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, 2006

                                       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, or a non-accelerated  filer. (See definition of "accelerated
filer and large  accelerated  filer in Rule 12b-2 of the  Exchange  Act.)  Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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, 2006: $61,475,934.

Number of shares of Common Stock outstanding as of March 23, 2007: 6,902,706.

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 COMPANY'S  ACTUAL RESULTS AND  EXPERIENCES 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. As used
in this Annual Report on Form 10-K, the term "Berkshire",  the "Company" or "we"
and similar  pronouns  shall mean  Berkshire  Bancorp Inc. and its  consolidated
subsidiaries  unless  the  context  otherwise  requires.  Berkshire's  principal
activity is the ownership and management of its wholly-owned banking subsidiary,
The Berkshire Bank (the "Bank"), a New York State chartered commercial bank.

        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
        New York, NY 10038

                                       2
<PAGE>


        STOCK SPLIT AND STOCK  DIVIDEND.  At the Annual Meeting of  Stockholders
held on May 18, 2004,  the Company's  stockholders  approved an amendment to the
Company's  Certificate of  Incorporation  effecting a one-for-ten  reverse stock
split of the  Company's  issued  and  outstanding  Common  Stock  (the  "Reverse
Split").  Following the  effectiveness of the Reverse Split, the Company's Board
of  Directors  declared a  thirty-for-one  forward  stock split in the form of a
stock dividend in Common Stock which became effective  immediately.  The Company
paid approximately  $463,000 to purchase  fractional shares from stockholders as
part of the Reverse Split.  The Company's  Common Stock began trading on May 19,
2004 giving effect to these transactions.

        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
"Debentures")  issued by the Company.  The Debentures,  the sole assets of BCTI,
mature on July 23, 2034 and bear interest at a floating rate,  three month LIBOR
plus 2.70%.

        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%.  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 six 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, 2006
            ---------------------------------------------------------
              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
              Ridgefield, NJ

                                       3
<PAGE>


        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
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  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
and mortgage-backed 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.

                                       4
<PAGE>


        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").

        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.

                                       5
<PAGE>


        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, 2006 and 2005, 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
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

                                       6
<PAGE>


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, 2006 and 2005, the Bank's Tier
I leverage capital ratio was 10.9% and 10.1%, 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,
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, 2006 and 2005, the Bank maintained a 18.6%
and 22.2% Tier I risk-based capital ratio and a 19.3% and 23.0% 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, 2006 and 2005, 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 2005 and  2006  calendar  years  totaled  approximately  $11.43
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

                                       7
<PAGE>


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 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.

                                       8
<PAGE>


        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 2006 and 2005 was equal to 0.0127% and  0.0444%,  respectively,
of its insured  deposits  and which is recorded as a deposit  insurance  premium
expense for financial statement purposes.  Beginning in 2007, the assessment was
revised to 0.0122% 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 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,
2006,  2005 and 2004,  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 2006, 2005 and 2004. (See Dividends in Item 5).

        EMPLOYEES.  On March 23, 2007,  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.

                                       9
<PAGE>


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.
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.

                                       10
<PAGE>


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.

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,  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 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.

                                       11
<PAGE>


        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 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
6,900,000 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

                                       12
<PAGE>


ITEM 2. PROPERTIES.

        The following are Berkshire's and the Bank's principal  facilities as of
March 9, 2007:

                                      Approximate
                                      Floor Area   Approximate  Lease
Location           Operations         (Sq. Ft.)    Annual Rent  Expiration
------------       -----------------  -----------  -----------  ----------------
New York, NY       Executive Offices   1,500       $  18,000    (1)(3)
New York, NY       Main Bank Office
                    and Bank Branch    9,700       Owned        Feb 2008
Brooklyn, NY       Bank Branch         4,500       $ 200,418    March 2008
Brooklyn, NY       Bank Branch         2,866       $  59,130    March 2008
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)
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                     Owned

----------
(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.

                                     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, 2005               HIGH       LOW
-----------------------------------              ------     -----

January 1, 2005 to March 31, 2005                 22.04     19.51

April 1, 2005 to June 30, 2005                    20.98     17.50

July 1, 2005 to September 30, 2005                18.75     17.02

October 1, 2005 to December 31, 2005              18.30     15.83



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 23, 2007, there were  approximately
1,300 holders of record of the Company's Common Stock.

                                       13
<PAGE>


DIVIDENDS

        For the fiscal years ended December 31, 2006, 2005 and 2004, 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 2006, 2005 and 2004.

        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,  restated to reflect the reverse
split and stock dividend which occurred on May 18, 2004, as follows:

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

April 1, 2004            April 19, 2004        April 28, 2004            $.05

October 5, 2004          October 22, 2004      October 29, 2004          $.06

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

        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, 2005,  the Company has purchased a total of 1,848,909
shares of its Common  Stock.  During  fiscal year 2006,  we purchased a total of
50,000 shares and at December 31, 2006 there were 501,091 shares of Common Stock
which may yet be purchased under our stock repurchase plan. Certain  information
concerning the 50,000 shares purchased in 2006 is set forth below.


                      ISSUER PURCHASES OF EQUITY SECURITIES

                                             TOTAL NUMBER OF     MAXIMUM NUMBER
                  TOTAL                         SHARES (OR      (OR APPROXIMATE
                  NUMBER                          UNITS)        DOLLAR VALUE) OF
                  OF                           PURCHASED AS    SHARES (OR UNITS)
                  SHARES        AVERAGE          PART OF        THAT MAY YET BE
                  (OR         PRICE PAID         PUBLICLY       PURCHASED UNDER
                  UNITS)       PER SHARE     ANNOUNCED PLANS      THE PLANS OR
                  PURCHASED    (OR UNIT)       OR PROGRAMS          PROGRAMS
                  ---------   -----------   -----------------  -----------------
November 2006       50,000      $15.80           50,000              501,091
=============       ======      ======           ======              =======


EQUITY COMPENSATION PLANS

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

                                       14
<PAGE>


                                PERFORMANCE GRAPH

        The  following  graph  compares  the  cumulative  total  return  on  the
Company's  Common  Stock with the  cumulative  total  return of The Nasdaq Stock
Market  Bank  Stocks  Index and the Nasdaq  Market  Total  Return  Index for the
five-year  period ended  December 31, 2006.  The graph assumes that the value of
the  investment  in the Company and the index was $100 on December  31, 2001 and
assumes that all dividends were reinvested.

                       RETURN TO SHAREHOLDERS OF BERKSHIRE BANCORP INC.


                               [GRAPHIC OMITTED]


* BERKSHIRE BANCORP INC. O NASDAQ BANK STOCKS INDEX  # NASDAQ TOTAL RETURN INDEX

<TABLE>
<CAPTION>
                             ==================================================================
                               12/31/01   12/31/02   12/31/03   12/31/04   12/30/05   12/29/06
-----------------------------------------------------------------------------------------------
<S>                             <C>         <C>        <C>        <C>        <C>        <C>
Berkshire Bancorp Inc.          $100.00     121.16     176.42     216.95     181.05     175.79
-----------------------------------------------------------------------------------------------
NASDAQ Market                   $100.00     105.58     131.69     150.71     147.23     165.24
Bank Stock Index
-----------------------------------------------------------------------------------------------
NASDAQ Market                   $100.00      69.13     103.36     112.49     114.88     126.21
Total Return Index
===============================================================================================
</TABLE>

                                       15
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA.

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES

                      FIVE YEAR FINANCIAL HIGHLIGHTS (A)(B)

        The following is a summary of certain financial information with respect
to the Company at and for the fiscal years ended December 31, 2006,  2005, 2004,
2003  and  2002.  This  information  is  derived  from  and  should  be  read in
conjunction with the Company's  financial  statements and notes thereto included
elsewhere in this Form 10-K.

                               ------------------------------------------------
                                                 DECEMBER 31,
                               ------------------------------------------------
                                 2006      2005      2004      2003      2002
                               --------  --------  --------  --------  --------
                                 (Dollars in thousands,except per share data)
BALANCE SHEET DATA:
Total Assets                   $948,656  $977,452  $972,649  $905,669  $683,738
Loans, net                      367,152   305,964   284,052   292,163   273,182
Investment securities           515,231   599,972   631,592   569,848   371,458
Goodwill, net                    18,549    18,549    18,549    18,549    18,549
Deposits                        681,489   680,260   619,888   604,255   473,818
Borrowings                      115,390   156,245   223,352   192,136   104,372
Subordinated debt                22,681    22,681    15,464        --        --
Stockholders' equity            115,777   108,710   107,619   103,490    98,525

STATEMENT OF OPERATIONS DATA:
Interest income                  48,221    45,056    40,008    34,426    32,242
Interest expense                 29,186    22,399    15,916    13,647    13,416
                               --------  --------  --------  --------  --------
Net interest income before
 provision for loan losses       19,035    22,657    24,092    20,779    18,826
Provision for loan losses           410       180       180       240       387
                               --------  --------  --------  --------  --------
Net interest income              18,625    22,477    23,912    20,539    18,439
Investment securities gains       2,336         4       793     2,746     1,539
Other income                      1,357     1,202     1,026     1,237       748
Other expenses                   13,582    13,139    12,095    11,463    10,780
                               --------  --------  --------  --------  --------
Income before income taxes        8,736    10,544    13,636    13,059     9,946
Provision for income taxes        3,856     5,003     6,134     5,644     4,349
                               --------  --------  --------  --------  --------
Net income                     $  4,880  $  5,541  $  7,502  $  7,415  $  5,597
                               ========  ========  ========  ========  ========
Net income per share:
 Basic                         $    .71  $    .81  $   1.12  $   1.12  $    .81
                               ========  ========  ========  ========  ========
 Diluted                       $    .70  $    .80  $   1.10  $   1.10  $    .81
                               ========  ========  ========  ========  ========
Cash dividends per
 common share                  $    .16  $    .15  $    .11  $    .09  $    .07
                               ========  ========  ========  ========  ========

Selected Operating Ratios
Return on average assets            0.5%      0.6%      0.8%      0.9%      0.9%
Return on average equity            4.3%      5.1%      7.2%      7.2%      5.9%
Net interest margin                 2.2%      2.4%      2.6%      2.7%      3.3%
Average equity/average assets      12.1%     11.1%     11.0%     12.7%     15.6%
Allowance for loan
losses/total loans                  1.0%      1.1%      1.0%      0.9%      0.8%

(a)     The prior  years'  amounts  have been  reclassified  to  conform  to the
        current years' presentation.

(b)     The prior  years'  net income  per share and cash  dividends  per common
        share   amounts  have  been   retroactively   restated  to  reflect  the
        one-for-ten  reverse stock split and thirty-for-one  forward stock split
        which occurred on May 18, 2004.

                                       16
<PAGE>


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, 2006,  2005 and 2004.  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

STOCK SPLIT AND STOCK DIVIDEND.  At the Annual Meeting of  Stockholders  held on
May 18, 2004, the Company's  stockholders approved the Reverse Split.  Following
the  effectiveness  of the  Reverse  Split,  the  Company's  Board of  Directors
declared a stock dividend which became effective  immediately.  The Company paid
approximately  $463,000 to purchase  fractional shares from stockholders as part
of the Reverse Split.  The Company's  Common Stock began trading on May 19, 2004
giving effect to these transactions.

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  Debentures,  the sole  assets of BCTI,
mature on July 23, 2034 and bear interest at a floating rate,  three month LIBOR
plus 2.70%.

        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%.  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.

                                       17
<PAGE>


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
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,
2006,  the  Company  completed  its annual  testing,  which  determined  that no
impairment write-offs were 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.

                                       18
<PAGE>


DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        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                       832.8           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               --

                                       19
<PAGE>


        FISCAL  YEAR ENDED  DECEMBER  31,  2005  COMPARED  TO FISCAL  YEAR ENDED
DECEMBER 31, 2004. Net income was $5.54 million,  or $.80 per diluted share, for
the fiscal year ended December 31, 2005, compared to $7.50 million, or $1.10 per
diluted share,  for the fiscal year ended December 31, 2004. Net loans and total
assets  increased  by  approximately  8% and 1%,  respectively,  and  investment
securities decreased by approximately 5%.

                                       FISCAL YEAR ENDED DECEMBER 31,
                            ----------------------------------------------------
                                         2005            2004             %
                                                                       INC/(DEC)
                            (In millions, except per share data and percentages)
TOTAL ASSETS                           $977.7          $972.6                1%
Loans, net                              305.9           284.1                8%
Investment Securities                   600.0           631.6               (5)%
TOTAL LIABILITIES                       868.7           865.0                0%
Deposits                                680.3           619.9               10%
Borrowings                              178.9           238.8              (25)%
STOCKHOLDERS' EQUITY                    109.0           107.6                1%

TOTAL INCOME                             46.3            41.8               11%
Interest Income                          45.1            40.0               13%
TOTAL EXPENSE                            35.5            28.0               27%
Interest Expense                         22.4            15.9               41%
Net Interest Income                      22.7            24.1               (6)%
NET INCOME                                5.5             7.5              (27)%
Diluted Income Per Share                  .80            1.10              (27)%
BANK BRANCHES                              10               9               --


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.

                                       20
<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               TWELVE MONTHS ENDED
                                        DECEMBER 31, 2006                 DECEMBER 31, 2005                 DECEMBER 31, 2004
                                 -------------------------------   -------------------------------   -------------------------------

                                             INTEREST    AVERAGE               INTEREST    AVERAGE               INTEREST    AVERAGE
                                  AVERAGE       AND       YIELD/    AVERAGE       AND       YIELD/    AVERAGE       AND       YIELD/
                                  BALANCE    DIVIDENDS    RATE      BALANCE    DIVIDENDS    RATE      BALANCE    DIVIDENDS    RATE
                                 ---------   ---------   -------   ---------   ---------   -------   ---------   ---------   -------
<S>                              <C>         <C>          <C>      <C>         <C>           <C>     <C>         <C>           <C>
INTEREST-EARNING ASSETS:
Loans (1)                        $ 327,210   $ 23,844     7.29%    $ 287,178   $ 19,399      6.76%   $ 290,774   $ 18,825      6.47%
Investment securities              550,443     24,027     4.37       648,829     25,355      3.91      620,511     21,120      3.40
Other (2)(5)                         8,509        350     4.11        10,765        302      2.81        4,376         63      1.44
                                 ---------   --------     ----     ---------   --------      ----    ---------   --------      ----
Total interest-earning assets      886,162     48,221     5.44       946,772     45,056      4.76      915,661     40,008      4.37
                                                          ----                               ----                              ----
Noninterest-earning assets          46,882                            44,497                            40,592
                                 ---------                         ---------                         ---------
Total Assets                     $ 933,044                         $ 991,269                         $ 956,253
                                 =========                         =========                         =========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits          206,745      5,283     2.56       264,130      4,639      1.76      272,219      3,809      1.39
Time deposits                      410,729     17,276     4.21       338,834      9,552      2.82      309,968      6,024      1.94
Other borrowings                   144,722      6,627     4.58       225,657      8,208      3.64      223,208      6,083      2.73
                                 ---------   --------     ----     ---------   --------      ----    ---------   --------      ----
Total interest-bearing
 liabilities                       762,196     29,186     3.83       828,621     22,399      2.70      805,395     15,916      1.98
                                             --------     ----                 --------      ----                --------      ----

Demand deposits                     47,890                            44,739                            38,896
Noninterest-bearing liabilities      9,731                             8,310                             7,163
Stockholders' equity (5)           113,227                           109,599                           104,799
                                 ---------                         ---------                         ---------

Total liabilities and
 stockholders' equity            $ 933,044                         $ 991,269                         $ 956,253
                                 =========                         =========                         =========

Net interest income                          $ 19,035                          $ 22,657                          $ 24,092
                                             ========                          ========                          ========

Interest-rate spread (3)                                 1.61%                              2.06%                             2.39%
                                                         ====                               ====                              ====

Net interest margin (4)                                  2.15%                              2.39%                             2.63%
                                                         ====                               ====                              ====

Ratio of average interest-
earning assets to average
interest bearing liabilities          1.16                              1.14                              1.14
                                 =========                         =========                         =========
</TABLE>

----------
(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.

                                       21
<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, 2006
                                                        VERSUS
                                         TWELVE MONTHS ENDED DECEMBER 31, 2005
                                              INCREASE (DECREASE) DUE TO
                                        ---------------------------------------

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

Interest-earning assets:
 Loans                                  $ 1,522         $ 2,923         $ 4,445
 Investment securities                    2,985          (4,313)         (1,328)
 Other                                      140             (92)             48
                                        -------         -------         -------
Total                                     4,647          (1,482)          3,165
                                        -------         -------         -------

Interest-bearing
 liabilities:
Deposit accounts:
 Interest bearing deposits                2,113          (1,469)            644
 Time deposits                            4,710           3,014           7,724
 Other borrowings                         2,121          (3,702)         (1,581)
                                        -------         -------         -------
Total                                     8,944          (2,157)          6,787
                                        -------         -------         -------

Net interest income                     $(4,297)        $   675         $(3,622)
                                        =======         =======         =======



                                         TWELVE MONTHS ENDED DECEMBER 31, 2005
                                                        VERSUS
                                         TWELVE MONTHS ENDED DECEMBER 31, 2004
                                              INCREASE (DECREASE) DUE TO
                                        ---------------------------------------

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

Interest-earning assets:
 Loans                                  $   843         $  (269)        $   574
 Investment securities                    3,165           1,070           4,235
 Other                                       60             179             239
                                        -------         -------         -------
Total                                     4,068             980           5,048
                                        -------         -------         -------

Interest-bearing
 liabilities:
Deposit accounts:
 Interest bearing deposits                1,007            (177)            830
 Time deposits                            2,728             800           3,528
 Other borrowings                         2,031              94           2,125
                                        -------         -------         -------
Total                                     5,766             717           6,483
                                        -------         -------         -------

Net interest income                     $(1,698)        $   263         $(1,435)
                                        =======         =======         =======

                                       22
<PAGE>


INTEREST RATE RISK

        Fluctuations  in market interest rates can have a material effect on the
Company'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  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 are entered into with major financial institutions.

