 2.81% in fiscal 2006 and 2005, respectively.

INTEREST  INCOME.  Total interest  income for the fiscal year ended December 31,
2006 increased by $3.17 million, or 7.02%, to $48.22 million from $45.06 million
for the fiscal year ended December 31, 2005. The increase in interest income was
primarily  due to  the  increase  in  the  yields  on  interest-earning  assets,
partially offset by the decrease in the average amount of total interest-earning
assets.  Loans contributed  $23.84 million of interest income in fiscal 2006, an
increase of $4.44 million from the $19.40 million of interest income contributed
in fiscal

                                       25
<PAGE>

2005.  Investment  securities  contributed  $24.03 million of interest income in
fiscal  2006, a decrease of $1.33  million  from the $25.36  million of interest
income earned on securities in fiscal 2005.


                                FISCAL 2006                  FISCAL 2005
                         ---------------------------  --------------------------
                           INTEREST       % OF           INTEREST      % OF
                            INCOME        TOTAL           INCOME       TOTAL
                                     (In thousands, except percentages)
Loans                       $23,844       49.45%          $19,399      43.06%
Investment Securities        24,027       49.82            25,355      56.27
Other                           350        0.73               302       0.67
                            -------      ------           -------     ------
Total Interest Income       $48,221      100.00%          $45,056     100.00%


         Loans, which are inherently risky and therefore command a higher return
than our conservative portfolio of investment securities,  grew to 36.92% of our
total average interest-earning assets in fiscal 2006 from 30.33% in fiscal 2005.
While we actively seek to originate new loans with qualified  borrowers who meet
the Bank's  underwriting  standards,  our  strategy  has been to maintain  those
standards, sacrificing some current income to avoid possible large future losses
in the loan portfolio.

                                     FISCAL 2006                FISCAL 2005
                               -----------------------     ---------------------
                                 AVERAGE      % OF           AVERAGE      % OF
                                  AMOUNT      TOTAL           AMOUNT      TOTAL
                                         (In thousands, except percentages)
Loans                            $327,210     36.92%         $287,178     30.33%
Investment Securities             550,443     62.12           648,829     68.53
Other                               8,509      0.96            10,765      1.14
                                 --------    ------          --------    ------
Total Interest-Earning Assets    $886,162    100.00%         $946,772    100.00%


INTEREST EXPENSE.  Total interest expense for the fiscal year ended December 31,
2006  increased  by $6.79  million,  or 30.30%,  to $29.19  million  from $22.40
million for the fiscal year ended  December 31,  2005.  The increase in interest
expense was due to the  increase in the average  rate paid on such  liabilities,
3.83% and 2.70% in fiscal years 2006 and 2005, respectively, partially offset by
the  decrease  in  the  average  amount  of  interest-bearing   liabilities.  As
short-term  rates moved higher  during 2006,  interest  expense  increased as we
priced our deposit  products to meet the  competition  and the adjustable  rates
paid on other borrowings  increased as well. In April 2005 and May 2004, we sold
$7.22  million  and  $15.46  million,  respectively,  of  floating  rate  junior
subordinated  debentures  which mature in 2035 and 2034,  respectively.  The net
proceeds were used to augment the Bank's capital.  The interest expense on these
debentures,  which are included in other borrowings, was $1.77 million and $1.27
million during fiscal 2006 and 2005, respectively.

                                FISCAL 2006                  FISCAL 2005
                         ---------------------------  --------------------------
                           INTEREST       % OF           INTEREST      % OF
                           EXPENSE        TOTAL          EXPENSE       TOTAL
                                     (In thousands, except percentages)
Interest-Bearing Deposits   $ 5,283       18.10%         $ 4,639        20.71%
Time Deposits                17,276       59.19            9,552        42.64
Other Borrowings              6,627       22.71            8,208        36.65
                            -------      ------          -------       ------
Total Interest Expense      $29,186      100.00%         $22,399       100.00%

                                       26
<PAGE>

                                         FISCAL 2006            FISCAL 2005
                                   ----------------------  ---------------------
                                     AVERAGE      % OF       AVERAGE      % OF
                                      AMOUNT      TOTAL       AMOUNT      TOTAL
                                           (In thousands, except percentages)
Interest-Bearing Deposits            $206,745     27.12%     $264,130     31.88%
Time Deposits                         410,729     53.89       338,834     40.89
Other Borrowings                      144,722     18.99       225,657     27.23
                                     --------    ------      --------    ------
Total Interest-Bearing Liabilities   $762,196    100.00%     $828,621    100.00%


NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the fiscal year ended
December 31, 2006, total non-interest income increased by $2.48 million to $3.69
million from $1.21 million for the fiscal year ended December 31, 2005. In 2006,
we  recorded  gains of $2.34  million  on the sales and  issuer  redemptions  of
investment  securities.  In 2005, such gains amounted to $4,000. Service charges
on deposit accounts were flat and other income increased by $156,000.


                                  FISCAL 2006             FISCAL 2005
                            ----------------------  ------------------------
                             NON-INTEREST   % OF    NON-INTEREST    % OF
                                INCOME      TOTAL      INCOME       TOTAL
                                    (In thousands, except percentages)
Service Charges on Deposits     $  588      15.92%     $  589       48.84%
Investment Securities gains      2,336      63.26           4        0.33
Other                              769      20.82         613       50.83
                                ------     ------      ------      ------
Total Non-Interest Income       $3,693     100.00%     $1,206      100.00%


NON-INTEREST  EXPENSE.  Non-interest  expense  includes  salaries  and  employee
benefits,  occupancy and equipment  expenses,  legal and  professional  fees and
other  operating  expenses  associated  with the  day-to-day  operations  of the
Company.  Total  non-interest  expense  for the year  ended  December  31,  2006
increased by $443,000,  or 3.37%,  to $13.58 million from $13.14 million for the
year ended December 31, 2005. The largest component of non-interest  expense are
salaries and employee  benefits which  increased by $479,000 to $8.48 million in
fiscal  2006 from  $8.00  million in fiscal  2005.  The  increase  is due to the
addition of personnel in our internal control and compliance departments.

                                  FISCAL 2006             FISCAL 2005
                            ----------------------  ------------------------
                             NON-INTEREST   % OF    NON-INTEREST    % OF
                               EXPENSE      TOTAL     EXPENSE       TOTAL
                                    (In thousands, except percentages)
Salaries and Employee Benefits  $ 8,481     62.44%     $ 8,002      60.90%
Net Occupancy Expense             1,961     14.44        1,728      13.15
Equipment Expense                   108      0.80          397       3.02
FDIC Assessment                      85      0.63          272       2.07
Data Processing Expense             366      2.69          198       1.51
Other                             2,581     19.00        2,542      19.35
                                -------    ------      -------     ------
Total Non-Interest Expense      $13,582    100.00%     $13,139     100.00%


PROVISION FOR INCOME TAX.  During the years ended December 31, 2006 and 2005, we
recorded  income tax expense of $3.86 million and $5.00  million,  respectively.
The tax provisions for federal, state and local taxes recorded for 2006 and 2005
represent effective tax rates of 44.14% and 47.45%, respectively.

INVESTMENT ACTIVITIES

         GENERAL.  The  investment  policy of the Bank is designed  primarily to
provide satisfactory yields while maintaining  adequate liquidity,  a balance of
high quality, diversified investments, and minimal risk. The Bank does not, as a
rule,  invest  in  equity  securities.  The  largest  component  of  the  Bank's
securities   investments,   representing  more  than  50%  of  total  investment
securities, are debt securities issued by U.S. Government agencies including the
Federal Home Loan  Mortgage  Corporation  (Freddie  Mac),  the Federal  National
Mortgage   Association   (Fannie  Mae)  or  the  Government   National  Mortgage
Association

                                       27
<PAGE>

(Ginnie  Mae).  The  remainder  of the Bank's debt  securities  investments  are
primarily  short  term  debt  securities  issued  by the  United  States  or its
agencies.  The Bank  maintains  a small  portfolio  of less than $4  million  of
high-yield  corporate debt  securities.  Recognizing  the higher credit risks of
these  securities,  the Bank underwrites these securities in a manner similar to
its loan underwriting procedures.

         At December 31, 2007, our portfolio of investment  securities  included
approximately  $185 million of auction rate securities.  These  investments have
high credit quality ratings of AA or AAA and are fully  collateralized  by bonds
and other financial instruments. Auction rate securities are generally long-term
debt  instruments  that provide  liquidity  through a Dutch auction process that
resets  the  applicable  interest  rate at  pre-determined  calendar  intervals,
generally every 28 days.

          Recent  uncertainties  in the credit markets have negatively  impacted
our ability to liquidate,  if necessary,  investments in auction rate securities
because,  in recent  auctions,  the amount of securities  submitted for sale has
exceeded  the  amount of  purchase  orders.  We are not  certain  as to when the
liquidity issues relating to these  investments will improve;  however,  we have
the  ability  to  hold  these   available  for  sale   securities  to  maturity,
(predominately 20 years after December 31, 2007) recovering our investment. As a
result of the recent auction failures beginning in February 2008, the fair value
of these  securities,  while  maintaining  their  investment  grade  rating  and
interest  payments,  could be negatively  impacted at a later time. Were this to
occur, we may be required to reflect a write-down of certain of our auction rate
securities in future  periods as a charge to earnings if any of our auction rate
securities are deemed to be  other-than-temporarily  impaired.  Such  impairment
charge  would be recorded as other  expense and could be material to our results
of operations.

         Based on our expected  operating  cash flows,  and our other sources of
cash, we do not expect the potential  lack of liquidity in these  investments to
affect our ability to execute our current business plan.

         As required  by SFAS No.  115,  securities  are  classified  into three
categories:  trading,  held-to-maturity and available-for-sale.  Securities that
are bought and held principally for the purpose of selling them in the near term
are  classified  as  trading  securities  and are  reported  at fair  value with
unrealized  gains and losses  included  in  trading  account  activities  in the
statement  of  income.  Securities  that the Bank has the  positive  intent  and
ability to hold to maturity are classified as  held-to-maturity  and reported at
amortized  cost.  All other  securities  are  classified as  available-for-sale.
Available-for-sale  securities are reported at fair value with unrealized  gains
and losses  included,  on an  after-tax  basis,  as a separate  component of net
worth. The Bank does not have a trading securities  portfolio and has no current
plans to maintain such a portfolio in the future. The Bank generally  classifies
all newly  purchased debt  securities as available for sale in order to maintain
the  flexibility  to sell those  securities  if the need arises.  The Bank has a
limited  portfolio of  securities  classified  as held to maturity,  represented
principally by securities purchased a number of years ago.

         FEDERAL  HOME LOAN BANK STOCK.  The Bank owns stock of the Federal Home
Loan Bank of New York (the "FHLBNY") which is necessary for it to be a member of
the FHLBNY.  Membership requires the purchase of stock equal to 1% of the Bank's
residential  mortgage loans. If the Bank borrows from the FHLBNY,  the Bank must
own stock at least equal to 5% of its borrowings.









                                       28
<PAGE>

         The   following   table   sets   forth  the  cost  and  fair  value  of
available-for-sale and held-to-maturity securities as of the dates indicated:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                     ------------------------------------------------------------------------------------
                                               2007                          2006                          2005
                                      -----------------------       -----------------------       -----------------------
                                        COST          FAIR            COST          FAIR            COST          FAIR
                                                      VALUE                         VALUE                         VALUE
                                      --------       --------       --------       --------       --------       --------
                                                                         (In thousands)
<S>                                   <C>            <C>            <C>            <C>            <C>            <C>
  AVAILABLE-FOR-SALE
U.S. Treasury Notes                   $     --       $     --       $  5,002       $  4,990       $ 14,985       $ 14,899
U.S. Government Agencies               272,789        272,318        322,986        317,164        448,196        439,645
Mortgage-backed securities              53,886         53,057         67,472         65,853         81,681         79,686
Corporate notes                         71,147         67,601         44,366         44,038         54,590         52,304
Municipal securities                     1,973          3,004          5,698          7,187          1,972          2,306
Auction rate securities                184,597        184,597         71,500         71,500             --             --
Marketable equity
 securities and other                   18,698         18,384          3,919          4,066         10,351         10,570
                                      --------       --------       --------       --------       --------       --------
Total                                 $603,090       $598,961       $520,943       $514,798       $611,775       $599,410
                                      ========       ========       ========       ========       ========       ========

  HELD-TO-MATURITY
U.S. Government Agencies              $    395       $    405       $    433       $    436       $    562       $    573
                                      ========       ========       ========       ========       ========       ========
</TABLE>


         The following  tables  summarize the Company's  available-for-sale  and
held- to-maturity securities:

                                                     DECEMBER 31, 2007
                                        --------------------------------------
                                          WEIGHTED
                                           AVERAGE
                                            YIELD        COST       FAIR VALUE
                                          --------     --------     ----------
                                                 (Dollars in thousands)
AVAILABLE-FOR-SALE

  U.S. Government Agencies Obligations
Due within one year                          4.02%     $ 39,997      $ 39,877
Due after one year through five years        4.31       161,079       160,789
Due after five years through ten years       4.99        68,684        68,691
Due after ten years                          6.51         3,029         2,961
                                                       --------      --------
                                                        272,789       272,318
                                                       --------      --------
  Municipal Obligations
Due after ten years                          9.41         1,973         3,004
                                                       --------      --------
                                                          1,973         3,004
                                                       --------      --------
  Mortgage-backed securities
Due after one year through five years        4.55         4,606         4,517
Due after five years through ten years       4.10         8,650         8,445
Due after ten years                          5.37        40,630        40,095
                                                       --------      --------
                                                         53,886        53,057
                                                       --------      --------
  Corporate Notes
Due within one year                          4.84        36,695        36,426
Due after one year through five years        6.95         8,146         8,098
Due after five years through ten years       4.07         8,476         5,561
Due after ten years                          6.71        17,830        17,516
                                                       --------      --------
                                                         71,147        67,601
                                                       --------      --------
  Auction rate and other securities
  Common Stocks                              0.22         1,681         1,386
  Preferred Stocks                           6.38       184,838       184,824
  Money market funds                         4.88        14,658        14,653
  Federal Home Loan Bank Stock               8.05         2,118         2,118
                                                       --------      --------
                                                        203,295       202,981
                                                       --------      --------
                                                       $603,090      $598,961
                                                       ========      ========

                                       29
<PAGE>

HELD-TO-MATURITY
  U.S. Government Agencies Obligations
Due after five years through ten years       5.75            16            16
Due after ten years                          6.53           379           389
                                                       --------      --------
                                                       $    395      $    405
                                                       ========      ========

LOAN PORTFOLIO

         LOAN PORTFOLIO  COMPOSITION.  The Company's loans consist  primarily of
mortgage loans secured by residential and non-residential  properties as well as
commercial  loans which are either  unsecured  or secured by  personal  property
collateral.  Most of the  Company's  loans are  either  made to  individuals  or
personally  guaranteed  by the  principals  of the business to which the loan is
made. At December 31, 2007,  2006 and 2005, the Company had total loans,  net of
unearned  income of  $434.79  million,  $370.92  million  and  $309.23  million,
respectively,  and an allowance for loan losses of $4.18 million,  $3.77 million
and  $3.27  million,  respectively.  From time to time,  the Bank may  originate
residential  mortgage  loans,  sell  them  on  the  secondary  market,  normally
recognizing fee income in connection with the sale.

         Interest  rates on loans are  affected  by the demand  for  loans,  the
supply of money  available  for  lending,  credit  risks,  the rates  offered by
competitors and other  conditions.  These factors are in turn affected by, among
other things, economic conditions,  monetary policies of the federal government,
and legislative tax policies.

         In order to manage  interest rate risk, the Bank focuses its efforts on
loans with  interest  rates that adjust  based upon changes in the prime rate or
changes in United States Treasury or similar indices. Generally, credit risks on
adjustable-rate  loans are somewhat  greater than on fixed-rate  loans primarily
because,  as interest  rates rise, so do  borrowers'  payments,  increasing  the
potential for default.  The Bank seeks to impose  appropriate loan  underwriting
standards  in order to protect  against  these and other  credit  related  risks
associated with its lending operations.

         In addition to analyzing  the income and assets of its  borrowers  when
underwriting  a loan,  the Bank obtains  independent  appraisals on all material
real estate in which the Bank takes a mortgage. The Bank generally obtains title
insurance in order to protect against title defects on mortgaged property.

         COMMERCIAL AND MORTGAGE LOANS. The Bank originates  commercial mortgage
loans  secured  by  office  buildings,   retail   establishments,   multi-family
residential  real estate and other types of commercial  property.  Substantially
all of the properties are located in the New York City metropolitan area.

         The Bank generally makes  commercial  mortgage loans with loan to value
ratios not to exceed 75% and with terms to maturity that do not exceed 15 years.
Loans secured by commercial  properties  generally  involve a greater  degree of
risk than one- to four-family  residential  mortgage loans.  Because payments on
such loans are often  dependent on  successful  operation or  management  of the
properties, repayment may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting  policies.  The Bank evaluates the  qualifications  and
financial condition of the borrower, including credit history, profitability and
expertise,  as well as the value and condition of the underlying  property.  The
factors  considered by the Bank include net operating income;  the debt coverage
ratio  (the  ratio of cash net  income to debt  service);  and the loan to value
ratio. When evaluating the borrower,  the Bank considers the financial resources
and  income  level of the  borrower,  the  borrower's  experience  in  owning or
managing similar  property and the Bank's lending  experience with the borrower.
The Bank's policy requires borrowers to present evidence of the ability to repay
the loan without  having to resort to the sale of the  mortgaged  property.  The
Bank also seeks to focus its  commercial  mortgage  loans on loans to  companies
with operating businesses, rather than passive real estate investors.

                                       30
<PAGE>

         COMMERCIAL  LOANS.  The Bank makes  commercial  loans to businesses for
inventory  financing,   working  capital,  machinery  and  equipment  purchases,
expansion, and other business purposes. These loans generally have higher yields
than mortgages  loans,  with maturities of one year,  after which the borrower's
financial condition and the terms of the loan are re-evaluated.  At December 31,
2007 and 2006, approximately $76.13 million and $63.33 million, respectively, or
17.4% and 17.0%,  respectively,  of the Company's total loan portfolio consisted
of such loans.

         Commercial  loans tend to present  greater  risks than  mortgage  loans
because the collateral,  if any, tends to be rapidly  depreciable,  difficult to
sell at full  value and is often  easier  to  conceal.  In order to limit  these
risks, the Bank evaluates these loans based upon the borrower's ability to repay
the loan from ongoing operations. The Bank considers the business history of the
borrower and  perceived  stability  of the  business as  important  factors when
considering  applications for such loans.  Occasionally,  the borrower  provides
commercial or residential  real estate  collateral for such loans, in which case
the value of the  collateral  may be a  significant  factor in the loan approval
process.

         RESIDENTIAL  MORTGAGE  LOANS (1 TO 4  FAMILY  LOANS).  The  Bank  makes
residential  mortgage  loans  secured  by  first  liens  on  one-to-four  family
owner-occupied or rental residential real estate. At December 31, 2007 and 2006,
approximately $145.65 million and $143.62 million, respectively, or 33% and 39%,
respectively, of the Company's total loan portfolio consisted of such loans. The
Company offers both adjustable rate mortgages  ("ARMS") and fixed-rate  mortgage
loans. The relative proportion of fixed-rate loans versus ARMs originated by the
Bank depends  principally upon current customer  preference,  which is generally
driven by economic and interest rate  conditions and the pricing  offered by the
Bank's  competitors.  At December 31, 2007 and 2006,  approximately 10% and 14%,
respectively,  of the Bank's residential one-to-four family owner-occupied first
mortgage portfolio were ARMs and approximately 90% and 86%,  respectively,  were
fixed-rate  loans.  The  percentage  represented  by  fixed-rate  loans tends to
increase during periods of low interest  rates.  The ARMs generally carry annual
caps and life-of-loan ceilings, which limit interest rate adjustments.

         The  Bank's  residential  loan  underwriting   criteria  are  generally
comparable  to those  required  by the  Federal  National  Mortgage  Association
("FNMA") and other major secondary market loan purchasers. Generally, ARM credit
risks are somewhat greater than fixed-rate loans primarily because,  as interest
rates rise, the borrowers' payments rise,  increasing the potential for default.
The Bank's teaser rate ARMs (ARMs with low initial  interest  rates that are not
based upon the index plus the margin for  determining  future rate  adjustments)
were underwritten based on the payment due at the fully-indexed rate.

         In  addition  to  verifying  income and assets of  borrowers,  the Bank
obtains independent appraisals on all residential first mortgage loans and title
insurance is required at closing.  Private mortgage insurance is required on all
loans with a  loan-to-value  ratio in excess of 80% and the Bank  requires  real
estate tax escrows on such loans.  Real  estate tax  escrows  are  voluntary  on
residential mortgage loans with loan-to-value ratios of 80% or less.

         Fixed-rate  residential  mortgage loans are generally originated by the
Bank for terms of 15 to 30 years. Although 30 year fixed-rate mortgage loans may
adversely  affect our net interest  income in periods of rising  interest rates,
the Bank  originates  such  loans to  satisfy  customer  demand.  Such loans are
generally  originated at initial  interest  rates which exceed the fully indexed
rate on ARMs offered at the same time.  Fixed-rate  residential  mortgage  loans
originated by the Bank generally include due-on-sale  clauses,  which permit the
Bank to demand  payment in full if the borrower  sells the property  without the
Bank's  consent.  Due-on-sale  clauses are an important  means of adjusting  the
rates on the  Bank's  fixed-rate  mortgage  loan  portfolio,  and the Bank  will
generally  exercise  its rights  under these  clauses if  necessary  to maintain
market yields.

