<PAGE>


                       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, 2002

                                       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: None

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

Common Stock, par value $.10 per share
(Title of Class)

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 an accelerated filer (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, 2002: $34,633,451.

Number of shares of Common Stock outstanding as of March 14, 2003: 2,237,976.

                      DOCUMENTS INCORPORATED BY REFERENCE:

None




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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, 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 ("Berkshire", the
"Company" or "we" and similar pronouns), is a bank holding company registered
under the Bank Holding Company Act. 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. The Company has one wholly-owned banking subsidiary, The
Berkshire Bank, a New York State chartered commercial bank (the "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

     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, its
agencies, and business corporations, and mortgage-backed securities. The Bank
currently operates from three deposit-taking offices in New York City and four
deposit-taking offices in Orange and Sullivan Counties, New York. In July 1995,
the Bank


                                        2




<PAGE>


opened a branch in Brooklyn, in January 2001, the Bank opened a branch in
downtown Manhattan and in March 2001, as a result of the merger with Goshen
Bank, the Bank acquired two branches in Goshen, NY, a branch in Harriman, NY and
a branch in Bloomingburg, NY. These branches provide the Bank with customary
retail banking offices. On March 22, 2001, the Company purchased a parcel of
land and building located in mid-town Manhattan for a total purchase price of
$3.49 million in cash. In January 2003, the Bank relocated its main office to
and opened a branch at this location.

     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, since the merger with Goshen Bank on March 30, 2001,
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. 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.

     On November 7, 2002, we sold our 24.9% interest in a merchant credit card
processing company for $285,000, which represents our initial purchase price in
December 1999. We accounted for our interest in this company under the equity
method of accounting and have recorded approximately $200,000 in net losses
since December 1999. The purchase price to Berkshire and the amounts owed to the
Bank are being paid in the form of a note to be held by the Bank.

     On March 30, 2001, pursuant to the terms of an Agreement and Plan of
Reorganization dated August 16, 2000 (the "Agreement"), we completed the merger
with GSB Financial Corporation, a Delaware corporation, a savings and loan
holding company ("GSB Financial"), and its wholly-owned subsidiary, Goshen
Savings Bank, a federal savings bank, chartered and existing under the laws of
the United States ("Goshen Bank"). GSB Financial was merged with and into
Berkshire and Goshen Bank was merged with and into The Berkshire Bank. Holders
of the common stock of GSB Financial received $20.75 in cash for each share of


                                        3




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common stock of GSB Financial held by them, or, in the alternative, at their
election, 0.6027 shares of Berkshire's common stock. As a result of this
transaction, 978,032 shares of GSB Financial common stock were converted into
589,460 shares of Berkshire common stock, and 974,338 shares of GSB Financial
common stock were purchased for $20.75 per share, totaling approximately $20.2
million.

     This transaction was accounted for under the purchase method of accounting.
Goodwill of $7.5 million was recorded in the transaction. Effective January 1,
2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill
and Intangible Assets which eliminates the amortization of goodwill and requires
an annual impairment test. As of December 31, 2002, we have completed the
transitional testing of our intangible assets, including goodwill. We did not
identify any impairment on our outstanding goodwill.

     The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of Statement of Financial Accounting Standard No.
142.

<TABLE>
<CAPTION>
                                                 For The Year Ended
                                                    December 31,
                                      ----------------------------------------
                                              2002     2001     2000
                                             ------   ------   -------
                                      (In thousands, except per share amounts)
<S>                                          <C>      <C>      <C>
Reported net income                          $5,597   $3,299   $12,066
Add back: goodwill amortization                  --      935       635
                                             ------   ------   -------
Adjusted net income                          $5,597   $4,234   $12,701
                                             ======   ======   =======

   Basic earnings per share:
Reported basic earnings per share            $ 2.44   $ 1.41   $  5.76
Goodwill amortization                            --      .40       .30
                                             ------   ------   -------
Adjusted basic earnings per share            $ 2.44   $ 1.81   $  6.06
                                             ======   ======   =======

   Diluted earnings per share:
Reported diluted earnings per share          $ 2.43   $ 1.41   $  5.76
Goodwill amortization                            --      .40       .30
                                             ------   ------   -------
Adjusted diluted earnings per share          $ 2.43   $ 1.81   $  6.06
                                             ======   ======   =======
</TABLE>

     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 one subsidiary, Berkshire Agency, Inc., a company engaged in the
title insurance business.

     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 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 now be predicted.

     Bank Holding Company Regulation. The Federal Reserve is authorized to make
regular examinations of the Company and its nonbank subsidiaries. Under federal


                                        4




<PAGE>


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. However, pursuant to
Section 103 of the Gramm-Leach-Bliley Act, the Company may elect, provided it
meets certain conditions, to engage in a significantly broader range of
activities or own shares of companies that engage in such broader activities,
those that are determined to be financial in nature or incidental to such
financial activity or complementary in certain situations, to a financial
activity. The Company has not so elected.

     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.

     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 types. Primary capital
includes common equity, surplus, undivided profits, perpetual preferred stock,
mandatory convertible instruments, the allowance for loan and lease losses,
contingency and other capital reserves, and minority interests in equity
accounts of consolidated subsidiaries. Secondary capital includes limited-life
preferred stock, subordinated notes and debentures and certain unsecured long
term debt.

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

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

     At December 31, 2002 and 2001, the Company satisfied all applicable Federal
Reserve minimum capital requirements.

     Source of Strength Doctrine. It is the Federal Reserve policy that bank
holding companies must serve as a source of financial strength to its subsidiary
depository institutions and must commit all available resources to support such
institutions even if it might not otherwise do so. Although this "source of
strength" policy has been challenged in litigation, the Federal Reserve
continues to take the position that it has authority to enforce it. The Federal
Reserve also has the authority to terminate any activity of the Company that
constitutes a serious risk to the financial soundness or stability of the Bank
or, in extreme cases, to terminate its control of any bank or nonbank
subsidiaries.

     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


                                        5




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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.

     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.

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

     The FDIC requires that the highest rated banks maintain a Tier I leverage
ratio (Tier I capital to adjusted total assets) of at least 3.0%. All other
banks subject to FDIC capital requirements must maintain a Tier I leverage
ration of 4.0% to 5.0% or more. As of December 31, 2002 and 2001, the Bank's
Tier I leverage capital ratio was 7.8% and 9.6%, 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


                                        6




<PAGE>


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, 2002 and 2001, the Bank maintained a 18.5%
and 19.6% Tier I risk-based capital ratio and a 19.4% and 20.4% 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, 2002 and 2001, the Bank was well capitalized under all three of these
standards.

     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
2001 and 2002 calendar years totaled approximately $7.60 million. However, the
ability of Berkshire to pay future dividends is not presently dependent upon the
receipt of dividends from the Bank.

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


                                        7




<PAGE>


     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 (see Item. 2 - Properties for additional
information).

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

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

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

     However, the Bank must pay a share of the cost of the bonds issued in the
late 1980s to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation. The Bank must pay an annual assessment for this purpose, which for
fiscal 2002 was equal to 0.0166% of its insured deposits and which is recorded
as a deposit insurance premium expense for financial statement purposes.
Beginning in 2003, the assessment was revised to 0.0168% 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.


                                        8




<PAGE>


     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,
2002, 2001 and 2000, the Company has been deemed to be a Personal Holding
Company (a "PHC"), as defined in the Internal Revenue Code. As a PHC, we are
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. Accordingly, on December 4, 2001 and November
17, 2000, the Board of Directors of the Company declared cash dividends in the
amounts of $.04 and $.44 per common share, respectively. No such dividend was
required to be paid in fiscal 2002. (See Dividends in Item 5).

     Employees. On March 14, 2003, Berkshire had one full time employee and the
Bank employed approximately 78 full time and 5 part time employees. The Bank's
employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good.

ITEM 2. Properties.

     The following are Berkshire's and the Bank's principal facilities as of
March 14, 2003:

<TABLE>
<CAPTION>
                                        Approximate   Approximate
                                         Floor Area     Annual            Lease
Location               Operations        (Sq. Ft.)       Rent          Expiration
--------           ------------------   -----------   -----------   ----------------
<S>                <C>                     <C>          <C>         <C>
New York, NY       Executive Offices        1,500       $ 18,000    (1)(3)
New York, NY       Main Bank Office
                      and Bank Branch       9,700       Owned       Feb 2008 (4)
Brooklyn, NY       Bank Branch              4,500       $131,000    December 2002
New York, NY       Bank Branch              5,500       $237,000    June 2005 (2)(3)
Goshen, NY         Bank Branch             10,680       Owned
Harriman, NY       Bank Branch              1,623       Owned
Bloomingburg, NY   Bank Branch              1,530       $ 25,000    August 2005
</TABLE>

-------------

(1)  Rented on a month to month basis from a company affiliated with Mr. Moses
     Marx, a director of the Company.

(2)  Leased from a company affiliated with Mr. Marx, a director of the Company.

(3)  Management believes the annual rent paid is comparable to the annual rent
     that would be paid to non-affiliated parties in a similar commercial
     transaction for similar commercial space.

(4)  Leased by the Bank from the Company at a annual rent of $375,000 which
     management believes is comparable to the annual rent that would be paid by
     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 the Bank or
its assets is 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 operations of the Bank.

ITEM 4. Submission of Matters to a Vote of Security Holders.

     Not Applicable.


                                        9




<PAGE>


                                     PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.

     The Company's Common Stock trades on the Nasdaq National Market System
under the symbol ZAPS.

     The following table sets forth, for the periods indicated, the high and low
sales prices for the Company's Common Stock as reported by the National
Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
                                        High      Low
                                       ------   ------
<S>                                    <C>      <C>
Fiscal Year Ended December 31, 2002
-----------------------------------
January 1, 2002 to March 31, 2002      28.74    27.66
April 1, 2002 to June 30, 2002         32.00    27.81
July 1, 2002 to September 30, 2002     32.476   29.62
October 1, 2002 to December 31, 2002   34.31    31.00
</TABLE>

<TABLE>
<CAPTION>
                                        High      Low
                                       -----    ------
<S>                                    <C>      <C>
Fiscal Year Ended December 31, 2001
-----------------------------------
January 1, 2001 to March 31, 2001      34.25    27.438
April 1, 2001 to June 30, 2001         33.00    28.00
July 1, 2001 to September 30, 2001     31.25    25.57
October 1, 2001 to December 31, 2001   30.45    27.14
</TABLE>

     As of the close of business on March 14, 2003, there were approximately
2,151 holders of record of the Company's Common Stock.