        As additional interest rate management strategy,  the Bank borrows funds
from the Federal Home Loan Bank,  approximately  $52.74  million at December 31,
2006, at fixed rates for a period of one to five years.

        We seek to maximize our 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.

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,  under
which 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, for collateral-dependent  loans,
the fair value of the  collateral  adjusted  for market  conditions  and selling
expenses.  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
groups 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.

                                       23
<PAGE>


        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
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  considers  it  important  to maintain  the ratio of our
allowance  for loan  losses to total loans at an  adequate  level given  current
economic  conditions,  interest  rates,  and the  composition  of the portfolio.
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, 2006 and 2005,  we  charged-off
loans of $42,000 and $26,000,  respectively, and recovered loans of $137,000 and
$185,000,  respectively.  All  amounts  recovered  in fiscal  2006 and 2005 were
returned to the allowance for loan losses.


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

                                       24
<PAGE>


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.  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,  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 the
average  amount of  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 the
average amount of  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, the difference between the average
yield  on  interest-earning  assets  and the  average  cost of  interest-bearing
liabilities,  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, or annualized net interest income as a
percentage of average  interest-earning  assets,  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 provided 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 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.

                                       25
<PAGE>


                                     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 of said sales 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%


                                      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%

                                       26
<PAGE>


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.

                                       27
<PAGE>


RESULTS OF  OPERATIONS  FISCAL YEAR ENDED  DECEMBER 31, 2005  COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 2004.

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, 2005 was $5.54
million,  or $.80 per share,  as compared to $7.50 million,  or $1.10 per share,
for the fiscal year ended December 31, 2004.

        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.  From June 2003 through June 30, 2004,  interest rates, as measured by
the prime rate, remained constant at 4.00%. On July 1, 2004,  inflation fighting
actions taken by the Federal  Reserve Board with respect to short-term  interest
rates (the only rates it can control)  resulted in a 25 basis point  increase in
the prime rate to 4.25%,  the first such  increase in  short-term  rates in more
than four years. Similar 25 basis point moves in the federal funds rate taken by
the Federal  Reserve  Board during 2004 and 2005,  the most recent  occurring on
January 31, 2006,  have moved the prime rate to its present level of 7.50%,  the
longest sustained period of monetary policy tightening in more than a decade.

        While  short-term  market  rates have  followed  the  upticks of federal
funds,  long-term  interest rates have declined during this period,  a condition
referred to as a flattening  yield curve. A flat or narrowing yield curve places
a squeeze on interest margins for financial institutions,  like the Company, who
depend upon a spread  between  long- and  short-term  rates for interest  margin
profits and the largest percentage of income.

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,  2005,  net  interest  income
decreased by $1.44 million,  or 5.96%, to $22.66 million from $24.09 million for
the fiscal year ended December 31, 2004. The decrease in net interest income was
the  result of the  28.84%  growth  in the  average  amount of  interest-bearing
liabilities to $828.62 million during fiscal 2005 from $805.40 million in fiscal
2004  and  the 72  basis  point  increase  in the  average  rates  paid  on such
liabilities  to 2.70% in 2005 from 1.98% in 2004.  The  decrease in net interest
income was  partially  offset by the 3.40%  increase  in the  average  amount of
interest-earning  assets to $946.77  million during 2005 from $915.66 million in
2004 and the 39 basis  point  increase  in the  average  yields  earned  on such
earning assets to 4.76% in 2005 from 4.37% in 2004.

        Also  contributing  to  the  change  in  net  interest  income  was  the
interest-rate   spread  or  the   difference   between  the  average   yield  on
interest-earning  assets and the average cost of  interest-bearing  liabilities.
During fiscal 2005,  the Company's  interest-rate  spread  decreased by 33 basis
points to 2.06% from 2.39%  during  fiscal  2004.  If interest  rates  remain at
current  levels or  increase  slowly over time,  we expect to see only  moderate
pressure  on  the  Company's  interest-rate  spread  and  net  interest  income.
Investment securities in our portfolio that have been sold, matured or called by
the  issuer  during  fiscal  2004 and 2005 have been  replaced  with  securities
carrying somewhat higher yields and, by design,  shorter maturities to provide a
hedge against a rising interest rate environment. Rates paid on deposit accounts
are likely to increase  in a rising  rate  environment  due to  competition  for
deposits in the market place.  The cost of borrowed  funds with floating  rather
than fixed interest rates will increase as well.

NET INTEREST MARGIN. Net interest margin, or annualized net interest income as a
percentage of average  interest-earning assets, declined to 2.39% in fiscal 2005
from 2.63% in fiscal 2004. 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

                                       28
<PAGE>


assets which  provided an aggregate  average  yield of 4.76% and 4.37% in fiscal
2005 and 2004, respectively.

        The average  amount of loans  decreased  slightly to $287.18  million in
fiscal 2005 from $290.77 million in fiscal 2004,  however,  the average yield on
the loan  portfolio  increased  by 29 basis  points to 6.76% in fiscal 2005 from
6.47% in fiscal 2004.  During periods of low and stable interest rates borrowers
gravitate  towards  fixed-rate loans to lock in a low interest rate.  Adjustable
rate loans are generally  preferred when interest  rates are trending  higher as
they did in 2004 and 2005. One-to-four family mortgage loans,  approximately 45%
and 54% of our loan portfolio at December 31, 2005 and 2004,  respectively,  are
particularly sensitive to changes in interest rates.

        The average amount of investment  securities increased by $28.32 million
to $648.83  million in fiscal  2005 from  $620.51  million in fiscal  2004.  The
average yield on investment  securities improved by 51 basis points, to 3.91% in
2005 from  3.40% in 2004 and are  likely to  continue  to  increase  in a rising
interest rate environment.  The average amount of other interest-earning assets,
primarily short-term  investments,  increased by $6.39 million to $10.77 million
in 2005 from $4.38  million in 2004 and  returned an average  yield of 2.81% and
1.44% in fiscal 2005 and 2004, respectively.

INTEREST  INCOME.  Total interest  income for the fiscal year ended December 31,
2005  increased  by $5.05  million,  or 12.62%,  to $45.06  million  from $40.01
million for the fiscal year ended  December 31,  2004.  The increase in interest
income  was  primarily  due to  the  growth  in  the  average  amount  of  total
interest-earning  assets. Loans contributed $19.40 million of interest income in
fiscal 2005, an increase of $574,000 from the $18.83 million of interest  income
contributed in fiscal 2004. Investment securities  contributed $25.36 million of
interest  income in fiscal  2005,  an increase of $4.24  million over the $21.12
million of interest income earned on loans in fiscal 2004.


                                    FISCAL 2005                 FISCAL 2004
                               --------------------        --------------------
                               INTEREST       % OF         INTEREST      % OF
                                INCOME       TOTAL          INCOME       TOTAL
                                      (In thousands, except percentages)
Loans                           $19,399       43.06%        $18,825       47.05%
Investment Securities            25,355       56.27          21,120       52.79
Other                               302        0.67              63        0.16
                                -------      ------         -------      ------
Total Interest Income           $45,056      100.00%        $40,008      100.00%


        Loans,  which are inherently risky and therefore command a higher return
than our conservative portfolio of investment securities,  declined to 30.33% of
our total average  interest-earning  assets in fiscal 2005 from 31.76% in fiscal
2004. 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 2005                  FISCAL 2004
                                -------------------         -------------------
                                AVERAGE        % OF         AVERAGE      % OF
                                 AMOUNT       TOTAL          AMOUNT      TOTAL
                                      (In thousands, except percentages)
Loans                           $287,178      30.33%        $290,774      31.76%
Investment Securities            648,829      68.53          620,511      67.77
Other                             10,765       1.14            4,376       0.47
                                -------      ------         -------      ------
Total Interest-Earning Assets   $946,772     100.00%        $915,661     100.00%

                                       29
<PAGE>


INTEREST EXPENSE.  Total interest expense for the fiscal year ended December 31,
2005  increased  by $6.48  million,  or 40.73%,  to $22.40  million  from $15.92
million for the fiscal year ended  December 31,  2004.  The increase in interest
expense  was  due to  the  growth  in the  average  amount  of  interest-bearing
liabilities and the increase in the average rate paid on such liabilities, 2.70%
and 1.98% in fiscal years 2005 and 2004, respectively. As short-term rates moved
higher during 2005, 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  additional  interest  expense  on these
debentures,  which is  included  in other  borrowings,  was  $1.27  million  and
$463,000 during fiscal 2005 and 2004.

                                   FISCAL 2005                   FISCAL 2004
                               --------------------        --------------------
                               INTEREST       % OF         INTEREST       % OF
                                EXPENSE      TOTAL          EXPENSE       TOTAL
                                        (In thousands, except percentages)
Interest-Bearing Deposits       $ 4,639       20.71%        $ 3,809       23.93%
Time Deposits                     9,552       42.64           6,024       37.85
Other Borrowings                  8,208       36.65           6,083       38.22
                                -------      ------         -------      ------
Total Interest Expense          $22,399      100.00%        $15,916      100.00%


                                    FISCAL 2005                  FISCAL 2004
                                -------------------         -------------------
                                AVERAGE      % OF           AVERAGE       % OF
                                 AMOUNT      TOTAL          AMOUNT       TOTAL
                                -------      ------         -------      ------
                                      (In thousands, except percentages)
Interest-Bearing Deposits       $264,130      31.88%        $272,219      33.80%
Time Deposits                   338,834       40.89         309,968       38.49
Other Borrowings                225,657       27.23         223,208       27.71
                                -------      ------         -------      ------
Total Interest-Bearing
  Liabilities                   $828,621     100.00%        $805,395     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, 2005,  total  non-interest  income  decreased by $613,000 to $1.21
million from $1.82 million for the fiscal year ended December 31, 2004. In 2004,
we recorded gains of $793,000 on the sales and issuer  redemptions of investment
securities.  In 2005, such gains amounted to $4,000.  Service charges on deposit
accounts increased by $69,000 to $589,000 in fiscal 2005 from $520,000 in fiscal
2004.

                                   FISCAL 2005                 FISCAL 2004
                              ---------------------     -----------------------
                              NON-INTEREST    % OF      NON-INTEREST      % OF
                                 INCOME       TOTAL         INCOME        TOTAL
                                      (In thousands, except percentages)
Service Charges on Deposits     $   589       48.84%        $   520       28.59%
Investment Securities gains           4        0.33             793       43.60
Other                               613       50.83             506       27.81
                                -------      ------         -------      ------
Total Non-Interest Income       $ 1,206      100.00%        $ 1,819      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,  2005
increased by $1.04 million,  or 8.63%, to $13.14 million from $12.10 million for
the year ended December 31, 2004. The largest component of non-interest  expense
are salaries and employee benefits which increased by $1.12 million,  or 16.21%,
to $8.00 million in fiscal 2005 from $6.89 million in fiscal 2004.  The increase
is due to the  addition of  personnel  in our  internal  control and  compliance
departments.

                                       30
<PAGE>


                                   FISCAL 2005                 FISCAL 2004
                             ----------------------      ----------------------
                             NON-INTEREST     % OF       NON-INTEREST     % OF
                                EXPENSE      TOTAL          EXPENSE      TOTAL
                                       (In thousands, except percentages)
Salaries and Employee Benefits  $ 8,002       60.90%        $ 6,886       56.93%
Net Occupancy Expense             1,728       13.15           1,538       12.72
Equipment Expense                   397        3.02             357        2.95
FDIC Assessment                     272        2.07             115        0.95
Data Processing Expense             198        1.51             157        1.30
Other                             2,542       19.35           3,042       25.15
                                -------      ------         -------      ------
Total Non-Interest Expense      $13,139      100.00%        $12,095      100.00%


PROVISION FOR INCOME TAX.  During the years ended December 31, 2005 and 2004, we
recorded  income tax expense of $5.00 million and $6.13  million,  respectively.
The tax provisions for federal, state and local taxes recorded for 2005 and 2004
represent effective tax rates of 47.45% and 44.98%, 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 (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.

        As required by the  Statement of Financial  Accounting  Standard No. 115
("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.

                                       31
<PAGE>


        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.

        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,
                              --------------------------------------------------------------------
                                       2006                   2005                    2004
                              --------------------    --------------------    --------------------
                                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    $ 24,896    $ 24,722
U.S. Government Agencies       322,986     317,164     448,196     439,645     471,018     467,271
Mortgage-backed securities      67,472      65,853      81,681      79,686     109,822     109,330
Corporate notes                 44,366      44,038      54,590      52,304      21,089      21,627
Municipal securities             5,698       7,187       1,972       2,306       1,307       1,441
Marketable equity
 securities and other           75,419      75,566      10,351      10,570       6,363       6,577
                              --------    --------    --------    --------    --------    --------
Total                         $520,943    $514,798    $611,775    $599,410    $634,495    $630,968
                              ========    ========    ========    ========    ========    ========

  HELD-TO-MATURITY
U.S. Government Agencies      $    433    $    436    $    562    $    573    $    624    $    633

Total                         $    433    $    436    $    562    $    573    $    624    $    633
                              ========    ========    ========    ========    ========    ========
</TABLE>

                                       32
<PAGE>


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

                                                        DECEMBER 31, 2006
                                                --------------------------------
                                                WEIGHTED
                                                 AVERAGE
                                                  YIELD      COST     FAIR VALUE
                                                  ----     --------    --------
                                                     (Dollars in thousands)
AVAILABLE-FOR-SALE
  U.S. Treasury Notes
Due after one year through five years             4.62%    $  5,002    $  4,990

                                                           --------    --------
                                                              5,002       4,990
                                                           --------    --------
  U.S. Government Agencies Obligations
Due within one year                               4.19       31,051      30,921
Due after one year through five years             4.14      200,964     197,212
Due after five years through ten years            4.61       76,931      75,325
Due after ten years                               4.06       14,040      13,706
                                                           --------    --------
                                                            322,986     317,164
  Municipal Obligations
Due after ten years                               9.84        5,698       7,187
                                                           --------    --------
                                                              5,698       7,187
                                                           --------    --------
  Mortgage-backed securities
Due after one year through five years             4.44        5,101       4,900
Due after five years through ten years            4.07       10,224       9,746
Due after ten years                               5.00       52,147      51,207
                                                           --------    --------
                                                             67,472      65,853
  Corporate Notes
Due within one year                               5.30       15,439      15,438
Due after one year through five years             5.80        7,036       7,027
Due after five years through ten years            4.00        5,000       4,483
Due after ten years                               6.79       16,891      17,090

                                                             44,366      44,038

  Common Stocks                                   0.46          329         420
  Preferred Stocks                                4.44       71,741      71,797
  Money market funds                              4.37          305         305
  Federal Home Loan Bank Stock                    6.25        3,044       3,044
                                                           --------    --------
                                                             75,419      75,566
                                                           $520,943    $514,798
HELD-TO-MATURITY
  U.S. Government Agencies Obligations
Due after five years through ten years            6.25           29          29
Due after ten years                               6.58          404         407
                                                           --------    --------
                                                           $    433    $    436
                                                           ========    ========


                                       33
<PAGE>


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, 2006,  2005 and 2004, the Company had total loans,  net of
unearned  income of  $370.92  million,  $309.23  million  and  $286.98  million,
respectively,  and an allowance for loan losses of $3.77 million,  $3.27 million
and  $2.93  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.

        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.

        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


                                       34
<PAGE>


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, 2006 and 2005,
approximately $143.62 million and $142.81 million, respectively, or 39% and 46%,
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, 2006 and 2005,  approximately  14% and 4%,
respectively,  of the Bank's residential one-to-four family owner-occupied first
mortgage portfolio were ARMs and approximately 86% and 96%,  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%.

        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.

        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.

                                       35
<PAGE>


        At December 31, 2006, the Bank's total capital, net of goodwill and loan
loss reserves,  was  approximately  $99.17 million and thus it was generally not
permitted  to make  loans to one  borrower  in  excess of  approximately  $14.89
million,  with  an  additional  amount  of  approximately  $9.93  million  being
permitted  if secured by readily  marketable  collateral.  The Bank was also not
permitted  to  make  any  single  mortgage  loan  in  an  amount  in  excess  of
approximately  $14.89 million.  At December 31, 2006, 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.