         ARMs  originated  in recent  years  have  interest  rates  that  adjust
annually based upon the movement of the one year treasury bill constant maturity
index,  plus a margin of 2.00% to 2.75%.  These loans  generally  have a maximum
interest rate adjustment of 2% per year, with a lifetime  maximum  interest rate
adjustment, measured from the initial interest rate, of 5.5% or 6.0%.

                                       31
<PAGE>

         The Bank offers a variety of other loan products including  residential
single  family  construction  loans to persons who intend to occupy the property
upon completion of  construction,  home equity loans secured by junior mortgages
on one-to-four  family  owner-occupied  residences,  and  short-term  fixed-rate
consumer  loans  either  unsecured  or secured by  monetary  assets such as bank
deposits and marketable  securities or personal  property.  At December 31, 2007
and 2006,  the Company's  loan  portfolio  was  comprised of $300.3  million and
$238.4 million,  respectively,  or 68.8% and 64.1%, respectively,  of other loan
products.

         ORIGINATION  OF  LOANS.   Loan   originations   can  be  attributed  to
depositors,  retail customers, phone inquiries,  advertising, the efforts of the
Bank's loan officers,  and referrals from other  borrowers,  real estate brokers
and  builders.  The Bank  originates  loans  primarily  through its own efforts,
occasionally  obtaining  loan  opportunities  as a result of referrals from loan
brokers.

         At December  31, 2007,  the Bank was  generally  not  permitted to make
loans to one  borrower  in  excess  of  approximately  $15.67  million,  with an
additional amount of approximately  $10.45 million being permitted if secured by
readily  marketable  collateral.  The Bank was  also not  permitted  to make any
single loan in an amount in excess of approximately  $15.67 million. At December
31, 2007, the Bank was in compliance with these standards.

         DELINQUENCY  PROCEDURES.  When a  borrower  fails  to  make a  required
payment on a loan,  the Bank  attempts  to cause the  deficiency  to be cured by
contacting  the  borrower.  The Bank  reviews  past due  loans on a case by case
basis,  taking the action it deems  appropriate  in order to collect  the amount
owed.  Litigation  may be  necessary  if other  procedures  are not  successful.
Judicial  resolution  of a past due loan can be delayed if the borrower  files a
bankruptcy  petition  because  collection  action cannot be continued unless the
Bank first  obtains  relief from the automatic  stay provided by the  Bankruptcy
Code.

         If a non-mortgage loan becomes delinquent and satisfactory arrangements
for payment cannot be made, the Bank seeks to realize upon any personal property
collateral to the extent feasible and collect any remaining amount owed from the
borrower through legal proceedings, if necessary.

         It is the Bank's policy to discontinue accruing interest on a loan when
it is 90  days  past  due or if  management  believes  that  continued  interest
accruals are unjustified.  The Bank may continue  interest accruals if a loan is
more  than 90 days  past  due if the Bank  determines  that  the  nature  of the
delinquency  and the  collateral  are such that  collection of the principal and
interest on the loan in full is reasonably assured. When the accrual of interest
is  discontinued,  all accrued but unpaid  interest is charged  against  current
period income.  Once the accrual of interest is  discontinued,  the Bank records
interest as and when received until the loan is restored to accruing status.  If
the Bank determines that collection of the loan in full is in reasonable  doubt,
then amounts received are recorded as a reduction of principal until the loan is
returned to accruing status.










                                       32
<PAGE>

         The following  table sets forth  information  concerning  the Company's
loan portfolio by type of loan at the dates indicated:


<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                         -----------------------------------------------------------------------------------------------------------
                               2007                   2006                    2005                  2004                  2003
                         ------------------     ------------------     ------------------    ------------------    -----------------
                                     % OF                   % OF                   % OF                  % OF                 % OF
                          AMOUNT     TOTAL       AMOUNT     TOTAL       AMOUNT     TOTAL      AMOUNT     TOTAL      AMOUNT    TOTAL
                         --------    ------     --------    ------     --------    ------    --------    ------    --------   ------
<S>                      <C>          <C>       <C>          <C>       <C>          <C>      <C>           <C>     <C>          <C>
Commercial and
 professional loans      $ 76,132     17.4%     $ 63,331     17.0%     $ 33,370     10.8%    $ 16,498      5.7%    $ 22,228     7.5%
Secured by real estate
 1 - 4 family             142,140     32.6       139,611     37.5       139,931     45.1      155,079     53.9      169,589    57.4
 Multi family               3,506      0.8         4,013      1.1         2,874      0.9        4,600      1.6        6,608     2.2
 Non-residential
 (commercial)             212,850     48.8       160,417     43.1       132,142     42.6      109,597     38.1       94,956    32.2
Consumer                    1,691      0.4         4,763      1.3         2,018      0.6        1,989      0.7        2,239     0.7
                         --------    -----      --------    -----      --------    -----     --------    -----     --------   -----

Total loans               436,319    100.0%      372,135    100.0%      310,335    100.0%     287,763    100.0%     295,620   100.0%
                                     =====                  =====                  =====                 =====                =====

Less: Allowance
 for loan losses           (4,183)                (3,771)                (3,266)               (2,927)               (2,593)
Unearned fees              (1,534)                (1,212)                (1,105)                 (784)                 (864)
                         --------               --------               --------              --------              --------
Loans, net               $430,602               $367,152               $305,964              $284,052              $292,163
                         ========               ========               ========              ========              ========
</TABLE>



                                       33
<PAGE>

IMPAIRED  LOAN  BALANCE,  NONACCRUAL  LOANS AND LOANS GREATER THAN 90 DAYS STILL
ACCRUING

         The following table sets forth certain information regarding nonaccrual
loans,  including  the  ratio  of such  loans to total  assets  as of the  dates
indicated,  and certain  other related  information.  The Bank had no foreclosed
real  estate  during  these  periods  and loans past due more than 90 days still
accruing were $314,000 and $0 at December 31, 2007 and 2006, respectively.


                                                  DECEMBER 31,
                             ---------------------------------------------------
                               2007       2006     2005       2004      2003
                               ----       ----     ----       ----      ----
                                          (Dollars in Thousands)
Nonaccrual loans:
Commercial and               $    --   $    --   $    --   $    --   $    --
 professional loans
Consumer                          --        --         3         1        --
Secured by real estate           153       201       253       342       109
                             -------   -------   -------   -------   -------
Total nonaccrual loans           153       201       256       343       109
                             -------   -------   -------   -------   -------
Accruing loans delinquent
 90 days or more                 314        --        74        50        --
                             -------   -------   -------   -------   -------
Total nonperforming loans    $   467   $   201   $   330   $   393   $   109
                             =======   =======   =======   =======   =======
Total nonperforming loans
 to total assets                 .04%      .02%      .03%      .04%      .01%
                             =======   =======   =======   =======   =======


         The following tables present information  regarding the Company's total
allowance  for loan  losses as well as the  allocation  of such  amounts  to the
various categories of loans at the dates indicated (dollars in thousands):

                                                      DECEMBER 31, 2007
                                             -----------------------------------
                                            ALLOWANCE
                                             FOR LOAN   PERCENT OF   PERCENT OF
                                              LOSSES    ALLOWANCE    TOTAL LOANS
                                            ----------  ----------   -----------
Commercial and
 professional loans                           $   929      22.2%        17.4%
Secured by real estate
 1 - 4 family                                     591      14.2         32.6
 Multi family                                      43       1.0          0.8
 Non-residential                                2,597      62.1         48.8
Consumer and other                                 21       0.5          0.4
General allowance (1)                               3       0.0           --
                                              -------     -----        -----
Total allowance
 for loan losses                              $ 4,183     100.0%       100.0%
                                              =======     =====       ======

------------------------
(1)The allowance for loan losses is allocated to specific loans as necessary.

                                                     DECEMBER 31, 2006
                                             -----------------------------------
                                            ALLOWANCE
                                             FOR LOAN   PERCENT OF   PERCENT OF
                                              LOSSES    ALLOWANCE    TOTAL LOANS
                                            ----------  ----------   -----------
Commercial and
 professional loans                           $   852      22.6%        17.0%
Secured by real estate
 1 - 4 family                                     634      16.8         37.5
 Multi family                                      54       1.4          1.1
 Non-residential                                2,166      57.5         43.1
Consumer and other                                 64       1.7          1.3
General allowance (1)                              --        --           --
                                              -------     -----        -----
Total allowance
 for loan losses                              $ 3,771     100.0%       100.0%
                                              =======     =====        =====

------------------------
(1)The allowance for loan losses is allocated to specific loans as necessary.

                                       34
<PAGE>


                                                     DECEMBER 31, 2005
                                             -----------------------------------
                                            ALLOWANCE
                                             FOR LOAN   PERCENT OF   PERCENT OF
                                              LOSSES    ALLOWANCE    TOTAL LOANS
                                            ----------  ----------   -----------
Commercial and
 professional loans                           $   450      13.8%        10.8%
Secured by real estate
 1 - 4 family                                     937      28.7         45.1
 Multi family                                      39       1.2          0.9
 Non-residential                                1,784      54.6         42.6
Consumer and other                                 27       0.8          0.6
General allowance (1)                              29       0.9           --
                                              -------     -----        -----
Total allowance
 for loan losses                              $ 3,266     100.0%       100.0%
                                              =======     =====        =====

------------------------
(1)The allowance for loan losses is allocated to specific loans as necessary.

                                                     DECEMBER 31, 2004
                                             -----------------------------------
                                            ALLOWANCE
                                             FOR LOAN   PERCENT OF   PERCENT OF
                                              LOSSES    ALLOWANCE    TOTAL LOANS
                                            ----------  ----------   -----------
Commercial and
 professional loans                           $   223       7.6%         5.7%
Secured by real estate
 1 - 4 family                                     775      26.5         53.9
 Multi family                                      62       2.1          1.6
 Non-residential                                1,398      47.8         38.1
Consumer and other                                 27       0.9          0.7
General allowance (1)                             442      15.1           --
                                              -------     -----        -----
Total allowance
 for loan losses                              $ 2,927     100.0%       100.0%
                                              =======     =====        =====

------------------------
(1)The allowance for loan losses is allocated to specific loans as necessary.


                                                     DECEMBER 31, 2003
                                             -----------------------------------
                                            ALLOWANCE
                                             FOR LOAN   PERCENT OF   PERCENT OF
                                              LOSSES    ALLOWANCE    TOTAL LOANS
                                            ----------  ----------   -----------
Commercial and
 professional loans                           $   300      11.6%         7.5%
Secured by real estate
 1 - 4 family                                     424      16.3         57.4
 Multi family                                      89       3.4          2.2
 Non-residential                                1,198      46.2         32.2
Consumer and other                                 30       1.2          0.7
General allowance (1)                             552      21.3           --
                                              -------     -----        -----
Total allowance
 for loan losses                              $ 2,593     100.0%       100.0%
                                              =======     =====        =====

------------------------
(1)The allowance for loan losses is allocated to specific loans as necessary.








                                       35
<PAGE>

         The  following  table sets forth  information  regarding  the aggregate
maturities of the Company's loans in the specified  categories and the amount of
such loans which have fixed and variable rates.


                                                DECEMBER 31, 2007
                                 -----------------------------------------------
                                  WITHIN       1 TO         AFTER
                                  1 YEAR      5 YEARS      5 YEARS       TOTAL
                                 --------     --------     --------     --------
                                                  (In thousands)
FIXED RATE
Commercial and professional      $  7,506     $ 26,662     $    198     $ 34,366
Non-residential                    24,516       21,597       23,871       69,984
                                 --------     --------     --------     --------
Total fixed rate                 $ 32,022     $ 48,259     $ 24,069     $104,350
                                 --------     --------     --------     --------

ADJUSTABLE RATE
Commercial and professional        23,346       14,989        3,431       41,766
Non-residential                    30,098       46,359       68,100      144,557
                                 --------     --------     --------     --------
Total adjustable rate            $ 53,444     $ 61,348     $ 71,531     $186,323
                                 --------     --------     --------     --------
Total                            $ 85,466     $109,607     $ 95,600     $290,673
                                 ========     ========     ========     ========

         Demand loans, loans with no stated maturity,  are included in the table
above in the Within One Year category.


         The following table sets forth  information with respect to activity in
the  Company's  allowance  for loan  losses  during the  periods  indicated  (in
thousands, except percentages):


                                            YEARS ENDED DECEMBER 31,
                              --------------------------------------------------
                                2007      2006      2005      2004      2003
                                ----      ----      ----      ----      ----
Average loans outstanding     $389,520  $327,210  $287,178  $290,774  $291,586
                              ========  ========  ========  ========  ========
Allowance at beginning
 of period                       3,771     3,266     2,927     2,593     2,315
Charge-offs:
 Commercial and other
  loans                             --        42        26        24         4
 Real estate loans                  --        --        --        --        13
                              --------  --------  --------  --------  --------
  Total loans charged-off           --        42        26        24        17
                              --------  --------  --------  --------  --------
Recoveries:
 Commercial and other
  loans                             57       137       185       178        55
 Real estate loans                  --        --        --        --        --
                              --------  --------  --------  --------  --------
  Total loans recovered             57       137       185       178        55
                              --------  --------  --------  --------  --------
  Net recoveries
   (charge-offs)                    57        95       159       154        38
                              --------  --------  --------  --------  --------
Provision for loan losses
 charged to operating
 expenses                          355       410       180       180       240
                              --------  --------  --------  --------  --------
Allowance at end of period    $  4,183  $  3,771  $  3,266  $  2,927  $  2,593
                              --------  --------  --------  --------  --------
Ratio of net recoveries
 (charge-offs) to average
 loans outstanding                 .01%      .03%      .06%      .05%      .01%
                              ========  ========  ========  ========  ========
Allowance as a percent
 of total loans                   0.96%     1.01%     1.05%     1.02%     0.88%
                              ========  ========  ========  ========  ========
Total loans at end
 of period                    $436,319  $372,135  $310,335  $287,763  $295,620
                              ========  ========  ========  ========  ========

                                       36
<PAGE>

DEPOSITS

         The  Bank  concentrates  on  obtaining   deposits  from  a  variety  of
businesses,  professionals  and retail  customers.  The Bank  offers a number of
different deposit programs,  including statement savings accounts, NOW accounts,
money market deposits  accounts,  checking accounts and certificates of deposits
with terms from seven days to five years.  Deposit  account terms vary according
to the  minimum  balance  required,  the time  period the funds  must  remain on
deposit and the interest rate, among other factors.  The Bank prices its deposit
offerings competitively within the market it serves. These products are designed
to attract new customers,  retain existing customers and create opportunities to
offer other bank products or services.  While the market and pricing for deposit
funds are very competitive, the Bank believes that personalized, quality service
is also an important element in retaining core deposit customers.

         The following table  summarizes the composition of the average balances
of major deposit categories:


                                              DECEMBER 31,
                       ---------------------------------------------------------
                              2007                2006                2005
                              ----                ----                ----
                       AVERAGE   AVERAGE   AVERAGE   AVERAGE   AVERAGE   AVERAGE
                        AMOUNT    YIELD     AMOUNT    YIELD     AMOUNT    YIELD
                        ------    -----     ------    -----     ------    -----
                                      (Dollars in thousands)
Demand deposits        $ 50,647     --     $ 47,890     --     $ 44,739     --
NOW and money market     29,984   0.76%      35,141   0.61%      42,756   0.56%
Savings deposits        261,065   3.83      171,604   2.95      221,374   1.99
Time deposits           449,754   4.83      410,729   4.21      338,834   2.82
                       --------   ----     --------   ----     --------   ----
Total deposits         $791,450   4.04%    $665,364   3.39%    $647,703   2.19%
                       ========   ====     ========   ====     ========   ====

         The  aggregate  amount of jumbo  certificates  of deposit,  each with a
minimum denomination of $100,000,  was approximately $247.43 million at December
31, 2007.

         The  following  table  summarizes  the  maturity  distribution  of time
deposits of $100,000 or more as of December 31, 2007:

                                       (In thousands)
3 months or less                           $167,994
Over 3 months but within 6 months            61,347
Over 6 months but within 12 months           17,975
Over 12 months                                  112
                                           --------
Total                                      $247,428
                                           ========






                                       37
<PAGE>

SHORT-TERM BORROWINGS

         Securities sold under agreements to repurchase  generally mature within
30 days from the date of the  transactions.  Short-term  borrowings  consist  of
securities  sold under  agreements  to repurchase  and various other  borrowings
which  generally  have  maturities  of less than one year.  The details of these
categories are presented below:

                                                  YEARS ENDED DECEMBER 31,
                                             -----------------------------------
                                                2007        2006       2005
                                             ----------  ----------  ----------
                                                    (Dollars in thousands)
Securities sold under repurchase
 agreements and federal funds purchased

    Balance at year-end                      $ 76,842    $ 62,652    $ 73,044
    Average during the year                  $ 40,049    $ 56,236    $108,785
    Maximum month-end balance                $ 76,842    $ 79,154    $145,489
    Weighted average rate during the year        4.93%       3.75%       3.47%
    Rate at December 31                          4.65%       4.94%       3.59%


CAPITAL RESOURCES AND LIQUIDITY

LIQUIDITY

         The  management  of the  Company's  liquidity  focuses on ensuring that
sufficient  funds are  available to meet loan funding  commitments,  withdrawals
from deposit  accounts,  the repayment of borrowed funds,  and ensuring that the
Bank and the Company comply with regulatory  liquidity  requirements.  Liquidity
needs of the Bank have historically been met by deposits, investments in federal
funds  sold,  principal  and  interest  payments  on loans,  and  maturities  of
investment securities.

         At December 31, 2007, our portfolio of investment  securities  included
approximately  $185 million of auction rate securities.  These  investments have
high credit quality ratings of AA or AAA and are fully  collateralized  by bonds
and other financial instruments. Auction rate securities are generally long-term
debt  instruments  that provide  liquidity  through a Dutch auction process that
resets  the  applicable  interest  rate at  pre-determined  calendar  intervals,
generally every 28 days.

          Recent  uncertainties  in the credit markets have negatively  impacted
our ability to liquidate,  if necessary,  investments in auction rate securities
because,  in recent  auctions,  the amount of securities  submitted for sale has
exceeded  the  amount of  purchase  orders.  We are not  certain  as to when the
liquidity  issues relating to these available for sale investments will improve;
however,  we have the ability to hold these  available  for sale  securities  to
maturity,  (predominately  20 years after December 31, 2007) thereby  recovering
our investment. As a result of the recent auction failures beginning in February
2008, the fair value of these  securities,  while  maintaining  their investment
grade  rating and interest  payments,  could be  negatively  impacted at a later
time.  Were this to occur, we may be required to reflect a write-down of certain
of our auction rate  securities in future periods as a charge to earnings if any
of our auction rate securities are deemed to be other-than-temporarily impaired.
Such impairment  charge would be recorded as other expense and could be material
to our results of operations.

         Based on our expected  operating  cash flows,  and our other sources of
cash, we do not expect the potential  lack of liquidity in these  investments to
affect our  capital,  liquidity  or our ability to execute our current  business
plan.


                                       38
<PAGE>

         For the parent company,  Berkshire Bancorp Inc., liquidity means having
cash available to fund operating expenses and to pay stockholder dividends, when
and if declared  by the  Company's  Board of  Directors.  The Company  paid cash
dividends  per  share of $.18,  $.16 and $.15 in  fiscal  2007,  2006 and  2005,
respectively.  The ability to fund the Company's operations and to pay dividends
is not  dependent  upon the receipt of dividends  from the Bank. At December 31,
2007,  the  Company  had cash of  approximately  $12.5  million  and  investment
securities with a fair market value of $12.3 million.

CONTINGENT LIABILITIES AND COMMITMENTS

         The Bank maintains financial instruments with off-balance sheet risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These financial  instruments  include  commitments to extend credit and stand-by
letters of credit.  The following  table  presents the Company's  commitments at
December 31, 2007.

<TABLE>
<CAPTION>
                                                              EXPIRATION BY PERIOD
                                 ------------------------------------------------------------------------------
                                                     LESS                                                MORE
                                                     THAN             1-3                3-5             THAN
                                   TOTAL            1 YEAR           YEARS              YEARS           5 YEARS
                                   -----            ------           -----              -----           -------
                                                                 (In thousands)
<S>                               <C>              <C>              <C>                <C>              <C>
Lines of Credit                   $ 18,635         $  8,342         $  1,379           $ 5,134          $ 3,780
Standby Letters
 of Credit                           5,374            5,374               --                --               --
Loan Commitments                    28,645           13,162           15,483                --               --

                                  --------         --------         --------           -------          -------
Total                             $ 52,654         $ 26,878         $ 16,862           $ 5,134          $ 3,780
                                  ========         ========         ========           =======          =======
</TABLE>


CONTRACTUAL OBLIGATIONS

         The following table presents the Company's  contractual  obligations at
December 31, 2007.