Dividends

     For the fiscal years ended December 31, 2002, 2001 and 2000, the Company
has been deemed to be a Personal Holding Company (a "PHC"), as defined in the
Internal Revenue Code. As a PHC, we are 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. Accordingly, on
December 4, 2001 and November 17, 2000, the Board of Directors of the Company
declared cash dividends in the amounts of $.04 and $.44 per common share,
respectively. No such dividend was required to be paid in fiscal 2002.

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

<TABLE>
<CAPTION>
                                                           Per Share
 Declaration Date      Record Date        Payment Date      Amount
------------------   ----------------   ----------------   ---------
<S>                  <C>                <C>                  <C>
March 30,2000        April 14, 2000     April 28, 2000       $.10
September 25, 2000   October 10, 2000   October 24, 2000     $.10
March 8, 2001        April 16, 2001     April 30, 2001       $.10
October 5, 2001      October 19, 2001   October 29, 2001     $.10
April 8, 2002        April 23, 2002     April 30, 2002       $.10
October 4, 2002      October 21, 2002   October 29, 2002     $.12
</TABLE>

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

Equity Compensation Plans

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


                                       10




<PAGE>


ITEM 6. Selected Financial Data.

                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES

                       Five Year Financial Highlights (a)

     The following is a summary of certain financial information with respect to
the Company at and for the fiscal years ended December 31, 2002, 2001 and 2000,
at and for the proforma twelve months ended December 31, 1999 and as of and for
the fiscal year ended October 31, 1999. 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.

<TABLE>
<CAPTION>
                                                 December 31,               October 31,
                                -----------------------------------------   -----------
                                  2002       2001       2000     1999(b)       1999
                                --------   --------   --------   --------   -----------
                                   (Dollars in thousands, except per share data)
<S>                             <C>        <C>        <C>        <C>          <C>
Balance Sheet Data:
Total Assets                    $683,738   $536,365   $244,023   $192,130     $180,986
Loans, net                       273,182    250,010     74,515     64,668       59,652
Investment securities            371,458    242,579    117,060     89,497       82,876
Goodwill, net                     18,549     18,438     11,543     12,073       12,195
Deposits                         473,818    338,776    137,647    104,087      102,318
Stockholders' equity              98,525     95,992     79,107     78,070       73,306

Interest income                   32,242     24,941     14,019      9,852        8,525
Interest expense                  13,416     11,877      5,184      3,101        2,548
                                --------   --------   --------   --------     --------
Net interest income before
   provision for loan losses      18,826     13,064      8,835      6,751        5,977
Provision for loan losses            387        287         55         55           45
                                --------   --------   --------   --------     --------
Net interest income               18,439     12,777      8,780      6,696        5,932
Investment securities gains        1,539        637     13,288     10,731        7,622
Other income                         748        786      1,330        578          633
Other expenses                    10,780      7,838      3,829      3,489        2,948
Amortization of goodwill              --        935        635        730          608
                                --------   --------   --------   --------     --------
Income before income taxes         9,946      5,427     18,934     13,786       10,631
Provision for income taxes         4,349      2,128      6,868      5,527        4,091
                                --------   --------   --------   --------     --------
Net income                      $  5,597   $  3,299   $ 12,066   $  8,259     $  6,540
                                ========   ========   ========   ========     ========
Net income per share:
   Basic                        $   2.44   $   1.41   $   5.76   $   3.88     $   3.08
                                ========   ========   ========   ========     ========
   Diluted                      $   2.43   $   1.41   $   5.76   $   3.65     $   2.89
                                ========   ========   ========   ========     ========
Cash dividends per
   common share                 $    .22   $    .24   $    .64   $    .32     $    .32
                                ========   ========   ========   ========     ========

Selected Operating Ratios
Return on average assets (c)         0.9%       0.8%       5.8%       7.0%         3.9%
Return on average equity (c)         5.9%       3.5%      14.9%      14.6%         6.2%
Net interest margin (c)              3.3%       3.6%       4.7%       4.9%         4.4%
Average equity/average assets       15.6%      23.8%      39.1%      47.9%        48.3%
Allowance for loan
   losses/total loans                0.8%       0.8%       1.5%       1.4%         1.5%
</TABLE>

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

(b)  On December 10, 1999, the Company changed its fiscal year end from
     October 31 to December 31st of each year. This change was effective
     December 31, 1999. For presentation purposes, proforma operations data
     is shown for the twelve months ended December 31, 1999.

(c)  Selected amounts for the two months ended December 31, 1999 were
     annualized to calculate ratios.


                                       11




<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 ("Berkshire", the "Company" or "we"
and similar pronouns) for the fiscal years ended December 31, 2002, 2001 and
2000. 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

     On March 30, 2001, the Company acquired GSB Financial Corporation and its
wholly owned subsidiary, Goshen Savings Bank ("Goshen Bank"). Goshen Bank was
simultaneously merged with and into our wholly owned subsidiary, The Berkshire
Bank (the "Bank"). The Company's historic financial statements included in this
Form 10-K for the twelve months ended December 31, 2001 do not include the
operations of Goshen Bank from January 1, 2001 through March 31, 2001.

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 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 each defined reporting unit. 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, 2002, the Company completed its transitional testing,
which determined that no impairment write-offs were necessary.


                                       12




<PAGE>


     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.

Discussion of Results of Operations

Overview

     Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December
31, 2001. Net income was $5.60 million, or $2.43 per share, for the fiscal year
ended December 31, 2002, compared to $3.30 million, or $1.41 per share, for the
fiscal year ended December 31, 2001, an increase of 69.66%. Investment
securities, loans and total assets increased by 53.13%, 9.31% and 27.48%,
respectively, due in part to the acquisition of GSB Financial on March 30, 2001.

     Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended December
31, 2000. Net income was $3.30 million, or $1.41 per share, for the fiscal year
ended December 31, 2001, compared to $12.07 million, or $5.76 per share, for the
fiscal year ended December 31, 2000. Net income in fiscal 2000 was favorably
impacted by a $13.29 million pre-tax gain on the sale of investment securities
and by a gain of approximately $808,000 as a result of the successful settlement
of certain prior year franchise tax issues.

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.


                                       13




<PAGE>


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

<TABLE>
<CAPTION>
                                               Twelve Months Ended                 Twelve Months Ended
                                                December 31, 2002                   December 31, 2001
                                        ---------------------------------   ---------------------------------
                                                    Interest                            Interest
                                         Average      and        Average     Average      and        Average
                                         Balance   Dividends   Yield/Rate    Balance   Dividends   Yield/Rate
                                        --------   ---------   ----------   --------   ---------   ----------
<S>                                     <C>         <C>           <C>       <C>         <C>           <C>
INTEREST-EARNING ASSETS:
Loans (1)                               $265,961    $18,723       7.04%     $195,296    $15,143       7.75%
Investment securities                    298,008     13,383       4.49       154,787      9,156       5.92
Other (2)(5)                               8,479        136       1.60        15,215        642       4.22
                                        --------    -------       ----      --------    -------       ----
Total interest-earning assets            572,448     32,242       5.63       365,298     24,941       6.83
                                                                  ----                                ----
Noninterest-earning assets                36,541                              32,993
                                        --------                            --------
Total Assets                            $608,989                            $398,291
                                        ========                            ========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits                116,331      1,644       1.41        85,194      2,291       2.69
Time deposits                            273,452      8,766       3.21       155,079      7,867       5.07
Other borrowings                          86,210      3,006       3.49        36,510      1,719       4.71
                                        --------    -------       ----      --------    -------       ----
Total interest-bearing
   liabilities                           475,993     13,416       2.82       276,783     11,877       4.29
                                                    -------       ----                  -------       ----

Demand deposits                           30,102                              21,857
Noninterest-bearing liabilities            7,586                               4,802
Stockholders' equity (5)                  95,308                              94,849
                                        --------                            --------

Total liabilities and
   stockholders' equity                 $608,989                            $398,291
                                        ========                            ========

Net interest income                                 $18,826                             $13,064
                                                    =======                             =======

Interest-rate spread (3)                                          2.81%                               2.54%
                                                                  ====                                ====

Net interest margin (4)                                           3.29%                               3.58%
                                                                  ====                                ====

Ratio of average interest-earning
   assets to average interest bearing
   liabilities                              1.20                                1.32
                                        ========                            ========

<CAPTION>
                                               Twelve Months Ended
                                                December 31, 2000
                                        ---------------------------------
                                                    Interest
                                         Average      and        Average
                                         Balance   Dividends   Yield/Rate
                                        --------   ---------   ----------
<S>                                     <C>         <C>           <C>
INTEREST-EARNING ASSETS:
Loans (1)                               $ 70,357    $ 6,397       9.09%
Investment securities                     90,918      6,381       7.01
Other (2)(5)                              27,410      1,241       4.53
                                        --------    -------       ----
Total interest-earning assets            188,685     14,019       7.43
                                                                  ----
Noninterest-earning assets                18,237
                                        --------
Total Assets                            $206,922
                                        ========

INTEREST-BEARING LIABILITIES:
Interest bearing deposits                 49,036      1,845       3.76
Time deposits                             42,158      2,499       5.93
Other borrowings                          14,277        840       5.88
                                        --------    -------       ----
Total interest-bearing
   liabilities                           105,471      5,184       4.92
                                                    -------       ----

Demand deposits                           14,848
Noninterest-bearing liabilities            5,652
Stockholders' equity (5)                  80,951
                                        --------

Total liabilities and
   stockholders' equity                 $206,922
                                        ========

Net interest income                                 $ 8,835
                                                    =======

Interest-rate spread (3)                                          2.51%
                                                                  ====

Net interest margin (4)                                           4.68%
                                                                  ====

Ratio of average interest-earning
   assets to average interest bearing
   liabilities                              1.79
                                        ========
</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.


                                       14




<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):

<TABLE>
<CAPTION>
                               Twelve Months Ended December 31, 2002
                                               Versus
                               Twelve Months Ended December 31, 2001
                                     Increase (Decrease) Due To
                               -------------------------------------
                                   Rate        Volume        Total
                                 -------      -------       ------
<S>                              <C>          <C>           <C>
Interest-earning assets:
   Loans                         $(1,395)     $ 4,975       $3,580
   Investment securities          (2,204)       6,431        4,227
   Other                            (399)        (107)        (506)
                                 -------      -------       ------
Total                             (3,998)      11,299        7,301
                                 -------      -------       ------

Interest-bearing liabilities:
Deposit accounts:
   Interest bearing deposits      (1,090)         443         (647)
   Time deposits                  (2,884)       3,783          899
   Other borrowings                 (449)       1,736        1,287
                                 -------      -------       ------
Total                             (4,423)       5,962        1,539
                                 -------      -------       ------

Net interest income              $   425      $ 5,337       $5,762
                                 =======      =======       ======
</TABLE>

<TABLE>
<CAPTION>
                               Twelve Months Ended December 31, 2001
                                               Versus
                               Twelve Months Ended December 31, 2000
                                     Increase (Decrease) Due To
                               -------------------------------------
                                   Rate        Volume        Total
                                 -------      -------      -------
<S>                              <C>          <C>          <C>
Interest-earning assets:
   Loans                         $  (943)     $ 9,689      $ 8,746
   Investment securities            (991)       3,768        2,777
   Other                             (88)        (513)        (601)
                                 -------      -------      -------
Total                             (2,022)      12,944       10,922
                                 -------      -------      -------

Interest-bearing liabilities:
   Deposit accounts:
   Interest bearing deposits        (525)         971          446
   Time deposits                    (363)       5,731        5,368
   Other borrowings                 (167)       1,046          879
                                 -------      -------      -------
Total                             (1,055)       7,748        6,693
                                 -------      -------      -------

Net interest income              $  (967)     $ 5,196      $ 4,229
                                 =======      =======      =======
</TABLE>


                                       15




<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.