                                       36
<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,
                            --------------------------------------------------------------------------------------------------------
                                   2006                  2005                  2004                 2003                 2002
                            ------------------    ------------------    ------------------   ------------------   ------------------
                                          % OF                 % OF                   % OF                 % OF                 % OF
                              AMOUNT     TOTAL     AMOUNT      TOTAL      AMOUNT     TOTAL     AMOUNT     TOTAL     AMOUNT     TOTAL
                            ---------    -----    ---------    -----    ---------    -----   ---------    -----   ---------    -----
                                                                       (Dollars in thousands)
<S>                         <C>          <C>      <C>          <C>      <C>           <C>    <C>           <C>    <C>           <C>
Commercial and
 professional loans         $  63,331    17.0%    $  33,370    10.8%    $  16,498     5.7%   $  22,228     7.5%   $  16,704     6.0%

Secured by real estate
 1 - 4 family                 139,611    37.5       139,931    45.1       155,079    53.9      169,589    57.4      180,730    65.4
 Multi family                   4,013     1.1         2,874     0.9         4,600     1.6        6,608     2.2        8,958     3.2
 Non-residential
 (commercial)                 160,417    43.1       132,142    42.6       109,597    38.1       94,956    32.2       65,809    23.8
Consumer                        4,763     1.3         2,018     0.6         1,989     0.7        2,239     0.7        4,051     1.6
                            ---------    ----     ---------    ----     ---------     ---    ---------     ---    ---------   -----

Total loans                   372,135    100.0%     310,335    100.0%     287,763    100.0%    295,620    100.0%    276,252   100.0%
                                         =====                 =====                 =====                =====               =====

Less: Allowance
 for loan losses               (3,771)               (3,266)               (2,927)              (2,593)              (2,315)
Unearned fees                  (1,212)               (1,105)                 (784)                (864)                (755)
                            ---------             ---------             ---------            ---------            ---------
Loans, net                  $ 367,152             $ 305,964              $284,052            $ 292,163             $273,182
                            =========             =========             =========            =========            =========
</TABLE>

                                       37
<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 $0 and $74,000 at December 31, 2006 and 2005, respectively.


                                                   DECEMBER 31,
                                 -----------------------------------------------
                                 2006       2005       2004       2003      2002
                                 ----       ----       ----       ----      ----
                                             (Dollars in Thousands)
Nonaccrual loans:
Commercial and                   $ --       $ --       $ --       $ --       $--
 professional loans
Consumer                           --          3          1         --        --
Secured by real estate            201        253        342        109        59
                                 ----       ----       ----       ----       ---
Total nonaccrual loans            201        256        343        109        59
                                 ----       ----       ----       ----       ---
Accruing loans delinquent
 90 days or more                   --         74         50         --        --
                                 ----       ----       ----       ----       ---
Total nonperforming loans        $201       $330       $393       $109       $59
                                 ====       ====       ====       ====       ===
Total nonperforming loans
 to total assets                  .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, 2006
                                    -------------------------------------------
                                    ALLOWANCE
                                     FOR LOAN       PERCENT OF      PERCENT OF
                                      LOSSES        ALLOWANCE       TOTAL LOANS
                                    ---------       ----------      -----------
Commercial and
 professional loans                  $   852            22.6%            0.23%
Secured by real estate
 1 - 4 family                            634            16.8             0.17
 Multi family                             54             1.4             0.01
 Non-residential                       2,166            57.5             0.58
Consumer and other                        64             1.7             0.02
General allowance (1)                     --              --               --
                                     -------         -------          -------
Total allowance
 for loan losses                     $ 3,771           100.0%            1.01%
                                     =======         =======          =======

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

                                                 DECEMBER 31, 2005
                                    -------------------------------------------
                                    ALLOWANCE
                                     FOR LOAN       PERCENT OF      PERCENT OF
                                      LOSSES        ALLOWANCE       TOTAL LOANS
                                    ---------       ----------      -----------
Commercial and
 professional loans                  $   450            13.8%            0.15%
Secured by real estate
 1 - 4 family                            937            28.7             0.30
 Multi family                             39             1.2             0.01
 Non-residential                       1,784            54.6             0.57
Consumer and other                        27             0.8             0.01
General allowance (1)                     29             0.9             0.01
                                     -------         -------          -------
Total allowance
 for loan losses                     $ 3,266           100.0%            1.05%
                                     =======         =======          =======

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

                                       38
<PAGE>


                                                 DECEMBER 31, 2004
                                    -------------------------------------------
                                    ALLOWANCE
                                     FOR LOAN       PERCENT OF      PERCENT OF
                                      LOSSES        ALLOWANCE       TOTAL LOANS
                                    ---------       ----------      -----------
Commercial and
 professional loans                    $   223             7.6%            0.08%
Secured by real estate
 1 - 4 family                              775            26.5             0.27
 Multi family                               62             2.1             0.02
 Non-residential                         1,398            47.8             0.49
Consumer and other                          27             0.9             0.01
General allowance (1)                      442            15.1             0.15
                                       -------         -------          -------
Total allowance
 for loan losses                       $ 2,927           100.0%            1.02%
                                       =======         =======          =======

----------
(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%            0.10%
Secured by real estate
 1 - 4 family                            424            16.3             0.14
 Multi family                             89             3.4             0.03
 Non-residential                       1,198            46.2             0.41
Consumer and other                        30             1.2             0.01
General allowance (1)                    552            21.3             0.19
                                     -------         -------          -------
Total allowance
 for loan losses                     $ 2,593           100.0%            0.88%
                                     =======         =======          =======

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


                                                DECEMBER 31, 2002
                                    -------------------------------------------
                                    ALLOWANCE
                                     FOR LOAN       PERCENT OF      PERCENT OF
                                      LOSSES        ALLOWANCE       TOTAL LOANS
                                    ---------       ----------      -----------
Commercial and
 professional loans                  $   225             9.7%            0.08%
Secured by real estate
 1 - 4 family                            452            19.5             0.16
 Multi family                            121             5.2             0.04
 Non-residential                         888            38.4             0.32
Consumer and other                        55             2.4             0.02
General allowance (1)                    574            24.8             0.21
                                     -------         -------          -------
Total allowance
 for loan losses                     $ 2,315           100.0%            0.83%
                                     =======         =======          =======

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

                                       39
<PAGE>


        The  following  tables set 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, 2006
                                       -----------------------------------------
                                        WITHIN      1 TO      AFTER
                                        1 YEAR    5 YEARS    5 YEARS      TOTAL
                                       -------    -------    -------    --------
                                                    (In thousands)
FIXED RATE
Commercial and professional            $   828    $32,036    $   228    $ 33,092
Non-residential                         32,325     30,405     17,482      80,212

Total fixed rate                       $33,153    $62,441    $17,710    $113,304
                                       -------    -------    -------    --------

ADJUSTABLE RATE
Commercial and professional             12,957     13,827      3,455      30,239
Non-residential                         20,816     11,818     52,334      84,968

Total adjustable rate                  $33,773    $25,645    $55,789    $115,207
                                       -------    -------    -------    --------
Total                                  $66,926    $88,086    $73,499    $228,511
                                       =======    =======    =======    ========


        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):

<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                              -------------------------------------------------------------
                                2006         2005         2004         2003          2002
                              --------     --------     --------     --------     ---------
<S>                           <C>          <C>          <C>          <C>          <C>
Average loans outstanding     $327,210     $287,178     $290,774     $291,586     $ 265,961
                              ========     ========     ========     ========     =========
Allowance at beginning
 of period                       3,266        2,927        2,593        2,315         2,030
Charge-offs:
 Commercial and other
  loans                             42           26           24            4           199
 Real estate loans                  --           --           --           13            --
                              --------     --------     --------     --------     ---------
  Total loans charged-off           42           26           24           17           199
                              --------     --------     --------     --------     ---------
Recoveries:
 Commercial and other
  loans                            137          185          178           55            97
 Real estate loans                  --           --           --           --            --
                              --------     --------     --------     --------     ---------
  Total loans recovered            137          185          178           55            97
                              --------     --------     --------     --------     ---------
  Net recoveries
   (charge-offs)                    95          159          154           38          (102)
                              --------     --------     --------     --------     ---------
Provision for loan losses
 charged to operating
 expenses                          410          180          180          240           387

Allowance at end of period    $  3,771     $  3,266     $  2,927     $  2,593     $   2,315
                              --------     --------     --------     --------     ---------
Ratio of net recoveries
 (charge-offs) to average
 loans outstanding                 .03%         .06%         .05%         .01%         (.03)%
                              ========     ========     ========     ========     =========

Allowance as a percent
 of total loans                   1.01%        1.05%        1.02%        0.88%         0.83%
                              ========     ========     ========     ========     =========

Total loans at end
 of period                    $372,135     $310,335     $287,763     $295,620     $ 276,252
                              ========     ========     ========     ========     =========
</TABLE>

                                       40
<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,
                        --------------------------------------------------------
                               2006               2005               2004
                        -----------------   ----------------   -----------------
                         AVERAGE  AVERAGE   AVERAGE  AVERAGE    AVERAGE  AVERAGE
                         AMOUNT    YIELD     AMOUNT   YIELD     AMOUNT    YIELD
                        --------   ----     --------   ----    --------   ----
                                        (Dollars in thousands)
Demand deposits         $ 47,890     --     $ 44,739     --    $ 38,896     --
NOW and money market      35,141   0.61%      42,756   0.56%     47,677   0.65%
Savings deposits         171,604   2.95      221,374   1.99     224,542   1.55
Time deposits            410,729   4.21      338,834   2.82     309,968   1.94
                        --------   ----     --------   ----    --------   ----
Total deposits          $665,364   3.39%    $647,703   2.19%   $621,083   1.58%
                        ========   ====     ========   ====    ========   ====


        The  aggregate  amount of jumbo  certificates  of  deposit,  each with a
minimum  denomination of $100,000,  was approximately  $203.59 million,  $203.72
million and $109.74 million at December 31, 2006, 2005 and 2004, respectively.

        The  following  table  summarizes  the  maturity  distribution  of  time
deposits of $100,000 or more as of December 31, 2006:

                                                           (In thousands)
        3 months or less                                        $103,269
        Over 3 months but within 6 months                         84,426
        Over 6 months but within 12 months                        12,714
        Over 12 months                                             3,181
                                                                --------
        Total                                                   $203,590
                                                                ========

                                       41
<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
Treasury Tax and Loan Note Options 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,
                                              ---------------------------------
                                                2006        2005         2004
                                              -------     --------     --------
                                                    (Dollars in thousands)
Securities sold under repurchase
 agreements and federal funds purchased

    Balance at year-end                       $62,652     $ 73,044     $127,747
    Average during the year                   $56,236     $108,785     $129,794
    Maximum month-end balance                 $79,154     $145,489     $148,753
    Weighted average rate during the year        3.75%        3.47%        1.87%
    Rate at December 31                          4.94%        3.59%        2.27%


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.

        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 $.16,  $.15 and $.11 in  fiscal  2006,  2005 and  2004,
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,
2006,  the  Company  had cash of  approximately  $11.5  million  and  investment
securities with a fair market value of $15.9 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, 2006.

                                            EXPIRATION BY PERIOD
                           -----------------------------------------------------
                                         LESS                             MORE
                                         THAN        1-3       3-5        THAN
                            TOTAL       1 YEAR      YEARS     YEARS      5 YEARS
                           -------     -------     -------    -----       ------
                                                (In thousands)
Lines of Credit            $38,288     $11,148     $21,866     $   --     $5,274
Standby Letters
 of Credit                   3,423       3,423          --         --         --
Loan Commitments                --          --          --         --         --
                           -------     -------     -------     ------     ------
Total                      $41,711     $14,571     $21,866     $   --     $5,274
                           =======     =======     =======     ======     ======

                                       42
<PAGE>


CONTRACTUAL OBLIGATIONS

        The following  table presents the Company's  contractual  obligations at
December 31, 2006.

                                          PAYMENTS DUE BY PERIODS
                           -----------------------------------------------------
                                         LESS                            MORE
                                         THAN        1-3       3-5       THAN
                            TOTAL       1 YEAR      YEARS     YEARS     5 YEARS
                           -------     -------     -------    -----      ------
                                                (In thousands)
Long-Term Debt             $75,419     $ 9,302     $29,436     $14,000   $22,681
Operating Leases             3,551         867       1,234        976       474
Time Deposits              423,712     418,413       5,297          2        --
                           -------     -------     -------     ------    ------
Total Contractual
Obligations                $502,682    $428,582    $35,967     $14,978   $23,155
                           =======     =======     =======     ======    ======


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

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  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 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.

                                       43
<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, 2006
                                                            (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                     11,300                                                          11,300       11,300

                           (Rate)        5.11%
Interest bearing deposits in banks      4,950              --              --             --            4,950       4,950

                           (Rate)        4.17%                                                           4.17%
Loans (1)(2)
Adjustable rate loans                  75,884          11,281          22,208         32,804          142,177       144,075

                           (Rate)        8.97%           7.66%           6.65%          6.91%            8.03%
Fixed rate loans                       12,680          20,502          23,523        173,253          229,958       230,977

                           (Rate)        8.59%           7.89%           6.90%          6.61%            6.86%
                                    ---------       ---------       ---------      ---------       ----------
Total loans                            88,564          31,783          45,731        206,057          372,135       375,052

Investments (3)(4)                    144,793          82,033         103,620        190,390          520,836       515,234

                           (Rate)        4.28%           4.39%           4.31%          4.88%            4.52%
                                    ---------       ---------       ---------      ---------       ----------
Total rate-sensitive assets           249,607          113,816        149,351        396,447          909,221
                                    ---------       ----------      ---------      ---------       ----------
Deposit accounts (5)
Savings and NOW                       193,945              --              --             --          193,945       193,945

                           (Rate)        3.19%                                                           3.19%
Money market                           14,413              --              --             --           14,413       14,413

                           (Rate)        0.70%                                                           0.70%
Time Deposits                         198,474         219,939           5,297              2          423,712       423,161

                           (Rate)        4.67%           5.02%           2.78%          1.74%            4.83%
                                    ---------       ---------       ---------      ---------       ----------
Total deposit accounts                406,832         219,939           5,297              2          632,070
Repurchase Agreements                  59,652           3,000              --             --           62,652       62,606

                           (Rate)        5.01%           3.52%             --             --             4.94%
Other borrowings                        2,588           6,714          29,436         36,681           75,419       75,569

                           (Rate)        5.53%           3.46%           3.60%          7.23%            5.42%
                                    ---------       ---------       ---------      ---------       ----------
Total rate-sensitive liabilities      469,072         229,653          34,733         36,683          770,141
                                    ---------       ---------       ---------      ---------       ----------
Interest rate caps                     20,000         (10,000)        (10,000)                                         20

Gap (repricing differences)          (239,465)       (105,837)        124,618        359,764          139,080
                                    =========       =========       =========      =========       ==========

Cumulative Gap                       (239,465)       (345,302)       (220,684)       139,080
                                    =========       =========       =========      =========
Cumulative Gap to Total Rate
Sensitive Assets                       (26.33)%        (37.98)%        (24.27)%        15.30%
                                    =========       =========       =========      =========
</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 loans) 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.

                                       44
<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  FASB  issued  SFAS  No.  157,   "Fair  Value
Measurements."  The Statement is effective for all financial  statements  issued
for fiscal years beginning  after November 15, 2007. 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 is for the year ended  December  31,  2006.  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.
Based upon the advice of our consultants,  management believes that the adoption
of this  statement for the year ended December 31, 2006 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  and  penalties,   accounting  in  interim   periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006.

                                       45
<PAGE>


        We are  currently  assessing  the  impact of FIN 48 on our  consolidated
financial  statements and expect that the adoption of FIN 48 by the Company will
result  in a  decrease  in our tax  reserves  of  approximately  $950,000  and a
corresponding increase to stockholders' equity as of January 1, 2007.

ACCOUNTING FOR FINANCIAL ASSETS

        In March 2006, the FASB issued SFAS No. 156,  "Accounting  for Servicing
of Financial  Assets-an  amendment of FASB  Statement  No. 140." This  statement
requires an entity to recognize a servicing  asset or servicing  liability  each
time it  undertakes an  obligation  to service a financial  asset,  and that the
servicing assets and servicing  liabilities be initially measured at fair value.
The statement also permits an entity to choose a subsequent  measurement  method
for  each  class  of  separately   recognized  servicing  assets  and  servicing
liabilities.  SFAS No. 156 is effective  as of the  beginning of the fiscal year
that begins after  September 15, 2006.  The  application  of SFAS No. 156 is not
expected  to have a material  impact on the  Company's  financial  condition  or
results of operations.

        In February 2006, the FASB issued SFAS No. 155,  "Accounting for Certain
Hybrid Financial  Instruments."  The Statement amends SFAS No. 133,  "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No.140,  "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities."  The  Statement  also  resolves  issues  addressed in SFAS No. 133
Implementation  Issue  No.  D1,  "Application  of  Statement  133 to  Beneficial
Interest in  Securitized  Financial  Assets."  SFAS No. 155  permits  fair value
remeasurement  for any hybrid  financial  instrument  that  contains an embedded
derivative   that  otherwise   would  require   bifurcation,   clarifies   which
interest-only   strips  and  principal-only   strips  are  not  subject  to  the
requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized  financial  assets  to  identify  interests  that  are  freestanding
derivatives or that are hybrid  financial  instruments  that contain as embedded
derivative  requiring  bifurcation,  and clarifies that concentrations of credit
risk in the form of subordination  are not embedded  derivatives.  The Statement
eliminates  the interim  guidance in SFAS No. 133  Implementation  Issue No. D1,
which provided that beneficial interests in securitized financial assets are not
subject to the provisions of SFAS No. 133.

        In October 2006, the FASB recommended a narrow scope exception for asset
backed securities,  including mortgage-backed securities,  created from pools of
loans  containing  embedded  call  features,  that (a) only  contain an embedded
derivative  that is tied to the  prepayment  risk of the  underlying  prepayable
financial assets,  and (b) the investor does not control the right to accelerate
the  settlement.  The  Statement  is  effective  for all  financial  instruments
acquired or issued  after the  beginning  of an entity's  first fiscal year that
begins after September 15, 2006.  Since the Statement is effective for purchases
made by the Company after December 31, 2006, management is unable, at this time,
to determine the impact of this statement.