<TABLE>
<CAPTION>
                                                            PAYMENTS DUE BY PERIODS
                                 ------------------------------------------------------------------------------
                                                     LESS                                                MORE
                                                     THAN             1-3                3-5             THAN
                                   TOTAL            1 YEAR           YEARS              YEARS           5 YEARS
                                   -----            ------           -----              -----           -------
                                                                 (In thousands)
<S>                               <C>              <C>              <C>                <C>             <C>
Long-Term Debt                    $ 54,288         $  5,264         $ 22,416           $ 3,927         $ 22,681
Operating Leases                     3,019              716            1,121               594              588
Time Deposits                      477,502          477,127              375                --               --
                                  --------         --------         --------           -------         --------
Total Contractual
Obligations                       $534,809         $483,107         $ 23,912           $ 4,521         $ 23,269
                                  ========         ========         ========           =======         ========
</TABLE>


         The  Company  currently  has  two  unconsolidated  subsidiaries  and no
special purpose entities.




                                       39
<PAGE>

CAPITAL

         The capital  ratios of the Bank and the Company are presently in excess
of the requirements  necessary to meet the "well  capitalized"  capital category
established  by  bank  regulators.  See  Note  P to the  Consolidated  Financial
Statements.

INTEREST RATE RISK

         Fluctuations in market interest rates can have a material effect on the
Bank's net interest  income  because the yields earned on loans and  investments
may not adjust to market rates of interest with the same frequency,  or with the
same speed, as the rates paid by the Bank on its deposits.

         Most of the Bank's deposits are either interest-bearing demand deposits
or short term certificates of deposit and other  interest-bearing  deposits with
interest  rates that  fluctuate as market rates  change.  Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and  securities  investments  with  either  short  terms  to  maturity  or  with
adjustable  rates or other  features  that  cause  yields to adjust  based  upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse  effects of a  substantial  and  sustained  increase in market  interest
rates,  the Bank has from time to time purchased off balance sheet interest rate
cap contracts which generally  provide that the Bank will be entitled to receive
payments from the other party to the contract if interest rates exceed specified
levels.  These  contracts,  when written,  are entered into with major financial
institutions.

         The  Company  seeks to  maximize  its net  interest  margin  within  an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted  net interest  income that may be gained or lost due to
favorable or  unfavorable  movements in interest  rates.  Interest rate risk, or
sensitivity,  arises when the  maturity or repricing  characteristics  of assets
differ   significantly  from  the  maturity  or  repricing   characteristics  of
liabilities.












                                       40
<PAGE>

In the banking industry,  a traditional  measure of interest rate sensitivity is
known as "gap" analysis,  which measures the cumulative  differences between the
amounts  of assets  and  liabilities  maturing  or  repricing  at  various  time
intervals.  The following table sets forth the Company's interest rate repricing
gaps for selected maturity periods:

<TABLE>
<CAPTION>
                                                                             BERKSHIRE BANCORP INC.
                                                               INTEREST RATE SENSITIVITY GAP AT DECEMBER 31, 2007
                                                                     (IN THOUSANDS, EXCEPT FOR PERCENTAGES)
                                            --------------------------------------------------------------------------------
                                             3 MONTHS    3 THROUGH      1 THROUGH     OVER
                                              OR LESS    12 MONTHS       3 YEARS     3 YEARS         TOTAL        FAIR VALUE
                                            ---------    ---------      ---------    ---------     ----------     ----------
<S>                                <C>        <C>           <C>            <C>          <C>           <C>           <C>
Federal funds sold                             31,000                                                  31,000        31,000
                                  (Rate)        4.03%
Interest bearing deposits in banks              7,579           --             --           --          7,579         7,579
                                  (Rate)         3.49%                                                   3.49%
Loans (1)(2)
Adjustable rate loans                         124,428       15,354         25,835       42,391        208,008       209,798
                                  (Rate)         8.10%        7.11%          6.66%        7.33%          7.69%
Fixed rate loans                                7,500       25,044         44,311      151,456        228,311       231,591
                                  (Rate)        11.00%        7.66%          7.92%        6.35%          6.95%
                                            ---------    ---------      ---------    ---------     ----------
Total loans                                   131,928       40,398         70,146      193,847        436,319       441,569
Investments (3)(4)                            267,476       65,223        141,605      129,181        603,485       599,366
                                  (Rate)         5.81%        4.58%          4.26%        5.46%          5.24%
                                            ---------    ---------      ---------    ---------     ----------
Total rate-sensitive assets                   437,983      105,621        211,751      323,028      1,078,383
                                            ---------    ---------      ---------    ---------     ----------
Deposit accounts (5)
Savings and NOW                               288,323           --             --           --        288,323       288,323
                                  (Rate)         3.64%                                                   3.64%
Money market                                   33,584           --             --           --         33,584        33,584
                                  (Rate)         2.98%                                                   2.98%
Time Deposits                                 319,567      157,560            375           --        477,502       477,802
                                  (Rate)         4.69%        4.67%          3.48%            %          4.68%
                                            ---------    ---------      ---------    ---------     ----------
Total deposit accounts                        641,474      157,560            375                     799,409
Repurchase Agreements                          64,842           --             --       12,000         76,842        77,267
                                  (Rate)         4.53%                                    4.91%          4.59%
Other borrowings                                1,788        3,476         22,416       26,608         54,288        55,160
                                  (Rate)         3.45%        3.21%          5.42%        7.18%          6.08%
                                            ---------    ---------      ---------    ---------     ----------
Total rate-sensitive liabilities              708,104      161,036         22,791       38,608        930,539
                                            ---------    ---------      ---------    ---------     ----------

Gap (repricing differences)                  (270,121)    ( 55,415)       188,960      284,420        147,844
                                            =========    =========      =========    =========     ==========

Cumulative Gap                               (270,121)    (325,536)      (136,576)     147,844
                                            =========    =========      =========    =========
Cumulative Gap to Total Rate Sensitive
Assets                                         (25.05)%     (30.19)%       (12.66)%      13.71%
                                            =========    =========      =========    =========
</TABLE>

---------------------------------------
(1)      Adjustable-rate  loans are included in the period in which the interest
         rates are next  scheduled to adjust  rather than in the period in which
         the loans mature.  Fixed-rate  loans are  scheduled  according to their
         maturity dates.
(2)      Includes nonaccrual loans.
(3)      Investments  are  scheduled  according  to their  respective  repricing
         (variable rate investments) and maturity (fixed rate securities) dates.
(4)      Investments are stated at book value.
(5)      NOW  accounts and savings  accounts are regarded as readily  accessible
         withdrawal accounts.  The balances in such accounts have been allocated
         among  maturity/repricing  periods  based  upon  The  Berkshire  Bank's
         historical experience.  All other time accounts are scheduled according
         to their respective maturity dates.

                                       41
<PAGE>


IMPACT OF INFLATION AND CHANGING PRICES

         The  Company's  financial  statements  measure  financial  position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the  increasing  cost of the Company's  operations.
The assets and  liabilities  of the Company are largely  monetary.  As a result,
interest  rates have a greater impact on the Company's  performance  than do the
effects of general  levels of  inflation.  In  addition,  interest  rates do not
necessarily  move in the direction,  or to the same extent as the price of goods
and services.  However,  in general,  high  inflation  rates are  accompanied by
higher interest rates, and vice versa.

NEW ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR FAIR VALUE MEASUREMENT

         In  September  2006,  the  Financial  Accounting  Standards  Board (the
"FASB") issued  Statement of Financial  Accounting  Standards  ("SFAS") No. 157,
"Fair  Value  Measurements."  The  Statement  is  effective  for  all  financial
statements issued for fiscal years beginning after November 15, 2007, or January
1, 2008 as to the Company.  The  Statement  defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market  participants at the measurement date,  establishes a
framework for measuring  fair value,  and expands  disclosures  about fair value
measurements. Adoption of SFAS No. 157 is not expected to have a material impact
on the Company's results of operations or financial condition.

ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS

         In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined  Benefit  Pension  and Other  Postretirement  Plans." The  Statement
requires  an  employer  that  is a  business  entity  and  sponsors  one or more
single-employer  defined  benefit plans to: (1) recognize the funded status of a
benefit plan - measured as the difference  between plan assets at fair value and
the benefit  obligation  - in its  statement  of  financial  position,  with the
corresponding  credit or charge,  net of taxes,  upon initial  adoption to Other
Comprehensive  Income;  (2)  recognize  as a  component  of other  comprehensive
income,  net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not  recognized  as  components  of net periodic
benefit cost pursuant to SFAS No. 87, "Employers'  Accounting for Pensions",  or
SFAS No. 106,  "Employers'  Accounting  for  Postretirement  Benefits Other Than
Pensions";  (3) measure  defined  benefit plan assets and  obligations as of the
date of the employer's fiscal year end; and (4) expand  disclosures in the notes
to the financial  statements about certain effects on net periodic benefit cost.
The Statement also amends SFAS No. 132 (revised 2003),  "Employers'  Disclosures
about Pensions and Other Postretirement  Benefits", and SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans for
Termination  Benefits".  An employer who has publicly traded equity  securities,
such as the Company,  is required to initially  recognize the funded status of a
defined benefit  postretirement plan and to provide the required  disclosures as
of the end of its first  fiscal year ending after  December  15,  2006.  For the
Company,  this was for the year ended  December  31,  2006,  and the adoption of
which had no significant effect on Other Comprehensive  Income and stockholders'
equity.

         The  requirement  to measure plan assets and benefit  obligations as of
the date of the employer's  fiscal year end is effective for fiscal years ending
after  December  15,  2008,  the fiscal year ending  December 31, 2008 as to the
Company. Based upon the advice of our consultants,  management believes that the
adoption  of  this  statement   will  have  no   significant   effect  on  Other
Comprehensive Income and stockholders' equity.

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

         On  July  13,  2006,  the  FASB  issued  FASB  Interpretation  No.  48,
"Accounting  for Uncertainty in Income Taxes" ("FIN 48"): an  interpretation  of
FASB No. 109. FIN 48 clarifies the  accounting for  uncertainty  involved in the
recognition and measurement of a tax position taken or expected to be taken in a
tax  return.  FIN 48  also  provides  guidance  on  derecognition,  measurement,
classification, interest

                                       42
<PAGE>

and penalties, accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years  beginning  after December 15, 2006, or January 1,
2007 as to the Company. We adopted FIN 48 on January 1, 2007 which resulted in a
decrease  in  our  tax  liability  accounts  of  approximately  $965,000  and  a
corresponding increase to stockholders' equity as of January 1, 2007.

ACCOUNTING FOR BUSINESS COMBINATIONS

         In December 2007, the FASB issued SFAS 141(R), "Accounting for Business
Combinations."  This  Statement  replaces  FASB  Statement  No.  141,  "Business
Combinations"  and is effective as of the beginning of the fiscal year beginning
on or after December 15, 2008, or January 1, 2009 as to the Company. SFAS 141(R)
establishes  principles and  requirements for how the acquirer of a business (i)
recognizes  and measures in its financial  statements  the  identifiable  assets
acquired,  the  liabilities  assumed,  and any  noncontrolling  interest  in the
acquiree,  (ii)  recognizes  and measures the goodwill  acquired in the business
combination  or a  gain  from a  bargain  purchase,  and  (iii)  determines  the
information to disclose in its financial  statements  with respect to the nature
and financial effects of the business  combination.  The adoption of SFAS 141(R)
is not expected to have a material impact on the Company's results of operations
or financial condition.

ACCOUNTING FOR NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS

         In  December   2007,  the  FASB  issued  SFAS  160,   "Accounting   For
Noncontrolling  Interests In Consolidated  Financial Statements." This Statement
amends Accounting Research Bulletin No. 51, "Consolidated  Financial Statements"
and is  effective as of the  beginning of the fiscal year  beginning on or after
December 15, 2008, or January 1, 2009 as to the Company. SFAS 160 is designed to
improve the  information  that a  reporting  entity  provides  in its  financial
statements with respect to (i) the ownership  interests in subsidiaries  held by
parties  other  than the  parent,  (ii) the  amount of  consolidated  net income
attributable to the parent and to the noncontrolling  interest, (iii) changes in
the parent's ownership interest,  (iv) the deconsolidation of a subsidiary,  and
(v)  disclosures  identifying  and  distinguishing  between the interests of the
parent and the interests of the noncontrolling  owners. The adoption of SFAS 160
is not expected to have a material impact on the Company's results of operations
or financial condition.

FAIR VALUE OPTION FOR FINANCIAL ASSETS AND LIABILITIES

         In February 2007, the FASB issued Statement 159, "The Fair Value Option
for Financial Assets and Financial  Liabilities" ("SFAS No. 159"). The objective
of SFAS No.  159 is to  provide  companies  with the  option to  recognize  most
financial  assets  and  liabilities  and  certain  other  items  at fair  value.
Statement  159  will  allow  companies  the  opportunity  to  mitigate  earnings
volatility  caused by  measuring  related  assets  and  liabilities  differently
without having to apply complex hedge accounting. Unrealized gains and losses on
items for which the fair value  option has been  elected  should be  reported in
earnings.  The fair  value  option  election  is  applied  on an  instrument  by
instrument basis (with some  exceptions),  is irrevocable,  and is applied to an
entire  instrument.  The election may be made as of the date of initial adoption
for existing  eligible items.  Subsequent to initial  adoption,  the Company may
elect the fair  value  option at initial  recognition  of  eligible  items or on
entering into an eligible firm  commitment.  The Company can only elect the fair
value option after initial recognition in limited circumstances.

         SFAS No. 159  requires  similar  assets and  liabilities  for which the
Company  has elected the fair value  option to be  displayed  on the face of the
balance  sheet either (a) together with  financial  instruments  measured  using
other  measurement  attributes  with  parenthetical  disclosure  of  the  amount
measured at fair value or (b) in separate line items. In addition,  SFAS No. 159
requires  additional  disclosures to allow financial  statement users to compare
similar assets and liabilities  measured differently either within the financial
statements  of  the  Company  or  between  financial   statements  of  different
companies.

         SFAS No. 159 is  required  to be  adopted by the  Company on January 1,
2008. Early adoption is permitted;  however,  the Company did not adopt SFAS No.
159 prior to the  required  adoption  date of January 1,  2008.  The  Company is
required

                                       43
<PAGE>

to adopt SFAS No. 159 concurrent  with SFAS No. 157, "Fair Value  Measurements."
The  remeasurement  to  fair-value  will  be  reported  as  a  cumulative-effect
adjustment  in the  opening  balance of  retained  earnings.  Additionally,  any
changes in fair  value due to the  concurrent  adoption  of SFAS No. 157 will be
included in the  cumulative-effect  adjustment  if the fair value option is also
elected for that item.

         The Company is currently evaluating, which, if any, items it will elect
to  recognize  at fair value at the date of adoption.  The  financial  statement
impact will depend on which items the Company elects to recognize at fair value,
fair value at the date of adoption, and the concurrent adoption of SFAS No. 157.
If the Company elects to recognize  items at fair value as a result of Statement
159, this could result in increased earnings volatility.

INTERNAL CONTROL OVER FINANCIAL REPORTING

         The current  objective of the Company's  Internal Control Program is to
allow the Bank and management to comply with Part 363 of the FDIC's  regulations
("FDICIA")  and  to  allow  the  Company  to  comply  with  Section  302  of the
Sarbanes-Oxley  Act of 2002 (the "Act"). In November 2005, the FDIC amended Part
363 of its regulations by raising the asset-size  threshold from $500 million to
$1 billion for internal control assessments by management and external auditors.
The final rule was effective December 28, 2005.

          Section  302 of the Act  requires  the CEOs and CFOs of the Company to
(i) certify that the annual and quarterly  reports filed with the Securities and
Exchange  Commission are accurate and (ii) acknowledge that they are responsible
for establishing,  maintaining and periodically  evaluating the effectiveness of
the  disclosure  controls  and  procedures.  Section  404  of the  Act  requires
management  to (i) report on internal  control over  financial  reporting,  (ii)
assess the effectiveness of such internal controls, and (iii) obtain an external
auditor's report on management's assessment of its internal control. The Company
is not an accelerated filer as defined in Rule 12b-2 of the Securities  Exchange
Act of 1934. Therefore,  the Company was not required to comply with Section 404
until the current year ended December 31, 2007.

         The Committee of Sponsoring  Organizations  (COSO)  methodology  may be
used to document and test the internal  controls  pertaining  to the accuracy of
Company issued  financial  statements and related  disclosures.  COSO requires a
review of the control  environment  (including  anti-fraud  and audit  committee
effectiveness),   risk   assessment,   control   activities,   information   and
communication, and ongoing monitoring.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.







                                       44
<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
of Berkshire Bancorp Inc.


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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Berkshire Bancorp
Inc. and  subsidiaries  as of December 31, 2007 and 2006,  and the  consolidated
results of their  operations and their  consolidated  cash flows for each of the
three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.


/s/ GRANT THORNTON LLP

New York, New York
March 31, 2008



                                       45
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)


                                                    DECEMBER 31,    DECEMBER 31,
                                                        2007            2006
                                                    -----------     -----------
ASSETS
Cash and due from banks                             $     8,614     $     8,061
Interest bearing deposits                                 7,579           4,950
Federal funds sold                                       31,000          11,300
                                                    -----------     -----------
Total cash and cash equivalents                          47,193          24,311
Investment Securities:
 Available-for-sale                                     598,961         514,798
 Held-to-maturity, fair value of $405
  in 2007 and $436 in 2006                                  395             433
                                                    -----------     -----------
Total investment securities                             599,356         515,231
Loans, net of unearned income                           434,785         370,923
 Less: allowance for loan losses                         (4,183)         (3,771)
                                                    -----------     -----------
Net loans                                               430,602         367,152
Accrued interest receivable                               8,602           6,397
Premises and equipment, net                               9,362           9,338
Goodwill, net                                            18,549          18,549
Other assets                                              6,854           7,678
                                                    -----------     -----------
Total assets                                        $ 1,120,518     $   948,656
                                                    ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
 Non-interest bearing                               $    53,805     $    49,418
 Interest bearing                                       799,410         632,071
                                                    -----------     -----------
Total deposits                                          853,215         681,489
Securities sold under agreements to repurchase           76,842          62,652
Long term borrowings                                     31,607          52,738
Subordinated debt                                        22,681          22,681
Accrued interest payable                                  9,089           8,110
Other liabilities                                         2,826           5,209
                                                    -----------     -----------
Total liabilities                                       996,260         832,879
                                                    -----------     -----------

Stockholders' equity
 Preferred stock - $.10 Par value:                           --              --
  2,000,000 shares authorized - none issued
 Common stock - $.10 par value
  Authorized  -- 10,000,000 shares
  Issued      --  7,698,285 shares
  Outstanding --
   December 31, 2007, 7,054,183 shares
   December 31, 2006, 6,877,881 shares                      770             770
Additional paid-in capital                               90,986          90,659
Retained earnings                                        42,352          37,285
Accumulated other comprehensive loss, net                (3,439)         (4,772)
 Treasury Stock at cost
 December 31, 2007,   644,102 shares
 December 31, 2006,   820,404 shares                     (6,411)         (8,165)
                                                    -----------     -----------
Total stockholders' equity                              124,258         115,777
                                                    -----------     -----------
Total liabilities and stockholders' equity          $ 1,120,518     $   948,656
                                                    ===========     ===========


         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       46
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED DECEMBER 31,
                                                               --------------------------------------------
                                                                 2007              2006              2005
                                                               --------          --------          --------
<S>                                                            <C>               <C>               <C>
INTEREST INCOME
Federal funds sold and interest bearing deposits               $  1,553          $    350          $    302
Investment securities                                            27,178            24,027            25,355
Loans, including related fees                                    29,804            23,844            19,399
                                                               --------          --------          --------
Total interest income                                            58,535            48,221            45,056
                                                               --------          --------          --------
INTEREST EXPENSE
Deposits                                                         32,083            22,559            14,191
Short-term borrowings                                             1,976             2,110             3,167
Long-term borrowings                                              3,734             4,517             5,041
                                                               --------          --------          --------
Total interest expense                                           37,793            29,186            22,399
                                                               --------          --------          --------
Net interest income                                              20,742            19,035            22,657
PROVISION FOR LOAN LOSSES                                           355               410               180
                                                               --------          --------          --------
Net interest income after
 provision for loan losses                                       20,387            18,625            22,477
                                                               --------          --------          --------
NON-INTEREST INCOME
Service charges on deposit accounts                                 658               588               589
Investment securities gains                                          86             2,336                 4
Other income                                                        915               769               613
                                                               --------          --------          --------
Total non-interest income                                         1,659             3,693             1,206
                                                               --------          --------          --------
NON-INTEREST EXPENSE
Salaries and employee benefits                                    8,971             8,481             8,002
Net occupancy expense                                             2,050             1,961             1,728
Equipment expense                                                    80               108               397
FDIC assessment                                                      86                85               272
Data processing expense                                             417               366               198
Other                                                             2,714             2,581             2,542
                                                               --------          --------          --------
Total non-interest expense                                       14,318            13,582            13,139
                                                               --------          --------          --------
Income before provision for income taxes                          7,728             8,736            10,544
Provision for income taxes                                        2,374             3,856             5,003
                                                               --------          --------          --------
Net income                                                     $  5,354          $  4,880          $  5,541
                                                               ========          ========          ========
Net income per share:
 Basic                                                         $    .77          $    .71          $    .81
                                                               ========          ========          ========
 Diluted                                                       $    .76          $    .70          $    .80
                                                               ========          ========          ========
Number of shares used to compute
  net income per share:
Basic                                                             6,987             6,891             6,805
                                                               ========          ========          ========
Diluted                                                           7,005             6,976             6,939
                                                               ========          ========          ========

Dividends per share                                            $    .18          $    .16          $    .15
                                                               ========          ========          ========
</TABLE>