     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 Company maintains an allowance for loan losses at a level deemed
sufficient to absorb losses, which are inherent in the loan portfolio at each
balance sheet date. Management reviews the adequacy of the allowance on at least
a quarterly basis to ensure that the provision for loan losses has been charged
against earnings in an amount necessary to maintain the allowance at a level
that is appropriate based on management's assessment of estimated losses. The
Company's methodology for assessing the appropriateness of the allowance for
loan losses consists of several key elements. These elements include a specific
allowance for loan watch list classified loans, an allowance based on historical
trends, an additional allowance for special circumstances, and an unallocated
portion. The Company consistently applies the following comprehensive
methodology.

     The allowance for loan watch list classified loans addresses those loans
maintained on the Company's loan watch list, which are assigned a rating of
substandard, doubtful, or loss. Substandard loans are those with a well-defined
weakness or a weakness, which jeopardizes the repayment of the debt. A loan may
be classified as substandard as a result of impairment of the borrower's
financial condition and repayment capacity. Loans for which repayment plans have
not been met or collateral equity margins do not protect the Company may also be
classified as substandard. Doubtful loans have the characteristics of
substandard loans with the added characteristic that collection or liquidation
in full, on the basis of presently existing facts and conditions, is highly
improbable. Although the possibility of loss is extremely high for doubtful
loans, the classification of loss is deferred until pending factors, which might
improve the loan, have been determined. Loans rated as doubtful in whole or in
part are placed in nonaccrual status. Loans, which are classified as loss, are
considered uncollectible and are charged to the allowance for loan losses. There
were $59,000 of classified loans at December 31, 2002 and no loans classified as
of December 31, 2001 and 2000.

     Loans on the loan watch list may also be impaired loans, which are defined
as nonaccrual loans or troubled debt restructurings, which are not in compliance
with their restructured terms. Each of the classified loans on the loan watch
list is individually analyzed to determine the level of the potential loss in
the loan under the current circumstances. The specific reserve established for
these criticized and impaired loans is based on careful analysis of the loan's
performance, the related collateral value, cash flow considerations and the
financial capability of any guarantor. The allowance for loan watch list
classified loans is equal to the total amount of potential unconfirmed losses
for


                                       16




<PAGE>


the individual classified loans on the watch list. Loan watch list loans are
managed and monitored by assigned Senior Management.

     The allowance based on historical trends uses charge-off experience of the
Company to estimate potential unconfirmed losses in the balances of the loan and
lease portfolios. The historical loss experience percentage is based on the
charge-off history. Historical loss experience percentages are applied to all
non-classified loans to obtain the portion of the allowance for loan losses
which is based on historical trends. Before applying the historical loss
experience percentages, loan balances are reduced by the portion of the loan
balances, which are subject to guarantee, by a government agency. Loan balances
are also adjusted for unearned discount on installment loans.

     The Company also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan loss but are not specifically identifiable. It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed these estimates by definition
lack precision. Management must make estimates using assumptions and
information, which is often subjective and changing rapidly.

     Since all identified losses are immediately charged off, no portion of the
allowance for loan losses is restricted to any individual loan or groups of
loans, and the entire allowance is available to absorb any and all loan losses.

     A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in doubt. Past
due loans are those loans which were contractually past due 90 days or more as
to interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.

Results of Operations Fiscal Year Ended December 31, 2002 Compared to Fiscal
Year Ended December 31, 2001.

General. On March 30, 2001, Berkshire, through its wholly-owned subsidiaries,
the Bank and Greater American Finance Group, Inc., completed its merger with GSB
Financial (see Note A of Notes to Consolidated Financial Statements). This
transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operation for the Company include only the results
of operation of GSB Financial for the nine month period from April 1 through
December 31, 2001. The Company acquired total loans, assets and deposits of
$134.06 million, $190.04 million and $127.86 million, respectively.

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

Net Income. Net income for the fiscal year ended December 31, 2002 was $5.60
million, or $2.43 per share, as compared to $3.30 million, or $1.41 per share,
for the fiscal year ended December 31, 2001. The increase was due in part to the
acquisition of GSB Financial referenced above.

     On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, thereby eliminating annual goodwill amortization
expense of approximately $1.0 million. Had SFAS No. 142 been in effect on
January 1, 2001, net income in fiscal 2001 would have been $4.23 million, or
$1.81 per share.

     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 risks inherent in the banking business. Interest rates, as
measured by the prime rate, stabilized at 4.75% throughout the first ten months
of 2002. During 2001, in contrast, the prime rate declined from 9.00% at the
beginning of the year to 4.75% at years' end.


                                       17




<PAGE>


Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets and interest
expense on interest-bearing liabilities.

     For the fiscal year ended December 31, 2002, net interest income increased
by approximately $5.76 million, or 44.11%, to $18.83 million from $13.06 million
for the fiscal year ended December 31, 2001. The year over year increase in net
interest income was the result of two factors. Firstly, the $207.15 million, or
56.71%, increase in average interest-earning assets to $572.45 million from
$365.30 million in fiscal 2001, partially offset by the $199.21 million, or
71.97%, increase in average interest-bearing liabilities to $475.99 million from
$276.78 million in fiscal 2001. The second factor contributing to the increase
in net interest income was the difference between the yield on assets compared
to the cost of liabilities. The average yield on interest-earning assets in 2002
declined to 5.63% from 6.83% in 2001, a decline of 120 basis points, or 17.57%,
however, the average cost of interest-bearing liabilities in 2002 declined to
2.82% from 4.29%, a steeper decline of 147 basis points, or 34.27% The
interest-rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest bearing liabilities,
which has a direct bearing on net interest income, improved to 2.81% in fiscal
2002 from 2.54% in fiscal 2001.

Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, declined to 3.29% in fiscal 2002
from 3.58% in fiscal 2001.

     During fiscal 2002, the Company made use of the prevailing interest rate
environment to secure deposits and to borrow funds at what we believe to be
attractive rates, and to invest such funds in loans and investment securities.
The average amounts of loans and investment securities increased by $70.67
million and $143.22 million, respectively, to $265.96 million and $298.01
million, respectively, in fiscal 2002 from $195.30 million and $154.79 million,
respectively, in fiscal 2001. Time deposits and borrowings increased by $118.37
million and $49.70 million, respectively, during 2002 to $273.45 million and
$86.21 million, respectively, from $155.08 million and $36.51 million,
respectively, during 2001.

Interest Income. Total interest income for the fiscal year ended December 31,
2002 increased by $7.30 million, or 29.27%, to $32.24 million from $24.94
million for the fiscal year ended December 31, 2001. The increase was the result
of the higher levels of average interest-earning assets during fiscal 2002 over
fiscal 2001. The average amount of loans and investment securities increased by
36.18% and 92.53%, respectively, contributing $18.72 million and $13.38 million
of interest income, respectively, compared to $15.14 million and $9.16 million
of interest income, respectively, in fiscal 2001.

     As may be expected during a period of falling interest rates, the average
yield on interest-earning assets declined to 5.63% during fiscal 2002 from 6.83%
in fiscal 2001. The average yield on loans declined to 7.04% from 7.75% and we
expect this trend may continue as homeowners refinance their existing mortgage
loans, commercial loans at higher rates are paid off and/or renewed, and new
mortgage loans and commercial loans are made, all at today's lower rates. The
average yield on investment securities has declined as well, to 4.49% in 2002
from 5.92% in 2001, as securities in our portfolio with above market rates have
either matured or have been called by the issuer, and have been replaced by
securities that meet our investment policy criteria, albeit with lower yields.

Interest Expense. Total interest expense for the fiscal year ended December 31,
2002 increased by $1.54 million, to $13.42 million from $11.88 million for the
fiscal year ended December 30, 2001. The increase is due to the overall increase
of $199.21 million in the average amount of interest-bearing liabilities to
$475.99 million in fiscal 2002 from $276.78 million in fiscal 2001. Interest
bearing deposits and time deposits increased by 62.23% to $389.78 million in
2002 from $240.27 million in 2001. Borrowings increased by 136.13% to $86.21
million in 2002 from $36.51 million in 2001 as a result of our strategy of
employing excess capital to fund the growth of our business. The increase in
total interest expense was partially offset by the decline in the average rates
paid on interest-bearing liabilities to 2.82% during the 2002 period from 4.29%
during the 2001 period.


                                       18




<PAGE>


Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of investment securities and service fee income. For the fiscal year ended
December 31, 2002, total non-interest income was $2.29 million, compared to
$1.42 million for the fiscal year ended December 31, 2001. Service fee income
increased to $548,000 in fiscal 2002 from $395,000 in fiscal 2001 as a result of
the growth in deposits at the Bank. Investment securities gains increased to
$1.54 million in 2002 from $637,000 in 2001, and other non-interest income
declined to $200,000 in 2002 from $391,000 in 2001.

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 fiscal year ended December 31, 2002
was $10.78 million as compared to $8.77 million for the fiscal year ended
December 31, 2001. The year to year increases are due primarily to increases in
salaries and employee benefits and net occupancy expenses resulting from the
expansion of the business.

Provision for Income Tax. During the fiscal year ended December 31, 2002, the
Company recorded income tax expense of $4.35 million, compared to income tax
expense of $2.13 million for the fiscal year ended December 31, 2001. The tax
provisions for federal, state and local taxes recorded for fiscal 2002 and 2001
represent effective tax rates of 43.73% and 39.21%, respectively. The increase
in the effective rate is primarily due to the elimination of the non-deductible
amortization expense of goodwill.

Results of Operations Fiscal Year Ended December 31, 2001 Compared to Fiscal
Year Ended December 31, 2000.