ACCOUNTING FOR PRIOR YEAR MISSTATEMENTS

        In September  2006, the SEC staff issued Staff  Accounting  Bulletin No.
108,  "Considering  the  Effects of Prior Year  Misstatements  when  Quantifying
Misstatements  in  Current  Year  Financial  Statements."  SAB 108 was issued to
provide  consistency  between  how  registrants   quantify  financial  statement
misstatements.  Historically,  there  have  been  two  widely-used  methods  for
quantifying the effects of financial statement misstatements.  These methods are
referred to as the "roll-over" and "iron curtain"  method.  The roll-over method
quantifies  the amount by which the current year income  statement is misstated.
Exclusive   reliance  on  an  income  statement   approach  can  result  in  the
accumulation  of errors on the balance  sheet that may not have been material to
any  individual  income  statement,  but which may  misstate one or more balance
sheet accounts.  The iron curtain method  quantifies the error as the cumulative
amount by which the current year balance sheet is misstated.  Exclusive reliance
on a balance sheet approach can result in disregarding  the effects of errors in
the current year income  statement  that results from the correction of an error
existing  in  previously  issued  financial  statements.  We  currently  use the
roll-over method for quantifying identified financial statement misstatements.

                                       46
<PAGE>


        SAB  108  established  an  approach  that  requires   quantification  of
financial  statement  misstatements  based on the effects of the misstatement on
each of the Company's  financial  statements and the related financial statement
disclosures.  This  approach  is  commonly  referred  to as the "dual  approach"
because it requires  quantification  of errors under both the roll-over and iron
curtain methods. SAB 108 allows registrants to initially apply the dual approach
either by (1) retroactively  adjusting prior financial statements as if the dual
approach  had always  been used or by (2)  recording  the  cumulative  effect of
initially  applying the dual approach as adjustments  to the carrying  values of
assets  and  liabilities  as of January  1, 2006 with an  offsetting  adjustment
recorded to the opening balance of retained  earnings.  Use of this  "cumulative
effect" transition method requires detailed  disclosure of the nature and amount
of each individual error being corrected  through the cumulative  adjustment and
how and when it arose.  SAB 108 is  effective  for  fiscal  years  ending  after
November 15, 2006. The Company does not expect the adoption of SAB 108 will have
a material effect on the Company's results of operations or financial  condition
as  management  is not aware of any prior year  misstatements  in the  Company's
financial statements.

ACCOUNTING FOR STOCK BASED COMPENSATION

        In December 2004, the Financial  Accounting Standards Board (the "FASB")
issued Statement No. 123 (revised 2004),  "Share-Based  Payment" ("SFAS 123(R)")
which requires the measurement  and recognition of compensation  expense for all
stock-based   compensation   payments  and  supersedes  the  Company's  previous
accounting  under Accounting  Principals  Board Opinion No. 25,  "Accounting for
Stock Issued to  Employees"  (APB 25).  SFAS 123(R) is effective  for all annual
periods  beginning  after June 15, 2005 or our fiscal year 2006.  In March 2005,
the  Securities  and Exchange  Commission  (the "SEC")  issued Staff  Accounting
Bulletin No. 107 ("SAB 107") relating to the adoption of SFAS 123(R).

        The  Company  adopted  SFAS  123(R) in the first  quarter of fiscal year
2006.  The  adoption  of SFAS  123(R)  did not have an impact  on its  operating
results  and  financial  condition  because  the  Company  made  no  stock-based
compensation  payments in fiscal 2006.  The pro forma  information  presented in
Note B9, Stock Based Compensation,  presents the estimated  compensation charges
under  Statement of Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based Compensation."

        At  December  31,  2006,  the  Company  has  one  stock-based   employee
compensation plan. The Company accounted for that plan under the recognition and
measurement  principles  of  APB  25 and  related  interpretations.  Stock-based
employee  compensation  costs were not  reflected in net income,  as all options
granted  under the plan had an exercise  price equal to the market  value of the
underlying  common  stock on the date of the grant.  The  Company  did not grant
stock  options  during  2006,  2005  and  2004,  and we have no  plans  to grant
significant  stock  options,  if any, in 2007.  Therefore,  we do not expect the
implementation  of FAS 123(R) to affect  our  financial  position  or results of
operations in the near future.

THE MEANING OF  OTHER-THAN-TEMPORARY  IMPAIRMENT AND ITS  APPLICATION TO CERTAIN
INVESTMENTS

        In November  2003,  the  Emerging  Issues Task Force (the "EITF") of the
FASB issued EITF Abstract 03-1, "The Meaning of Other-Than-Temporary  Impairment
and its  Application  to Certain  Investments"  (EITF Issue No. 03-1).  In March
2004, the EITF reached a consensus on EITF Issue No. 03-1 and in September 2004,
the FASB issued a proposed  Board-directed  FASB Staff Position (an "FSP"),  FSP
EITF 03-1-a,  "Implementation  Guidance for the  Application  of Paragraph 16 of
EITF Issue No.  03-1" (FSP EITF  03-1-a).  The  guidance  in FSP EITF  03-1-a is
applicable for investments in (a) debt and equity securities that are within the
scope of SFAS Nos. 115 and 124, and (b) equity  securities  that are not subject
to the scope of FAS 115 and 124 and not accounted for under the equity method of
accounting, "cost-method investments."

        The final  FSP,  retitled  FSP FAS 115-1 and FAS 124-1  "The  Meaning of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments,"
nullifies  certain  requirements  of EITF No. 03-1 and supersedes EITF Topic No.
D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security   Whose  Cost  Exceeds  Fair  Value."  FSP  FAS  115-1  and  FAS  124-1
specifically  (a) nullifies  the  requirements  of paragraphs  10-18 of EITF No.
03-1,

                                       47
<PAGE>


(b) carries  forward the  requirements  of  paragraphs  8 and 9 with  respect to
cost-method-investments  and the disclosure  requirements included in paragraphs
21 and 22 of EITF No. 03-1 and related  examples,  and (c)  references  existing
other-than-temporary   impairment   guidance.   FSP  FAS  115-1  and  FAS  124-1
establishes  a  three-step  approach  for  determining  when  an  investment  is
considered  impaired,  whether that impairment is other than temporary,  and the
measurement of an impairment loss.

        Application  of the guidance in FSP FAS 115-1 and FAS 124-1,  applicable
to reporting  periods beginning after December 15, 2005, did not have a material
adverse effect on our consolidated financial statements.

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 is not required to comply with Section 404
until the year ending 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 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

        See Item 7. Managements'  Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Risk

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                                       48
<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 as of December 31, 2006 and 2005, and the related
consolidated statements of income,  stockholders' equity and cash flows for each
of the three  years in the period  ended  December  31,  2006.  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 audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit 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, 2006 and 2005,  and the  consolidated
results of their  operations and their  consolidated  cash flows for each of the
three years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.


/s/ GRANT THORNTON LLP

New York, New York
March 28, 2007


                                       49
<PAGE>


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


                                                   DECEMBER 31,    DECEMBER 31,
                                                       2006            2005
                                                   ------------    ------------
ASSETS
Cash and due from banks                            $      8,061    $      9,825
Interest bearing deposits                                 4,950           4,457
Federal funds sold                                       11,300          13,600
                                                   ------------    ------------
Total cash and cash equivalents                          24,311          27,882
Investment Securities:
 Available-for-sale                                     514,798         599,410
 Held-to-maturity, fair value of $436
  in 2006 and $573 in 2005                                  433             562
                                                   ------------    ------------
Total investment securities                             515,231         599,972
Loans, net of unearned income                           370,923         309,230
 Less: allowance for loan losses                         (3,771)         (3,266)
                                                   ------------    ------------
Net loans                                               367,152         305,964
Accrued interest receivable                               6,397           6,784
Premises and equipment, net                               9,338           8,602
Goodwill, net                                            18,549          18,549
Other assets                                              7,678           9,699
                                                   ------------    ------------
Total assets                                       $    948,656    $    977,452
                                                   ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
 Non-interest bearing                              $     49,418    $     50,269
 Interest bearing                                       632,071         629,991
                                                   ------------    ------------
Total deposits                                          681,489         680,260
Securities sold under agreements to repurchase           62,652          73,044
Long term borrowings                                     52,738          83,201
Subordinated debt                                        22,681          22,681
Accrued interest payable                                  8,110           5,731
Other liabilities                                         5,209           3,825
                                                   ------------    ------------
Total liabilities                                       832,879         868,742
                                                   ------------    ------------

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 qqqq --  7,698,285 shares
  Outstanding --
   December 31, 2006, 6,877,881 shares
   December 31, 2005, 6,890,556 shares                      770             770
Additional paid-in capital                               90,659          90,594
Retained earnings                                        37,285          33,504
Accumulated other comprehensive loss, net                (4,772)         (8,415)
 Treasury Stock
 December 31, 2006,   820,404 shares
 December 31, 2005,   807,729 shares                     (8,165)         (7,743)
                                                   ------------    ------------
Total stockholders' equity                              115,777         108,710
                                                   ------------    ------------
Total liabilities and stockholders' equity         $    948,656    $    977,452
                                                   ============    ============


         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       50
<PAGE>


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


<TABLE>
<CAPTION>
                                                       FOR THE YEARS ENDED DECEMBER 31,
                                                    --------------------------------------
                                                      2006           2005           2004
                                                    --------       --------       --------
<S>                                                 <C>            <C>            <C>
INTEREST INCOME
Federal funds sold and interest bearing deposits    $    350       $    302       $     63
Investment securities                                 24,027         25,355         21,120
Loans, including related fees                         23,844         19,399         18,825
                                                    --------       --------       --------
Total interest income                                 48,221         45,056         40,008
                                                    --------       --------       --------
INTEREST EXPENSE
Deposits                                              22,559         14,191          9,833
Short-term borrowings                                  2,110          3,167          2,422
Long-term borrowings                                   4,517          5,041          3,661
                                                    --------       --------       --------
Total interest expense                                29,186         22,399         15,916
                                                    --------       --------       --------
Net interest income                                   19,035         22,657         24,092
PROVISION FOR LOAN LOSSES                                410            180            180
                                                    --------       --------       --------
Net interest income after
 provision for loan losses                            18,625         22,477         23,912
                                                    --------       --------       --------
NON-INTEREST INCOME
Service charges on deposit accounts                      588            589            520
Investment securities gains                            2,336              4            793
Other income                                             769            613            506
                                                    --------       --------       --------
Total non-interest income                              3,693          1,206          1,819
                                                    --------       --------       --------
NON-INTEREST EXPENSE
Salaries and employee benefits                         8,481          8,002          6,886
Net occupancy expense                                  1,961          1,728          1,538
Equipment expense                                        108            397            357
FDIC assessment                                           85            272            115
Data processing expense                                  366            198            157
Other                                                  2,581          3,542          3,042
                                                    --------       --------       --------
Total non-interest expense                            13,582         13,139         12,095
                                                    --------       --------       --------
Income before provision for income taxes               8,736         10,544         13,636
Provision for income taxes                             3,856          5,003          6,134
                                                    --------       --------       --------
Net income                                          $  4,880       $  5,541       $  7,502
                                                    ========       ========       ========
Net income per share:
 Basic                                              $    .71       $    .81       $   1.12
                                                    ========       ========       ========
 Diluted                                            $    .70       $    .80       $   1.10
                                                    ========       ========       ========
Number of shares used to compute
 net income per share:
Basic                                                  6,891          6,805          6,672
                                                    ========       ========       ========
Diluted                                                6,976          6,939          6,848
                                                    ========       ========       ========

Dividends per share                                 $    .16       $    .15       $    .11
</TABLE>

         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       51
<PAGE>


<TABLE>
<CAPTION>
                                                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                                                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                                 (IN THOUSANDS)

                                                                  ACCUMULATED
                                    COMMON  STOCK   ADDITIONAL       OTHER                                                 TOTAL
                                             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, 2004           2,566   $256     $89,866          $ 775      $ 22,960   $(10,367)                   $103,490
Net income                                                                           7,502                     7,502        7,502
Exercise of stock options                                 (90)                                  1,361                       1,271
Acquisition of treasury shares                                                                    (69)                        (69)
Effect of reverse one-for-ten
 stock split                        (2,309)  (230)       (233)                                                               (463)
Effect of thirty-for-one
 stock dividend                      7,441    744                                     (744)
Other comprehensive (loss) net
 of reclassification adjustment
 and taxes                                                            (3,377)                                 (3,377)      (3,377)
                                                                                                             ------
Comprehensive income                                                                                         $ 4,125
                                                                                                             =======
Cash dividends                                                                        (735)                                  (735)
                                     -----   ----     -------        -------      --------   --------                    --------
BALANCE AT DECEMBER 31, 2004         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
Deferred 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
Deferred 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
                                     =====   ====     =======        =======      ========   ========                    ========

                                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
</TABLE>

                                       52
<PAGE>


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

                                              FOR THE YEARS ENDED DECEMBER 31,
                                             ----------------------------------
                                               2006        2005         2004
                                             --------    --------    ----------

  CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                   $  4,880    $  5,541    $    7,502
Adjustments to reconcile net income
 to net cash provided by operating
 activities:
Realized gains on investment securities        (2,336)         (4)         (793)
Net (accretion) amortization of premiums
 of investment securities                        (595)         (3)        2,282
Depreciation and amortization                     727         650           590
Provision for loan losses                         410         180           180

  CHANGES IN ASSETS AND LIABILITIES:
 Decrease (increase) in accrued interest          387        (770)         (716)
  receivable
 Decrease (increase) in other assets            2,021      (3,030)       (3,873)
 Increase in accrued interest payable and
  other liabilities                             3,763       3,640           538
                                             --------    --------    ----------

 Net cash provided by operating activities      9,257       6,204         5,710
                                             --------    --------    ----------

  CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale
 Purchases                                   (489,737)   (378,781)   (1,740,889)
 Sales, maturities and calls                  580,923     404,533     1,674,188
Investment securities held to maturity
 Purchases                                         --          --            91
 Maturities                                       129          62            --
Net (increase) decrease in loans              (61,598)    (22,092)        7,931
Acquisition of premises and equipment          (1,463)       (575)         (602)
                                             --------    --------    ----------

Net cash provided by (used in)
 investing activities                          28,254       3,147       (59,281)
                                             --------    --------    ----------

                                       53
<PAGE>


                                              FOR THE YEARS ENDED DECEMBER 31,
                                             ----------------------------------
                                               2006        2005         2004
                                             --------    --------    ----------
  CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in non interest
 bearing deposits                                (851)      8,078         3,769
Net increase in interest bearing deposits       2,080      52,294        11,864
(Decrease) increase in securities sold
 under agreements to repurchase               (10,392)    (54,703)       13,356
Proceeds from long term debt                    2,000      20,000        37,164
Repayment of long term debt                   (32,463)    (32,404)      (19,304)
Proceeds from issuance of
 subordinated debentures, net                      --       7,217        14,791
Acquisition of treasury stock                    (790)         --           (69)
Proceeds from exercise of common
 stock options                                    433       1,686         1,271
Cash paid for fractional shares                    --          --          (463)
Dividends paid                                 (1,099)     (1,020)         (735)
                                             --------    --------    ----------
Net cash (used in) provided by financing
 activities                                   (41,082)      1,148        61,644
                                             --------    --------    ----------
  Net (decrease) increase in cash and
   cash equivalents                            (3,571)     10,499         8,073
  Cash and cash equivalents at
   beginning of year                         $ 27,882    $ 17,383    $    9,310
                                             --------    --------    ----------
  Cash and cash equivalents at
   end of year                               $ 24,311    $ 27,882    $   17,383
                                             ========    ========    ==========

SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION:
  Cash used to pay interest                  $ 26,807    $ 19,184    $   15,608
  Cash used to pay income taxes,
   net of refunds                            $  4,163    $  6,716    $    5,960


         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS

                                       54
<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2006 AND 2005

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 wholly owned subsidiary, The Berkshire Bank (the
"Bank"), a New York State chartered commercial bank.

        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.

        STOCK SPLIT AND STOCK DIVIDEND

        At the  Annual  Meeting  of  Stockholders  held  on May  18,  2004,  the
Company's  stockholders  approved an amendment to the Company's  Certificate  of
Incorporation  effecting a  one-for-ten  reverse  stock  split of the  Company's
issued  and  outstanding  Common  Stock (the  "Reverse  Split").  Following  the
effectiveness of the Reverse Split, the Company's Board of Directors  declared a
thirty-for-one  forward  stock  split in the form of a stock  dividend in Common
Stock  which  became  effective  immediately.  The  Company  paid  approximately
$463,000 to purchase  fractional shares from stockholders as part of the Reverse
Split. The Company's Common Stock began trading on May 19, 2004 giving effect to
these transactions.

        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 "Debentures")  issued by the Company.
The  Debentures,  the sole  assets  of BCTI,  mature  on July 23,  2034 and bear
interest at a floating rate, three month LIBOR plus 2.70%.

        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%.

                                       55
<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"),  East 39, LLC and the Bank,  (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 relates 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.

                                       56
<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.