         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       47
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     ACCUMULATED
                                               STOCK    ADDITIONAL      OTHER                                             TOTAL
                                     COMMON     PAR       PAID-IN   COMPREHENSIVE  RETAINED   TREASURY  COMPREHENSIVE  STOCKHOLDERS'
                                     SHARES    VALUE      CAPITAL     (LOSS) NET   EARNINGS    STOCK       INCOME         EQUITY
                                     ------    -----      -------   -------------  --------    -----       ------      -------------
<S>                                   <C>       <C>      <C>          <C>          <C>        <C>          <C>          <C>
BALANCE AT JANUARY 1, 2005            7,698     $770     $89,543      $(2,602)     $28,983    $ (9,075)                 $107,619
Net income                                                                           5,541                   5,541         5,541
Exercise of stock options                                    354                                 1,332                     1,686
Tax benefit from exercise
 of stock options                                            697                                                             697
Other comprehensive (loss) net
 of reclassification adjustment
 and taxes                                                              (5,813)                             (5,813)       (5,813)
                                                                                                           -------
Comprehensive loss                                                                                         $  (272)
                                                                                                           =======
Cash dividends                                                                      (1,020)                               (1,020)
                                     ------     ----     -------      -------     --------    --------                  --------
BALANCE AT DECEMBER 31, 2005          7,698      770      90,594        (8,415)     33,504      (7,743)                  108,710
Net income                                                                           4,880                   4,880         4,880
Acquisition of treasury shares                                                                    (790)                     (790)
Exercise of stock options                                    (19)                                  368                       349
Tax benefit from exercise                                     84                                                              84
 of stock options
Other comprehensive income net
 of reclassification adjustment
 and taxes                                                               3,643                               3,643         3,643
                                                                                                           -------
Comprehensive income                                                                                       $ 8,523
                                                                                                           =======
Cash dividends                                                                     (1,099)                                (1,099)
                                     ------     ----     -------      -------     --------    --------                  --------
BALANCE AT DECEMBER 31, 2006          7,698      770      90,659       (4,772)      37,285      (8,165)                  115,777
Adoption of FIN 48                                                                     965                                   965
                                                                                  --------                              --------
Adjusted balance at January 1, 2007                                                 38,250                               116,742
Net income                                                                           5,354                   5,354         5,354
Exercise of stock options                                   (32)                                 1,754                     1,722
Tax benefit from exercise
 of stock options                                            359                                                             359
Other comprehensive income net
 of reclassification adjustment
 and taxes                                                               1,333                               1,333         1,333
                                                                                                           -------
Comprehensive income                                                                                       $ 6,687
                                                                                                           =======
Cash dividends                                                                     (1,252)                                (1,252)
                                     ------     ----     -------      -------     --------    --------                  --------
BALANCE AT DECEMBER 31, 2007          7,698     $770     $90,986      $(3,439)    $ 42,352    $ (6,411)                 $124,258
                                     ======     ====     =======      =======     ========    ========                  ========
</TABLE>

         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       48
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                -------------------------------------------
                                                   2007            2006            2005
                                                -----------     -----------     -----------
<S>                                             <C>             <C>             <C>
  CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                      $     5,354     $     4,880     $     5,541
Adjustments to reconcile net income
 to net cash provided by operating
 activities:
Realized gains on investment securities                 (86)         (2,336)             (4)
Net (accretion) amortization of premiums
 of investment securities                            (1,339)           (595)             (3)
Depreciation and amortization                           739             727             650
Provision for loan losses                               355             410             180

  CHANGES IN ASSETS AND LIABILITIES:
 (Increase) decrease in accrued                      (2,205)            387            (770)
  interest receivable
 Decrease (increase) in other assets                  1,184           2,021          (3,317)
 (Decrease) increase in accrued interest
  payable and other liabilities                        (439)          3,763           3,230
                                                -----------     -----------     -----------

 Net cash provided by operating activities            3,563           9,257           5,507
                                                -----------     -----------     -----------

  CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale
 Purchases                                       (1,439,103)       (489,737)       (378,781)
 Sales, maturities and calls                      1,357,643         580,923         404,533
Investment securities held to maturity
 Purchases                                               --              --              --
 Maturities                                              93             129              62
Net (increase) in loans                             (63,806)        (61,598)        (22,092)
Acquisition of premises and equipment                  (763)         (1,463)           (575)
                                                -----------     -----------     -----------

Net cash (used in) provided by
 investing activities                              (145,936)         28,254           3,147
                                                -----------     -----------     -----------
</TABLE>


                                       49
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                -------------------------------------------
                                                   2007            2006            2005
                                                -----------     -----------     -----------
<S>                                             <C>             <C>             <C>
  CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in non interest
 bearing deposits                                     4,387            (851)          8,078
Net increase in interest bearing deposits           167,339           2,080          52,294
Increase (decrease) in securities sold
 under agreements to repurchase                      14,190         (10,392)        (54,703)
Proceeds from long term debt                         19,000           2,000          20,000
Repayment of long term debt                         (40,131)        (32,463)        (32,404)
Proceeds from issuance of
 subordinated debentures, net                            --              --           7,217
Acquisition of treasury stock                            --            (790)             --
Proceeds from exercise of common
 stock options                                        1,363             349           1,686
Tax benefits from exercise of                           359              84             697
 common stock options
Dividends paid                                       (1,252)         (1,099)         (1,020)
                                                -----------     -----------     -----------
Net cash provided by (used in)
 financing activities                               165,255         (41,082)          1,845
                                                -----------     -----------     -----------
  Net increase (decrease) in cash and
   cash equivalents                                  22,882          (3,571)         10,499
  Cash and cash equivalents at
   beginning of year                            $    24,311     $    27,882     $    17,383
                                                -----------     -----------     -----------
  Cash and cash equivalents at
   end of year                                  $    47,193     $    24,311     $    27,882
                                                ===========     ===========     ===========

SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION:
  Cash used to pay interest                     $    36,814     $    26,807     $    19,184
  Cash used to pay income taxes,
   net of refunds                               $     3,575     $     4,163     $     6,716
</TABLE>


         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       50
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 AND 2006

NOTE A - ORGANIZATION AND CAPITALIZATION

         ORGANIZATION

         Berkshire  Bancorp  Inc.  ("Berkshire"  or the  "Company"  or "we"  and
similar pronouns), a Delaware corporation,  is a bank holding company registered
under the Bank Holding Company Act of 1956.  Berkshire's  principal  activity is
the  ownership  and  management  of its indirect  wholly-owned  subsidiary,  The
Berkshire Bank (the "Bank"),  a New York State  chartered  commercial  bank. The
Bank is owned  through  Berkshire's  wholly-owned  subsidiary  Greater  American
Finance Group, Inc. ("GAFG").

         The  Bank  was  established  in 1989  to  provide  highly  personalized
services to high net worth  individuals  and to small and  mid-sized  commercial
businesses  primarily from the New York City  metropolitan  area. In March 2001,
the Company  expanded its customer base and market area with the  acquisition of
GSB  Financial  Corporation.  The Bank's  main  office and branch is in mid-town
Manhattan.  The Bank has one other branch in lower  Manhattan,  four branches in
Brooklyn,  New York,  four branches in Orange and Sullivan  Counties in New York
State, and one branch in Ridgefield, New Jersey.

         The Bank competes with other banking and financial  institutions in its
markets.  Commercial  banks,  savings  banks,  savings  and  loan  associations,
mortgage  bankers and brokers,  and credit unions actively  compete for deposits
and  loans.  Such  institutions,  as well as  consumer  finance,  mutual  funds,
insurance  companies,   and  brokerage  and  investment  banking  firms  may  be
considered  to be  competitors  of the Bank with  respect  to one or more of the
services provided by the Bank.

         The  Company  and the Bank are  subject to the  regulations  of certain
state and federal agencies and, accordingly,  are periodically examined by those
regulatory  authorities.   As  a  consequence  of  such  regulation  of  banking
activities,   the  Bank's   business  may  be  affected  by  state  and  federal
legislation.

         TRUST PREFERRED SECURITIES

         As of May 18 2004, the Company established Berkshire Capital Trust I, a
Delaware  statutory  trust,  ("BCTI").  The Company owns all the common  capital
securities of BCTI. BCTI issued $15.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds,  combined with the
proceeds  from the sale of BCTI's  common  capital  securities,  in the  Company
through the purchase of $15.464 million  aggregate  principal amount of Floating
Rate  Junior  Subordinated  Debentures  (the  "2004  Debentures")  issued by the
Company.  The 2004 Debentures,  the sole assets of BCTI, mature on July 23, 2034
and bear interest at a floating  rate,  three month LIBOR plus 2.70%,  currently
7.85%.

         On April 1, 2005, the Company established Berkshire Capital Trust II, a
Delaware  statutory  trust,  ("BCTII").  The Company owns all the common capital
securities of BCTII.  BCTII issued $7.0 million of preferred capital  securities
to investors in a private  transaction and invested the proceeds,  combined with
the proceeds from the sale of BCTII's common capital securities,  in the Company
through the purchase of $7.217 million  aggregate  principal  amount of Floating
Rate  Junior  Subordinated  Debentures  (the  "2005  Debentures")  issued by the
Company.  The 2005 Debentures,  the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating  rate,  three month LIBOR plus 1.95%,  currently
6.97%.



                                       51
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - (CONTINUED)

         Based on current  interpretations of the banking  regulators,  the 2004
Debentures and 2005 Debentures  (collectively,  the "Debentures")  qualify under
the  risk-based  capital  guidelines  of the Federal  Reserve as Tier 1 capital,
subject to certain  limitations.  The  Debentures  are  callable by the Company,
subject to any required  regulatory  approvals,  at par, in whole or in part, at
any time after five years from the date of issuance.  The Company's  obligations
under the Debentures and related documents,  taken together,  constitute a full,
irrevocable and unconditional  guarantee on a subordinated  basis by the Company
of the obligations of BCTI and BCTII under the preferred capital securities sold
by BCTI and BCTII to investors.  FIN46(R)  precludes  consideration  of the call
option  embedded in the preferred  capital  securities  when  determining if the
Company has the right to a majority of BCTI and BCTII expected residual returns.
Accordingly,  BCTI and BCTII are not included in the consolidated  balance sheet
of the Company.

         The Federal  Reserve  has issued  guidance  on the  regulatory  capital
treatment for the trust-preferred securities issued by BCTI and BCTII. This rule
would retain the current maximum percentage of total capital permitted for Trust
Preferred  Securities  at 25%,  but  would  enact  other  changes  to the  rules
governing  Trust  Preferred  Securities  that  affect  their  use as part of the
collection of entities  known as  "restricted  core capital  elements." The rule
would  take  effect  March 31,  2009;  however,  a five year  transition  period
starting  March 31, 2004 and  leading up to that date would  allow bank  holding
companies  to  continue to count Trust  Preferred  Securities  as Tier 1 Capital
after applying FIN-46(R).  Management has evaluated the effects of this rule and
does not  anticipate a material  impact on its capital  ratios when the proposed
rule is finalized.

NOTE B - SUMMARY OF ACCOUNTING POLICIES

1.       BASIS OF FINANCIAL STATEMENT PRESENTATION

         The consolidated  financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
and predominant  practice within the banking industry,  and include the accounts
of Berkshire  Bancorp Inc. and its wholly owned  subsidiaries,  Greater American
Finance Group, Inc. ("GAFG"), and GAFG's wholly owned subsidiary,  the Bank, and
East 39,  LLC,  (collectively,  the  "Company").  All  significant  intercompany
accounts and transactions have been eliminated.

         In preparing the financial  statements  in conformity  with  accounting
principles  generally  accepted in the United  States of America,  management is
required to make estimates and assumptions  that affect the reported  amounts of
assets and liabilities,  the disclosure of contingent  assets and liabilities at
the date of the  balance  sheets,  and the  reported  amounts  of  revenues  and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

         The principal  estimates that are susceptible to significant  change in
the near term relate to the  allowance for loan losses,  goodwill,  and deferred
tax assets and liabilities.  The evaluation of the adequacy of the allowance for
loan  losses  includes  an analysis  of the  individual  loans and overall  risk
characteristics  and size of the  different  loan  portfolios,  and  takes  into
consideration current economic and market conditions, the capability of specific
borrowers to pay specific loan  obligations,  as well as current loan collateral
values.  However, actual losses on specific loans, which also are encompassed in
the analysis, may vary from estimated losses.

         Substantially all outstanding goodwill resulted from the acquisition of
The   Berkshire   Bank  and  Goshen   Savings  Bank,   depository   institutions
concentrating  in the New York City and Orange and Sullivan County  communities,
respectively.  As the result of the market  penetration in these New York areas,
the  Company had  formulated  its own  strategy  to create  such a market  role.
Accordingly, implicit in the purchase of these franchises was the acquisition of
that role. However, if such benefits, including new business, are not derived or
the Company changes its business plan, an impairment may be recognized.

                                       52
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - (CONTINUED)

         The Company  recognizes  deferred  tax assets and  liabilities  for the
future tax effects of temporary  differences,  net operating loss  carryforwards
and tax credits.  Deferred tax assets are subject to management's judgment based
upon  available  evidence  that future  realization  is more likely than not. If
management  determines  that the Company may be unable to realize all or part of
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the  recorded  value of the net  deferred tax asset to the
expected realizable amount.

2.       INVESTMENT SECURITIES

         The Company  accounts for its investment  securities in accordance with
Statement of Financial  Accounting  Standard  ("SFAS") No. 115,  "Accounting for
Certain  Investments in Debt and Equity  Securities".  Investments in securities
are  classified  in one of  three  categories:  held  to  maturity,  trading  or
available for sale.  Investments  for which  management has both the ability and
intent to hold to maturity,  are carried at cost,  adjusted for the amortization
of  premiums  and  accretion  of  discounts  computed  by the  interest  method.
Investments  which  management  believes  may be sold prior to  maturity  due to
changes in interest rates, prepayment risk and equity, liquidity requirements or
other  factors,  are  classified  as  available  for  sale.   Available-for-sale
securities are carried at fair value, with the unrealized gains and losses,  net
of tax,  reported as a separate  component of stockholders'  equity and excluded
from the  determination of net income.  Gains or losses on disposition are based
on the net proceeds and cost of the securities  sold,  adjusted for amortization
of premiums  and  accretion  of  discounts,  using the  specific  identification
method.

         At December 31, 2007, our portfolio of investment  securities  included
approximately  $185 million of auction rate securities.  These  investments have
high credit quality ratings of AA or AAA and are fully  collateralized  by bonds
and other financial instruments. Auction rate securities are generally long-term
debt  instruments  that provide  liquidity  through a Dutch auction process that
resets  the  applicable  interest  rate at  pre-determined  calendar  intervals,
generally every 28 days.

         Recent uncertainties in the credit markets have negatively impacted our
ability to  liquidate,  if  necessary,  investments  in auction rate  securities
because,  in recent  auctions,  the amount of securities  submitted for sale has
exceeded  the  amount of  purchase  orders.  We are not  certain  as to when the
liquidity issues relating to these  investments will improve,  however,  we have
the ability to hold these securities to maturity  (predominately  20 years after
December 31, 2007), thereby recovering our investment. As a result of the recent
auction failures beginning in February 2008, the fair value of these securities,
while maintaining their investment grade rating and interest payments,  could be
negatively  impacted at a later time.  Were this to occur, we may be required to
reflect a write-down of certain of our auction rate securities in future periods
as a charge to earnings if any of our auction rate  securities  are deemed to be
other-than-temporarily  impaired.  Such  impairment  charge would be recorded as
other expense and could be material to our results of operations.

         Based on our expected  operating  cash flows,  and our other sources of
cash, we do not expect the potential  lack of liquidity in these  investments to
affect our ability to execute our current business plan.

3.       LOANS AND ALLOWANCE FOR LOAN LOSSES

         Loans  that  management  has the  intent  and  ability  to hold for the
foreseeable  future or until  maturity  or payoff  are  stated at the  amount of
unpaid  principal  and are net of unearned  discount,  unearned loan fees and an
allowance  for credit  losses.  The  allowance  for loan  losses is  established
through  a  provision  for  loan  losses  charged  to  expense.  Loan  principal
considered to be  uncollectible  by management is charged  against the allowance
for credit losses.  The allowance is an amount that management  believes will be
adequate to absorb

                                       53
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - (CONTINUED)

specifically  identifiable  losses and losses on existing  loans that may become
uncollectible  based upon an evaluation of known and inherent  risks in the loan
portfolio.  The evaluation takes into  consideration  such factors as changes in
the nature and size of the loan portfolio,  overall portfolio quality,  specific
problem or impaired loans, and current economic  conditions which may affect the
borrowers'  ability to pay. The  evaluation  details  historical  losses by loan
category, the resulting loss rates for which are projected at current loan total
amounts.

         The Company accounts for its impaired loans in accordance with SFAS No.
114,  "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118,  "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures"  and  SFAS  No.  5,  "Accounting  for  Contingencies."   Management
considers its  investment in  one-to-four  family real estate loans and consumer
loans  to be  homogeneous  groups  of  loans.  As  such,  these  loans  are  not
individually  evaluated for  impairment  but rather are  collectively  evaluated
under SFAS No.5.  These  standards  require that a creditor  measure  impairment
based on the present  value of  expected  future  cash flows  discounted  at the
loan's effective interest rate, except that as a practical expedient, a creditor
may measure  impairment based on a loan's  observable  market price, or the fair
value of the collateral if the loan is  collateral-dependent.  Regardless of the
measurement  method, a creditor must measure  impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.

         Interest  income  is  accrued  as earned  on a simple  interest  basis.
Accrual of interest is discontinued on a loan when  management  believes,  after
considering  economic and business conditions and collection  efforts,  that the
borrower's  financial condition is such that collection of interest is doubtful.
When a loan is  placed  on such  non-accrual  status,  all  accumulated  accrued
interest  receivable  applicable to periods prior to the current year is charged
off to the allowance for loan losses.  Interest which had accrued in the current
year is reversed out of current  period  income.  Loans 90 days or more past due
and still  accruing  interest  must have both  principal  and accruing  interest
adequately secured and must be in the process of collection.

4.       INTEREST RATE SWAP

         The  Bank,  from  time to time,  has  entered  into  interest  rate cap
agreements  in order to hedge its exposure to interest  rate  fluctuations.  The
Company  adopted the  provisions  of SFAS No. 133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  as amended,  as of January 1, 2001.  The
statement  requires the Company to recognize all derivative  instruments at fair
value as either assets or  liabilities.  Financial  derivatives  are reported at
fair value in other assets or other liabilities.  For derivatives not designated
as hedges, the gain or loss is recognized in current earnings. Amounts reclassed
into earnings, when the hedged transaction culminates,  are included in interest
income.  At December 31, 2007 and 2006,  the Company had $10.0 million and $20.0
million, respectively, outstanding.

5.       BANK PREMISES AND EQUIPMENT

         Bank premises and  equipment,  including  leasehold  improvements,  are
stated at cost less accumulated  depreciation.  Depreciation expense is computed
on the  straight-line  method  over the  estimated  useful  lives of the assets.
Leasehold  improvements  are amortized over the shorter of the estimated  useful
lives of the  improvements  or the terms of the related  leases.  An accelerated
depreciation method is used for tax purposes.


                                       54
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - (CONTINUED)

6.       OTHER REAL ESTATE OWNED

         Other  real  estate  owned,   representing  property  acquired  through
foreclosure,  is recorded at the lower of cost or estimated  fair market  value,
less costs of disposal.  When property is acquired,  the excess,  if any, of the
loan balance over fair market value is charged to the allowance for loan losses.
Periodically  thereafter,  the asset is reviewed for subsequent  declines in the
estimated fair market value.  Subsequent declines, if any, and holding costs, as
well as gains and losses on subsequent  sale,  are included in the  consolidated
statements of operations.

7.       GOODWILL

         Goodwill  resulting from the  acquisition of The Berkshire Bank in 1999
and GSB  Financial  Corporation  in 2001 is  accounted  for under SFAS No.  142,
"Goodwill and Intangible  Assets".  SFAS No. 142 includes  requirements  to test
goodwill and  indefinite  lived  intangible  assets for  impairment  rather than
amortize them. The Company performs such tests annually and did not identify any
impairment on its outstanding  goodwill and its identifiable  intangible  assets
from its most recent testing, performed at September 30, 2007.

8.       INCOME TAXES

         The Company  accounts  for income taxes under the  liability  method of
accounting for income taxes.  Deferred tax assets and liabilities are determined
based on the difference between the financial  statement and tax bases of assets
and liabilities as measured by the enacted tax rates that will be in effect when
these  differences  reverse.  Deferred  tax  expense is the result of changes in
deferred tax assets and liabilities.  The principal types of differences between
assets and  liabilities  for  financial  statement  and tax return  purposes are
allowance  for loan  losses,  deferred  loan  fees,  deferred  compensation  and
securities available for sale.

         As of January 1, 2007, the Company adopted FASB  Interpretation  No. 48
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109". The result of adoption was an increase to retained  earnings  totaling
$965,000 as a previously accrued liability was evaluated and determined to be no
longer necessary as the tax year expired.

9.       NET INCOME PER SHARE

         The Company  follows the  provisions  of SFAS No.  128,  "Earnings  Per
Share." Basic earnings per share  excludes  dilution and is computed by dividing
income available to common  shareholders by the  weighted-average  common shares
outstanding during the period. Diluted earnings per share takes into account the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were exercised and converted into common stock.