Net Income. Net income for the fiscal year ended December 31, 2001 was $3.30
million, or $1.41 per share, as compared to $12.07 million, or $5.76 per share,
for the fiscal year ended December 31, 2000.

     Net income in 2000 was favorably impacted by the pretax gain of $13.29
million on sales of the common stock of Elottery, Inc. and is not representative
of the Company's ongoing business. The Company acquired its shares of Elottery,
Inc. common stock as described below.

Net Interest Income. The Company's primary source of revenue is net interest
income, or the difference between interest income on earning assets and interest
expense on interest-bearing liabilities. The declining interest rate environment
that prevailed during 2001 was in contrast with the increasing interest rate
environment that existed during 2000.

     In fiscal 2001, net interest income increased by $4.22 million, or 47.74%,
to $13.06 million from $8.84 million in fiscal 2000. The increase was the result
of the growth in average interest-earning assets of $176.61 million, partially
offset by the growth in average interest-bearing liabilities of $171.31 million.
The increases in average interest-earning assets and interest-bearing
liabilities were primarily due to the acquisition of GSB Financial on March 30,
2001. Net interest rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest bearing liabilities,
improved slightly to 2.54% in 2001, from 2.51% in 2000. The increase in net
interest rate spread resulted from a 63 basis point decrease in the average cost
of interest-bearing liabilities to 4.29% in 2001, from 4.92% in 2000, partly
offset by a 60 basis point decrease in the average yield on interest-earning
assets to 6.83% in 2001, from 7.43% in 2000.

Net Interest Margin. Net interest margin, or annualized net interest income as a
percentage of average interest-earning assets, was 3.58% for the fiscal year
ended December 31, 2001 as compared to 4.68% for the fiscal year ended December
31, 2000. The decrease in net interest margin during fiscal 2001 was primarily
due to the acquisition of GSB Financial whose loan portfolio is made up
primarily of 1-4 family mortgage loans with annual yields less than previously
earned by Berkshire and by the sharply declining interest rate environment. The
decrease in net interest margin was partially offset by the increase in the
average amounts of interest-earning assets to $365.30 million in fiscal 2001
from $188.66 million in fiscal 2000.


                                       19




<PAGE>


Interest Income. Total interest income for the fiscal year ended December 31,
2001 increased by $10.92 million, or 77.89%, to $24.94 million from $14.02
million for the fiscal year ended December 31, 2000. The increase was the result
of a 93.63% increase in the average amounts of interest-earning assets in fiscal
2001, partially offset by a 60 basis point or 8.08% decrease in the average
yield on interest-earning in fiscal 2001. The increase in the average amounts of
interest-earning assets was due primarily to the acquisition of GSB Financial.

     Interest income on loans increased by $8.74 million, or 136.56%, to $15.14
million in fiscal 2001, from $6.40 million in fiscal 2000. The increase is due
to an increase of $124.94 million in average loans balances, partially offset by
the decrease in the average yield on loans to 7.75% in fiscal 2001 from 9.09% in
fiscal 2000. Interest income on investment securities increased $2.78 million,
or 43.57%, to $9.16 million in 2001, from $6.38 million in 2000. The increase is
due to an increase of $63.87 million in the average balance of investment
securities, partially offset by a decrease in the average yield on investments
to 5.92% in 2001, from 7.01% in 2000.

Interest Expense. Total interest expense for the fiscal year ended December 31,
2001 increased by $6.70 million, or 129.34%, to $11.88 million, from $5.18
million for the fiscal year ended December 31, 2000. The increase was the result
of a $171.31 million increase in the average amounts of interest-bearing
liabilities to $276.78 million in fiscal 2001 from $105.47 million in fiscal
2000, partially offset by the 63 basis point, 12.80% decrease in the average
rate paid on interest-bearing liabilities to 4.29% in 2001 from 4.92% in 2000.

     The increase in interest-bearing liabilities, comprised of interest bearing
deposits, time deposits and borrowings, was attributable to the acquisition of
GSB Financial and our strategy of employing excess capital to fund growth. The
year to year increase in the overall costs of interest-bearing liabilities was
partially offset by the declining interest rate environment during 2001, which
serves to lower the rates paid by the Bank to attract and retain deposit
accounts, and reduces the rates paid for borrowed funds.

     Interest expense on interest-bearing deposits, money market and savings
accounts, increased by approximately $446,000, or 23.78%, to $2.29 million for
the 2001 fiscal year from $1.85 million for the 2000 fiscal year. The increase
is due to higher average balances, $85.19 million in 2001 compared to $49.04
million in 2000, partially offset by a decrease in average rates paid on
interest-bearing deposits to 2.69% from 3.76%. Interest expense on time deposits
increased by $5.37 million, or 214.80%, to $7.87 million in 2001 from $2.50
million in 2000. The increase is due to an increase of $112.92 million, or
267.84%, in the average balance of time deposits to $155.08 million in fiscal
2001 from $42.16 million in fiscal 2000, partially offset by a decrease in the
average rates paid, 5.07% in 2001 and 5.93% in 2000. Interest expense on
borrowings increased by approximately $880,000, to $1.72 million in 2001, from
$840,000 in 2001 due to higher average balances, $36.51 million compared to
$14.28 million, partially offset by the lower average cost of borrowed funds.

Non-Interest Income. Non-interest income consists primarily of realized gains on
sales of marketable securities, loan sales and service fee income. For the
fiscal year ended December 31, 2001, total non-interest income was $1.42
million, compared to $14.62 million for the fiscal year ended December 31, 2000.
Non-interest income in 2000 included $13.29 million of non-recurring realized
gains on sales of marketable securities and $808,000 as a result of the
successful settlement of certain prior year franchise tax issues.

Non-Interest Expense. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees,
amortization of goodwill and other operating expenses associated with the
day-to-day operations of the Company. Total non-interest expense for the fiscal
year ended December 31, 2001 was $8.77 million, compared to $4.46 million for
the fiscal year ended December 31, 2000. The year to year increases are due
primarily to increases of $2.03 million in salaries and employee benefits,
$723,000 in occupancy expenses, $100,000 in equipment expenses and $300,000 in
amortization expenses resulting from the acquisition of GSB Financial, and the
amortization of the goodwill recorded in said acquisition.


                                       20




<PAGE>


Provision for Income Tax. During the fiscal year ended December 31, 2001, the
Company recorded income tax expense of $2.13 million, compared to income tax
expense of $6.87 million for the fiscal year ended December 31, 2000. The tax
provisions for federal, state and local taxes recorded for fiscal 2001 and 2000
represent effective tax rates of 39.21% and 36.27%, respectively. The increase
in the effective rate is due to the increase in non-deductible goodwill
amortization relating to the acquisition of GSB Financial in 2001 and tax
advantageous investment securities sold by the Company during 2000.

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 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 the Federal Home Loan Mortgage Corporation (Freddy Mac), the Federal
National Mortgage Association (Fanny Mae) or the Government National Mortgage
Association (Ginny 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.

     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,
                             -------------------------------------------------------------
                                    2002                  2001                 2000
                             -------------------   -------------------   -----------------
                                          Fair                  Fair                Fair
                               Cost       Value      Cost       Value      Cost     Value
                             --------   --------   --------   --------   -------   -------
                                                     (In thousands)
<S>                          <C>        <C>        <C>        <C>        <C>       <C>
   Available-For-Sale
U.S. Treasury Notes          $ 20,110   $ 20,213   $ 30,012   $ 30,038   $    --   $    --
U.S. Government Agencies      301,224    303,597    170,610    170,156    86,064    85,952
Mortgage-backed securities      6,256      6,262      2,493      2,499     4,208     4,199
Corporate notes                 3,878      4,076        751        639     1,654     1,313
Marketable equity
   securities and other        36,383     36,477     37,547     37,634     4,813     4,845
                             --------   --------   --------   --------   -------   -------
Total                        $367,851   $370,625   $241,413   $240,966   $96,739   $96,309
                             ========   ========   ========   ========   =======   =======
   Held-To-Maturity
U.S. Government Agencies     $    833   $    835   $  1,613   $  1,598   $   296   $   294
Corporate notes                    --         --         --         --    20,455    20,408
                             --------   --------   --------   --------   -------   -------
Total                        $    833   $    835   $  1,613   $  1,598   $20,751   $20,702
                             ========   ========   ========   ========   =======   =======
</TABLE>


                                       21




<PAGE>


     The following tables summarize the Company's available-for-sale and held-
to-maturity securities at December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                  December 31, 2002
                                          --------------------------------
                                          Weighted
                                           Average
                                            Yield      Cost     Fair Value
                                          --------   --------   ----------
                                               (Dollars in thousands)
<S>                                          <C>     <C>         <C>
Available-For-Sale
   U.S. Treasury Notes
Due after one year through five years        2.11%   $ 20,110    $ 20,213

                                                     --------    --------
                                                       20,110      20,213
                                                     --------    --------
   U.S. Government Agencies Obligations
Due within one year                                        --          --
Due after one year through five years        3.96     120,681     121,562
Due after five years through ten years       4.67     127,261     128,369
Due after ten years                          4.45      53,282      53,666
                                                     --------    --------
                                                      301,224     303,597
                                                     --------    --------
   Municipal Obligations
Due after ten years                          4.95       1,025       1,092
                                                     --------    --------
                                                        1,025       1,092
                                                     --------    --------
   Mortgage-backed securities
Due after ten years                          7.03       6,256       6,262
                                                     --------    --------
                                                        6,256       6,262
                                                     --------    --------
   Corporate Notes
Due within one year                          6.41       1,078       1,051
Due after one year through five years       32.14       2,676       3,022
Due after five years through ten years      15.29         124           3
                                                     --------    --------
                                                        3,878       4,076
                                                     --------    --------

   Common Stocks                               --          50          51
   Preferred Stocks                          9.71       3,098       3,124
   Money market funds                        1.39      29,325      29,325
   Federal Home Loan Bank Stock              5.58       2,885       2,885
                                                     --------    --------
                                                       35,358      35,385
                                                     --------    --------
                                                     $367,851    $370,625
                                                     ========    ========
Held-To-Maturity
   U.S. Government Agencies Obligations
Due after five years through ten years       3.33         168         169
Due after ten years                          6.37         665         666
                                                     --------    --------
                                                     $    833    $    835
                                                     ========    ========
</TABLE>

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, 2002, 2001 and 2000 , the Company had total loans of
$276.25 million, $252.23 million and $75.62 million, respectively, and an
allowance for loan losses of $2.32 million, $2.03 million and $1.11 million,
respectively. From time to time, the Bank may originate residential mortgage
loans and then sell them on the secondary market, normally recognizing fee
income in connection with the sale.