        The  Company is  required  to provide  disclosures  under  Statement  of
Financial Accounting  Standards ("SFAS") 131,  "Disclosures About Segments of an
Enterprise  and Related  Information."  Operating  segments are components of an
enterprise  about which  separate  financial  information  is available  that is
evaluated  regularly by the chief  operating  decision  maker in deciding how to
allocate resources and assess performance. The Company has one operating segment
and,  accordingly,  one  reportable  segment,  "Community  Banking."  All of the
Company's  activities  are  interrelated,  and each  activity is  dependent  and
assessed based on how each of the activities of the Company supports the others.
For example,  commercial  lending is  dependent  upon the ability of the Bank to
fund itself with retail  deposits and other  borrowings  and to manage  interest
rate  and  credit  risk.  This  situation  is  also  similar  for  consumer  and
residential mortgage lending.  Accordingly,  all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.

2.      INVESTMENT SECURITIES

        The Company  accounts for its investment  securities in accordance  with
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.

        THE MEANING OF  OTHER-THAN-TEMPORARY  IMPAIRMENT AND ITS  APPLICATION TO
        CERTAIN INVESTMENTS

        In November  2003,  the  Emerging  Issues Task Force (the "EITF") of the
FASB issued EITF Abstract 03-1, "The Meaning of Other-Than-Temporary  Impairment
and its  Application  to Certain  Investments"  (EITF Issue No. 03-1).  In March
2004, the EITF reached a consensus on EITF Issue No. 03-1 and in September 2004,
the FASB issued a proposed  Board-directed  FASB Staff Position (an "FSP"),  FSP
EITF 03-1-a,  "Implementation  Guidance for the  Application  of Paragraph 16 of
EITF Issue No.  03-1" (FSP EITF  03-1-a).  The  guidance  in FSP EITF  03-1-a is
applicable for investments in (a) debt and equity securities that are within the
scope of SFAS Nos. 115 and 124, and (b) equity  securities  that are not subject
to the scope of FAS 115 and 124 and not accounted for under the equity method of
accounting, "cost-method investments."

        The final  FSP,  retitled  FSP FAS 115-1 and FAS 124-1  "The  Meaning of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments,"
nullifies  certain  requirements  of EITF No. 03-1 and supersedes EITF Topic No.
D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security   Whose  Cost  Exceeds  Fair  Value."  FSP  FAS  115-1  and  FAS  124-1
specifically (a) nullifies the requirements of
paragraphs 10-18 of EITF No. 03-1,

                                       57
<PAGE>


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

NOTE B - (CONTINUED)

(b) carries  forward the  requirements  of  paragraphs  8 and 9 with  respect to
cost-method-investments  and the disclosure  requirements included in paragraphs
21 and 22 of EITF No. 03-1 and related  examples,  and (c)  references  existing
other-than-temporary   impairment   guidance.   FSP  FAS  115-1  and  FAS  124-1
establishes  a  three-step  approach  for  determining  when  an  investment  is
considered  impaired,  whether that impairment is other than temporary,  and the
measurement of an impairment loss.

        Application  of the guidance in FSP FAS 115-1 and FAS 124-1,  applicable
to reporting  periods beginning after December 15, 2005, did not have a material
adverse effect on our consolidated financial statements.

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 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." This standard requires 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.

        The  Company  follows the  provisions  of SFAS No. 140  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
SFAS No.  140 is  based  on  consistent  application  of a  financial-components
approach that recognizes the financial and servicing  assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered  and  derecognizes  liabilities  when  extinguished.  SFAS  No.  140
provides consistent guidelines for distinguishing  transfers of financial assets
from  transfers  that are secured  borrowings.  The Company  adopted SFAS 140 on
April 1, 2001 and the adoption did not have a material impact upon the Company's
consolidated financial statements.

                                       58
<PAGE>


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

NOTE B - (CONTINUED)

        In  October  2003,  the AICPA  issued SOP 03-3  Accounting  for Loans or
Certain Debt Securities Acquired in a Transfer.  SOP 03-3 applies to a loan with
the evidence of  deterioration of credit quality since  origination  acquired by
completion  of a transfer  for which it is  probable  at  acquisition,  that the
Company  will  be  unable  to  collect  all   contractually   required  payments
receivable.  SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as  interest  income  on a  level-yield  basis  over the life of the loan as the
accretable yield. The loan's contractual  required payments receivable in excess
of  the  amount  of  its  cash  flows  excepted  at  acquisition  (nonaccretable
difference)  should not be recognized as an adjustment to yield,  a loss accrual
or a  valuation  allowance  for credit  risk.  SOP 03-3 is  effective  for loans
acquired in fiscal years  beginning  after December 31, 2004.  Early adoption is
permitted.  The  adoption of SOP 03-3 did not have a  significant  impact on the
financial condition or results of operations of the Company.

        LOAN COMMITMENTS ACCOUNTED FOR AS DERIVATIVE INSTRUMENTS

        The SEC staff  recently  released Staff  Accounting  Bulletin (SAB) 105,
"Loan  Commitments  Accounted for as Derivative  Instruments."  SAB 105 provides
guidance  about the  measurement  of loan  commitments  recognized at fair value
under FASB Statement No. 133, Accounting for Derivative  Instruments and Hedging
Activities.  SAB 105 also requires companies to disclose their accounting policy
for those loan  commitments  including  methods and assumptions used to estimate
fair value and associated hedging strategies.  SAB 105 is effective for all loan
commitments  accounted for as derivatives  that are entered into after March 31,
2004. The adoption of SAB 105 did not have a material effect on our consolidated
financial statements.

        The Company adopted SFAS No. 149 ("SFAS No. 149"), Amendment of SFAS No.
133 on Derivative Instruments and Hedging Activities,  on July 1, 2003. SFAS No.
149  clarifies  and amends  SFAS No.  133 for  implementation  issues  raised by
constituents  or includes  the  conclusions  reached by the FASB on certain FASB
Staff  Implementation  Issues.  Statement  No. 149 also  amends  SFAS No. 133 to
require a lender to account for loan commitments  related to mortgage loans that
will be held for sale as  derivatives.  SFAS No. 149 is effective  for contracts
entered into or modified  after  September  30, 2003.  The Company  periodically
enters  into  commitments  with its  customers,  which it intends to sell in the
future.  The  adoption  of SFAS No.  149 did not have a  material  impact on the
Company's financial position or results of operations.

        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.

4.      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.

                                       59
<PAGE>


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

NOTE B - (CONTINUED)

5.      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.

6.      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, 2006.

7.      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.

8.      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.

9.      STOCK BASED COMPENSATION

        At  December  31,  2006,  the  Company  has  one  stock-based   employee
compensation plan, which is more fully described in Note K. The Company accounts
for that plan in  accordance  with  SFAS  Statement  No.  123(R),  "Share  Based
Payment."  Previously,  the Company  accounted for that plan in accordance  with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," ("APB No. 25") and related interpretations.

                                       60
<PAGE>


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

NOTE B - (CONTINUED)

        Under APB No.  25,  stock-based  employee  compensation  costs  were not
reflected in net income,  as all options  granted under the plan had an exercise
price equal to the market  value of the  underlying  common stock on the date of
the grant. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value  recognition  provisions  of
SFAS No. 123(R) to stock-based employee compensation.


                                            FOR THE YEARS ENDED DECEMBER 31,
                                         --------------------------------------
                                           2006          2005           2004
                                         --------      --------      ----------
                                        (In thousands, except per share amounts)

Net income                               $  4,880      $  5,541      $    7,502
Less: Stock based compensation
costs determined under fair value
methods for all awards                         --            --              --
                                         --------      --------      ----------
                                         $  4,880      $  5,541      $    7,502
                                         ========      ========      ==========

Basic earnings per share                 $    .71      $    .81      $     1.12
                                              .71           .81            1.12

Diluted earnings per share                    .70           .80            1.10
                                              .70           .80            1.10


        The fair value of each option was  estimated  on the date of grant using
the Black-Scholes  options-pricing model using weighted-average  assumptions for
expected  volatility,  risk-free  interest and expected life of the option.  The
Company did not grant stock options in fiscal 2006, 2005 and 2004.  There was no
stock based compensation expense in 2006.

        In December  2004,  the FASB issued  Statement  No. 123 (revised  2004),
"Share-Based  Payment"  ("SFAS  123(R)")  which  requires  the  measurement  and
recognition of compensation  expense for all stock-based  compensation  payments
and supersedes the Company's  previous  accounting  under APB 25. SFAS 123(R) is
effective  for all annual  periods  beginning  after June 15, 2005 or our fiscal
year 2006. In March 2005,  the Securities  and Exchange  Commission  (the "SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to the adoption of
SFAS 123(R). The Company adopted SFAS 123(R) in the first quarter of fiscal year
2006.  The  adoption  of SFAS  123(R)  did not  have a  material  impact  on our
financial position or results of operations.

10.     CASH EQUIVALENTS

        The Company considers all highly liquid debt investments  purchased with
an original maturity of three months or less, and amounts due from brokers to be
cash equivalents.

11.     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   $2,617,000  and  $2,589,000  at  December  31,  2006  and  2005,
respectively.

                                       61
<PAGE>


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

NOTE B - (CONTINUED)

12.     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, 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
                                             ========    ========    ==========


                                                YEAR ENDED DECEMBER 31, 2005
                                            ------------------------------------
                                                            Tax
                                            Before tax   (expense)    Net of tax
                                              amount      benefit       Amount
                                             --------    --------    ----------
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)
                                             ========    ========    ==========


                                                YEAR ENDED DECEMBER 31, 2004
                                            ------------------------------------
                                                            Tax
                                            Before tax   (expense)    Net of tax
                                              amount      benefit       Amount
                                             --------    --------    ----------
Unrealized gains (losses)
 on investment securities:
 Unrealized holding gains
  arising during period                      $ (4,014)   $  1,711    $   (2,303)
  Less reclassification adjustment for
   gains realized in net income                   793        (317)          476
                                             --------    --------    ----------
Unrealized (loss) on investment securities     (4,807)      2,028        (2,779)
Change in minimum pension liability              (598)         --          (598)
                                             --------    --------    ----------
Other comprehensive income (loss), net       $ (5,405)   $  2,028    $   (3,377)
                                             ========    ========    ==========


13.     RECLASSIFICATIONS

        Certain  amounts in the December 31, 2005 and 2004 financial  statements
have been reclassified to conform to the current period's presentation.

                                       62
<PAGE>



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

NOTE C - INVESTMENT SECURITIES

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


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


                                              DECEMBER 31, 2005
                            ----------------------------------------------------
                                            GROSS           GROSS
                            AMORTIZED     UNREALIZED     UNREALIZED        FAIR
                               COST         GAINS          LOSSES         VALUE
                            -----------  -------------   ------------   --------
                                                (In thousands)
Investment securities
U.S. Government Agencies      $ 562          $ 11          $ --         $ 573
                              =====          ====          ====         =====


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

                                              DECEMBER 31, 2006
                            ----------------------------------------------------
                                            GROSS          GROSS
                            AMORTIZED     UNREALIZED    UNREALIZED       FAIR
                               COST         GAINS         LOSSES        VALUE
                            ---------     ----------    ----------     --------
                                               (In thousands)
Investment securities
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
Marketable equity
 securities and other          75,419          216           (69)       75,566
                             --------      -------      --------      --------
 Totals                      $520,943      $ 2,131      $ (8,276)     $514,798
                             ========      =======      ========      ========

                                       63
<PAGE>


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

NOTE C - (CONTINUED)

                                              DECEMBER 31, 2005
                            ----------------------------------------------------
                                            GROSS           GROSS
                            AMORTIZED     UNREALIZED     UNREALIZED        FAIR
                               COST         GAINS          LOSSES         VALUE
                            -----------  -------------   ------------   --------
Investment securities
U.S. Treasury and Notes      $ 14,985         $ --      $    (86)     $ 14,899
U.S. Government Agencies      448,196           --        (8,551)      439,645
Mortgage-backed securities     81,681          112        (2,107)       79,686
Corporate notes                54,590          352        (2,638)       52,304
Municipal securities            1,972          334             --        2,306
Marketable equity
 securities and other          10,351          284           (65)       10,570
                             --------      -------      --------      --------
 Totals                      $611,775      $ 1,082      $(13,447)     $599,410
                             ========      =======      ========      ========



        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.  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
DESCRIPTION OF SECURITIES
<S>                                <C>        <C>          <C>          <C>          <C>          <C>
U.S. Treasury and Notes      $     --       $ --       $  4,990    $    12       $  4,990     $   12
U.S. Government Agencies       12,061          9        305,104      5,813        317,165      5,822
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      8,146        384,280      8,207
Marketable equity                  --         --             13         69             13         69
                             --------       ----       --------    -------       --------     ------
securities and other
Total temporarily
 impaired securities         $ 13,793       $ 61       $370,500    $ 8,215       $384,293     $8,276
                             ========       ====       ========    =======       ========     ======
</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 $8.26  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 $57,000.  Based upon our review of the
available  information,  such  unrealized  losses are not considered to be other
than temporary.


                                       64
<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, 2006 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.

<TABLE>
<CAPTION>

                                                    DECEMBER 31, 2006
                              ---------------------------------------------------------------
                                     AVAILABLE FOR SALE                HELD TO MATURITY
                              ---------------------------------   ---------------------------
                                AMORTIZED           FAIR           AMORTIZED        FAIR
                                  COST             VALUE             COST           VALUE
                              --------------  -----------------   ------------   ------------
                                                      (In thousands)
<S>                             <C>             <C>                   <C>            <C>
Due in one year or less         $ 46,490        $ 46,359              $ --           $ --
Due after one through
five years                       218,102         214,129                29             29
Due after five through
ten years                         92,156          89,554                --             --
Due after ten years               88,776          89,190               404            407
Marketable equity
securities and other              75,419          75,566                --             --
                                --------        --------             -----          ------
 Totals                         $520,943        $514,798             $ 433          $ 436
                                ========        ========             =====          =====
</TABLE>


        Gross gains realized on the sales of investment securities for the years
ended December 31, 2006, 2005 and 2004 were  approximately  $2,342,000,  $10,000
and $965,000,  respectively.  Gross losses were approximately $5,000, $6,000 and
$172,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

        As of December 31, 2006 and 2005,  securities  sold under  agreements to
repurchase with a book value of approximately $62.65 million and $73.04 million,
respectively,  were  outstanding.  The book value of the securities  pledged for
these repurchase agreements was $71.30 million and $77.15 million, respectively.
As of  December  31,  2006 and 2005,  the  Company  did not have any  investment
securities  of  any  one  issuer  where  the  carrying  value  exceeded  10%  of
shareholders' equity.

                                       65
<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,
                                            2006            2005
                                        ------------    ------------
                                              (In thousands)
Commercial and professional loans        $ 63,331        $ 33,370
Secured by real estate
 1 - 4 family                             139,611         139,931
 Multi family                               4,013           2,874
 Non-residential                          160,417         132,142
Consumer                                    4,763           2,018
                                         --------        --------
                                          372,135         310,335
Deferred loan fees                        (1,212)         (1,105)
Allowance for loan losses                 (3,771)         (3,266)
                                         --------        --------
                                         $367,152        $305,964
                                         ========        ========

        Changes in the allowance for loan losses are as follows:

                                  FOR THE YEARS ENDED DECEMBER 31,
                            ----------------------------------------------
                                2006            2005            2004
                            --------------  --------------  --------------
                                           (In thousands)
Balance at beginning              $ 3,266         $ 2,927         $ 2,593
 of year
Provision charged to                  410             180             180
 operations
Loans charged off                    (42)            (26)            (24)
Recoveries                            137             185             178

Balance at end of year            $ 3,771         $ 3,266         $ 2,927
                                  =======         =======         =======


        The Bank had $201,000,  $256,000 and $343,000 of non accrual loans as of
December 31, 2006, 2005 and 2004,  respectively,  and $0, $74,000 and $50,000 of
loans  delinquent more than ninety days and still accruing  interest at December
31, 2006, 2005 and 2004,  respectively.  The Bank classified the two non accrual
loans of $201,000 as impaired loans at December 31, 2006.  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.

        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.  At December 31, 2006, loans to these related parties amounted
to $11.2 million, were current as to principal and interest payments, and do not
involve  more than  normal  risk of  collectibility.  An analysis of activity in
loans to related  parties for the year ended December 31, 2006,  resulted in new
loans of $0 and repayments of approximately $1.1 million.

                                       66
<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        2006               2005
                              ---------------   -------------      -------------
                                                 (In thousands)
Land                            Indefinite        $ 3,572            $ 3,817
Buildings                       39 years            5,190              4,059
Furniture and equipment         3 to 10 years       3,052              2,890
Leasehold improvements          2 to 10 years       1,653              1,239
                                                  -------            -------
                                                   13,467             12,005
Accumulated depreciation
 and amortization                                  (4,129)            (3,403)
                                                  -------            -------
Total                                             $ 9,338            $ 8,602
                                                  =======            =======

        Depreciation  and  amortization  expense  was  approximately   $727,000,
$650,000  and $590,000  for the years ended  December  31, 2006,  2005 and 2004,
respectively.

NOTE F - DEPOSITS

        The  aggregate  amount of jumbo  certificates  of deposits  greater than
$100,000 were  approximately  $203.59 million and $203.72 million as of December
31, 2006 and 2005, respectively.