10.      STOCK BASED COMPENSATION

         At  December  31,  2007,  the  Company  has  one  stock-based  employee
compensation plan, which is more fully described in Note J. The Company accounts
for the plan in accordance with SFAS Statement No. 123(R), "Share Based Payment"
("SFAS  123R").  Under  the fair  value  recognition  provisions  of SFAS  123R,
share-based  compensation  cost is  measured at the grant date based on the fair
value of the  award  and is  recognized  as  expense  over the  vesting  period.
Determining  the fair value of  share-based  awards at the grant  date  requires
judgement,  including estimating the Company's stock price volatility,  employee
stock option exercise  behaviors and employee option forfeiture rates.  Prior to
the adoption of SFAS 123(R),  the Company  accounted  for the plan in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25") and related interpretations.

         The Company did not grant stock options in fiscal 2007,  2006 and 2005,
as a result of which, no stock based  compensation  expense was recorded in each
of those years.


                                       55
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - (CONTINUED)

11.      CASH EQUIVALENTS

         For purposes of reporting  cash flows,  cash and cash  equivalents  are
comprised  of cash  and due  from  banks,  interest  bearing  deposits  in other
financial  institutions  with an original maturity of less than ninety days, and
federal funds sold.

12.      RESTRICTIONS ON CASH AND DUE FROM BANKS

         The Bank is required  to  maintain  reserves  against  customer  demand
deposits by keeping cash on hand or balances with the Federal  Reserve Bank in a
non-interest bearing account. The amounts of those reserve and cash balances was
approximately   $3,258,000  and  $2,617,000  at  December  31,  2007  and  2006,
respectively.

13.      FEDERAL HOME LOAN BANK STOCK

         The Company is required as a  condition  of  membership  in the Federal
Home Loan Bank of New York ("FHLBNY") to maintain an investment in FHLBNY common
stock. The stock is redeemable at par, and therefore,  its cost is equivalent to
its redemption value.

14.      COMPREHENSIVE INCOME

         The  Company  follows  the  provisions  of  SFAS  No.  130,  "Reporting
Comprehensive  Income" which includes net income as well as certain other items,
which results in a change to equity during the period. (In thousands.)


                                              YEAR ENDED DECEMBER 31, 2007
                                          -----------------------------------
                                                          Tax
                                          Before tax    (expense)  Net of tax
                                            amount       benefit     Amount
                                          -----------   ---------  ----------
Unrealized gains (losses)
 on investment securities:
 Unrealized holding gains
  arising during period                     $2,278      $ (964)     $1,314
  Less reclassification adjustment for
   gains realized in net income                 86         (34)         52
                                            ------      ------      ------
Unrealized gain on investment securities     2,192        (930)      1,262
Change in minimum pension liability             71          --          71
                                            ------      ------      ------
Other comprehensive income, net             $2,263      $ (930)     $1,333
                                            ======      ======      ======


                                              YEAR ENDED DECEMBER 31, 2006
                                          -----------------------------------
                                                          Tax
                                          Before tax    (expense)  Net of tax
                                            amount       benefit     Amount
                                          -----------   ---------  ----------
Unrealized gains (losses)
 on investment securities:
 Unrealized holding gains (losses)
  arising during period                     $ 8,673     $(3,511)    $ 5,162
  Less reclassification adjustment for
   gains realized in net income               2,336        (934)      1,402
                                            -------     -------     -------
Unrealized gain on investment securities      6,337      (2,577)      3,760
Change in minimum pension liability            (117)         --        (117)
                                            -------     -------     -------
Other comprehensive income, net             $ 6,220     $(2,577)    $ 3,643
                                            =======     =======     =======


                                       56
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - (CONTINUED)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 2005
                                                          --------------------------------------------------
                                                                                  Tax
                                                            Before tax         (expense)       Net of tax
                                                              amount            benefit          Amount
                                                          ----------------   --------------   --------------
<S>                                                             <C>                <C>            <C>
Unrealized gains (losses) on investment securities:
 Unrealized holding gains (losses)
  arising during period                                         $ (8,834)          $ 3,313        $ (5,521)
  Less reclassification adjustment for
   gains realized in net income                                        4                (1)              3
                                                                --------           -------        --------
Unrealized (loss) on investment securities                        (8,838)            3,314          (5,524)
Change in minimum pension liability                                 (289)               --            (289)
                                                                --------           -------        --------
Other comprehensive income (loss), net                          $ (9,127)          $ 3,314        $ (5,813)
                                                                ========           =======        ========
</TABLE>



15.      RECLASSIFICATIONS

         Certain amounts in the December 31, 2006 and 2005 financial  statements
have been reclassified to conform to the current period's presentation.


NOTE C - INVESTMENT SECURITIES

         The following is a summary of held to maturity investment securities:


<TABLE>
<CAPTION>
                                                              DECEMBER 31, 2007
                                     ---------------------------------------------------------------------
                                                           GROSS              GROSS
                                       AMORTIZED        UNREALIZED          UNREALIZED          FAIR
                                         COST              GAINS              LOSSES            VALUE
                                     --------------   ----------------    ---------------   --------------
                                                                (In thousands)
<S>                                       <C>                <C>               <C>               <C>
U.S. Government Agencies                  $    395           $     11          $     (1)         $    405
                                          ========           ========          ========          ========

<CAPTION>

                                                              DECEMBER 31, 2006
                                     ---------------------------------------------------------------------
                                                           GROSS              GROSS
                                       AMORTIZED        UNREALIZED          UNREALIZED          FAIR
                                         COST              GAINS              LOSSES            VALUE
                                     --------------   ----------------    ---------------   --------------
                                                                (In thousands)
<S>                                       <C>                <C>               <C>               <C>
U.S. Government Agencies                  $    433           $      4          $     (1)         $    436
                                          ========           ========          ========          ========
</TABLE>

                                       57
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C - (CONTINUED)

         The following is a summary of available-for-sale investment securities:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 2007
                                         ----------------------------------------------------------------------
                                                               GROSS             GROSS
                                            AMORTIZED        UNREALIZED        UNREALIZED            FAIR
                                               COST             GAINS            LOSSES              VALUE
                                         ---------------   ---------------   ---------------    ---------------
                                                                    (In thousands)
<S>                                            <C>                <C>             <C>                  <C>
U.S. Government Agencies                       $272,789           $   151         $   (622)            272,318
Mortgage-backed securities                       53,886               100             (929)             53,057
Corporate notes                                  71,147                79           (3,625)             67,601
Municipal securities                              1,973             1,031                --              3,004
Auction rate securities                         184,597                --                --            184,597
Marketable equity
 securities and other                            18,698               106             (420)             18,384
                                               --------           -------         --------            --------
 Totals                                        $603,090           $ 1,467         $ (5,596)           $598,961
                                               ========           =======         ========            ========
</TABLE>


<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 2006
                                         ----------------------------------------------------------------------
                                                               GROSS             GROSS
                                            AMORTIZED        UNREALIZED        UNREALIZED            FAIR
                                               COST             GAINS            LOSSES              VALUE
                                         ---------------   ---------------   ---------------    ---------------
                                                                    (In thousands)
<S>                                            <C>                <C>             <C>                  <C>
U.S. Treasury and Notes                          $5,002           $    --         $    (12)           $  4,990
U.S. Government Agencies                        322,986                --           (5,822)            317,164
Mortgage-backed securities                       67,472                92           (1,711)             65,853
Corporate notes                                  44,366               334             (662)             44,038
Municipal securities                              5,698             1,489                --              7,187
Auction rate securities                          71,500                --                --             71,500
Marketable equity
 securities and other                             3,919               216              (69)              4,066
                                               --------           -------         --------            --------
 Totals                                        $520,943           $ 2,131         $ (8,276)           $514,798
                                               ========           =======         ========            ========
</TABLE>


          The Company has investments in certain debt and equity securities that
have unrealized losses or may be otherwise impaired, but an other-than-temporary
impairment  has not been  recognized in the  financial  statements as management
believes the decline is due to the credit markets coupled with the interest rate
environment.  The  following  table  indicates  the  length  of time  individual
securities  have been in a continuous  unrealized  loss position at December 31,
2007 (in thousands):

<TABLE>
<CAPTION>
                                        LESS THAN 12 MONTHS             12 MONTHS OR LONGER                    TOTAL
                                   -----------------------------   -----------------------------   -----------------------------
                                      FAIR VALUE    UNREALIZED        FAIR VALUE    UNREALIZED        FAIR VALUE    UNREALIZED
                                                      LOSSES                          LOSSES                          LOSSES
<S>                                     <C>           <C>              <C>            <C>              <C>            <C>
DESCRIPTION OF SECURITIES
U.S. Government Agencies                $    --       $    --          $204,397       $   623          $204,397       $   623
Mortgage-backed securities                3,058             7            41,427           922            44,485           929
Corporate notes                          27,468         2,428            17,885         1,197            45,353         3,625
                                       --------       -------          --------       -------          --------       -------
Subtotal, debt securities                30,526         2,435           263,709         2,742           294,235         5,177
Marketable equity securities
and other                                 1,406           324               213            96             1,619           420
                                       --------       -------          --------       -------          --------       -------
Total temporarily
impaired securities                    $ 31,932       $ 2,759          $263,922       $ 2,838          $295,854       $ 5,597
                                       ========       =======          ========       =======          ========       =======
</TABLE>

                                       58
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C - (CONTINUED)

         The Company had a total of 90 debt  securities with a fair market value
of $294.24  million which were  temporarily  impaired at December 31, 2007.  The
total  unrealized  loss on these  securities was $5.18  million,  of which $1.55
million is  attributable  to changes in interest  rates which have decreased the
market value of these securities. The remaining unrealized loss of $3.63 million
is on 4 corporate  notes which are  currently  reorganizing  in U.S.  bankruptcy
court.  We have the ability to hold these  securities to maturity,  all but 4 of
which  are US  Government  Agency  securities  and  mortgage-backed  securities,
therefore,  the  unrealized  losses  associated  with these  securities  are not
considered to be other than temporary.

         The Company also had 8 equity securities with an aggregated fair market
value of $1.62 million which were temporarily impaired at December 31, 2007. The
total unrealized loss on these securities was $420,000. Based upon our review of
the available information, such unrealized losses are not considered to be other
than temporary.

         The following table indicates the length of time individual  securities
have been in a  continuous  unrealized  loss  position at December  31, 2006 (in
thousands):

<TABLE>
<CAPTION>
                                     LESS THAN 12 MONTHS             12 MONTHS OR LONGER                    TOTAL
                                 -----------------------------   -----------------------------   -----------------------------
                                   FAIR VALUE    UNREALIZED        FAIR VALUE    UNREALIZED        FAIR VALUE    UNREALIZED
                                                   LOSSES                          LOSSES                          LOSSES
<S>                                 <C>            <C>               <C>          <C>               <C>            <C>
DESCRIPTION OF SECURITIES
U.S. Treasury and Notes             $     --       $     --          $  4,990     $     12          $  4,990       $     12
U.S. Government Agencies              12,061              9           305,104        5,814           317,165          5,823
Mortgage-backed securities             1,732             52            49,454        1,659            51,186          1,711
Corporate notes                           --             --            10,939          662            10,939            662
Municipal securities                      --             --                --           --                --             --
                                    --------       --------          --------     --------          --------       --------
Subtotal, debt securities             13,793             61           370,487        8,147           384,280          8,208
Marketable equity securities
and other                                 --             --                13           69                13             69
                                    --------       --------          --------     --------          --------       --------
Total temporarily                   $ 13,793       $     61          $370,500     $  8,216          $384,293       $  8,277
impaired securities                 ========       ========          ========     ========          ========       ========
</TABLE>


         The Company had a total of 86 debt  securities with a fair market value
of $384.28  million which were  temporarily  impaired at December 31, 2006.  The
total  unrealized  loss on these  securities was $8.28  million,  of which $8.11
million is  attributable to increases in interest rates which have decreased the
market value of these securities.  The remaining  unrealized loss of $153,000 is
on 2 corporate notes which are currently  reorganizing in U.S. bankruptcy court.
We have the ability to hold these securities to maturity, all but 7 of which are
US Government and US Government  Agency  securities,  therefore,  the unrealized
losses  associated  with these  securities  are not  considered to be other than
temporary.

         The Company also had 2 equity securities with an aggregated fair market
value of $13,000 which were temporarily impaired at December 31, 2006. The total
unrealized  loss on these  securities was $69,000.  Based upon our review of the
available  information,  such  unrealized  losses are not considered to be other
than temporary.


                                       59
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C - (CONTINUED)

         The amortized  cost and fair value of investment  securities  available
for sale and held to maturity, by contractual maturity, at December 31, 2007 are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.


                                              DECEMBER 31, 2007
                                  ------------------------------------------
                                  AVAILABLE FOR SALE      HELD TO MATURITY
                                  --------------------   -------------------
                                   AMORTIZED   FAIR      AMORTIZED   FAIR
                                     COST      VALUE       COST      VALUE
                                   --------   --------   --------   --------
                                                 (In thousands)
Due in one year or less            $ 76,692   $ 76,303   $     --   $     --
Due after one through
five years                          173,831    173,404         --         --
Due after five through
ten years                            85,810     82,697         16         16
Due after ten years                  63,462     63,576        379        389
Auction rate securities             184,597    184,597         --         --
Marketable equity securities
and other                            18,698     18,384         --         --
                                   --------   --------   --------   --------
 Totals                            $603,090   $598,961   $    395   $    405
                                   ========   ========   ========   ========


         Gross gains  realized  on the sales of  investment  securities  for the
years  ended  December  31,  2007,  2006 and 2005 were  approximately  $125,000,
$2,342,000, and $10,000, respectively.  Gross losses were approximately $39,000,
$5,000,  and  $6,000  for the years  ended  December  31,  2007,  2006 and 2005,
respectively.

         As of December 31, 2007 and 2006,  securities sold under  agreements to
repurchase with a book value of approximately $76.84 million and $62.65 million,
respectively,  were  outstanding.  The book value of the securities  pledged for
these repurchase agreements was $78.95 million and $71.30 million, respectively.
As of  December  31,  2007 and 2006,  the  Company  did not have any  investment
securities  of  any  one  issuer  where  the  carrying  value  exceeded  10%  of
shareholders' equity.







                                       60
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D - LOANS

         Major classifications of loans are as follows:

                                                    DECEMBER 31,    DECEMBER 31,
                                                       2007             2006
                                                    ------------    ------------
                                                           (In thousands)
Commercial and professional loans                    $  76,132       $  63,331
Secured by real estate
 1 - 4 family                                          142,140         139,611
 Multi family                                            3,506           4,013
 Non-residential                                       212,850         160,417
Consumer                                                 1,691           4,763
                                                     ---------       ---------
                                                       436,319         372,135
Deferred loan fees                                      (1,534)         (1,212)
Allowance for loan losses                               (4,183)         (3,771)
                                                     ---------       ---------
                                                     $ 430,602       $ 367,152
                                                     =========       =========


         Changes in the allowance for loan losses are as follows:

                                             FOR THE YEARS ENDED DECEMBER 31,
                                        ----------------------------------------
                                            2007          2006          2005
                                        -------------  -----------   -----------
                                                       (In thousands)
Balance at beginning                       $ 3,771       $ 3,266        $ 2,927
 of year
Provision charged to                           355           410            180
 operations
Loans charged off                               --           (42)           (26)
Recoveries                                      57           137            185
                                           -------       -------        -------
Balance at end of year                     $ 4,183       $ 3,771        $ 3,266
                                           =======       =======        =======


         The Bank had $153,000, $201,000 and $256,000 of non accrual loans as of
December 31, 2007, 2006 and 2005, respectively,  and $314,000, $0 and $74,000 of
loans  delinquent more than ninety days and still accruing  interest at December
31, 2007, 2006 and 2005, respectively. The Bank classified the non-accrual loans
of  $153,000  as  impaired  loans at December  31,  2007.  However,  no specific
allocation  from the allowance  for loan losses was made because the  collateral
underlying  each loan was deemed to be sufficient to cover any loss in the event
of a default.  Therefore,  all of the  allowance  for loan loss is includable in
regulatory capital.

         In accordance  with banking  regulations,  the Bank, from time to time,
enters  into  lending  transactions  in the  ordinary  course of  business  with
directors,  executive  officers,  principal  stockholders and affiliates of such
persons on the same terms as those prevailing for comparable  transactions  with
other borrowers. The following table summarizes the activity in loans to related
parties.

                         Balance at 12/31/06    $ 9,701,822
                         New Loans                3,600,000
                         Repayments                 183,276
                                                -----------
                         Balance at 12/31/07    $13,118,546
                                                ===========

                                       61
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E - PREMISES AND EQUIPMENT

         Major  classifications  of premises and  equipment  are  summarized  as
follows:

                                      ESTIMATED      DECEMBER 31,  DECEMBER 31,
                                    USEFUL LIVES        2007          2006
                                 ------------------ -------------  ------------
                                                   (In thousands)
Land                             Indefinite            $ 3,572      $ 3,572
Buildings                        39 years                5,190        5,190
Furniture and equipment          3 to 10 years           3,262        3,052
Leasehold improvements           2 to 10 years           2,207        1,653

                                                       -------      -------
                                                        14,231       13,467
Accumulated depreciation and                            (4,869)      (4,129)
amortization                                           -------      -------

Total                                                  $ 9,362      $ 9,338
                                                       =======      =======

         Depreciation  and  amortization  expense  was  approximately  $739,000,
$727,000  and $650,000  for the years ended  December  31, 2007,  2006 and 2005,
respectively.

NOTE F - DEPOSITS

         The aggregate  amount of jumbo  certificates  of deposits  greater than
$100,000 were  approximately  $247.53 million and $203.59 million as of December
31, 2007 and 2006, respectively.

The scheduled maturities of all certificates of deposit are as follows:

                                    DECEMBER 31, 2007
                                    -----------------
                                     (In thousands)
                      2008              $ 477,127
                      2009                    373
                      2010                      2
                                        ---------
                                        $ 477,502
                                        =========

NOTE G - BORROWINGS

         SHORT-TERM  BORROWINGS  Securities sold under  agreements to repurchase
generally  mature within 30 days from the date of the  transactions.  Short-term
borrowings consist of various borrowings which generally have maturities of less
than one year. The details of these categories are presented below:

                                                   YEAR ENDED DECEMBER 31,
                                             -----------------------------------
                                               2007        2006          2005
                                             ---------   ---------    ----------
                                                  (Dollars in Thousands)
Securities sold under repurchase
 agreements and federal funds purchased

    Balance at year-end                      $ 76,842    $ 62,652     $ 73,044
    Average during the year                  $ 40,049    $ 56,236     $108,785
    Maximum month-end balance                $ 76,842    $ 79,154     $145,489
    Weighted average rate during the year        4.93%       3.75%        3.47%
    Rate at December 31                          4.65%       4.94%        3.59%

                                       62
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE G - (CONTINUED)

         LONG-TERM  BORROWINGS  At December 31, 2007,  advances from the Federal
Home Loan Bank ("FHLB")  totaling  $31.61 million will mature within one to five
years and are reported as long-term borrowings.  The advances are collateralized
by FHLB stock and certain first  mortgage  loans totaling  $31.61  million.  The
advances  had a weighted  average  rate of 5.00%.  Unused lines of credit at the
FHLB were $69.8 million at December 31, 2007.