                                       22




<PAGE>


     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
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, 2002 and 2001,
approximately $180.73 million and $165.20 million, respectively, or 65.4% and
65.5%, respectively, of the Company's total loan portfolio consisted of such
loans as compared to approximately $25.68 million, or 34.0%, at December 31,
2000. The increase is due largely to the March 2001 acquisition of GSB
Financial, whose loan portfolio consisted primarily of residential mortgage


                                       23




<PAGE>


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, 2002 and 2001,
approximately 10% and 13%, respectively, of the Bank's residential one-to-four
family owner-occupied first mortgage portfolio were ARMs and approximately 88%
and 87%, 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, telephone inquiries, advertising, the efforts of the Bank's
loan officers, and referrals from other borrowers and real estate brokers and
builders. The Bank originates loans primarily through its own efforts.
Occasionally, the Bank may obtain loan opportunities as a result of referrals
from loan brokers.

     At December 31, 2002, the Bank's total capital, net of goodwill and loan
loss reserves, was approximately $53.7 million and thus it was generally not
permitted to make loans to one borrower in excess of approximately $8.1 million,
with an additional amount of approximately $5.4 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 $8.1
million. At December 31, 2002, the Bank was in compliance with these standards.


                                       24




<PAGE>


     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.

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

<TABLE>
<CAPTION>
                                              December 31,
                         -----------------------------------------------------
                               2002               2001               2000
                         ----------------   ----------------   ---------------
                                     % of               % of              % of
                          Amount    Total    Amount    Total    Amount   Total
                         --------   -----   --------   -----   -------   -----
                                              (Dollars in thousands)
<S>                      <C>        <C>     <C>        <C>     <C>       <C>
Commercial and
   professional loans    $ 16,704     6.0%  $ 19,130     7.6%  $ 9,419    12.5%
Secured by real estate
   1 - 4 family           180,730    65.4    165,195    65.5    25,677    34.0
   Multi family             8,958     3.2     11,186     4.4     4,765     6.3
   Non-residential
      (commercial)         65,809    23.8     51,893    20.6    34,968    46.2
Consumer                    4,051     1.6      4,689     1.8       229     0.3
Other                          --      --        140     0.1       565     0.7
                         --------   -----   --------   -----   -------   -----

Total loans               276,252   100.0%   252,233   100.0%   75,623   100.0%
                                    =====              =====             =====

Less:
Allowance for
loan losses                (2,315)            (2,030)           (1,108)
Unearned fees                (755)              (193)             (275)
                         --------           --------           -------
Loans, net               $273,182           $250,010           $74,240
                         ========           ========           =======
</TABLE>


                                       25




<PAGE>


<TABLE>
<CAPTION>
                                           October 31,
                               ---------------------------------
                                   1999 (1)          1998 (1)
                               ---------------   ---------------
                                     (Dollars in thousands)
                                          % of              % of
                                Amount   Total    Amount   Total
                               -------   -----   -------   -----
<S>                            <C>       <C>     <C>       <C>
Commercial and
   professional loans          $ 6,824    11.3%  $ 3,548     8.9%
Secured by real
   estate                       51,300    84.7    33,015    82.9
Personal                         1,932     3.2     1,970     5.0
Other                              501     0.8     1,264     3.2
                               -------   -----   -------

Total loans                     60,557   100.0%   39,797   100.0%
                                         =====             =====

Less:
   Allowance for loan losses      (905)             (803)
                               -------           -------

Loans, net                     $59,652           $38,994
                               =======           =======
</TABLE>

(1)  Information is prepared on a proforma basis for comparability purposes.
     Balances stated are not reflected in the historical financial statements of
     the Company.

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 approximately $0 and $58,000 of loans past
due more than 90 days still accruing at December 31, 2002 and 2001,
respectively.

<TABLE>
<CAPTION>
                               December 31,         October 31,
                            ------------------   -----------------
                            2002   2001   2000   1999(1)   1998(1)
                            ----   ----   ----   -------   -------

                                       (Dollars in thousands)
<S>                          <C>    <C>    <C>     <C>       <C>
Nonaccrual loans:
Commercial and               $      $ 9    $--     $ --      $ --
   professional loans
Secured by real estate        59     --     --      121        30
                             ---    ---    ---     ----      ----
Total nonaccrual loans        59      9     --      121        30
                             ---    ---    ---     ----      ----
Total nonperforming loans    $59    $ 9    $--     $121      $ 30
                             ===    ===    ===     ====      ====
Total nonperforming loans
   to total assets            --     --     --      .07%      .08%
                             ===    ===    ===     ====      ====
</TABLE>

(1)  Information is prepared on a proforma basis for comparability purposes.
     Balances stated are not reflected in the historical financial statements of
     the Company.


                                       26




<PAGE>


     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):

<TABLE>
<CAPTION>
                                    December 31, 2002
                          ------------------------------------
                          Allowance
                           for Loan   Percent of   Percent of
                            Losses     Allowance   Total Loans
                          ---------   ----------   -----------
<S>                         <C>         <C>           <C>
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%
                            ======      =====         ====
</TABLE>

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

<TABLE>
<CAPTION>
                                    December 31, 2001
                          ------------------------------------
                          Allowance
                           for Loan   Percent of   Percent of
                            Losses     Allowance   Total Loans
                          ---------   ----------   -----------
<S>                         <C>         <C>           <C>
Commercial and
   professional loans       $  188        9.3%        0.07%
Secured by real estate
   1 - 4 family                804       39.6         0.32
   Multi family                 84        4.1         0.03
   Non-residential             790       38.9         0.32
Consumer and other              24        1.2         0.06
General allowance (1)          140        6.9         0.06
                            ------      -----         ----
Total allowance
   for loan losses          $2,030      100.0%        0.79%
                            ======      =====         ====
</TABLE>

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

<TABLE>
<CAPTION>
                                    December 31, 2000
                          ------------------------------------
                          Allowance
                           for Loan   Percent of   Percent of
                            Losses     Allowance   Total Loans
                          ---------   ----------   -----------
<S>                         <C>         <C>           <C>
Commercial and
   professional loans       $   89        8.0%        0.12%
Secured by real estate         654       59.0         0.86
Personal and other              13        1.2         0.02
General allowance (1)          352       31.8         0.47%
                            ------      -----         ----
Total allowance
   for loan losses          $1,108      100.0%        1.47%
                            ======      =====         ====
</TABLE>

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


                                       27




<PAGE>


<TABLE>
<CAPTION>
                                     October 31, 1999(2)
                          ------------------------------------
                          Allowance
                           for Loan   Percent of   Percent of
                            Losses     Allowance   Total Loans
                          ---------   ----------   -----------
<S>                         <C>         <C>           <C>
Commercial and
   professional loans       $ 69          7.6%        0.11%
Secured by real estate       569         63.0         0.94
Personal and other            77          8.5         0.13
General allowance (1)        190         20.9         0.31
                            ----        -----         ----
Total allowance
   for loan losses          $905        100.0%        1.49%
                            ====        =====         ====
</TABLE>

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

(2)  Information is prepared on a proforma basis for comparability purposes.
     Balances stated are not reflected in the historical financial statements of
     the Company.

<TABLE>
<CAPTION>
                                    October 31, 1998(2)
                          ------------------------------------
                          Allowance
                           for Loan   Percent of   Percent of
                            Losses     Allowance   Total Loans
                          ---------   ----------   -----------
<S>                         <C>         <C>           <C>
Commercial and
   professional loans       $ 35          4.4%        0.09%
Secured by real estate       394         49.1         0.99
Personal and other            34          4.2         0.09
General allowance (1)        340         42.3         0.85
                            ----        -----         ----
Total allowance
   for loan losses          $803        100.0%        2.02%
                            ====        =====         ====
</TABLE>

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

(2)  Information is prepared on a proforma basis for comparability purposes.
     Balances stated are not reflected in the historical financial statements of
     the Company.

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

<TABLE>
<CAPTION>
                                     December 31, 2002
                           -------------------------------------
                            Within    1 to      After
                            1 Year   5 Years   5 Years    Total
                           -------   -------   -------   -------
                                       (In thousands)
<S>                        <C>       <C>       <C>       <C>
Fixed Rate
Commercial, financial
   and agricultural        $ 2,204   $ 8,083   $20,858   $31,145
Real estate-construction        --     1,099       386     1,485
                           -------   -------   -------   -------
Total fixed rate           $ 2,204   $ 9,182   $21,244   $32,630
                           -------   -------   -------   -------

Adjustable Rate
Commercial, financial
   and agricultural         31,784     6,723       100    38,607
Real estate-construction       506     2,350        --     2,856
                           -------   -------   -------   -------
Total adjustable rate      $32,290   $ 9,073   $   100   $41,463
                           -------   -------   -------   -------
Total                      $34,494   $18,255   $21,344   $74,093
                           =======   =======   =======   =======
</TABLE>


                                       28




<PAGE>


     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>
                                                                         Two Months    Year Ended
                                                                           Ended       October 31,
                                           Years Ended December 31,     December 31,       (1)
                                        -----------------------------   ------------   -----------
                                          2002       2001       2000         1999         1999
                                        --------   --------   -------   ------------   -----------
<S>                                     <C>        <C>        <C>          <C>           <C>
Average loans outstanding               $265,961   $195,296   $70,357      $61,691       $48,387
                                        ========   ========   =======      =======       =======

Allowance at beginning of period           2,030      1,108       923          905           803
Charge-offs:
   Commercial and other loans                199         97        --           --            --
   Real estate loans                          --         --        --           --            31
                                        --------   --------   -------      -------       -------
      Total loans charged-off                199         97        --           --            31
                                        --------   --------   -------      -------       -------
Recoveries:
   Commercial and other loans                 97         41       130            8            78
   Real estate loans                          --         --        --           --            --
                                        --------   --------   -------      -------       -------
      Total loans recovered                   97         41       130            8            78
                                        --------   --------   -------      -------       -------
      Net recoveries (charge-offs)          (102)       (56)      130            8            47
                                        --------   --------   -------      -------       -------
Provision for loan losses charged
   to operating expenses                     387        287        55           10            55
Acquisition of GSB                            --        691        --           --            --
                                        --------   --------   -------      -------       -------
Allowance at end of period              $  2,315   $  2,030   $ 1,108      $   923       $   905
                                        --------   --------   -------      -------       -------
Ratio of net recoveries (charge-
   offs) to average loans
   outstanding (2)                          (.03)%     (.02)%     .18%         .08%          .09%
                                        ========   ========   =======      =======       =======
Allowance as a percent of total loans       0.83%      0.80%     1.47%        1.41%         1.49%
                                        ========   ========   =======      =======       =======
Total loans at end of period            $276,252   $252,233   $75,623      $65,591       $60,557
                                        ========   ========   =======      =======       =======
</TABLE>

(1)  Information is prepared on a proforma basis for comparability purposes.
     Balances stated are not reflected in the historical financial statements of
     the Company.