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

                                       DECEMBER 31, 2006
                                       -----------------
                                        (In thousands)
                       2007               $ 418,413
                       2008                   5,284
                       2009                      13
                       2010                       2
                                          ---------
                                          $ 423,712
                                          =========

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:

<TABLE>
<CAPTION>

                                                       YEAR ENDED DECEMBER 31,
                                               -----------------------------------------
                                                  2006           2005          2004
                                               ------------   -----------   ------------
                                                        (Dollars in Thousands)
Securities sold under repurchase
 agreements and federal funds purchased
<S>                                            <C>            <C>           <C>
    Balance at year-end                        $ 62,652       $ 73,044      $127,747
    Average during the year                    $ 56,236       $108,785      $129,794
    Maximum month-end balance                  $ 79,154       $145,489      $148,753
    Weighted average rate during the year          3.75%          3.47%         1.87%
    Rate at December 31                            4.94%          3.59%         2.27%
</TABLE>

                                       67
<PAGE>

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

NOTE G - (CONTINUED)

        LONG-TERM  BORROWINGS  At December 31, 2006,  advances  from the Federal
Home Loan Bank ("FHLB")  totaling  $52.74 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.  The  advances had a weighted
average rate of 4.38%. Unused lines of credit at the FHLB were $185.8 million at
December 31, 2006.

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

                YEAR       AMOUNT
               ------    ---------
               2007      $  9,302
               2008        17,812
               2009        11,624
               2010        14,000
               -----     --------
               Total     $ 52,738
                         ========

NOTE H - EARNINGS PER SHARE

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


                                           YEAR ENDED DECEMBER 31, 2006
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   ---------------------------------------------
                                      Income            Shares        Per share
                                    (numerator)     (denominator)       amount
                                   --------------   ---------------   ----------
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
                                    =======             =====          =====


                                           YEAR ENDED DECEMBER 31, 2005
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   ---------------------------------------------
                                      Income            Shares        Per share
                                    (numerator)     (denominator)       amount
                                   --------------   ---------------   ----------
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
                                    =======             =====          =====

                                       68
<PAGE>


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

NOTE H - (CONTINUED)

                                           YEAR ENDED DECEMBER 31, 2004
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   ---------------------------------------------
                                      Income            Shares        Per share
                                    (numerator)     (denominator)       amount
                                   --------------   ---------------   ----------
Basic earnings per share
 Net income available to
  common stockholders               $ 7,502             6,672          $ 1.12
Effect of dilutive securities
 Options                                 --               176           (.02)
                                    -------             -----          -----
Diluted earnings per share
 Net income available to
  common stockholders plus
  assumed conversions               $ 7,502             6,848         $ 1.10
                                    =======    ==       =====         ======


NOTE I - INCOME TAXES

        The components of income tax expense are as follows:

                                          YEARS ENDED DECEMBER 31,
                              ----------------------------------------------
                                  2006             2005             2004
                                  ----             ----             ----
Current                       $ 4,282,000      $ 4,985,000      $ 6,515,000
Deferred Taxes (Benefit)         (426,000)          18,000         (381,000)
                              -----------      -----------      -----------
                              $ 3,856,000      $ 5,003,000      $ 6,134,000
                              ===========      ===========      ===========

        A  reconciliation  of the provision for income taxes for the years ended
December  31,  2006,  2005 and 2004 and the  amount  computed  by  applying  the
statutory Federal income tax rate to income from continuing operations follows:

                                          YEARS ENDED DECEMBER 31,
                              ----------------------------------------------
                                  2006             2005             2004
                                  ----             ----             ----
Effective Tax Reconciliation
Tax at statutory rate         $ 2,611,000      $ 3,585,000      $ 4,636,000
State and City, net of
 federal income tax benefit     1,100,000        1,344,000        1,423,000
Tax exempt income                      --               --               --
Other                             145,000           74,000           75,000
                              -----------      -----------      -----------
Actual provision for
 income taxes                 $ 3,856,000      $ 5,003,000      $ 6,134,000
                              ===========      ===========      ===========


                                       69
<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,
2006 and 2005 are as follows:

                                             DECEMBER 31,
                                   --------------------------------
                                      2006                 2005
                                      ----                 ----
Net deferred tax assets
 Loan loss provision               $1,721,000           $1,504,000
 Depreciation                         123,000               39,000
 Other                                301,000              124,000
 Unrealized loss on
  investment securities             2,979,000            4,841,000
                                   ----------           ----------
Net deferred tax asset
 included in other assets          $5,124,000           $6,508,000
                                   ==========           ==========


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  185,878  and  223,203 as of  December  31,  2006 and 2005,
respectively. The Company did not grant options in 2006, 2005 and 2004.

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

<TABLE>
<CAPTION>

                                                 DECEMBER 31,
                     ---------------------------------------------------------------------
                             2006                    2005                     2004
                     ---------------------  ----------------------   ---------------------

                                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    223,203   $ 9.70         365,084   $10.65        508,419   $10.12
Granted                    --   $   --              --   $   --             --   $   --
Cancelled                  --   $   --          (3,000)  $12.67         (1,500)  $10.00
Exercised             (37,325)  $ 9.34        (138,881)  $12.20       (141,835)  $ 8.95
                     --------                 --------                --------
Outstanding at
 end of year          185,878   $ 9.76         223,203   $ 9.70        365,084   $10.65
                     ========                 ========                ========
Exercisable at
 end of year          185,878   $ 9.76         223,203   $ 9.70        365,084   $10.65
                     ========                 ========                ========
Weighted average
 fair value of
 options granted
 during the year                 $   --                   $   --                  $   --
                                 ======                   ======                  ======

</TABLE>

                                       70
<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, 2006:

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

                          NUMBER          WEIGHTED
                        OUTSTANDING       AVERAGE         WEIGHTED
                            AT            REMAINING       AVERAGE
   RANGE OF             DECEMBER 31,     CONTRACTUAL      EXERCISE
EXERCISE PRICES            2006          LIFE (YEARS)      PRICE
---------------        -------------     ------------    ----------

$ 5.98 -  8.78           29,378             1.45          $ 8.49
 10.00 - 10.00          156,500             0.69           10.00
                        -------
                        185,878


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,
                                  ------------------------------------------------------
                                            2006                         2005
                                  --------------------------   -------------------------
                                  FAIR VALUE     % OF TOTAL    FAIR VALUE    % OF TOTAL
                                  ------------   -----------   -----------   -----------
                                            (In thousands, except percentages
<S>                                     <C>        <C>              <C>        <C>
Mutual Funds
 International Equity Fund          $   198        9.54%        $   128         7.45%
 Large Cap Equity Growth Fund           504       24.28             396        23.04
 International Investment
  Grade Bond Fund                       637       30.68             507        29.49
Small Cap Equity Growth Fund             99        4.77             114         6.63
Large Cap Equity Value Fund             487       23.46             397        23.09
Corporate Common Stocks(1)              151        7.27             165         9.60
Cash and cash equivalents                --          --              12         0.70

Total Plan Assets                   $ 2,076      100.00%        $ 1,719       100.00%
                                    =======      ======         =======       ======
</TABLE>

----------------
(1)  Includes 4,500  shares of the Company's Common Stock with a market value of
     $73,350 and $75,465 at December 31, 2006 and 2005, respectively.

                                       71
<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,
                                            ----------------------
                                               2006         2005
                                            ---------     --------
Discount rate                                  5.75%        5.50%
Rate of compensation increase                  5.00%        5.00%


        Weighted-average assumptions used to determine net periodic benefit cost
for the years ended December 31, 2006 and 2005 were as follows:

                                                 DECEMBER 31,
                                            ----------------------
                                               2006         2005
                                            -----------   --------
Discount rate                                  5.50%        5.75%
Rate of compensation increase                  5.00%        5.00%
Expected return on plan assets                 8.50%        8.50%
Measurement date                           1/1/2006     1/1/2005

                                       72
<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, 2006 and 2005:

<TABLE>
<CAPTION>

                                                                    DECEMBER 31,
                                                        -----------------------------------
                                                              2006                2005
                                                        --------------        -------------
<S>                                                       <C>                  <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                   $ 2,735,177          $ 2,316,075
Service cost                                                  353,071              304,144
Interest cost                                                 149,594              134,275
Actuarial (gain) loss                                          (3,660)             158,125
Benefits paid                                                (130,339)            (177,442)
                                                          -----------          -----------
Benefits obligation at end of year                        $ 3,103,843          $ 2,735,177
                                                          ===========          ===========

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year            $ 1,719,290          $ 1,804,866
Actual return on plan assets                                  154,347              (20,484)
Employer contribution                                         332,700              112,350
Benefits paid                                                (130,339)            (177,442)
                                                          -----------          -----------
Fair value of plan assets at end of year                  $ 2,075,998          $ 1,719,290
                                                          ===========          ===========

AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
 POSITION CONSIST OF:
Noncurrent assets                                         $        --                  N/A
Current liabilities                                                --                  N/A
Noncurrent liabilities                                     (1,027,845)                 N/A
Prepaid benefit cost                                              N/A                   --
Accrued benefit cost                                              N/A           (1,015,887)
Intangible asset                                                  N/A              120,874
Accumulated other comprehensive charge                            N/A              887,262
                                                          -----------          -----------
Net amount recognized at year end                         $ 1,027,845          $    (7,775)
                                                          ===========          ===========

AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE
INCOME CONSIST OF:
Net loss                                                  $   820,100          $   887,262
Transition obligation                                              --                  N/A
Prior service cost                                            102,504                  N/A
                                                          -----------          -----------
Accumulated other comprehensive charge                    $   922,604          $   887,262

ADDITIONAL YEAR-END INFORMATION FOR PENSION PLANS WITH
ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN
ASSETS
Projected benefit obligation                              $ 3,103,843          $ 2,375,177
Accumulated benefit obligation                              3,103,843            2,735,177
Fair value of plan assets                                   2,075,998            1,719,290
</TABLE>

                                       73
<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, 2006, 2005 and 2004 is as follows:

<TABLE>
<CAPTION>

                                                             DECEMBER 31,
                                        ------------------------------------------------
                                             2006              2005             2004
                                        --------------    -------------     ------------
<S>                                           <C>              <C>              <C>
Service cost                               $ 353,071        $ 304,144        $ 243,916
Interest cost                                149,594          134,275          121,005
Expected return on assets                   (151,131)        (150,819)        (150,145)
Amortization
 Net transition (asset) obligation                --               --               --
 Prior service cost                           18,370           18,370           18,370
 (Gain) loss                                  60,286           40,091           19,058
                                           ---------        ---------        ---------
Net periodic pension cost                  $ 430,190        $ 346,061        $ 252,204
                                           =========        =========        =========
</TABLE>


        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, 2006 and 2005:

<TABLE>
<CAPTION>

                                                                     DECEMBER 31,
                                                          -----------------------------------
                                                               2006               2005
                                                          ----------------   ----------------
<S>                                                           <C>               <C>
Net loss (gain)                                               $    N/A          $     N/A
Prior service cost                                                 N/A                N/A
Increase (decrease) in minimum liability included in
other comprehensive income prior to FAS 158 application
                                                               (67,162)          (289,337)
Initial OCI charge upon FAS 158 application                    102,504                N/A
Amortization of prior service cost                                 N/A                N/A
Amortization of transition obligation                              N/A                N/A
                                                              --------           --------
Total recognized in other comprehensive income                  35,342            289,337
Total recognized in net periodic benefit cost and
other comprehensive income                                     465,532            635,398
</TABLE>

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  $45,148,  $18,370 and $0,
respectively.

ESTIMATED FUTURE BENEFIT PAYMENTS

        We estimate future benefit payments to be as follows:

                                                   BENEFIT
                    YEARS                         PAYMENTS
                    -----                        ----------
                    2007                         $  181,075
                    2008                            158,350
                    2009                            233,217
                    2010                            158,267
                    2011                            145,376
                    Years 2012-2016               1,359,610


                                       74
<PAGE>

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

NOTE K - (CONTINUED)

COMPANY CONTRIBUTIONS

        The Company  contributed  $332,700 to its Retirement  Plan in the fiscal
year ended December 31, 2006.  During the fiscal year ending  December 31, 2007,
the Company expects to contribute approximately $255,000 to its Retirement Plan.

2.      FORMER GOSHEN BANK PENSION PLAN

        The Bank, as successor to Goshen Bank,  had a  non-contributory  defined
benefit pension plan covering substantially all of its employees.  In the fourth
quarter of 2000,  the Goshen Bank froze its  defined  benefit  pension  plan and
provided that there would be no further  accruals under the plan. On October 24,
2002, the Board of Directors of the Bank approved the  termination of this plan.
In 2003, we paid out approximately  $600,000 to complete the termination of this
plan and  purchase  annuity  contracts.  Upon the  notice  of  termination,  all
participant benefits vest 100%.

3.      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,
                                               ---------------------------------
                                                    2006              2005
                                               ----------------  ---------------
                                                        (In thousands)
Change in benefit obligation
  Benefit obligation at beginning of year          $ 735             $ 719
  Service cost                                        --                --
  Interest cost                                       42                43
  Actual (gain) loss                                 (27)               22
  Benefits paid                                      (52)              (49)
                                                   -----             ------
  Benefits obligation at end of year                 698               735
                                                   -----             ------

Change in plan assets
  Fair value of plan assets
   at beginning of year                               --                --
  Actual return on plan assets                        --                --
  Employer contribution                               49                49
  Benefits paid                                      (49)              (49)
                                                   -----             ------
  Fair value of plan assets
   at end of year                                     --                --
                                                   -----             ------

  Funded status                                     (698)             (735)
  Unrecognized net actuarial loss                    N/A                47
                                                   -----             ------
  Accrued benefit cost (included in
   other liabilities)                              $ 698             $ 688
                                                   =====             =====


                                       75
<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,
                                        ----------------------------------
                                             2006              2005
                                        ----------------  ----------------
                                                 (In thousands)
Service cost                                $ --              $ --
Interest cost on projected
 benefit obligation                           42                43
Actual return on plan assets                  --                --
                                            ----              ----
Net periodic benefit cost                   $ 42              $ 43
                                            ====              ====

        The assumed  discount rate used in  determining  the  actuarial  present
value of the  projected  benefit  obligation  was  6.125% and 5.875% in 2006 and
2005, respectively.

4.      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,
$107,000  and $89,000  for the years ended  December  31,  2006,  2005 and 2004,
respectively.

5.      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,
2006  and  2005,  the  balance   accumulated   under  these   arrangements   was
approximately $245,000 and $241,000, 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, 2006, the balance accumulated
under the Plan was approximately $30,000.


                                       76

<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  2015.  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,
                     ------------
                     2007                        $  867,000
                     2008                           653,000
                     2009                           581,000
                     2010                           581,000
                     2011                           395,000
                     Thereafter                     603,000
                                                 ----------
                                                 $3,680,000

        Rental expense was approximately $1,286,000, $1,208,000 and $964,000 for
the fiscal years ended December 31, 2006, 2005 and 2004, respectively.  Included
in rental  expense was  approximately  $328,000,  $359,000  and $298,000 for the
fiscal years ended  December 31, 2006,  2005 and 2004,  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, 2006 and 2005 are outlined
below.

        For cash and cash  equivalents,  the  recorded  book  values  of  $24.31
million  and  $27.88  million  at  December  31,  2006 and  2005,  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.

                                       77

<PAGE>

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

NOTE M - (CONTINUED)

<TABLE>
<CAPTION>

                                                        DECEMBER 31,
                                 ------------------------------------------------------------
                                            2006                           2005
                                 ---------------------------- -------------------------------
                                   CARRYING      ESTIMATED       CARRYING       ESTIMATED
                                    AMOUNT       FAIR VALUE       AMOUNT        FAIR VALUE
                                 -------------  ------------- --------------- ---------------
                                                       (In thousands)
<S>                                 <C>            <C>             <C>             <C>
Investment securities              $515,231       $515,234        $599,972        $599,983
Loans, net of unearned income       370,923        375,052         309,230         313,065
Time Deposits                       423,712        423,161         402,585         400,407
Repurchase Agreements                62,652         62,606          73,044          72,505
Long-term Debt                       75,419         75,569         105,882         105,753
</TABLE>

        The net loan  portfolio  at  December  31, 2006 and 2005 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 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 $20,000 at December 31, 2006 and 2005.


                                       78

<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,
                                               ------------------------------
                                                    2006             2005
                                               -------------    -------------
                                                        (In thousands)
Unused lines of credit                           $ 38,288         $ 16,808
Commitments to extend credit                           --            2,531
Standby letters of credit and financial
 guarantees written                                 3,423            1,155
                                                 --------         --------
                                                 $ 41,711         $ 20,494
                                                 ========         ========
Interest rate caps-notional amount               $ 20,000         $ 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,
2006 varies up to 100%.

                                       79

<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,  2006 are
$3,423,000  and they expire  through  2007.  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, 2006,  the Bank meets all capital  adequacy
requirements to which it is subject.

        As of December 31, 2006,  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.