         Outstanding long-term borrowings mature as follows (in thousands):

                   YEAR              AMOUNT
                  ------            ---------
                  2008              $   5,264
                  2009                  8,416
                  2010                 14,000
                  2011                     --
                  2012                  3,927
                                    ---------

                  Total             $  31,607
                                    =========


NOTE H - EARNINGS PER SHARE

         The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows:


<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31, 2007
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                          -------------------------------------------------------
                                              Income               Shares            Per share
                                            (numerator)        (denominator)          amount
                                          ----------------   -------------------   --------------
<S>                                          <C>                     <C>               <C>
Basic earnings per share
 Net income available to
  common stockholders                        $5,354                  6,987             $   .77
Effect of dilutive securities
 Options                                         --                     18                (.01)
                                             ------                -------             -------
Diluted earnings per share
 Net income available to
  common stockholders plus
  assumed conversions                        $5,354                  7,005             $   .76
                                             ======                =======             =======
</TABLE>


<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31, 2006
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                          -------------------------------------------------------
                                              Income               Shares            Per share
                                            (numerator)        (denominator)          amount
                                          ----------------   -------------------   --------------
<S>                                          <C>                     <C>               <C>
Basic earnings per share
 Net income available to
  common stockholders                        $4,880                  6,891             $   .71
Effect of dilutive securities
 Options                                         --                     85                (.01)
                                             ------                -------             -------
Diluted earnings per share
 Net income available to
  common stockholders plus
  assumed conversions                        $4,880                  6,976             $   .70
                                             ======                =======             =======
</TABLE>

                                       63
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H - (CONTINUED)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31, 2005
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                          -------------------------------------------------------
                                              Income               Shares            Per share
                                            (numerator)        (denominator)          amount
                                          ----------------   -------------------   --------------
<S>                                          <C>                     <C>               <C>
Basic earnings per share
 Net income available to
  common stockholders                        $5,541                  6,805             $   .81
Effect of dilutive securities
 Options                                         --                    134                (.01)
                                             ------                -------             -------
Diluted earnings per share
 Net income available to
  common stockholders plus
  assumed conversions                        $5,541                  6,939             $   .80
                                             ======                =======             =======
</TABLE>



NOTE I - INCOME TAXES

         The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                            ----------------------------------------------------
                                                2007                 2006                2005
                                                ----                 ----                ----
<S>                                         <C>                  <C>                 <C>
Current                                     $ 2,723,000          $ 4,282,000         $ 4,985,000
Deferred Taxes (Benefit)                       (349,000)            (426,000)             18,000
                                            -----------          -----------         -----------
                                            $ 2,374,000          $ 3,856,000         $ 5,003,000
                                            ===========          ===========         ===========
</TABLE>

         A reconciliation  of the provision for income taxes for the years ended
December  31,  2007,  2006 and 2005 and the  amount  computed  by  applying  the
statutory Federal income tax rate to income from continuing operations follows:

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                  ------------------------------------------------
                                                     2007               2006              2005
                                                     ----               ----              ----
<S>                                               <C>                <C>              <C>
Effective Tax Reconciliation
Tax at statutory rate                             $ 2,627,000        $ 2,970,000      $ 3,584,960
State and City, net of federal
 income tax benefit                                 1,195,000          1,123,109        1,311,420
Permanent items                                    (1,430,000)          (337,670)          (4,352)
Other                                                 (18,000)           100,561          110,972
                                                  -----------        -----------      -----------
Actual provision for
 income taxes                                     $ 2,374,000        $ 3,856,000      $ 5,003,000
                                                  ===========        ===========      ===========
</TABLE>

                                       64
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - (CONTINUED)

         The tax effect of the principal  temporary  differences at December 31,
2007 and 2006 are as follows:

                                                              DECEMBER 31,
                                                       -------------------------
                                                          2007           2006
                                                          ----           ----
Net deferred tax assets
 Loan loss provision                                   $1,950,000     $1,721,000
 Depreciation                                             230,000        123,000
 Other                                                    315,000        301,000
 Unrealized loss on
  investment securities                                 2,015,000      2,979,000
                                                       ----------     ----------
Net deferred tax asset
 included in other assets                              $4,510,000     $5,124,000
                                                       ==========     ==========


NOTE J - STOCK PLANS

         In March 1999, the  stockholders of the Company approved the 1999 Stock
Incentive Plan (the "1999 Stock Incentive Plan").  The 1999 Stock Incentive Plan
permits  the  granting  of awards  in the form of  nonqualified  stock  options,
incentive stock options, restricted stock, deferred stock, and other stock-based
incentives.  Up to 600,000  shares of common  stock of the Company may be issued
pursuant to the 1999 Stock  Incentive  Plan.  Officers,  directors and other key
employees of the Company or any  subsidiary are eligible to receive awards under
the 1999  Stock  Incentive  Plan.  Options  outstanding  under  the  1999  Stock
Incentive  Plan  were  2,076  and  185,878  as of  December  31,  2007 and 2006,
respectively. The Company did not grant options in 2007, 2006 and 2005.

A summary of activity with respect to the Stock Option Plan follows:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                         ----------------------------------------------------------------------
                                 2007                    2006                     2005
                         -------------------     --------------------     ---------------------
                                    WEIGHTED                 WEIGHTED                  WEIGHTED
                                    AVERAGE                  AVERAGE                   AVERAGE
                                    EXERCISE                 EXERCISE                  EXERCISE
                          SHARES     PRICE       SHARES       PRICE       SHARES        PRICE
                          ------     -----       ------       -----       ------        -----
<S>                       <C>        <C>         <C>          <C>          <C>          <C>
Outstanding at
beginning of year         185,878    $ 9.76      223,203      $ 9.70       365,084      $10.65
Granted                        --    $   --           --      $   --            --      $   --
Cancelled                  (7,500)   $10.00           --      $   --        (3,000)     $12.67
Exercised                (176,302)   $ 9.77      (37,325)     $ 9.34      (138,881)     $12.20
                         --------                -------                  --------
Outstanding at
end of year                 2,076    $ 8.29      185,878      $ 9.76       223,203      $ 9.70
                         ========                =======                  ========
Exercisable at
end of year                 2,076    $ 8.29      185,878      $ 9.76       223,203      $ 9.70
                         ========                =======                  ========
Weighted average fair
value of options
granted during the
year                                 $   --                   $   --                    $   --
                                     ======                   ======                    ======
</TABLE>

                                       65
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J - (CONTINUED)

         The following table summarizes  information  about options  outstanding
and exercisable at December 31, 2007:

                     OPTIONS OUTSTANDING AND EXERCISABLE
---------------------------------------------------------------------------

                          NUMBER             WEIGHTED
                       OUTSTANDING            AVERAGE              WEIGHTED
                            AT               REMAINING             AVERAGE
   RANGE OF            DECEMBER 31,         CONTRACTUAL            EXERCISE
EXERCISE PRICES            2007             LIFE (YEARS)            PRICE
---------------        ------------         ------------           --------

$ 5.98 - $8.64              2,076                  2.45             $ 8.29
                         ========


NOTE K - EMPLOYEE BENEFIT PLANS

1.       RETIREMENT INCOME PLAN

         The Company's  Retirement Income Plan (the "Plan") covers substantially
all  full-time  employees.  Benefits  are based upon a  combination  of employee
compensation and years of service.  The Company pays the entire cost of the Plan
and funds such costs as they accrue.  The  Company's  funding  policy is to make
annual  contributions  within minimum and maximum levels  required by applicable
regulations.  The Company's customary  contributions are designed to fund normal
cost on a current  basis and to fund over 30 years the  estimated  prior service
cost of  benefit  improvements  (15  years of  annual  gains  and  losses).  The
projected unit cost method was used to determine the annual cost.

         The following table  summarizes the major  categories of Plan assets as
of the dates indicated:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                          -----------------------------------------------------------------
                                                       2007                              2006
                                          -------------------------------   -------------------------------
                                           FAIR VALUE       % OF TOTAL       FAIR VALUE        % OF TOTAL
                                          --------------   --------------   --------------    -------------
                                                         (In thousands, except percentages
<S>                                          <C>                <C>             <C>                 <C>
Mutual Funds
 International Equity Fund                   $   266            10.86%          $   198             9.54%
 Large Cap Equity Growth Fund                    608            24.82               504            24.28
 International Investment
  Grade Bond Fund                                844            34.45               637            30.68
Small Cap Equity Growth Fund                      58             2.36                99             4.77
Large Cap Equity Value Fund                      528            21.55               487            23.46
Corporate Common Stocks(1)                       138             5.63               151             7.27
Cash and cash equivalents                          8             0.33                --               --

                                             -------           ------           -------           ------
Total Plan Assets                            $ 2,450           100.00%          $ 2,076           100.00%
                                             =======           ======           =======           ======
</TABLE>

---------------
(1)      Includes 4,500 shares of the Company's Common Stock with a market value
         of $72,045 and $73,350 at December 31, 2007 and 2006, respectively.


                                       66
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - (CONTINUED)

         The  assets  of the Plan are  primarily  invested  in well  diversified
common stock and fixed income funds  designed to minimize risk while  maximizing
expected portfolio returns. To achieve the long term rate of return, Plan assets
are  invested  in a  mixture  of  instruments,  including  but not  limited  to,
corporate common stock,  investment grade bond funds, small and large cap equity
funds and international  equity funds. The allocation of assets is determined by
the  Investment  Manager,  and typically  include 50% to 70% equities,  with the
remainder invested in fixed income and a minimal amount of cash. Presently, this
diversified portfolio is expected to return approximately 8.50% in the long run.

         The expected rate of return on Plan assets was determined  based upon a
review of historical  returns,  both for our Plan and for medium to  large-sized
defined  benefit  pension  funds with  similar  asset  allocations.  This review
generated separate expected future long-term returns for each asset class listed
in the above table.  These expected  future returns were then blended based upon
our Plan's target asset allocation.

ASSUMPTIONS

         Weighted-average assumptions used to determine benefit obligations were
as follows at the dates indicated:

                                               DECEMBER 31,
                                      -----------------------------
                                          2007            2006
                                      -------------   -------------
Discount rate                                6.30%           5.75%
Rate of compensation increase                5.00%           5.00%


         Weighted-average  assumptions  used to determine  net periodic  benefit
cost for the years ended December 31, 2007 and 2006 were as follows:

                                                 DECEMBER 31,
                                     -----------------------------------
                                          2007               2006
                                     ----------------   ----------------
Discount rate                                  5.75%              5.50%
Rate of compensation increase                  5.00%              5.00%
Expected return on plan assets                 8.50%              8.50%
Measurement date                          12/31/2007         12/31/2006





                                       67
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - (CONTINUED)

         The following  table sets forth the Plan's  benefit  obligations,  fair
value of the Plan assets and the funded  status of the Plan in  accordance  with
FAS 158 for the years ended December 31, 2007 and 2006:

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                    -----------------------------------
                                                                          2007              2006
                                                                    -----------------  ----------------
<S>                                                                    <C>              <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                                $ 3,103,843      $ 2,735,177
Service cost                                                               407,623          353,071
Interest cost                                                              177,221          149,594
Actuarial (gain) loss                                                       63,668           (3,660)
Benefits paid                                                             (191,949)        (130,339)
                                                                       -----------      -----------
Benefits obligation at end of year                                     $ 3,560,406      $ 3,103,843
                                                                       ===========      ===========

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year                         $ 2,075,998      $ 1,719,290
Actual return on plan assets                                               177,141          154,347
Employer contribution                                                      389,400          332,700
Benefits paid                                                             (191,949)        (130,339)
                                                                       -----------      -----------
Fair value of plan assets at end of year                               $ 2,450,590      $ 2,075,998
                                                                       ===========      ===========

AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
 POSITION CONSIST OF:
Liabilities                                                            $(1,109,816)     $(1,027,845)
Prepaid benefit cost                                                           N/A              N/A
Accrued benefit cost                                                           N/A              N/A
Intangible asset                                                               N/A              N/A
Accumulated other comprehensive charge                                         N/A              N/A
                                                                       -----------      -----------
Net amount recognized at year end                                      $ 1,109,816      $ 1,027,845
                                                                       ===========      ===========

ADDITIONAL YEAR-END INFORMATION FOR PENSION PLANS WITH ACCUMULATED
BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS
Projected benefit obligation                                           $ 3,560,406      $ 3,103,843
Accumulated benefit obligation                                           3,560,406        3,103,843
Fair value of plan assets                                                2,450,590        2,075,998
</TABLE>




                                       68
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - (CONTINUED)

A summary of the  components  of net  periodic  benefit  cost and other  amounts
recognized  in other  comprehensive  income in  accordance  with FAS 158 for the
years ended December 31, 2007, 2006 and 2005 is as follows:

                                                      DECEMBER 31,
                                      ------------------------------------------
                                        2007            2006            2005
                                      ---------       ---------       ---------
Service cost                          $ 407,623       $ 353,071       $ 304,144
Interest cost                           177,221         149,594         134,275
Expected return on assets              (182,142)       (151,131)       (150,819)
Amortization
 Prior service cost                      18,370          18,370          18,370
 (Gain) loss                             52,649          60,286          40,091
                                      ---------       ---------       ---------
Net periodic pension cost             $ 473,721       $ 430,190       $ 346,061
                                      =========       =========       =========


         The following table sets forth other changes in plan assets and benefit
obligations  recognized in other comprehensive income in accordance with FAS 158
at December 31, 2007 and 2006:

                                                                DECEMBER 31,
                                                            -------------------
                                                              2007       2006
                                                            --------   --------
Net loss (gain)                                             $ 68,669   $    N/A
Prior service cost                                               N/A        N/A
Increase (decrease) in minimum liability included in other
comprehensive income prior to FAS 158 application                N/A    (67,162)
Initial OCI charge upon FAS 158 application                      N/A    102,504
Amortization of prior service cost                           (18,370)       N/A
Amortization of transition obligation                        (52,649)       N/A
                                                            --------   --------
Total recognized in other comprehensive income                (2,350)    35,342
Total recognized in net periodic benefit cost and other
comprehensive income                                        $471,371   $465,532

The estimated net loss (gain), prior service cost and net transition  obligation
that will be amortized from the accumulated other comprehensive  income into net
periodic  benefit cost over the next fiscal year are $43,000,  $18,000 and zero,
respectively.

ESTIMATED FUTURE BENEFIT PAYMENTS

         We estimate future benefit payments to be as follows:

                                                 BENEFIT
                         YEARS                  PAYMENTS
                         -----                  --------
                         2008                  $ 265,958
                         2009                    199,872
                         2010                    193,469
                         2011                    240,195
                         Years 2012-2016       2,719,826




                                       69
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - (CONTINUED)

COMPANY CONTRIBUTIONS

         The Company  contributed  $389,400 to its Retirement Plan in the fiscal
year ended December 31, 2007.  During the fiscal year ending  December 31, 2008,
we expects to contribute approximately $750,000 to the Plan.

2.       POSTRETIREMENT WELFARE PLAN

         The Bank, as successor to Goshen Bank provides  certain health care and
life  insurance   benefits  for  retired   employees  and  their  spouses.   The
postretirement  health care and life insurance  benefits plan was terminated for
persons  retiring  after  December 31, 1998.  Eligible  employees  retired on or
before that date will have  benefits paid through the plan under the agreed upon
terms existing at the employee's retirement date.

                                                         DECEMBER 31,
                                              ---------------------------------
                                                   2007              2006
                                              ----------------  ---------------
                                                         (In thousands)
Change in benefit obligation
  Benefit obligation at beginning of year         $     698        $     735
  Service cost                                           --               --
  Interest cost                                          41               42
  Actual (gain) loss                                     (6)             (27)
  Benefits paid                                         (55)             (52)
                                                  ---------        ---------
  Benefits obligation at end of year                    678              698
                                                  ---------        ---------

Change in plan assets
  Fair value of plan assets
   at beginning of year                                  --               --
  Actual return on plan assets                           --               --
  Employer contribution                                  55               49
  Benefits paid                                         (55)             (49)
                                                  ---------        ---------
  Fair value of plan assets
   at end of year                                        --               --
                                                  ---------        ---------
  Funded status                                        (698)            (678)
  Unrecognized net actuarial loss                       N/A              N/A
                                                  ---------        ---------
  Accrued benefit cost (included in
   other liabilities)                             $     678        $     698
                                                  =========        =========



                                       70
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - (CONTINUED)

Net benefit cost included the following components:

                                          YEAR ENDED DECEMBER 31,
                                  ----------------------------------------
                                         2007                 2006
                                  -------------------   ------------------
                                               (In thousands)
Service cost                            $     --            $     --
Interest cost on projected
 benefit obligation                           41                  42
Actual return on plan assets                  --                  --
                                        --------            --------
Net periodic benefit cost               $     41            $     42
                                        ========            ========

         The assumed  discount rate used in  determining  the actuarial  present
value of the projected benefit obligation was 6.50% and 6.125% in 2007 and 2006,
respectively.

3.       401(k) PLANS

         The Bank has a 401(k) plan in which  employees can contribute up to 15%
of their salary. The Bank also matches 50% of the employee  contribution up to a
maximum of 3% of the  employee's  salary.  The  matching  expense was  $124,000,
$124,000  and $107,000  for the years ended  December  31, 2007,  2006 and 2005,
respectively.

4.       DEFERRED COMPENSATION ARRANGEMENTS

         GSB  Financial  and  Goshen  Bank  established  deferred   compensation
arrangements for certain directors and executives.  These deferred  compensation
arrangements  were  terminated as a result of the  acquisition.  At December 31,
2007  and  2006,  the  balance   accumulated   under  these   arrangements   was
approximately $228,000 and $245,000, respectively, and will be paid out when the
individual  (i) ceases to be a director  and/or  executive of the Company;  (ii)
attains the age of 75; or (iii) specifies a particular date.

         In July 2006, the Bank  established the Deferred  Compensation  Plan of
The Berkshire Bank (the "Plan") to provide for a systematic  method by which key
employees of the Bank may defer payment of all or part of the compensation  that
may be earned by them.  The Plan is intended to be a  nonqualified  and unfunded
plan maintained primarily for the purpose of providing deferred compensation for
a select  group of  management  or  highly  compensated  employees  pursuant  to
Sections  201(2),  301(a)(3)  and  401(a)(1) of the Employee  Retirement  Income
Security Act of 1974,  as amended.  At December 31, 2007 and 2006,  the balances
accumulated under the Plan were approximately $95,000 and $30,000, respectively.









                                       71
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L - COMMITMENTS AND CONTINGENCIES

1.       LEASES AND OTHER COMMITMENTS

         The  Company   leases  certain  of  its  operating   facilities   under
non-cancelable  operating  leases  expiring  in 2008  through  2016.  The leases
require  payment by the Company of the real estate  taxes and  insurance  on the
leased  properties.  Approximate  future minimum  annual rental  payments are as
follows:

                       Year Ending          (In thousands)
                       December 31,
                       ---------------
                       2008                       $    716
                       2009                            648
                       2010                            473
                       2011                            292
                       2012                            303
                       Thereafter                      558
                                                  --------
                                                  $  2,990
                                                  ========

         Rental expense was approximately $1,329,000, $1,286,000 and $1,208,000
for the fiscal  years ended  December  31,  2007,  2006 and 2005,  respectively.
Included in rental expense was approximately $368,000,  328,000 and $359,000 for
the fiscal years ended December 31, 2007, 2006 and 2005, respectively, which was
paid to a company affiliated with a director of the Company.

NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107  requires  disclosure  of the  estimated  fair value of an
entity's assets and liabilities considered to be financial instruments.  For the
Company,  as for most  financial  institutions,  the  majority of its assets and
liabilities  are  considered  financial  instruments as defined in SFAS No. 107.
However,   many  such   instruments  lack  an  available   trading  market,   as
characterized by a willing buyer and seller engaging in an exchange transaction.
Also,  it is the  Company's  general  practice and intent to hold its  financial
instruments to maturity and not to engage in trading or sales activities, except
for certain loans. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.

         Changes in the  assumptions  or  methodologies  used to  estimate  fair
values  may  materially  affect  the  estimated  amounts.  Also,  management  is
concerned that there may not be reasonable  comparability  between  institutions
due to the wide range of permitted  assumptions and methodologies in the absence
of  active  markets.  This lack of  uniformity  gives  rise to a high  degree of
subjectivity in estimating financial instrument fair values.

         Estimated  fair values have been  determined  by the Company  using the
best available data and an estimation  methodology suitable for each category of
financial  instruments.  The estimation  methodologies  used, the estimated fair
values,  and recorded  book  balances at December 31, 2007 and 2006 are outlined
below.

         For cash and cash  equivalents,  the  recorded  book  values  of $47.19
million  and  $24.31  million  at  December  31,  2007 and  2006,  respectively,
approximate fair values.

         The estimated fair values of investment  securities are based on quoted
market  prices,  if available.  Estimated fair values are based on quoted market
prices of comparable instruments if quoted market prices are not available.




                                       72
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M - (CONTINUED)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                         ------------------------------------------------------------------------
                                                       2007                                 2006
                                         ---------------------------------  -------------------------------------
                                            CARRYING         ESTIMATED           CARRYING           ESTIMATED
                                             AMOUNT          FAIR VALUE           AMOUNT            FAIR VALUE
                                         ---------------  ----------------  ------------------  -----------------
                                                                     (In thousands)
<S>                                            <C>               <C>                 <C>                <C>
Investment securities                          $599,356          $599,366            $515,231           $515,234
Loans, net of unearned income                   434,785           441,569             370,923            375,052
Time Deposits                                   477,502           477,802             423,712            423,161
Repurchase Agreements                            76,842            77,267              62,652             62,606
Long-term Debt                                   54,288            55,160              75,419             75,569
</TABLE>

         The net loan  portfolio  at December  31, 2007 and 2006 has been valued
using a  present  value  discounted  cash  flow  where  market  prices  were not
available. The discount rate used in these calculations is the estimated current
market rate  adjusted for credit risk.  The carrying  value of accrued  interest
approximates fair value.

         The estimated fair values of demand deposits (i.e.  interest (checking)
and  non-interest  bearing demand  accounts,  savings and certain types of money
market  accounts) are, by  definition,  equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amount of accrued
interest payable approximates its fair value.

         The fair value of commitments to extend credit is estimated  based upon
the amount of  unamortized  deferred  loan  commitment  fees.  The fair value of
letters of credit is based upon the amount of unearned  fees plus the  estimated
cost to  terminate  letters of credit.  Fair  values of  unrecognized  financial
instruments,  including  commitments  to extend  credit,  and the fair  value of
letters of credit are considered immaterial.

         The fair value of interest rate caps,  included in long-term  debt, are
based upon the  estimated  amount the Company  would receive or pay to terminate
the contracts or  agreements,  taking into account  current  interest rates and,
when  appropriate,  the  current  creditworthiness  of the  counterparties.  The
aggregate  fair  value for the  interest  rate caps  were  approximately  $0 and
$20,000 at December 31, 2007 and 2006, respectively.

         The fair value of the long term debt  approximates  the carrying  value
due to the re-pricing of the debt.








                                       73
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
         OF CREDIT RISK

         The Bank is party to financial instruments with  off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  Such  financial  instruments  are recorded in the  financial
statements  when they become  payable.  Those  instruments  involve,  to varying
degrees,  elements  of credit  and  interest  rate risk in excess of the  amount
recognized in the consolidated  balance sheets. The contract or notional amounts
of those  instruments  reflect  the  extent of  involvement  the  Banks  have in
particular classes of financial instruments.

         The Bank's exposure to credit loss in the event of  non-performance  by
the other party to the financial instrument for commitments to extend credit and
standby  letters of credit is represented by the  contractual or notional amount
of  those  instruments.  The  Bank  uses  the same  credit  policies  in  making
commitments  and  conditional   obligations  as  they  do  for  on-balance-sheet
instruments.