(2)  Net recoveries have been annualized to calculate ratios for comparability
     purposes.

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.


                                       29




<PAGE>


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

<TABLE>
<CAPTION>
                                               December 31,
                       ------------------------------------------------------------
                              2002                 2001                 2000
                       ------------------   ------------------   ------------------
                        Average   Average    Average   Average    Average   Average
                        Amount     Yield     Amount     Yield     Amount     Yield
                       --------   -------   --------   -------   --------   -------
                                          (Dollars in thousands)
<S>                    <C>         <C>      <C>         <C>      <C>         <C>
Demand deposits        $ 30,102      --     $ 21,857      --     $ 14,848      --
NOW and money market     60,114    1.28%      51,026    2.64%      44,582    3.85%
Savings deposits         56,217    1.56       34,168    2.69        4,454    2.93
Time deposits           273,452    3.21      155,079    5.07       42,158    5.93
                       --------    ----     --------    ----     --------    ----
Total deposits         $419,885    2.48%    $262,130    3.89%    $106,042    4.08%
                       ========    ====     ========    ====     ========    ====
</TABLE>

     The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $108.72 million, $68.88 million and
$55.32 million at December 31, 2002, 2001 and 2000, respectively.

     The following table summarizes the maturity distribution of time deposits
of $100,000 or more as of the dates indicated:

<TABLE>
<CAPTION>
                                      December 31,
                                     --------------
                                          2002
                                     --------------
                                     (In thousands)
<S>                                     <C>
3 months or less                        $ 44,472
Over 3 months but within 6 months         36,898
Over 6 months but within 12 months        25,624
Over 12 months                             1,727
                                        --------
Total                                   $108,721
                                        ========
</TABLE>

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:

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                            ---------------------------
                                             2002      2001      2000
                                            -------   -------   -------
                                              (Dollars in thousands)
<S>                                         <C>       <C>       <C>
Securities sold under repurchase
   agreements and federal funds purchased

   Balance at year-end                      $46,673   $53,756   $23,127
   Average during the year                  $38,443   $13,372   $12,367
   Maximum month-end balance                $47,407   $53,756   $24,495
   Weighted average rate during the year       1.79%     3.62%     5.85%
   Rate at December 31                         1.46%     1.67%     5.75%
</TABLE>


                                       30




<PAGE>


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 Berkshire 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 shareholder dividends, when and
if declared by our Board of Directors. We paid cash dividends of $.22 per share,
$.24 per share, $.64 per share, $.32 per share and $.72 per share in fiscal
2002, 2001, 2000, 1999 and 1998, respectively. The ability to fund our
operations and to pay dividends is not dependent upon the receipt of dividends
from The Berkshire Bank. At December 31, 2002, we had cash of $7.44 million and
investment securities of $6.15 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, 2002.

<TABLE>
<CAPTION>
                                Expiration By Period
                     -------------------------------------------
                                Less                      More
                                Than      1-3     3-5     Than
                      Total    1 Year    Years   Years   5 Years
                     -------   ------   ------   -----   -------
                                    (In thousands)
<S>                  <C>       <C>      <C>       <C>     <C>
Lines of Credit      $ 7,624   $2,231   $4,652    $ --    $  741
Standby Letters
   of Credit             750      408      342      --        --
Loan Commitments       2,243    2,243
Home Equity Unused
   Commitments         3,565      174      835     675     1,881
                     -------   ------   ------    ----    ------
Total                $14,182   $5,056   $5,829    $675    $2,622
                     =======   ======   ======    ====    ======
</TABLE>


                                       31




<PAGE>


Contractual Obligations

     The following table presents the Company's contractual obligations at
December 31, 2002.

<TABLE>
<CAPTION>
                                 Payments Due By Periods
                    -------------------------------------------------
                                 Less                          More
                                 Than       1-3       3-5      Than
                     Total      1 Year     Years     Years    5 Years
                    --------   --------   -------   -------   -------
                                      (In thousands)
<S>                 <C>        <C>        <C>       <C>       <C>
Long-Term Debt      $ 57,699   $    500   $ 1,000   $42,199   $14,000
Operating Leases       3,118        900       947       595       676
Time Deposits        311,979    299,691    12,230        58        --
                    --------   --------   -------   -------   -------
Total Contractual
   Obligations      $372,796   $301,091   $14,177   $42,852   $14,676
                    ========   ========   =======   =======   =======
</TABLE>

     The Company currently does not have any unconsolidated subsidiaries or
special purpose entities.

Capital

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

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.


                                       32




<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, 2002
                                                        (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>
Interest bearing deposits in banks            127           --           --         --       127         127
                             (Rate)          1.25%                                          1.25%
Loans (1)(2)
Adjustable rate loans                      42,397       10,654        9,656     12,423    75,130      75,130
                             (Rate)          5.90%        5.82%        5.51%      7.71%     6.14%
Fixed rate loans                              577        3,062        8,811    188,672   201,122     203,122
                             (Rate)          6.98%        8.00%        7.52%      6.96%     7.00%
                                         --------     --------     --------    -------   -------
Total loans                                42,974       13,716       18,467    201,095   276,252     278,252
Investments (3)(4)                         79,964        1,261       75,898    211,398   368,521     368,523
                             (Rate)          2.62%        6.23%        4.20%      4.99%     4.32%
                                         --------     --------     --------    -------   -------
Total rate-sensitive assets               123,065       14,977       94,365    412,493   644,900
                                         --------     --------     --------    -------   -------
Deposit accounts (5)
Savings and NOW                            90,653           --           --         --    90,653      90,653
                             (Rate)          1.46%                                          1.46%
Money market                               39,866           --           --         --    39,866      39,866
                             (Rate)          1.13%                                          1.13%
Time Deposits                             111,868      187,823       12,275         13   311,979     312,117
                             (Rate)          2.65%        2.85%        2.90%      2.47%     2.78%
                                         --------     --------     --------    -------   -------
Total deposit accounts                    242,387      187,823       12,275         13   442,498
Repurchase Agreements                      41,673        5,000           --         --    46,673      46,673
                             (Rate)          1.49%        1.20%                             1.46%
Other borrowings                              500           --        1,000     56,199    57,699      57,699
                             (Rate)          6.09%                     5.90%      4.56%     4.60%
                                         --------     --------     --------    -------   -------
Total rate-sensitive liabilities          284,560      192,823       13,275     56,212   546,870
                                         --------     --------     --------    -------   -------
Interest rate caps                         20,000           --      (10,000)   (10,000)                   53
Gap (repricing differences)              (181,495)    (177,846)      91,090    366,281    98,030
                                         ========     ========     ========    =======   =======

Cumulative Gap                           (181,495)    (359,341)    (268,251)    98,030
                                         ========     ========     ========    =======
Cumulative Gap to Total Rate
Sensitive Assets                           (28.14)%     (55.72)%     (41.60)%    15.20%
                                         ========     ========     ========    =======
</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.


                                       33




<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

Business Combinations

     The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also requires that
the acquisition of a less-than-whole financial institution, such as a branch, be
accounted for as a business combination if the transferred assets and activities
constitute a business. The adoption on October 1, 2002 of SFAS No. 147 did not
have an impact on the Company's financial position or results of operations.

Goodwill and Intangible Assets

     Statement of Financial Accounting Standard ("SFAS") No. 141, Business
Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Intangible Assets
("SFAS No. 142") was adopted on January 1, 2002. SFAS No. 142 modifies the
accounting for all purchased goodwill and intangible assets. SFAS No. 142
includes requirements to test goodwill and indefinite lived intangible assets
for impairment rather than amortize them. As a result of the adoption of SFAS
No. 142, Berkshire eliminated the amortization of goodwill as of January 1,
2002. The Company has completed the transitional impairment testing and did not
identify any impairment on its outstanding goodwill.

     The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of Statement of Financial Accounting Standard No.
142.

<TABLE>
<CAPTION>
                                                 For The Year Ended
                                                    December 31,
                                      ----------------------------------------
                                               2002     2001      2000
                                              ------   ------   -------
                                      (In thousands, except per share amounts)
<S>                                           <C>      <C>      <C>
Reported net income                           $5,597   $3,299   $12,066
Add back: goodwill amortization                   --      935       635
                                              ------   ------   -------
Adjusted net income                           $5,597   $4,234   $12,701
                                              ======   ======   =======

   Basic earnings per share:
Reported basic earnings per share             $ 2.44   $ 1.41   $  5.76
Goodwill amortization                             --      .40       .30
                                              ------   ------   -------
Adjusted basic earnings per share             $ 2.44   $ 1.81   $  6.06
                                              ======   ======   =======

   Diluted earnings per share:
Reported diluted earnings per share           $ 2.43   $ 1.41   $  5.76
Goodwill amortization                             --      .40       .30
                                              ------   ------   -------
Adjusted diluted earnings per share           $ 2.43   $ 1.81   $  6.06
                                              ======   ======   =======
</TABLE>


                                       34




<PAGE>


Accounting for Stock Based Compensation

     SFAS No. 148 "Accounting for Stock Based Compensation-Transition and
Disclosure", which amends the disclosure and certain provisions of SFAS No. 123,
was issued in December 2002. SFAS No. 148 requires all entities with stock based
employee compensation arrangements to provide additional disclosures in their
summary of significant accounting policies note. The new interim period
disclosures are required in financial statements for interim periods beginning
after December 15, 2002.

<TABLE>
<CAPTION>
                                                     For The Years Ended December 31,
                                                 ----------------------------------------
                                                          2002     2001      2000
                                                         ------   ------   -------
                                                 (In thousands, except per share amounts)
<S>                               <C>                    <C>      <C>      <C>
Net income                        As Reported:           $5,597   $3,299   $12,066
Less: Stock based compensation
   costs determined under fair
   value methods for all awards                             680      316       618
                                                         ------   ------   -------
                                  Pro Forma:             $4,917   $2,983   $11,448
                                                         ======   ======   =======

Basic earnings per share          As Reported:           $ 2.44   $ 1.41   $  5.76
                                  Pro Forma:               2.14     1.28      5.46

Diluted earnings per share        As Reported:             2.43     1.41      5.76
                                  Pro Forma:               2.14     1.28      5.46
</TABLE>

     The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants as of December 31, 2001 and 2000, expected
volatility of 22%, and 25%, respectively, risk-free interest of 5.34% and 6.37%,
respectively, and expected lives of 5 years for all years. The Company did not
grant options in 2002.

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.

     Inasmuch as the acquisition of the GSB Financial Corporation and Goshen
Savings Bank was consummated on March 30, 2001, the financial statements set
forth below include the results of operations of GSB Financial and Goshen Bank
from April 1, 2001, through December 31, 2001.