                                       80

<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, 2006
and 2005 (dollars in thousands):

<TABLE>
<CAPTION>

                                                                                  TO BE WELL
                                                                                 CAPITALIZED
                                                                                    UNDER
                                                                                    PROMPT
                                                               FOR CAPITAL        CORRECTIVE
                                                                ADEQUACY            ACTION
                                                 ACTUAL         PURPOSES          PROVISIONS
                                             -------------    -------------    ---------------
                                             AMOUNT   RATIO   AMOUNT  RATIO    AMOUNT   RATIO
                                             ------   -----   ------  -----    ------   -----
DECEMBER 31, 2006
<S>                                         <C>      <C>      <C>     <C>      <C>     <C>
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>


<TABLE>
<CAPTION>

                                                                                  TO BE WELL
                                                                                 CAPITALIZED
                                                                                    UNDER
                                                                                    PROMPT
                                                               FOR CAPITAL        CORRECTIVE
                                                                ADEQUACY            ACTION
                                                 ACTUAL         PURPOSES          PROVISIONS
                                             -------------    -------------    ---------------
                                             AMOUNT   RATIO   AMOUNT  RATIO    AMOUNT   RATIO
                                             ------   -----   ------  -----    ------   -----

DECEMBER 31, 2005
<S>                                           <C>      <C>      <C>     <C>      <C>     <C>
Total Capital (to Risk-Weighted Assets)
  Company                                   124,523  28.6%    34,820 >8.0%         --    N/A
                                                                     -
  Bank                                       95,193  23.0%    33,116 >8.0%     34,416 >10.0%
                                                                     -                -
Tier I Capital (to Risk-Weighted Assets)
  Company                                   121,257  27.9%    17,410 >4.0%         --    N/A
                                                                     -
  Bank                                       91,927  22.2%    16,558 >4.0%     20,649  >6.0%
                                                                     -                 -
Tier I Capital (to Average Assets)
  Company                                   121,257  12.2%    39,651 >4.0%         --    N/A
                                                                     -
  Bank                                       91,927  10.1%    36,495 >4.0%     46,550  >5.0%
                                                                     -                 -
</TABLE>

                                       81
<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,
                                               ---------------------------------
                                                    2006             2005
                                               ---------------  ----------------
ASSETS

Cash                                                $  11,515         $  11,196
Equity investment in subsidiaries                     113,972           109,026
Investment in securities available for sale            15,874            11,760
Accrued interest receivable                               189               481
Other assets                                            1,023             1,547
                                                    ---------         ---------
Total assets                                        $ 142,573         $ 134,010
                                                    =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Subordinated debt                                   $  22,681         $  22,681
Other liabilities                                       4,115             2,619
                                                    ---------         ---------
Total liabilities                                      26,796            25,300
                                                    ---------         ---------

Stockholders' equity
Common stock                                              770               770
Additional paid-in capital                             90,659            90,594
Retained earnings                                      37,285            33,504
Accumulated other comprehensive
 loss, net                                             (4,772)           (8,415)
Common stock in treasury, at cost                      (8,165)           (7,743)
                                                    ---------         ---------
Total stockholders' equity                            115,777           108,710
                                                    ---------         ---------
                                                    $ 142,573         $ 134,010
                                                    =========         =========


                                       82

<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,
                                          ---------------------------------
                                            2006         2005       2004
                                          --------     --------   ------
INCOME
Interest income from the Bank             $     65     $     53   $     71
Interest income                              1,115        1,622      1,090
Gain on sales of                             1,600           10        734
 investment securities
Other income (loss)                            235          217         96
                                          --------     --------   --------
Total income                                 3,015        1,902      1,991

EXPENSES
Salaries and employee benefits                 697          605        489
Interest expense                             1,780        1,268        463
Other expenses                                 602          580      1,058
                                          --------     --------   --------
Total expenses                               3,079        2,453      2,010
                                          --------     --------   --------
Income (loss) before income taxes
 and equity in undistributed net
 income of the Bank                            (64)        (551)       (19)
Equity in undistributed
 net income of the Bank                      5,203        6,229      7,668
                                          --------     --------   --------
Income before taxes                          5,139        5,678      7,649
Provision for income taxes                     259          137        147
                                          --------     --------   --------
Net income                                $  4,880     $  5,541   $  7,502
                                          ========     ========   ========

                                       83

<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,
                                                           -----------------------------------
                                                              2006         2005          2004
                                                           --------       -----    --   ----
<S>                                                        <C>          <C>           <C>
  Operating activities:
Net income                                                 $  4,880     $  5,541      $  7,502
Adjustments to reconcile net
 income to net cash provided by
 (used in) operating activities:
Gain on sales of investment securities                       (1,600)         (10)         (734)
Equity in undistributed net income of the Bank               (5,203)      (6,229)       (7,668)
Dividends received from the Bank                              1,730        1,291           500
Increase in other liabilities                                    23        1,025           798
Decrease (increase) in other assets                             816        (154)            69
                                                           --------     --------      --------
 Net cash provided by operating activities                      646        1,464           467
                                                           --------     --------      --------

  Investing activities:
Investment securities available for sale
 Purchases                                                   (3,725)      (4,548)       (9,150)
 Sales                                                        4,854          140         3,874
Net decrease in loans                                            --        6,059           185
Contribution to the Bank                                         --       (7,217)      (14,791)
                                                           --------     --------      --------
Net cash provided by (used in) investing activities           1,129       (5,566)      (19,882)
                                                           --------     --------      --------

  Financing activities:
Proceeds from exercise of common stock options                  433        1,686         1,271
Acquisition of treasury stock                                  (790)          --           (69)
Cash paid for fractional shares                                  --           --          (463)
Issuance of subordinated debentures                              --        7,217        14,791
Dividends paid                                               (1,099)      (1,020)         (735)
                                                           --------     --------      --------
Net cash (used in) provided by financing activities          (1,456)       7,883        14,795
                                                           --------     --------      --------

  Net increase (decrease) in cash and cash equivalents          319        3,781        (4,620)
  Cash and cash equivalents at beginning of year             11,196        7,415        12,035
                                                           --------     --------      --------
  Cash and cash equivalents at end of year                 $ 11,515     $ 11,196      $  7,415
                                                           ========     ========      ========

Supplemental disclosures of cash flow information:
  Cash used to pay interest                                $  1,694     $  1,132      $    273
  Cash used to pay income taxes                            $    473     $    362      $    419
</TABLE>

                                       84
<PAGE>

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

NOTE Q - QUARTERLY FINANCIAL DATA (UNAUDITED)

        The following  represents  summarized  quarterly  financial  data of the
Company  which,  in  the  opinion  of  management,   reflects  all  adjustments,
consisting  only  of  normal  recurring   adjustments,   necessary  for  a  fair
presentation of the Company's results of operations.  (In thousands,  except per
share data).

<TABLE>
<CAPTION>

                                                                 THREE MONTHS ENDED
                                             ------------------------------------------------------
                                              MARCH 31     JUNE 30      SEPTEMBER 30    DECEMBER 31
                                             ----------   ----------    ------------    -----------
                2006
                ----
<S>                                          <C>          <C>           <C>             <C>
Interest income                              $ 11,835     $ 11,816      $ 12,141        $ 12,429
Interest expense                               (6,607)      (6,945)       (7,509)         (8,125)
                                             --------     --------      --------        --------
Net interest income                             5,228        4,871         4,632           4,304
Provision for loan losses                         (45)         (45)          (45)           (275)
Gains on sales of securities                      741            2            --           1,593
Non-interest income                               312          304           359             382
Non-interest expenses                          (3,413)      (3,378)       (3,400)         (3,391)
                                             --------     --------      --------        --------
Income before taxes                             2,823        1,754         1,546           2,613
Provision for taxes                            (1,327)        (834)         (689)         (1,006)
                                             --------     --------      --------        --------
Net income                                   $  1,496     $    920      $    857        $  1,607
                                             ========     ========      ========        ========

Per share data
  Net income per common share
  Basic                                      $    .22     $    .13      $    .12        $    .24
                                             ========     ========      ========        ========
  Diluted                                    $    .21     $    .13      $    .12        $    .24
                                             ========     ========      ========        ========
</TABLE>


<TABLE>
<CAPTION>

                                                                 THREE MONTHS ENDED
                                             ------------------------------------------------------
                                              MARCH 31     JUNE 30      SEPTEMBER 30    DECEMBER 31
                                             ----------   ----------    ------------    -----------
                2005
                ----
<S>                                          <C>          <C>           <C>             <C>
Interest income                              $ 10,967     $ 11,378      $ 11,250        $ 11,461
Interest expense                               (4,814)      (5,585)       (5,879)         (6,121)
                                             --------     --------      --------        --------
Net interest income                             6,153        5,793         5,371           5,340
Provision for loan losses                         (45)         (45)          (45)            (45)
Gains (losses) on sales of securities               6            3            --              (5)
Non-interest income                               263          282           300             357
Non-interest expenses                          (3,193)      (3,378)       (3,221)         (3,347)
                                             --------     --------      --------        --------
Income before taxes                             3,184        2,655         2,405           2,300
Provision for taxes                            (1,486)      (1,304)       (1,108)         (1,105)
                                             --------     --------      --------        --------
Net income                                   $  1,698     $  1,351      $  1,297        $  1,195
                                             ========     ========      ========        ========

Per share data
  Net income per common share
  Basic                                      $    .25     $    .20      $    .19        $    .17
                                             ========     ========      ========        ========
  Diluted                                    $    .25     $    .20      $    .19        $    .16
                                             ========     ========      ========        ========
</TABLE>

                                       85
<PAGE>


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

        Not Applicable.

ITEM 9A.  CONTROLS AND PROCEDURES


EVALUATION OF THE COMPANY'S  DISCLOSURE CONTROLS AND INTERNAL CONTROL. 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").

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 over financial  reporting" as defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934 ("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.

CONCLUSIONS.  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.  In accordance with SEC requirements,
the CEO/CFO  notes that during the fiscal  quarter  ended  December 31, 2006, no
changes in Internal  Control have occurred that have materially  affected or are
reasonably likely to materially affect Internal Control.

ITEM 9B. OTHER INFORMATION

        On March 28,  2007,  the Board of  Directors  of the  Company,  upon the
recommendation of the independent directors of the Company, approved bonuses for
fiscal year 2006 to Messrs.  Steven Rosenberg,  Moses Krausz and David Lukens of
$25,000,  $250,000 and  $25,000,  respectively,  and fixed  salaries for Messrs.
Steven Rosenberg and David Lukens for fiscal year 2007 at $220,000 and $183,000,
respectively, effective January 1, 2007.

                                       86

<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             58     President, Chief Executive Officer,
                                     Chief Financial Officer and Director
William L. Cohen             65     Director
Martin A. Fischer            69     Director
Moses Marx                   71     Director
Randolph B. Stockwell        60     Director
Moses Krausz                 66     President of The Berkshire Bank
David Lukens                 57     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, a small  start-up  company.  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. 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.

                                       87
<PAGE>

ITEM 10. (CONTINUED)

        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 2007. 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.       COMPENSATION DISCUSSION AND ANALYSIS

        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.

PHILOSOPHY ON EXECUTIVE COMPENSATION

        It is our philosophy to compensate  executive  officers in a manner that
promotes the recruitment,  motivation and retention of exceptional employees who
will help us achieve our strategic business objectives and increase  stockholder
value. Our executive compensation philosophy is implemented through compensation
programs based upon the following principles:

        * Targeted total compensation (salary,  bonus, and long-term incentives)
        and benefits package for executives should be set near the median levels
        of  compensation  for  corporate  executives  delivered  by certain peer
        companies,  taking into  account the  relative  responsibilities  of the
        executive officers involved. Actual total compensation in any given year
        may be above or below the target level based on individual and corporate
        performance.

        * Our total  compensation  package should provide an appropriate  mix of
        fixed   and    variable    compensation    to   support   a   meaningful
        pay-for-performance relationship for our executive officers.

        * Performance-based  compensation should be tied to performance measures
        believed to enhance future stockholder value.

        * Our  long-term  incentive  program  should be  designed  to  encourage
        executive  retention  and  link  executive   compensation   directly  to
        long-term stockholder interests.

        * Compensation plans should be easy to understand and administer.

                                       88

<PAGE>



OVERVIEW OF COMPANY POLICY ON EXECUTIVE COMPENSATION

        Our executive  compensation  policy and practice is  established  by the
Independent Directors.  Specific policies and practices relating to each element
of named executive officers'  compensation are described below. The objective of
our compensation policy is to provide an overall  compensation  opportunity that
is competitive with that offered for similar positions by similar  organizations
in our industry. Executive compensation may be above or below this general level
at  times  for a  variety  of  reasons,  including  performance,  recruiting  or
retention requirements and market conditions.

        Actual compensation  against this generally median target is designed to
be commensurate with our corporate performance and the individual performance of
our  executives.  We generally  structure our benefits  based on a review of the
typical practices within our industry and our business strategy.

        Our approach to the total pay package for our  executive  officers is to
view the various elements of the package as a portfolio of rewards,  designed to
achieve  different  specific  purposes but to balance  each other in  motivating
appropriate  behavior,  rewarding  different  aspects of  performance or meeting
corporate   objectives  for  attracting  and  retaining  the  talent  needed  to
successfully lead our company and increase stockholder value.

THE ROLE OF THE INDEPENDENT DIRECTORS AND MANAGEMENT IN DETERMINING EXECUTIVE
COMPENSATION

        For compensation  purposes,  our executive officers consist of the three
executive  officers named in the Summary  Compensation  Table.  The  Independent
Directors  approve all key elements of our  executive  compensation  and benefit
programs  for the  named  executive  officers.  In  addition,  they  assess  our
financial  performance and capital position  compared to our plan in determining
future awards under the plans.  Finally,  the Independent  Directors approve all
salary increases, cash bonus amounts, equity grants,  employment,  severance, or
change of control agreements and all benefit programs as they apply to the named
executive officers.

COMPENSATION POLICY REGARDING NAMED EXECUTIVE OFFICERS

        Each element of compensation is described below.  Generally,  the mix of
pay elements,  including salary and annual cash bonus,  long-term  incentive and
equity opportunity,  benefits and perquisites, are designed to address the needs
of our company and reflect the  competitive  marketplace.  We review the mix and
allocation to individuals  regularly,  but maintain a flexible policy to deliver
compensation  that motivates,  retains and rewards our executives.  In executing
this policy, the Independent  Directors consider a variety of factors,  applying
its collective judgment where appropriate, against a frame of reference that the
total pay opportunity should be generally competitive.

BASE SALARIES

        In general,  we target base salaries at competitive  levels  relative to
executive officers in comparable positions in our industry,  taking into account
the comparable  responsibilities  of the executive officers involved.  Where the
responsibilities of executive positions are different from those typically found
among other bank holding  companies  or banks,  or where  executives  are new to
their  responsibilities or play a particularly  critical role, base salaries may
be targeted above or below median competitive  levels. In determining  salaries,
the  Independent  Directors  also  take  into  account  individual   leadership,
integrity and vision,  experience and  performance  relative to other  executive
officers  in  comparable  positions.  We believe the named  executive  officers'
salaries  reported in the Summary  Compensation  Table are in keeping  with this
philosophy.

ANNUAL NON-EQUITY INCENTIVE AWARDS

        For 2006, the Independent  Directors  determined the cash awards for the
named executive officers which represent, in their view, a generally competitive
level of bonus for corporate and individual performance.  This amount is set for
each  individual and position so that,  along with base salary,  the executive's
total cash pay would be  comparable  to the cash  compensation  of executives of
similarly sized companies in our industry.

                                       89

<PAGE>

ANNUAL INCENTIVE PERFORMANCE GOALS AND MEASURES

        At the  beginning of each year,  the  Independent  Directors  review our
business  plan and budgets for the coming year.  Historically  and in 2006,  the
targets  for  performance  are  measured  by the  (i)  management  of  our  loan
portfolio,  loan products and  underwriting  standards,  (ii)  management of our
investment activities and portfolio of investment securities,  (iii) integration
of new bank branches,  (iv)  integration  of new  technologies  and  information
systems,  (v) safety and soundness of the bank,  (vi)  financial  performance to
budget,  and (vii) growth in stockholders'  equity. The annual incentive portion
of total  compensation  is  designed  to reward  executives  for  meeting  these
objectives which we believe are the important  drivers for the long-term success
of our company.

        At year end, the Independent  Directors review performance against these
objectives and apply more judgmental factors,  which reflect actual achievements
in such  areas as the  quality  of  earnings,  risk  positioning  and  strategic
positioning of our portfolio of loans and investment  securities.  The effect of
market and  industry  conditions,  interest  rates and the economy in general on
performance is also  considered.  Total payouts may be adjusted up or down based
on this assessment.

        Based on their  assessment of each executive  officer's  performance for
the year relative to our plan,  their judgment on the appropriate  effect of any
of the factors discussed above and any individual performance  adjustments,  the
Independent  Directors  make a decision  on the actual  bonus to be paid to such
executive   officer  for  the  year.   The   decision  is  based  in  part  upon
recommendations  made by the Chief  Executive  Officer  and the named  executive
officer's immediate superior, if not the Chief Executive Officer.

        Further  detail on  individual  annual bonus  payments made to the named
executive  officers  is  provided  in the  Summary  Compensation  Table  and its
accompanying narrative.

LONG-TERM AND INCENTIVE AWARDS

        We provide periodic, but not annual, long-term equity incentives through
our 1999 Stock  Incentive  Plan which was approved by our  stockholders.  Equity
incentives in past years provided for long-term  compensation  opportunities for
the named  executive  officers in the form of a fair market  value stock  option
grant.

STOCK OPTIONS

        We  intend  that  the  value of any  future  stock  options  we grant be
measured  by the fair value of the option at grant  date  under FAS  123(R).  We
believe  that  periodic,  not annual,  stock option  grants best link  executive
compensation  to the interests of our  stockholders.  The value  realizable from
this type of award is solely  dependent  on the increase in our stock price over
the term of the options,  after which the options expire. Our practice in regard
to stock options and other equity grants is that such grants are typically  made
to existing  executives on a periodic  basis,  with possible  exceptions for new
hires,  promotions or special retention awards. The Independent Directors review
management  recommendations  as to stock option  grants to  employees  below the
named executive officer level.

        Typically,  stock  option  awards are  approved  in advance and they are
effective  on a future  pre-selected  date.  We do not select stock option grant
dates for executives in  coordination  with the release of material,  non-public
information,  or time the release of such  information  because of option  grant
dates.  Historically,  we have awarded non-qualified stock options which vest in
full one year from the date of the award and expire five years thereafter.