         Unless noted otherwise,  the Bank does not require  collateral or other
security to support  financial  instruments  with credit risk.  The  approximate
contract amounts are as follows:

                                                       DECEMBER 31,
                                         ---------------------------------------
                                               2007                 2006
                                         -------------------  ------------------
                                                      (In thousands)
Unused lines of credit                       $ 18,635             $ 19,601
Commitments to extend credit                   28,645               18,687
Standby letters of credit and financial
 guarantees written                             5,374                3,423
                                             --------             --------
                                             $ 52,654             $ 41,711
                                             ========             ========
Interest rate caps-notional amount           $ 10,000             $ 20,000
                                             ========             ========


         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation of any  condition  established  in the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent  future  cash   requirements.   The  Bank  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed necessary by the Bank upon extension of credit,  is based on management's
credit evaluation.

         Standby  letters of credit are  conditional  commitments  issued by the
Bank  to  guarantee  the  performance  of a  customer  to a third  party.  Those
guarantees  are  primarily  issued  to  support  public  and  private  borrowing
arrangements,   including   commercial   paper,   bond   financing  and  similar
transactions.  The  credit  risk  involved  in  issuing  letters  of  credit  is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds  residential  or  commercial  real estate,  accounts  receivable,
inventory and equipment as collateral  supporting  those  commitments  for which
collateral  is  deemed  necessary.  The  extent  of  collateral  held for  those
commitments at December 31, 2007 varies up to 100%.







                                       74
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE N - (CONTINUED)

         The Company  defines the initial fair value of these  letters of credit
as the fee received from the customer. The maximum potential undiscounted amount
of future  payments  of these  letters  of credit as of  December  31,  2007 are
$5,374,000  and they expire  through  2008.  Amounts due under these  letters of
credit would be reduced by any  proceeds the Company  would be able to obtain in
liquidating  the  collateral  for  the  loans,  which  varies  depending  on the
customer.

         The  Bank  grants  loans  primarily  to  customers  in New York and its
immediately adjacent suburban  communities.  Although the Bank has a diversified
loan  portfolio,  a large  portion of their loans are secured by  commercial  or
residential  real property.  The Bank does not generally  engage in non-recourse
lending and typically will require the principals of any commercial  borrower to
obligate  themselves  personally on the loan.  Although the Bank has diversified
loan portfolios,  a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector.  Commercial and standby letters
of credit were granted primarily to commercial borrowers.

         The Bank has entered  into  interest  rate cap  agreements  in order to
hedge its  exposure  to interest  rate  fluctuations.  The  Company  adopted the
provisions of SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging
Activities",  as amended,  as of January 1, 2001.  The  statement  requires  the
Company to recognize all  derivative  instruments at fair value as either assets
or liabilities. Financial derivatives are reported at fair value in other assets
or other liabilities. For derivatives not designated as hedges, the gain or loss
is recognized in current  earnings.  Amounts  reclassed into earnings,  when the
hedged transaction culminates, are included in interest income.

NOTE O - REGULATORY MATTERS

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

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

         As of December 31, 2007, the Bank met all regulatory  requirements  for
classification  as well  capitalized  under the regulatory  framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total  risk-based,  Tier 1 risk-based and Tier 1 leverage  ratios as set
forth in the following table.  There are no conditions or events since that date
that management believes have changed the institution's category.






                                       75
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O - (CONTINUED)

         The  following  table sets forth the  actual  and  required  regulatory
capital  amounts and ratios of, the Company and the Bank as of December 31, 2007
and 2006 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                       TO BE WELL
                                                                                                    CAPITALIZED UNDER
                                                                           FOR CAPITAL              PROMPT CORRECTIVE
                                                            ACTUAL       ADEQUACY PURPOSES          ACTION PROVISIONS
                                                            ------       -----------------          -----------------

                                                           AMOUNT     RATIO    AMOUNT   RATIO       AMOUNT    RATIO
                                                           ------     -----    ------   -----       ------    -----
<S>                                                        <C>        <C>      <C>       <C>        <C>       <C>
DECEMBER 31, 2007
Total Capital (to Risk-Weighted Assets)
  Company                                                  136,012    18.3%    59,461   >8.0%           --      N/A
                                                                                        -
  Bank                                                     104,500    14.5%    57,753   >8.0%       72,191   >10.0%
                                                                                        -                    -
Tier I Capital (to Risk-Weighted Assets)
  Company                                                  131,829    17.7%    29,731   >4.0%           --      N/A
                                                                                        -
  Bank                                                     100,317    13.9%    28,876   >4.0%       43,314    >6.0%
                                                                                        -                     -
Tier I Capital (to Average Assets)
  Company                                                  131,829    12.9%    41,040   >4.0%           --      N/A
                                                                                        -
  Bank                                                     100,317     9.7%    41,288   >4.0%       51,610    >5.0%
                                                                                        -                     -
</TABLE>

 <TABLE>
<CAPTION>
                                                                                                       TO BE WELL
                                                                                                    CAPITALIZED UNDER
                                                                           FOR CAPITAL              PROMPT CORRECTIVE
                                                            ACTUAL       ADEQUACY PURPOSES          ACTION PROVISIONS
                                                            ------       -----------------          -----------------

                                                         AMOUNT     RATIO      AMOUNT   RATIO       AMOUNT    RATIO
                                                         ------     -----      ------   -----       ------    -----
<S>                                                      <C>        <C>        <C>       <C>        <C>       <C>
DECEMBER 31, 2006
Total Capital (to Risk-Weighted Assets)
  Company                                                128,452    23.9%      43,031   >8.0%           --      N/A
                                                                                        -
  Bank                                                    99,170    19.3%      41,120   >8.0%       51,400   >10.0%
                                                                                        -                    -
Tier I Capital (to Risk-Weighted Assets)
  Company                                                124,681    23.2%      21,516   >4.0%           --      N/A
                                                                                        -
  Bank                                                    95,400    18.6%      20,560   >4.0%       30,840    >6.0%
                                                                                        -                     -
Tier I Capital (to Average Assets)
  Company                                                124,681    13.4%      37,322   >4.0%           --      N/A
                                                                                        -
  Bank                                                    95,400    10.9%      35,022   >4.0%       43,778    >5.0%
                                                                                        -                     -
</TABLE>







                                       76
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

         The condensed financial  information for Berkshire Bancorp Inc. (parent
company only) is as follows:

                            CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)

                                                           DECEMBER 31,
                                                 -------------------------------
                                                      2007             2006
                                                 ---------------   -------------
ASSETS

Cash                                                $  12,478       $  11,515
Equity investment in subsidiaries                     121,896         113,972
Investment in securities available for sale            12,297          15,874
Accrued interest receivable                               215             189
Other assets                                            1,455           1,023
                                                    ---------       ---------
Total assets                                        $ 148,341       $ 142,573
                                                    =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Subordinated debt                                   $  22,681       $  22,681
Other liabilities                                       1,402           4,115
                                                    ---------       ---------
Total liabilities                                      24,083          26,796
                                                    ---------       ---------

Stockholders' equity
Common stock                                              770             770
Additional paid-in capital                             90,986          90,659
Retained earnings                                      42,352          37,285
Accumulated other comprehensive
 loss, net                                             (3,439)         (4,772)
Common stock in treasury, at cost                      (6,411)         (8,165)
                                                    ---------       ---------
Total stockholders' equity                            124,258         115,777
                                                    ---------       ---------
                                                    $ 148,341       $ 142,573
                                                    =========       =========













                                       77
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P - (CONTINUED)

                         CONDENSED STATEMENTS OF INCOME
                                 (IN THOUSANDS)



                                              FOR THE YEARS ENDED DECEMBER 31,
                                         --------------------------------------
                                           2007            2006          2005
                                         --------        --------      -------
INCOME
Interest income from the Bank            $     51        $     65      $     53
Interest income                             1,271           1,115         1,622
Gain on sales of                              125           1,600            10
 investment securities
Other income                                  235             235           217
                                         --------        --------      --------
Total income                                1,682           3,015         1,902

EXPENSES
Salaries and employee benefits                771             697           605
Interest expense                            1,840           1,780         1,268
Other expenses                                746             602           580
                                         --------        --------      --------
Total expenses                              3,357           3,079         2,453
                                         --------        --------      --------
Income (loss) before income taxes
 and equity in undistributed net
 income of the Bank                        (1,675)            (64)         (551)
Equity in undistributed
 net income of the Bank                     6,727           5,203         6,229
                                         --------        --------      --------
Income before taxes                         5,052           5,139         5,678
(Benefit) provision for
 income taxes                                (302)            259           137
                                         --------        --------      --------
Net income                               $  5,354        $  4,880      $  5,541
                                         ========        ========      ========







                                       78
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P - (CONTINUED)

                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                     -----------------------------------------
                                                          2007         2006        2005
                                                        --------     --------     --------
<S>                                                     <C>          <C>          <C>
  Operating activities:
Net income                                              $  5,354     $  4,880     $  5,541
Adjustments to reconcile net
 income to net cash provided by
 (used in) operating activities:
Gain on sales of investment securities                      (125)      (1,600)         (10)
Equity in undistributed net income of the Bank            (6,727)      (5,203)      (6,229)
Dividends received from the Bank                           1,810        1,730        1,291
(Decrease) increase in other liabilities                  (1,748)          23        1,025
(Increase) decrease in other assets                          (99)         816         (851)
                                                        --------     --------     --------
 Net cash (used in) provided by operating activities      (1,535)         646          767
                                                        --------     --------     --------

  Investing activities:
Investment securities available for sale
 Purchases                                                (1,635)      (3,725)      (4,548)
 Sales                                                     6,670        4,854          140
Net (increase) decrease in loans                          (3,007)          --        6,059
Contributions to the Bank                                     --           --       (7,217)
                                                        --------     --------     --------
Net cash provided by (used in) investing activities        2,028        1,129       (5,566)
                                                        --------     --------     --------

  Financing activities:
Proceeds from exercise of common stock options             1,363          349        1,686
Tax benefits from exercise of common stock options           359           84          697
Acquisition of treasury stock                                 --         (790)          --
Issuance of subordinated debentures                           --           --        7,217
Dividends paid                                            (1,252)      (1,099)      (1,020)
                                                        --------     --------     --------
Net cash provided by (used in) financing activities          470       (1,456)       8,580
                                                        --------     --------     --------

  Net increase in cash and cash equivalents                  963          319        3,781
  Cash and cash equivalents at beginning of year          11,515       11,196        7,415
                                                        --------     --------     --------
  Cash and cash equivalents at end of year              $ 12,478     $ 11,515     $ 11,196
                                                        ========     ========     ========
</TABLE>






                                       79
<PAGE>

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE Q - SUBSEQUENT EVENT

         At December 31, 2007, our portfolio of investment  securities  included
approximately  $185 million of auction rate securities.  These  investments have
high credit quality ratings of AA or AAA and are fully  collateralized  by bonds
and other financial instruments. Auction rate securities are generally long-term
debt  instruments  that provide  liquidity  through a Dutch auction process that
resets  the  applicable  interest  rate at  pre-determined  calendar  intervals,
generally every 28 days.

         Recent uncertainties in the credit markets have negatively impacted our
ability to  liquidate,  if  necessary,  investments  in auction rate  securities
because,  in recent  auctions,  the amount of securities  submitted for sale has
exceeded  the  amount of  purchase  orders.  We are not  certain  as to when the
liquidity issues relating to these investments will improve.  As a result of the
timing of the  recent  auction  failures  beginning  in  February  2008,  we are
uncertain as to the current fair market value of the auction rate  securities we
hold.  Based on the fair market  value of the  auction  rate  securities  and an
analysis of other-than-temporary  impairment factors, including, but not limited
to,  whether the credit ratings of the issuers or the insurers  deteriorate,  or
the collateral of the securities  deteriorates,  we may be required to reflect a
write-down  of certain of our auction rate  securities  in the first  quarter of
2008 as a charge to earnings if any of our auction rate securities are deemed to
be other-than-temporarily  impaired. Such impairment charge would be recorded as
other  expense and could be material to our results of  operations.  At December
31, 2007, management  evaluated the market value of these securities, concluding
that the values stated herein are appropriate.

         Based on our expected  operating  cash flows,  and our other sources of
cash, we do not expect the potential  lack of liquidity in these  investments to
affect our ability to execute our current business plan.


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

         Not Applicable.


ITEM 9A(T).  CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES.

As of the end of the period  covered  by this  Annual  Report on Form 10-K,  the
Company  evaluated  the  effectiveness  of  the  design  and  operation  of  its
"disclosure  controls  and  procedures"  as  defined  in Rule  13a-15(e)  of the
Securities  Exchange  Act  of  1934  ("Disclosure  Controls").  This  evaluation
("Controls   Evaluation")   was  done  under  the   supervision   and  with  the
participation of the Company's management, including the Chief Executive Officer
("CEO"),  who is also  the  Chief  Financial  Officer  ("CFO").  Based  upon the
Controls Evaluation,  the CEO/CFO has concluded that the Disclosure Controls are
effective in reaching a reasonable level of assurance that information  required
to be disclosed by the Company is recorded,  processed,  summarized and reported
within the time period  specified in the  Securities  and Exchange  Commission's
rules and forms and that any  material  information  relating  to the Company is
accumulated  and   communicated   with   management,   including  its  principal
executive/financial   officer  to  allow  timely  decisions  regarding  required
disclosure.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate "internal control over financial  reporting" for the Company as defined
in  Rule  13a-15(f)  under  the  Securities  Exchange  Act  of  1934  ("Internal
Control").  The  Company's  Internal  Control is designed to provide  reasonable
assurance  to the  Company's  management  and Board of Directors  regarding  the
preparation  and fair  presentation  of published  financial  statements and the
reliability of financial reporting.

                                       80
<PAGE>

Management of the Company,  including the CEO/CFO, assessed the effectiveness of
the  Company's  Internal  Control  as of  December  31,  2007.  In  making  this
assessment,  management  used  the  criteria  set  forth  by  the  Committee  of
Sponsoring  Organizations  of  the  Treadway  Commission  ("COSO")  in  Internal
Control-Integrated Framework. Based on its assessment, management believes that,
as of December 31, 2007, the Company's  Internal  Control is effective  based on
those criteria.

This Annual  Report on Form 10-K does not include an  attestation  report of the
Company's   registered  public  accounting  firm  regarding   Internal  Control.
Management's  report was not subject to attestation by the Company's  registered
public  accounting  firm  pursuant  to  temporary  rules of the  Securities  and
Exchange  Commission that permit the Company to provide only management's report
in this annual report.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS.

The  Company's  management,  including  the  CEO/CFO,  does not expect  that its
Disclosure  Controls and/or its Internal  Control will prevent all error and all
fraud. A control system, no matter how well conceived and operated,  can provide
only  reasonable,  not absolute,  assurance  that the  objectives of the control
system are met.  Further,  the design of a control  system must reflect the fact
that there are  resource  constraints,  and the  benefits  of  controls  must be
considered relative to their costs.

Because of the inherent  limitations  in all control  systems,  no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making  can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,  controls
can be circumvented by the individual acts of some persons,  by collusion of two
or more people,  or by  management  override of the  control.  The design of any
system of  controls  also is based in part upon  certain  assumptions  about the
likelihood of future events,  and there can be no assurance that any design will
succeed in achieving  its stated goals under all  potential  future  conditions;
over time,  control may become inadequate  because of changes in conditions,  or
the degree of  compliance  with the  policies  or  procedures  may  deteriorate.
Because  of  the  inherent  limitations  in  a  cost-effective  control  system,
misstatements due to error or fraud may occur and not be detected.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

In accordance  with SEC  requirements,  the CEO/CFO notes that during the fiscal
quarter ended  December 31, 2007, no changes in the Company's  Internal  Control
have  occurred  that  have  materially  affected  or are  reasonably  likely  to
materially affect the Company's Internal Control.

ITEM 9B. OTHER INFORMATION

         On December 18, 2007,  the Board of Directors of the Company,  upon the
recommendation of the independent directors of the Company, approved bonuses for
fiscal year 2007 to Messrs.  Steven Rosenberg,  Moses Krausz and David Lukens of
$30,000,  $275,000 and  $30,000,  respectively,  and fixed  salaries for Messrs.
Steven Rosenberg and David Lukens for fiscal year 2008 at $230,000 and $192,000,
respectively, effective January 1, 2008.

         The Bank's Deferred  Compensation  Plan (the "Plan") was established in
July 2006 to provide for a systematic  method by which key employees of the Bank
may  defer  payment  of not  less  than 3% and not  more  than 50% of his or her
compensation  that would  otherwise  be payable  during the year.  The  Deferred
Compensation  Plan is intended to be a nonqualified and unfunded plan maintained
primarily for the purpose of providing deferred  compensation for a select group
of  management  or highly  compensated  employees  pursuant to Sections  201(2),
301(a)(3) and 401(a)(1) of the Employee  Retirement Income Security Act of 1974,
as amended.  On November  29,  2007,  the Plan was amended  with  respect to the
selection  of the  employees  eligible  to  participate  in the  Plan,  and  for
additional amounts to be credited to a participant's account.

                                       81
<PAGE>

                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following are the current directors and executive officers of the Company:

NAME                   AGE    POSITION(S)
----                   ---    --------------------------------------------------
Steven Rosenberg       59     President, Chief Executive Officer,
                               Chief Financial Officer and Director
William L. Cohen       66     Director
Martin A. Fischer      70     Director
Moses Marx             72     Director
Randolph B. Stockwell  61     Director
Moses Krausz           67     President of The Berkshire Bank
David Lukens           58     Executive Vice President, Chief Financial Officer
                               of The Berkshire Bank

         Mr.  Rosenberg has served as President and Chief  Executive  Officer of
the Company since March 1999 and as Vice President and Chief  Financial  Officer
of the Company  from April 1990 to March 1999.  He  continues  to serve as Chief
Financial  Officer.  Mr.  Rosenberg  was  elected a director  in May 1995.  From
September 1987 through April 1990, he served as President and Director of Scomel
Industries,  Inc., a company engaged in international  marketing and consulting.
Mr.  Rosenberg  is a director of The Cooper  Companies,  Inc. (a  developer  and
manufacturer of healthcare products).

         Mr.  Cohen was  elected a director  in July 1993.  He has served as the
Chief Executive Officer of Andover  Properties,  LLC, a real estate  development
company  specializing  in self storage  facilities  since November 2003, and has
been a private investor for over six years. Mr. Cohen served as President, Chief
Executive Officer and Chairman of the Board of The Andover Apparel Group,  Inc.,
an apparel manufacturing company, from 1980 to 2000.

         Mr. Fischer was elected a director on December 6, 2006. He has been the
President and Chief Executive of Mount Carmel Cemetery  Association,  a New York
State  not-for-profit  corporation  since April 2001. Mr. Fischer was counsel to
Warshaw,  Burstein,  Cohen,  Schlesinger and Kuh, a New York City law firm, from
1987 until 2001 and served as President,  Chief Operating Officer and a director
of Kinney System,  Inc. and The Katz Parking System, Inc. from 1981 to 1986. Mr.
Fischer was appointed  Commissioner of the New York State Insurance Fund in 1977
and served as its Chairman until January 1995.

         Mr.  Marx was  elected a director  in May 1995.  Mr.  Marx has been the
General  Partner in United  Equities  Company since 1954 and General  Partner in
United  Equities  Commodities  Company since 1972. He is also President of Momar
Corp.  All of these are  investment  companies.  Mr.  Marx is a director  of The
Cooper Companies, Inc.

         Mr.  Stockwell  was  elected a  director  in July  1988.  He has been a
private investor for over ten years.  Since April 1999, Mr. Stockwell has served
as President  of Yachting  Systems of America,  LLC. In  addition,  he served in
various  capacities with the Community  Bank, a commercial  bank, from September
1972 to January 1987.

         Mr.  Krausz has held the  position of President of the Bank since March
1992 and Chief Executive  Officer since November 1993. He was elected a director
in May 2007. Prior to joining the Bank, Mr. Krausz was Managing  Director of SFS
Management Co., L.P., a mortgage banker,  from 1987 to 1992 and was President of
UMB Bank and Trust Company, a New York State chartered bank, from 1978 to 1987.

         Mr.  Lukens has held the  position of Senior Vice  President  and Chief
Financial  Officer of the Bank since  December 1999 and Executive Vice President
since  December  2003.  Prior to joining  the Bank,  Mr.  Lukens was Senior Vice
President  and Chief  Financial  officer of First  Washington  State Bank, a New
Jersey  commercial bank, from 1994 to 1999 and was Vice President and Controller
at the  Philadelphia,  PA branch of Bank Leumi Le-Israel B.M., an  international
commercial bank, from 1978 to 1994.

         There are no  family  relationships  (whether  by  blood,  marriage  or
adoption) among any of the Company's current directors or executive officers.


                                       82
<PAGE>

         At each annual meeting of stockholders, the successors to the directors
then  serving  are  elected  to  serve  from  the  time of  their  election  and
qualification  until the next annual meeting  following  their election or until
their  successors  have been duly elected and qualified,  or until their earlier
death, resignation or removal. All of our current directors have been elected to
serve until the annual meeting of stockholders to be held in 2008. The Company's
officers,  except for Messrs. Krausz and Lukens who have employment  agreements,
serve at the discretion of the Board of Directors.