                                       35




<PAGE>


               Report of Independent Certifieds Public Accountants

Board of Directors and Stockholders
Berkshire Bancorp Inc.

We have audited the accompanying consolidated balance sheets of Berkshire
Bancorp Inc. and its subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 its subsidiaries as of December 31, 2002 and 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note B6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets on January 1, 2002.


/s/ GRANT THORNTON LLP
--------------------------
Philadelphia, Pennsylvania
January 31, 2003


                                       36




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                     December 31,   December 31,
                                                         2002           2001
                                                     ------------   ------------
<S>                                                    <C>            <C>
ASSETS
Cash and due from banks                                $  6,183       $  7,170
Interest bearing deposits                                   127            213
Federal funds sold                                           --          3,000
                                                       --------       --------
Total cash and cash equivalents                           6,310         10,383
Investment Securities:
   Available-for-sale                                   370,625        240,966
   Held-to-maturity, fair value of $835
      in 2002 and $1,598 in 2001                            833          1,613
                                                       --------       --------
Total investment securities                             371,458        242,579
Loans, net of unearned income                           275,497        252,040
   Less: allowance for loan losses                       (2,315)        (2,030)
                                                       --------       --------
Net loans                                               273,182        250,010
Accrued interest receivable                               4,106          3,399
Premises and equipment, net                               8,976          7,446
Goodwill, net of accumulated amortization
   of $2,300 in 2001                                     18,549         18,438
Other assets                                              1,157          4,110
                                                       --------       --------
Total assets                                           $683,738       $536,365
                                                       ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
   Non-interest bearing                                $ 31,320       $ 30,163
   Interest bearing                                     442,498        308,613
                                                       --------       --------
Total deposits                                          473,818        338,776
Securities sold under agreements to repurchase           46,673         53,756
Long term borrowings                                     57,699         42,278
Accrued interest payable                                  3,348          2,406
Other liabilities                                         3,675          3,157
                                                       --------       --------
Total liabilities                                       585,213        440,373
                                                       --------       --------

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      --  2,566,095 shares
      Outstanding --
         December 31, 2002, 2,237,976 shares
         December 31, 2001, 2,379,990 shares                256            256
Additional paid-in capital                               89,890         89,914
Retained earnings                                        16,145         11,053
Accumulated other comprehensive income (loss), net        1,480           (281)
   Treasury Stock
   December 31, 2002, 328,119 shares
   December 31, 2001, 186,105 shares                     (9,246)        (4,950)
                                                       --------       --------
Total stockholders' equity                               98,525         95,992
                                                       --------       --------
                                                       $683,738       $536,365
                                                       ========       ========
</TABLE>

          The accompanying notes are an integral part of these statements


                                       37




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                For The Years Ended December 31,
                                                --------------------------------
                                                     2002      2001      2000
                                                   -------   -------   -------
<S>                                                <C>       <C>       <C>
INTEREST INCOME
Federal funds sold and interest bearing
   deposits                                        $   136   $   642   $ 1,241
Investments                                         13,383     9,156     6,381
Loans, including related fees                       18,723    15,143     6,397
                                                   -------   -------   -------
Total interest income                               32,242    24,941    14,019
                                                   -------   -------   -------
INTEREST EXPENSE
Deposits                                            10,410    10,158     4,344
Short-term borrowings                                  687       483       723
Long-term borrowings                                 2,319     1,236       117
                                                   -------   -------   -------
Total interest expense                              13,416    11,877     5,184
                                                   -------   -------   -------
Net interest income                                 18,826    13,064     8,835
PROVISION FOR LOAN LOSSES                              387       287        55
                                                   -------   -------   -------
Net interest income after
   provision for loan losses                        18,439    12,777     8,780
                                                   -------   -------   -------
NON-INTEREST INCOME
Service charges on deposit accounts                    548       395       146
Investment securities gains                          1,539       637    13,288
Other income                                           200       391     1,184
                                                   -------   -------   -------
Total non-interest income                            2,287     1,423    14,618
                                                   -------   -------   -------
NON-INTEREST EXPENSE
Salaries and employee benefits                       5,183     4,153     2,125
Net occupancy expense                                1,625     1,170       447
Equipment expense                                      312       201       101
FDIC assessment                                         66        42        27
Data processing expense                                193       138        21
Amortization of goodwill                                --       935       635
Other                                                3,401     2,134     1,108
                                                   -------   -------   -------
Total non-interest expense                          10,780     8,773     4,464
                                                   -------   -------   -------
Income before provision for taxes                    9,946     5,427    18,934
Provision for income taxes                           4,349     2,128     6,868
                                                   -------   -------   -------
Net income                                         $ 5,597   $ 3,299   $12,066
                                                   =======   =======   =======
Net income per share:
   Basic                                           $  2.44   $  1.41   $  5.76
                                                   =======   =======   =======
   Diluted                                         $  2.43   $  1.41   $  5.76
                                                   =======   =======   =======

Dividends per share                                $   .22   $   .24   $   .64
</TABLE>

         The accompanying notes are an integral part of these statements


                                       38




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

              For The Years Ended December 31, 2002, 2001 and 2000
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                            Accumulated
                                                               other        Accumu-
                                       Stock   Additional  comprehensive     lated                                   Total
                              Common    Par     paid-in       income       earnings    Treasury   Comprehensive  stockholders'
                              Shares   value    capital     (loss), net    (deficit)     stock       income         equity
                              ------   -----   ----------  -------------   ---------   --------   -------------  -------------
<S>                           <C>      <C>      <C>        <C>            <C>         <C>          <C>            <C>
Balance at January 1, 2000     2,566    $256    $78,570      $ 4,425       $ (2,421)   $(2,760)                     $78,070
Net income                                                                   12,066                  12,066          12,066
Treasury shares issued for                          (21)                                    49                           28
   options exercised
Acquisition of treasury shares                                                          (5,254)                      (5,254)
Other comprehensive (loss) net
   of reclassification
   adjustment and taxes                                       (4,510)                                (4,510)         (4,510)
                                                                                                    -------
Comprehensive income                                                                                $ 7,556
                                                                                                    =======
Cash dividends                                                               (1,293)                                 (1,293)
                               -----    ----    -------      -------       --------    -------                      -------
Balance at December 31, 2000   2,566    $256    $78,549      $   (85)      $  8,352    $(7,965)                     $79,107
Net income                                                                    3,299                   3,299           3,299
Treasury shares issued
   for acquisition of
   GSB Financial Corp                            11,386                                  7,887                       19,273
Acquisition of treasury shares                                                          (4,983)                      (4,983)
Treasury shares issued for
   options exercised                                (21)                                   111                           90
Other comprehensive (loss) net
   of reclassification
   adjustment and taxes                                         (196)                                  (196)
                                                                                                    -------
Comprehensive income                                                                                $ 3,103
                                                                                                    =======
Cash dividends                                                                 (598)                                   (598)
                               -----    ----    -------      -------       --------    -------                      -------
Balance at December 31, 2001   2,566    $256    $89,914      $  (281)      $ 11,053    $(4,950)                     $95,992
Net income                                                                    5,597                   5,597           5,597
Acquisition of treasury shares                                                          (4,422)                      (4,422)
Exercise of stock options                           (24)                                   126                          102
Other comprehensive income net
   of reclassification
   adjustment and taxes                                        1,761                                  1,761           1,761
                                                                                                    -------
Comprehensive income                                                                                $ 7,358
                                                                                                    =======
Cash dividends                                                                 (505)                                   (505)
                               -----    ----    -------      -------       --------    -------                      -------
Balance at December 31, 2002   2,566    $256    $89,890      $ 1,480       $ 16,145    $(9,246)                     $98,525
                               =====    ====    =======      =======       ========    =======                      =======
</TABLE>

         The accompanying notes are an integral part of these statements


                                       39




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                  For The Years Ended December 31,
                                                 ----------------------------------
                                                     2002         2001       2000
                                                 -----------   ---------   --------
<S>                                              <C>           <C>         <C>
      CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                       $     5,597   $   3,299   $ 12,066
Adjustments to reconcile net income
   to net cash provided by (used in)
   operating activities:
Realized gain on investment securities                (1,539)       (637)   (13,288)
Depreciation and amortization                            414       1,197        740
Provision for loan losses                                387         287         55
Increase in deferred taxes                               133        (426)     1,522

      CHANGES IN ASSETS AND LIABILITIES:
   (Increase) decrease in accrued
      interest receivable                               (707)       (659)       259
   Decrease (increase) other assets                    2,760       1,320        (81)
   Increase (decrease) in accrued interest
      payable and other liabilities                    1,316         616     (1,692)
                                                 -----------   ---------   --------
   Net cash provided by (used in)
      operating activities                             8,361       4,997       (419)
                                                 -----------   ---------   --------

      CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Madison Merchant
   Services, Inc.                                         --          --       (285)
Investment in The Berkshire Bank                          --          --       (105)
Cash paid for business acquired                           --     (20,222)        --
Cash of entities acquired                                 --       6,047         --
Investment securities available
   for sale
   Purchases                                      (1,729,416)   (461,048)   (84,247)
   Sales                                           1,603,261     359,278     77,212
Investment securities held to maturity
   Purchases                                              --    (167,800)   (19,909)
   Maturities                                            780     187,724      4,157
Net increase in loans                                (23,559)    (42,003)    (9,991)
Acquisition of premises and equipment                 (2,055)     (4,138)       (93)
                                                 -----------   ---------   --------

Net cash (used in) investing activities             (150,989)   (142,162)   (33,261)
                                                 -----------   ---------   --------
</TABLE>


                                       40




<PAGE>


                    BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                              For The Years Ended December 31,
                                              --------------------------------
                                                 2002       2001       2000
                                               --------   --------   -------
<S>                                            <C>        <C>        <C>
      CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in non interest
   bearing deposits                               1,157     15,654    (1,040)
Net increase in interest bearing deposits       133,885     57,611    34,600
(Decrease) increase in securities sold
   under agreements to repurchase                (7,083)    30,629    23,127
Issuance of long term debt                       34,923     24,778        --
Repayment of long term debt                     (19,502)   (12,000)       --
Acquisition of treasury stock                    (4,422)    (4,983)   (5,254)
Proceeds from exercise of common
   stock options                                    102         90        28
Dividends paid                                     (505)      (598)   (1,293)
                                               --------   --------   -------
Net cash provided by financing activities       138,555    111,181    50,168
                                               --------   --------   -------

      Net (decrease) increase in cash
         and cash equivalents                    (4,073)   (25,984)   16,488
      Cash and cash equivalents at
         beginning of year                     $ 10,383     36,367    19,879
                                               --------   --------   -------
      Cash and cash equivalents at
         end of year                           $  6,310   $ 10,383   $36,367
                                               ========   ========   =======

SUPPLEMENTAL DISCLOSURES OF CASH
   FLOW INFORMATION:
      Cash used to pay interest                $ 12,474   $ 10,804   $ 4,012
      Cash used to pay income taxes            $  5,692   $  1,637   $ 7,163
</TABLE>

         The accompanying notes are an integral part of these statements


                                       41




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                           December 31, 2002 and 2001

NOTE A - ORGANIZATION AND PLAN OF MERGER AND CAPITALIZATION

     Organization

     Berkshire Bancorp Inc. ("Berkshire" or the "Company"), 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").