RESTRICTED STOCK

        We have not used restricted  stock grants in the past,  though we may do
so in the future.  Restricted stock, unlike a stock option, is an outright grant
of common stock in which  ownership  vests over a period of time.  If restricted
stock is granted,  then,  throughout  the vesting  period  holders of restricted
stock  would  have the right to vote  their  restricted  shares  and to  receive
dividends.

                                       90
<PAGE>

POLICY ON POST-TERMINATION BENEFITS

        Our policy on  executive  post-termination  benefits  is to review  each
situation as it arises. We seek to provide fair and appropriate treatment to all
of our employees depending upon the termination situation.

CHANGE OF CONTROL TERMINATION POLICIES

        We have no change of control agreements with any of our employees.

RETIREMENT PLAN

        Substantially all full-time employees are eligible to participate in the
Berkshire Bancorp Inc.  Retirement Income Plan after one year of employment.  We
believe that  retirement  plan benefits are an integral part of  compensation of
our executive  officers and other employees.  We provide these benefits in order
to make an income stream available to the recipients that will assist in meeting
their  post-retirement  needs. Benefits are determined by compensation and years
of service.  Further  detail  regarding the  retirement  plan is provided in the
Pension Benefits Table and accompanying discussion.

DEFERRED COMPENSATION

        Certain named  executives  are eligible to  participate  in the Deferred
Compensation  Plan of The Berkshire  Bank.  This plan,  adopted in July 2006, is
designed to allow executives to defer base salary and annual  incentives until a
future  date.  The  interest  rates  at which  these  deferrals  accrue  are not
guaranteed and we believe are in line with competitive practice in our industry.
Further  detail on the  interest  rates we pay is provided  in the  Nonqualified
Deferred Compensation Table and accompanying discussion.

PERQUISITES AND OTHER BENEFITS

        We do not  provide  perquisites  of any  kind  to  our  named  executive
officers.  However,  our  executives  are eligible to participate in the benefit
plans available to all of our employees.

NON-EMPLOYEE DIRECTOR COMPENSATION

        In 2006,  the  Independent  Directors  reviewed  the  components  of its
non-employee  director compensation program and recommended to the Board that it
remain  unchanged.  A further  review will be  undertaken in 2007 to assure that
director pay remains  appropriate.  Details regarding  director  compensation is
provided in the Director Compensation Table and accompanying discussion.

TAX CONSIDERATIONS

        Section  162(m) of the Internal  Revenue Code  disallows a tax deduction
for compensation in excess of $1 million paid to our Chief Executive  Officer or
any of our other named executive  officers whose total  compensation is required
to be reported.  However,  performance-based  compensation  that  satisfies  the
requirements  of  Section  162(m) is  deductible.  We intend  to  establish  and
administer executive officer compensation programs that are deductible. However,
we may award  compensation from time to time that is not fully tax deductible if
we determine that such awards are consistent with our philosophy and in the best
interests of our stockholders.

        Section 409A of the Internal Revenue Code provides that amounts deferred
under  nonqualified  deferred  compensation  plans are included in an employee's
income  when  they  vest  unless  specified   requirements  are  met.  If  these
requirements are not met, employees are also subject to an additional income tax
and  interest  penalties.  Our  nonqualified  deferred  compensation  plans  are
intended to meet, and will be amended to meet, these requirements.  As a result,
our employees will be taxed when the deferred  compensation  is actually paid to
them and we will be entitled to a tax deduction at that time.

        Section 280G of the  Internal  Revenue  Code  disallows a company's  tax
deduction for what are defined as "excess parachute  payments," and Section 4999
imposes a 20% excise tax on any person who receives excess parachute payments.

                                       91

<PAGE>

None  of our  named  executive  officers  are  entitled  to such  payments  upon
termination of their  employment,  including  termination  following a change of
control of our company.  We do not have change of control agreements with any of
our named executive officers.

        Our  stock  awards  generally  accelerate  in the  event of a change  of
control and  qualifying  termination  of  employment.  This  acceleration  could
contribute to potential excess parachute payments.

ACCOUNTING CONSIDERATIONS

        Stock options,  restricted  stock, and performance  shares are accounted
for based on their  grant date fair  value,  as  determined  under FAS 123R.  We
consider the  accounting  expense as well as the cash expense of all programs as
part of our design and review criteria.

                    EXECUTIVE COMPENSATION & BENEFITS REPORT

        The independent  directors have reviewed and discussed the  Compensation
Discussion and Analysis set forth in this Form 10-K with our management; and

        Based  on  such  review  and  discussions   the  Independent   Directors
recommended  to our Board of  Directors  that the  Compensation  Discussion  and
Analysis be included in this Annual Report on Form 10-K.

William L. Cohen
Martin A. Fischer
Randolph B. Stockwell

                                       92
<PAGE>

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 year ended December 31, 2006, and to
each of the other executive  officers of the Bank whose total  compensation  was
more than  $100,000  during the fiscal year ended  December 31, 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 and Chief Financial
Officer
Moses Krausz                     2006    422,130    250,000            --        11,424        683,554
President and Chief Executive
Officer of The Berkshire Bank
David Lukens                     2006    174,000     25,000        11,996         7,658        218,654
Executive Vice President and
Chief Financial Officer of The
Berkshire Bank
</TABLE>

NARRATIVE 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
20,  2008  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 $6,600,  income associated with life insurance
coverage and aggregate earnings on the Deferred Compensation Plan.

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.  The amounts  reported for Change in Pension  Value and  Nonqualified
Deferred  Compensation  Earnings  includes  only the  change in the value of Mr.
Luken's  benefit  payable  under our  Retirement  Income Plan.  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 $5,970,  income  associated  with life insurance
coverage and aggregate earnings on the Deferred Compensation Plan.

                                       93

<PAGE>

       GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED DECEMBER 31, 2006

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

        The   following   table  sets  forth   certain   information   regarding
equity-based  awards held by each of our named executive officers as of December
31, 2006.

<TABLE>
<CAPTION>

                                                        OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
                --------------------------------------------------------------------------------------------------------------------
                                         OPTION AWARDS                                                STOCK AWARDS
                --------------------------------------------------------------------------------------------------------------------
                                                                                                                          EQUITY
                                                                                                                         INCENTIVE
                                                                                                                        PLAN AWARDS:
                                                                                                                         MARKET OR
                                                                                                              EQUITY       PAYOUT
                                               EQUITY                                                    INCENTIVE PLAN   VALUE OF
                                           INCENTIVE PLAN                                                   AWARDS:       UNEARNED
                 NUMBER OF    NUMBER OF        AWARDS:                        NUMBER OF                     NUMBER OF      SHARES,
                SECURITIES   SECURITIES      NUMBER OF                         SHARES OR                    UNEARNED      UNITS, OR
                UNDERLYING   UNDERLYING      SECURITIES                        UNITS OF  MARKET VALUE OF  SHARES, UNITS,    OTHER
                UNEXERCISED  UNEXERCISED     UNDERLYING    OPTION               STOCK    SHARES OR UNITS OR OTHER RIGHTS RIGHTS THAT
NAME              OPTIONS      OPTIONS      UNEXERCISED   EXERCISE   OPTION   THAT HAVE   OF STOCK THAT    THAT HAVE NOT   HAVE NOT
                    (#)          (#)      UNEARNED OPTIONS  PRICE  EXPIRATION NOT VESTED HAVE NOT VESTED      VESTED        VESTED
                EXERCISABLE UNEXERCISABLE       (#)           $       DATE       (#)           (#)              (#)           (#)
<S>               <C>           <C>             <C>          <C>     <C>        <C>           <C>              <C>          <C>
Steven Rosenberg  30,000         --              --         10.00   07/31/07     --            --               --           --
Moses Krausz      60,000         --              --         10.00   07/31/07     --            --               --           --
David Lukens      15,000         --              --         10.00   07/31/07     --            --               --           --
</TABLE>


    OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR ENDED DECEMBER 31, 2006

        The following  table sets forth  certain  information  regarding  option
exercises by our named  executive  officers  during the year ended  December 31,
2006.

<TABLE>
<CAPTION>

                       -----------------------------------------------------------------
                                OPTION AWARDS                    STOCK AWARDS
                       -----------------------------------------------------------------
                         NUMBER OF                         NUMBER OF
                          SHARES                            SHARES
                        ACQUIRED ON    VALUE REALIZED     ACQUIRED ON   VALUE REALIZED
                          EXERCISE     ON EXERCISE (1)      VESTING       ON VESTING
NAME                        (#)              ($)              (#)             ($)
<S>                        <C>              <C>               <C>    <C>      <C>
Steven Rosenberg             --                --              --              --
Moses Krausz                 --                --              --              --
David Lukens               5,000           28,083              --              --
</TABLE>

(1) Calculated based upon the closing sale price of our common stock on the date
of exercise  less the exercise  price for such  shares,  but  excluding  any tax
obligation  incurred  by the named  executive  officer  in  connection  with the
exercise.

                                       94
<PAGE>

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, 2006,  options
to acquire 557,757 shares of our common stock have been granted under this plan,
185,878  options  are  outstanding  and  exercisable,  and  42,243  options  are
available for future grants.

                          POST-EMPLOYMENT COMPENSATION

PENSION BENEFITS

<TABLE>
<CAPTION>

                                                  NUMBER OF       PRESENT VALUE        PAYMENTS
                                               YEARS CREDITED     OF ACCUMULATED     DURING LAST
                                                   SERVICE           BENEFIT         FISCAL YEAR
NAME                         PLAN NAME               (#)               ($)               ($)
<S>                  <C>                             <C>             <C>                 <C>
Steven Rosenberg     Retirement Income Plan          15.7            1,063,312           --
David Lukens         Retirement Income Plan           6.0               57,953           --
</TABLE>


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.

        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).

                                       95

<PAGE>

NONQUALIFIED DEFERRED COMPENSATION
<TABLE>

                                         EXECUTIVE                                                         AGGREGATE
                                       CONTRIBUTIONS      REGISTRANT         AGGREGATE       AGGREGATE     BALANCE AT
                                       IN FISCAL YEAR  CONTRIBUTIONS IN     EARNINGS IN    WITHDRAWALS/   DECEMBER 31,
                                            2006       FISCAL YEAR 2006  FISCAL YEAR 2006  DISTRIBUTIONS      2006
NAME                   PLAN NAME             $                 $                 $               $             $
<S>            <C>                         <C>               <C>               <C>           <C>             <C>
Moses Krausz   Deferred Compensation       7,000              --                75            --             7,075
               Plan
David Lukens   Deferred Compensation       2,610              --                28            --             2,638
               Plan
</TABLE>

------------------
        All of the amounts reported under the caption Registrant's Contributions
and  Aggregate  Earnings in Fiscal  2006 have also been  reported in the Summary
Compensation  Table for fiscal 2006.  None of the amounts  reported in Aggregate
Balance  at  December  31,  2006  were  reported  as  compensation  to the named
executive officer in our Summary Compensation Tables of previous years.


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.

                                       96
<PAGE>

                            COMPENSATION OF DIRECTORS

DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006.
<TABLE>
<CAPTION>
                                                                   CHANGE IN
                                                                    PENSION
                                                                   VALUE AND
                         FEES                                     NONQUALIFIED
                       EARNED OR                    NON-EQUITY      DEFERRED
                        PAID IN   STOCK   OPTION  INCENTIVE PLAN  COMPENSATION  ALL OTHER
                         CASH     AWARDS  AWARDS   COMPENSATION     EARNINGS   COMPENSATION  TOTAL
NAME                      $         $       $           $               $           $          $
<S>                     <C>        <C>     <C>         <C>             <C>         <C>      <C>
William L. Cohen        32,500      --      --          --              --          --      32,500
Moses Marx              26,500      --      --          --              --          --      26,500
Martin A. Fischer (a)    3,083      --      --          --              --          --       3,083
Thomas V. Guarino (b)   28,416      --      --          --              --          --      28,416
Randolph B. Stockwell   30,500      --      --          --              --          --      30,500
</TABLE>

        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.

-----------------
(a)     Mr. Fischer was elected to the Board on December 7, 2006.

(b)     Mr.  Guarino   resigned  from  the  Board  effective  August  31,  2006.

(c)     Messrs.  Cohen,  Marx and  Stockwell  each own stock  options  for 3,000
        shares of the Company's common stock.

(d)     Mr. Fischer owns stock options for 1,500 shares of our common stock.


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

        The following table sets forth certain  information as of March 23, 2007
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 (1)          *
                   160 Broadway
                   New York, NY 10038
Common Stock       Martin A. Fischer                       9,800 (2)          *
                   160 Broadway
                   New York, NY 10038
Common Stock       Moses Krausz                          148,691 (3)          2.1%
                   4 East 39th Street
                   New York, NY 10016
Common Stock       David Lukens                           15,600 (4)          *
                   4 East 39th Street
                   New York, NY 10016
Common Stock       Moses Marx                          3,538,864 (5)         51.3%
                   160 Broadway
                   New York, NY 10038
Common Stock       Steven Rosenberg                       62,580 (6)          *
                   160 Broadway
                   New York, NY 10038
Common Stock       Randolph B. Stockwell                  24,000 (7)          *
                   160 Broadway
                   New York, NY 10038
Common Stock       All executive officers and
                   directors as a group (7 persons)    3,807,035 (8)         54.3%
</TABLE>
---------------------------------
                   * Less than 1%

                                       97
<PAGE>

ITEM 12. (CONTINUED)

(1)     Includes  3,000 shares  issuable upon the exercise of options which have
        been granted to Mr. Cohen under our 1999 Stock Incentive Plan.

(2)     Includes  1,500 shares  issuable upon the exercise of options which have
        been granted to Mr. Fischer under our 1999 Stock Incentive Plan.

(3)     Includes  60,000 shares issuable upon the exercise of options which have
        been granted to Mr. Krausz under our 1999 Stock Incentive Plan and 2,100
        shares owned by Mr. Krausz's spouse.

(4)     Includes  15,000 shares issuable upon the exercise of options which have
        been granted to Mr. Lukens under our 1999 Stock Incentive Plan.

(5)     Includes  3,000 shares  issuable upon the exercise of options which have
        been granted to Mr. Marx under our 1999 Stock  Incentive  Plan,  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.

(6)     Includes  30,000 shares issuable upon the exercise of options which have
        been granted to Mr. Rosenberg under our 1999 Stock Incentive Plan.

(7)     Includes  3,000 shares  issuable upon the exercise of options which have
        been granted to Mr. Stockwell under our 1999 Stock Incentive Plan.

(8)     Includes  115,500  shares of common  stock which are  issuable  upon the
        exercise of outstanding options.


EQUITY COMPENSATION PLANS

        The following  table details  information  regarding our existing equity
compensation plans as of December 31, 2006.

<TABLE>
<CAPTION>
                                                                                   (C)
                                  (A)                                       NUMBER OF SECURITIES
                            NUMBER OF SECURITIES         (B)              REMAINING AVAILABLE FOR
                              TO BE ISSUED UPON     WEIGHTED-AVERAGE       FUTURE ISSUANCE UNDER
                                 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               185,878              $ 9.76                   42,243
plans approved by
security holders
Equity compensation                    --                  --                       --
plans not approved by
security holders
Total                             185,878              $ 9.76                   42,243
</TABLE>

                                       98
<PAGE>

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

        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,  $328,000  and $359,000 in
fiscal 2006 and 2005,  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.

POLICY REGARDING APPROVAL OF TRANSACTIONS BETWEEN BERKSHIRE AND RELATED PARTIES

        It is the  policy  of the Board of  Directors  of the  Company  that the
Company, acting by its independent directors,  shall on an ongoing basis conduct
an appropriate review of all related party transactions required to be disclosed
pursuant  to SEC  Regulation  S-K Item 404 for  potential  conflict  of interest
situations and that all such related party  transactions must be approved by the
Company's Audit Committee.

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, 2006    DECEMBER 31, 2005
                                                     -------------------  -------------------
<S>                                                            <C>                  <C>
AUDIT FEES                                                     $281,540             $168,581

AUDIT RELATED FEES: Professional services                            --               26,959
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 returns                 68,200               57,160

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 2006 and
2005.  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.

                                       99
<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, 2006 and 2005

        Consolidated Statements of Income for the Years Ended December 31, 2006,
        2005 and 2004

        Consolidated  Statements  of  Stockholders'  Equity for the Years  Ended
        December 31, 2006, 2005 and 2004

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

        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 August 1, 2001, by and
        between The Berkshire Bank and Moses Krausz  (incorporated  by reference
        to Exhibit 10.8 to the Company's  Quarterly  Report on Form 10-Q for the
        Quarterly Period Ended June 30, 2002).+

                                      100
<PAGE>

10.6    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).+

10.7    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).+

10.8    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).+

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.

                                      101
<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 29, 2007
                                         ------------------------------------


        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 29, 2007
-------------------------
    STEVEN ROSENBERG


/s/ WILLIAM L. COHEN                Director                     March 29, 2007
-------------------------
    WILLIAM L. COHEN


/s/ MARTIN A. FISCHER               Director                     March 29, 2007
-------------------------
    MARTIN A. FISCHER


/s/ MOSES MARX                      Director                     March 29, 2007
-------------------------
    MOSES MARX


/s/ RANDOLPH B. STOCKWELL           Director                     March 29, 2007
--------------------------
    RANDOLPH B. STOCKWELL

                                      102