AUDIT COMMITTEE MEMBERS, FINANCIAL EXPERT AND INDEPENDENCE

         Our Board of Directors has established an Audit Committee  comprised of
three independent  directors,  Messrs.  William L. Cohen,  Martin A. Fischer and
Randolph  B.  Stockwell.  All of the  members  of the Audit  Committee  meet the
independence  requirements under current NASDAQ corporate  governance  standards
for companies whose securities are listed on NASDAQ.  Based upon their education
and  relevant  experience,  our  Board has  determined  that  Messrs.  Cohen and
Stockwell each qualify as financial experts as defined by the Sarbanes-Oxley Act
of 2002 and the rules of the Securities and Exchange Commission.

CORPORATE CODE OF ETHICS

         We  have  adopted  a  Corporate  Code of  Ethics  that  applies  to the
directors,  officers and employees,  including the senior management:  the chief
executive officer,  chief financial  officer,  controller and persons performing
similar functions, of Berkshire Bancorp Inc. and its subsidiaries. Copies of our
Corporate Code of Ethics are available  without  charge upon written  request to
the Company, Attention President, at its principal executive office.


ITEM 11.     EXECUTIVE COMPENSATION

         Our Board of Directors  has delegated  primary  authority for executive
compensation  to the three  independent  members  of the Board,  or  Independent
Directors,  who, though not a formal compensation committee of the Board, act in
such capacity.

EXECUTIVE COMPENSATION

         The following table shows the  compensation  paid in or with respect to
the last fiscal year to the individual who served as our Chief Executive Officer
and Chief  Financial  Officer for the fiscal  years ended  December 31, 2007 and
2006,  and to each of the  other  executive  officers  of the Bank  whose  total
compensation  was more than $100,000  during the fiscal years ended December 31,
2007 and 2006 (our "named executive officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                CHANGE IN
                                                                              PENSION VALUE
                                                                                   AND
                                                                               NONQUALIFIED
                                                                                 DEFERRED
                                                                               COMPENSATION         ALL OTHER
NAME AND PRINCIPAL                                  SALARY       BONUS           EARNINGS           COMPENSATION     TOTAL
POSITION                                YEAR          $            $                 $                   $             $
<S>                                     <C>         <C>           <C>                <C>               <C>          <C>
Steven Rosenberg                        2006        200,000       25,000             232,267                --      457,267
President, Chief Executive Officer      2007        220,000       30,000             301,822                --      551,822
and Chief Financial Officer

Moses Krausz                            2006        422,130      250,000                  --            11,424      683,554
President and Chief Executive Officer   2007        436,201      275,000                 818            11,575      723,594
of The Berkshire Bank

David Lukens                            2006        174,000       25,000              11,996             7,658      218,654
Executive Vice President                2007        183,000       30,000              13,822             8,736      235,558
and Chief Financial Officer
of The Berkshire Bank
</TABLE>

                                       83
<PAGE>

NARRATIVE TO SUMMARY COMPENSATION TABLE

Mr.  Rosenberg  does not have an  employment  agreement  with  us.  The  amounts
reported  for Change in Pension  Value and  Nonqualified  Deferred  Compensation
Earnings  includes only the change in the value of his benefit payable under our
Retirement  Income Plan. Mr. Rosenberg does not participate in the Bank's 401(k)
Plan or its Deferred Compensation Plan.

Mr. Krausz has an employment  agreement with us. The agreement  expires on April
30,  2010  unless  automatically  renewed  for up to three  additional  years as
provided for in the  agreement.  The  agreement  provides for the payment to Mr.
Krausz of a specified base salary with fixed annual increases,  the payment of a
discretionary  bonus and participation in our employee benefit plans.  There are
no change in control provisions in Mr. Krausz's employment agreement. Mr. Krausz
is a participant in the Bank's 401(k) Plan and its Deferred  Compensation  Plan.
The amounts reported in All Other Compensation consists of contributions we made
to Mr.  Krausz's  401(k)  account  of  $6,750  and  $6,600  in  2007  and  2006,
respectively, and income associated with life insurance coverage.

Mr. Lukens has an  employment  agreement  with us. The agreement  will expire on
June 30, 2008 unless  automatically  renewed for up to three additional years as
provided for in the  agreement.  The  agreement  provides for the payment to Mr.
Lukens of a base salary and annual  bonus,  and  participation  in our  employee
benefit plans.  There are no change in control provisions Mr. Lukens' employment
agreement.  Mr.  Lukens  is a  participant  in the  Bank's  401(k)  Plan and its
Deferred  Compensation  Plan.  The amounts  reported  in All Other  Compensation
consists of  contributions  we made to Mr.  Lukens' 401(k) account of $6,161 and
$5,970,  in 2007  and  2006,  respectively,  and  income  associated  with  life
insurance coverage.


         GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED DECEMBER 31, 2007

         There  were no  grants of  awards  made to any of our  named  executive
officers in 2007 and 2006 under any non-equity or equity incentive plan.


1999 STOCK INCENTIVE PLAN

         Our 1999 Stock  Incentive  Plan  permits the  granting of awards in the
form of nonqualified stock options,  incentive stock options,  restricted stock,
deferred stock, and other  stock-based  incentives.  Up to 600,000 shares of our
common stock may be issued pursuant to the 1999 Stock Incentive Plan (subject to
appropriate  adjustment  in the event of  changes in our  corporate  structure).
Officers, directors and other key employees of us or any of our subsidiaries are
eligible  to receive  awards  under the 1999 Stock  Incentive  Plan.  The option
exercise  price of all options which are granted under the 1999 Stock  Incentive
Plan  must be at  least  equal to 100% of the  fair  market  value of a share of
common stock of the Company on the date of grant. At December 31, 2007,  options
to acquire 550,257 shares of our common stock have been granted under this plan,
2,076 options are outstanding and exercisable,  and 49,743 options are available
for future grants.

                          POST-EMPLOYMENT COMPENSATION

RETIREMENT INCOME PLAN. Our Retirement Income Plan is a noncontributory  defined
benefit plan  covering  substantially  all of our  full-time,  non-union  United
States employees. Under the Retirement Income Plan, our benefits were based upon
a combination of employee  compensation and years of service. We paid the entire
cost of the plan for our employees  and funded such costs as they  accrued.  Our
funding  policy was to make  annual  contributions  within  minimum  and maximum
levels  required by applicable  regulations.  Our customary  contributions  were
designed  to fund  normal  cost on a  current  basis  and fund over 30 years the
estimated prior service cost of benefit  improvements  (15 years of annual gains
and losses).  The  projected  unit cost method was used to determine  the annual
cost. Plan assets consist principally of equity and fixed income mutual funds.


                                       84
<PAGE>

         Benefit  accruals were frozen as of September 15, 1988,  resulting in a
plan curtailment.  As a result of such  curtailment,  we did not accrue benefits
for future services; however, we did continue to contribute as necessary for any
unfunded liabilities. In 2000, we reinstated the Retirement Income Plan to cover
substantially all of our full-time, non-union United States employees.

         Except for Mr. Rosenberg whose benefit is subject to the laws governing
the  Retirement  Income  Plan,  a  participant  in the  Retirement  Income  Plan
accumulates  a balance in his or her  retirement  account by  receiving:  (i) an
annual  retirement  credit of 5% of gross wages paid during the year, but not in
excess of the applicable annual maximum compensation  permitted to be taken into
account under Internal Revenue Service guidelines for each year of service;  and
(ii) an annual interest credit based upon the 30-year U. S. Treasury  securities
rate. We pay the entire cost of the Retirement Income Plan for our employees and
fund such costs as they accrue.

         Our plan  provides  for a normal  retirement  age of 65.  However,  the
estimated  annual unreduced  benefits  payable under the Retirement  Income Plan
upon  earlier  retirement  at  age 62  for  Messrs.  Rosenberg  and  Lukens  are
approximately  $160,000 and $16,000,  respectively.  In accordance with the laws
currently  governing the Retirement  Income Plan,  the estimated  annual benefit
payable to Mr.  Rosenberg  is not  expected  to  increase.  Mr.  Krausz is not a
participant in the Retirement  Income Plan. (See Note K of Notes to Consolidated
Financial  Statements for more  information  concerning  the  Retirement  Income
Plan).

DEFERRED   COMPENSATION   PLAN.  The  Bank's  deferred   compensation  plan  was
established  in July  2006 to  provide  for a  systematic  method  by which  key
employees  of the Bank may defer  payment  of not less than 3% and not more than
50% of his or her compensation  that would otherwise be payable during the year.
The Deferred  Compensation  Plan is intended to be a  nonqualified  and unfunded
plan maintained primarily for the purpose of providing deferred compensation for
a select  group of  management  or  highly  compensated  employees  pursuant  to
Sections  201(2),  301(a)(3)  and  401(a)(1) of the Employee  Retirement  Income
Security Act of 1974, as amended.

         On June 30 and December 31 of each year,  account balances are credited
with the applicable  earnings rate, the highest deposit rate paid by the Bank on
its generally  available  interest  bearing  deposit  accounts  (excluding  time
deposits), in effect at that time.  Distributions from the Deferred Compensation
Plan may be made  upon (i)  termination  of  employment,  (ii) an  unforeseeable
emergency,  (iii) death,  (iv) disability,  as defined under Section 409A of the
Internal  Revenue  Code of 1986,  as amended,  (the  "Code") and (v) a Change in
Control  Event,  to  the  extent  such  Change  in  Control  Event   constitutes
permissible payment under Section 409A of the Code.


                            COMPENSATION OF DIRECTORS

DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007.





                              FEES EARNED
                              OR PAID IN        ALL OTHER
                                 CASH         COMPENSATION         TOTAL
NAME                               $                $                $
William L. Cohen                    32,500            --           32,500
Moses Marx                          27,500            --           27,500
Martin A. Fischer                   29,333            --           29,333
Randolph B. Stockwell               32,500            --           32,500

         Each director who is not also an employee receives a stipend of $25,000
per annum and $1,500 for each day during which he  participates  in a meeting of
the Board or a Committee of the Board.  Each of these  directors also receives a
fee of $1,000 for  telephonic  meetings  of the Board or a Board  Committee.  In
addition, see "1999 Stock Incentive Plan" above.

                                       85
<PAGE>


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

         The following table sets forth certain information as of March 26, 2008
with respect to the beneficial  ownership of our Common Stock by (i) each person
who is known by us to own  beneficially  more than 5% of our Common Stock,  (ii)
each of our directors and persons named in the Summary  Compensation  Table, and
(iii) all executive officers and directors as a group.

<TABLE>
<CAPTION>
                                                                     AMOUNT AND NATURE
                                  NAME AND ADDRESS OF                  OF BENEFICIAL           PERCENT
   TITLE OF CLASS                   BENEFICIAL OWNER                     OWNERSHIP             OF CLASS
---------------------  -------------------------------------------  ---------------------     -----------
<S>                    <C>                                               <C>                      <C>
Common Stock           William L. Cohen                                      7,500                  *

Common Stock           Martin A. Fischer                                     9,800                  *

Common Stock           Moses Krausz                                         90,464 (1)              1.3%

Common Stock           David Lukens                                            600                  *

Common Stock           Moses Marx                                        3,822,702 (2)             54.2%
                       160 Broadway
                       New York, NY 10038

Common Stock           Steven Rosenberg                                     62,580                  *

Common Stock           Randolph B. Stockwell                                21,000                  *

Common Stock           All executive officers and directors as a
                       group (7 persons)                                 4,014,646                 56.9%
</TABLE>
---------------------------------------------------------
                       * Less than 1%

(1)      Includes 2,100 shares owned by Mr. Krausz's spouse.
(2)      Includes  285,000 shares owned by Momar  Corporation and 386,163 shares
         owned  by  Terumah  Foundation.   Does  not  include  37,302.32  shares
         representing  23.0% of the shares  owned by Eva and  Esther,  L.P.,  of
         which Mr. Marx has a 23.0%  limited  partnership  interest.  Mr. Marx's
         daughters  and  their  husbands  are the  general  partners  of Eva and
         Esther, L.P.


EQUITY COMPENSATION PLANS

         The following table details  information  regarding our existing equity
compensation plans as of December 31, 2007.

<TABLE>
<CAPTION>
                                                                                               (c)
                                                                                       NUMBER OF SECURITIES
                                         (a)                       (b)               REMAINING AVAILABLE FOR
                              NUMBER OF SECURITIES TO BE     WEIGHTED-AVERAGE          FUTURE ISSUANCE UNDER
                               ISSUED UPON EXERCISE OF       EXERCISE PRICE OF       EQUITY COMPENSATION PLANS
                                 OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS,       (EXCLUDING SECURITIES
PLAN CATEGORY                    WARRANTS AND RIGHTS        WARRANTS AND RIGHTS       REFLECTED IN COLUMN (a)
-------------                    -------------------        -------------------       -----------------------
<S>                                           <C>                     <C>                           <C>
Equity compensation                           2,076                   $ 9.76                        49,743
plans approved by
security holders

Equity compensation                              --                       --                            --
plans not approved by
security holders

Total                                         2,076                   $ 9.76                        49,743
</TABLE>




                                       86
<PAGE>

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

         The  Bank  has  made  loans  to  certain  of its  directors  and  their
affiliates and, assuming continued  compliance with generally  applicable credit
standards,  it expects to continue  to make such  loans.  All of these loans (i)
were made in the ordinary course of business,  (ii) were made on the same terms,
including interest rates, as those available to other persons not related to the
Company,  and (iii) did not involve more than the normal risk of  collectibility
or present other unfavorable features.

         In January 2000,  the Bank entered into a lease  agreement with Bowling
Green  Associates,  LP, the principal owner of which is Mr. Marx, for commercial
space to open a bank branch. We obtained an appraisal of the market rental value
of the space from an independent appraisal firm and management believes that the
terms of the lease,  including  the annual rent paid,  $368,000  and $328,000 in
fiscal 2007 and 2006,  is  comparable to the terms and annual rent that would be
paid to non-affiliated  parties in a similar commercial  transaction for similar
commercial space.

       See Item 1.  Business -  Transactions  With  Related  Parties and Item 2.
Properties for additional information.

INDEPENDENCE OF DIRECTORS

       Our board has determined that Messrs. William L. Cohen, Martin A. Fischer
and Randolph B. Stockwell are independent  under the  independence  standards of
the NASDAQ Stock Market LLC.


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

         The  Company's  principal  accountant  is Grant  Thornton  LLP  ("Grant
Thornton").  The total fees paid to Grant Thornton for the last two fiscal years
are as follows:


<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED        FISCAL YEAR ENDED
                                                                   DECEMBER 31, 2007        DECEMBER 31, 2006
                                                                 -----------------------  -----------------------
<S>                                                                            <C>                      <C>
AUDIT FEES                                                                     $316,380                 $281,540

AUDIT RELATED FEES: Professional services                                            --                       --
rendered for employee benefit plan audits,
accounting assistance in connection with
acquisitions and consultations related to
financial accounting and reporting standards

TAX FEES: Tax consulting, preparation of                                         68,910                   68,200
returns

ALL OTHER FEES: Professional services                                                --                       --
rendered for corporate support
</TABLE>


         The Audit  Committee  has  established  its  pre-approval  policies and
procedures,  pursuant to which the Audit Committee  approved the foregoing audit
and permissible  non-audit  services  provided by Grant Thornton LLP in 2007 and
2006.  Consistent  with the Audit  Committee's  responsibility  for engaging our
independent  auditors,  all  audit  and  permitted  non-audit  services  require
pre-approval by the Audit Committee.  The full Audit Committee approves proposed
services and fee estimates for these services.  The Audit Committee  chairperson
has been  designated  by the Audit  Committee  to approve any  services  arising
during the year that were not  pre-approved  by the Audit Committee and services
that were pre-approved.  Service approved by the Audit Committee chairperson are
communicated to the full Audit Committee at its next regular  quarterly  meeting
and the Audit  Committee  reviews  services and fees for the fiscal year at each
such meeting.  Pursuant to these  procedures,  the Audit Committee  approved the
foregoing audit and permissible  non-audit  services  provided by Grant Thornton
LLP.

                                       87
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

         (a) DOCUMENTS FILED AS PART OF THIS REPORT:

         (1)  Financial Statements

         Report of Independent Registered Public Accounting Firm

         Consolidated Balance Sheets as of December 31, 2007 and 2006

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

         Consolidated  Statements  of  Stockholders'  Equity for the Years Ended
         December 31, 2007, 2006 and 2005

         Consolidated  Statements of Cash Flows for the Years Ended December 31,
         2007, 2006 and 2005

         Notes to Consolidated Financial Statements


         Schedule
         Number       Description
         --------     -----------

         None

         All schedules for which provision is made in the applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and, therefore, have been omitted.

         (3)  Exhibits

EXHIBIT
NUMBER   DESCRIPTION
------   -----------

2.1      Agreement and Plan of  Reorganization,  dated as of August 16, 2000, by
         and between  Berkshire  Bancorp Inc.,  Greater  American Finance Group,
         Inc., The Berkshire Bank, GSB Financial  Corporation and Goshen Savings
         Bank (incorporated by reference to the Companies Registration Statement
         on Form S-4 dated October 13, 2000.
3.1      Amended  and  Restated  Certificate  of  Incorporation  of the  Company
         (incorporated  by  reference  to Exhibit 3.1 to the  Company's  Current
         Report on Form 8-K dated March 30, 1999,  and the  Company's  Quarterly
         Report on Form 10-Q for the Quarterly Period Ended June 30, 2004).
3.2      Amended and Restated By-laws of the Company  (incorporated by reference
         to Exhibit 3.2 to the Company's  Current Report on Form 8-K dated March
         30, 1999).
10.1     1999 Stock Incentive Plan of the Company  (incorporated by reference to
         Exhibit 10.8 to the  Company's  Current  Report on Form 8-K dated March
         30, 1999).+
10.2     Employment Agreement, dated May 1, 1999, between The Berkshire Bank and
         Moses  Krausz  (incorporated  by  reference  to  Exhibit  10.3  to  the
         Company's Annual Report on Form 10-K for the Fiscal Year Ended December
         31, 2000).+
10.3     Employment Agreement, dated January 1, 2001, between The Berkshire Bank
         and David  Lukens  (incorporated  by  reference  to Exhibit 10.4 to the
         Company's Annual Report on Form 10-K for the Fiscal Year Ended December
         31, 2000).+
10.4     Lease Agreement, dated October 26, 1999, between Braun Management, Inc.
         as agent for Bowling Green  Associates,  L.P.,  and The Berkshire  Bank
         (incorporated  by reference to Exhibit 10.5 to the Company's  Quarterly
         Report on Form 10-Q for the Quarterly Period Ended March 31, 2001).
10.5     Amendment No. 2 to Employment Agreement,  dated January 1, 2001, by and
         between The Berkshire Bank and David Lukens  (incorporated by reference
         to Exhibit 10.1 to the Company's  Quarterly Report on Form 10-Q for the
         Quarterly Period Ended June 30, 2006).+

                                       88
<PAGE>

10.6     Deferred  Compensation Plan of The Berkshire Bank, dated June 27, 2005,
         (incorporated  by reference to Exhibit 10.2 to the Company's  Quarterly
         Report on Form 10-Q for the Quarterly Period Ended June 30, 2006).+
10.7     Amendment No. 1 to Deferred  Compensation of The Berkshire Bank,  dated
         August 17,  2006  (incorporated  by  reference  to Exhibit  10.1 to the
         Company's  Quarterly Report on Form 10-Q for the Quarterly Period Ended
         September 30, 2006).+
10.8     Amendment  No. 3 to Employment  Agreement,  dated July 23, 2007, by and
         between The Berkshire Bank and Moses Krausz  (incorporated by reference
         to Exhibit 10.1 to the Company's  Quarterly Report on Form 10-Q for the
         Quarterly Period Ended June 30, 2007).+
10.9     Amendment No. 2 to Deferred  Compensation of The Berkshire Bank,  dated
         August 17, 2006.+
21.      Subsidiaries of the Company.
23.      Consent of Independent Registered Public Accounting Firm
31.      Certification of Principal  Executive and Financial Officer pursuant to
         Section 302 of the Sarbanes-Oxley Act of 2002.
32.      Certification of Principal  Executive and Financial Officer pursuant to
         Section 906 of the Sarbanes-Oxley Act of 2002.

--------------------------
+ Denotes a management compensation plan or arrangement.

















                                       89
<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.

                                    BERKSHIRE BANCORP INC.



                                    BY:   /s/ Steven Rosenberg
                                          --------------------------------------
                                              STEVEN ROSENBERG
                                          President, (Chief Executive Officer)


                                    DATE: March 26, 2008
                                          --------------------------------------


         PURSUANT TO THE  REQUIREMENTS  OF THE SECURITIES  EXCHANGE ACT OF 1934,
THIS  REPORT HAS BEEN  SIGNED  BELOW BY THE  FOLLOWING  PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

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

                                    President, (Chief
                                    Executive Officer,
                                    Principal Financial
                                    Officer and Principal
                                    Accounting Officer);
/s/ Steven Rosenberg                Director                  March 26, 2008
-------------------------
      STEVEN ROSENBERG


/s/ William L. Cohen                Director                  March 26, 2008
-------------------------
      WILLIAM L. COHEN


/s/ Martin A. Fischer               Director                  March 26, 2008
-------------------------
      MARTIN A. FISCHER


/s/ Moses Krausz                    Director                  March 26, 2008
-------------------------
      MOSES KRAUSZ


/s/ Moses Marx                      Director                  March 26, 2008
-------------------------
      MOSES MARX


/s/ Randolph B. Stockwell           Director                  March 26, 2008
--------------------------
     RANDOLPH B. STOCKWELL






                                       90