     The Bank, a New York State chartered commercial 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. It has one branch in Brooklyn, NY,
one branch in downtown Manhattan and four branches in Orange and Sullivan
Counties in New York state.

     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.

     Mergers and Acquisitions

     On March 30, 2001, Berkshire completed its acquisition of GSB Financial
Corporation ("GSB Financial"). As a result, GSB Financial merged with and into
Berkshire and Goshen Savings Bank ("Goshen Bank") merged with and into The
Berkshire Bank. Under the terms of the merger, each share of GSB Financial
common stock was redeemed for $20.75, or converted into 0.6027 shares of
Berkshire's common stock. As a result of this transaction, 978,032 shares of GSB
Financial common stock were converted into 589,460 shares of Berkshire common
stock, and 974,338 shares of GSB Financial common stock were purchased for
$20.75 per share, totaling approximately $20.2 million.

     This transaction was accounted for under the purchase method of accounting
and accordingly, the results of operations of the Company for the year ended
December 31, 2001, include only the results of operations of GSB Financial from
April 1, 2001 through December 31, 2001. The acquisition resulted in the
recording of approximately $7.5 million of goodwill, which, through December 31,
2001, has been amortized on a straight-line basis over 15 years.

     The following represents the unaudited pro forma financial information of
the Company as if the acquisition occurred on the first date of the periods
indicated. The pro forma information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the transaction actually taken place.


                                       42




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

Note A - (continued)

<TABLE>
<CAPTION>
                            For The Year Ended
                                December 31,
                            ------------------
                              2001       2000
                            -------    -------
                              (In thousands)
<S>                         <C>        <C>
Interest income             $31,499    $26,019
Interest Expense             15,396     12,227
                            -------    -------
Net interest income          16,103     13,792
Provision for loan losses       547        190
Non-interest income           1,696     15,321
Non-interest expense         11,007      8,916
Net income                  $ 3,427    $12,531
</TABLE>

NOTE B - SUMMARY OF ACCOUNTING POLICIES

1.   Basis of Financial Statement Presentation

     The consolidated financial statements include the accounts of Berkshire
Bancorp and its wholly owned subsidiaries, Greater American Finance Group, Inc.
("GAFG") and The Berkshire Bank (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 estimate that is susceptible to significant change in the
near term relates to the allowance for loan losses and goodwill. 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.

     The Company provides disclosures under 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


                                       43




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE B - (continued)

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, and 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.

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 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.

     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 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.


                                       44




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE B - (continued)

     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.

     On July 6, 2001, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB No. 102 provides guidance on the
development, documentation, and application of a systematic methodology for
determining the allowance for loans and leases in accordance with US GAAP. The
adoption of SAB No. 102 is not expected to have a material impact on the
Company's financial position or results of operations.

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.

     On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. However, SFAS No. 144 makes changes
to the scope and certain measurement requirements of existing accounting
guidance. SFAS No. 144 also changes the requirements relating to reporting the
effects of a disposal or discontinuation of a segment of a business. The
adoption of this statement did not have a significant impact on the financial
condition or results of operations of the Company.

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 and GSB
Financial has been amortized on a straight-line basis over approximately 20
years and 15 years, respectively. Amortization expense for the years ended
December 31, 2001 and 2000 was approximately $935,000 and $635,000,
respectively.

     On June 29, 2001, SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Intangible Assets were issued. These statements resulted in
significant modifications relative to the Company's accounting for goodwill and
other intangible assets. SFAS No. 141, which was effective upon issuance,
requires that all business combinations initiated after June 30, 2001 must be
accounted for under the purchase method of accounting. SFAS No. 142 modifies the
accounting for all purchased goodwill and intangible assets. SFAS No. 142
includes requirements to test goodwill and indefinite lived intangible assets
for


                                       45




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE B - (continued)

impairment rather than amortize them. Upon adoption of SFAS 142, on January 1,
2002, the Company no longer amortized goodwill, thereby eliminating annual
amortization expense of approximately $1.0 million.

     The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of SFAS No. 142.

<TABLE>
<CAPTION>
                                                 For The Year Ended
                                                    December 31,
                                             -------------------------
                                              2002     2001      2000
                                             ------   ------   -------
                                      (In thousands, except per share amounts)
<S>                                          <C>      <C>      <C>
Reported net income                          $5,597   $3,299   $12,066
Add back: goodwill amortization                  --      935       635
                                             ------   ------   -------
Adjusted net income                          $5,597   $4,234   $12,701
                                             ======   ======   =======

   Basic earnings per share:
Reported basic earnings per share            $ 2.44   $ 1.41   $  5.76
Goodwill amortization                            --      .40       .30
                                             ------   ------   -------
Adjusted basic earnings per share            $ 2.44   $ 1.81   $  6.06
                                             ======   ======   =======

   Diluted earnings per share:
Reported diluted earnings per share          $ 2.43   $ 1.41   $  5.76
Goodwill amortization                            --      .40       .30
                                             ------   ------   -------
Adjusted diluted earnings per share          $ 2.43   $ 1.81   $  6.06
                                             ======   ======   =======
</TABLE>

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.


                                       46




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE B - (continued)

9.   Stock Based Compensation

     The Company follows SFAS No. 123 "Accounting for Stock Based Compensation."
This statement introduced a method of accounting for employee stock-based
compensation plans based upon the fair value of the awards on the date they are
granted. Under this fair value based method, public companies estimate the fair
value of stock options using a pricing model, such as the Black-Scholes model,
which requires inputs such as the expected volatility of the stock price and an
estimate of the dividend yield over the option's expected life. The FASB,
however, does not require the use of this method. Entities that continue to
account for stock option plans under the existing method (APB No. 25) are
required to disclose proforma net income and earnings per share, as if the fair
value method had been used.

     At December 31, 2002, the Company has one stock-based employee compensation
plan, which is more fully described in Note K. The Company accounts for that
plan under the recognition and measurement principles of APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Stock-based
employee compensation costs are 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, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                    For The Years Ended December 31,
                                                ----------------------------------------
                                                        2002     2001      2000
                                                       ------   ------   -------
                                                (In thousands, except per share amounts)

<S>                              <C>                   <C>      <C>      <C>
Net income                       As Reported:          $5,597   $3,299   $12,066
Less: Stock based compensation
   costs determined under fair
   value methods for all awards                           680      316       618
                                                       ------   ------   -------
                                 Pro Forma:            $4,917   $2,983   $11,448
                                                       ======   ======   =======

Basic earnings per share         As Reported:          $ 2.44   $ 1.41   $  5.76
                                 Pro Forma:              2.14     1.28      5.46

Diluted earnings per share       As Reported:            2.43     1.41      5.76
                                 Pro Forma:              2.14     1.28      5.46
</TABLE>

     The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants as of December 31, 2001 and 2000, expected
volatility of 22%, and 25%, respectively, risk-free interest of 5.34% and 6.37%,
respectively, and expected lives of 5 years for all years. The Company did not
grant options in 2002.

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 $1,155,000, $900,000 and $1,032,000 at December 31, 2002, 2001 and
2000, respectively.


                                       47




<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.)

<TABLE>
<CAPTION>
                                                Year Ended
                                             December 31, 2002
                                    -----------------------------------
                                                    Tax
                                    Before tax   (expense)   Net of tax
                                      amount      benefit      Amount
                                    ----------   ---------   ----------
<S>                                   <C>         <C>          <C>
Unrealized gains on
   investment securities:

      Unrealized holding gains
         arising during period        $4,760      $(1,872)     $2,888

      Less reclassification
         adjustment for gains
         realized in net income        1,539         (616)        923
                                      ------      -------      ------

Unrealized gain (loss) on
investment securities                  3,221       (1,256)      1,965

Minimum pension liability               (340)         136        (204)
                                      ------      -------      ------

Other comprehensive
   income, net                        $2,881      $(1,120)     $1,761
                                      ======      =======      ======
</TABLE>

<TABLE>
<CAPTION>
                                                Year Ended
                                             December 31, 2001
                                    -----------------------------------
                                                    Tax
                                    Before tax   (expense)   Net of tax
                                      amount      benefit      Amount
                                    ----------   ---------   ----------
<S>                                   <C>          <C>         <C>
Unrealized gains (losses)
   on investment securities:

      Unrealized holding (losses)
         arising during period        $ 357        $(171)      $ 186

      Less reclassification
         adjustment for gains
         realized in net income         637         (255)        382
                                      -----        -----       -----

Other comprehensive
   loss, net                          $(280)       $  84       $(196)
                                      =====        =====       =====
</TABLE>


                                       48




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

Note B - (continued)

<TABLE>
<CAPTION>
                                              Year Ended
                                           December 31, 2000
                                  -----------------------------------
                                                 Tax
                                  Before tax   (expense)   Net of tax
                                    amount      benefit      Amount
                                  ----------   ---------   ----------
<S>                                <C>          <C>         <C>
Unrealized gains (losses)
   on investment securities:

      Unrealized holding gains
         arising during period     $ 4,898      $(1,435)    $ 3,463

      Less reclassification
         adjustment for gains
         realized in net income     13,288       (5,315)      7,973
                                   -------      -------     -------
Other comprehensive
   loss, net                       $(8,390)     $ 3,880     $(4,510)
                                   =======      =======     =======
</TABLE>

13.  Reclassifications

     Certain amounts in the December 31, 2001 and 2000 financial statements have
been reclassified to conform to the current period's presentation.

NOTE C - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                        December 31, 2002
                           -------------------------------------------
                                         Gross        Gross
                           Amortized   unrealized   unrealized   Fair
                             Cost        gains        losses     value
                           ---------   ----------   ----------   -----
                                         (In thousands)
<S>                          <C>           <C>          <C>      <C>
Investment securities
U.S. Government Agencies     $833          $3           $(1)     $835
                             ----         ---           ---      ----
   Totals                    $833          $3           $(1)     $835
                             ====         ===           ===      ====
</TABLE>

<TABLE>
<CAPTION>
                                        December 31, 2001
                           --------------------------------------------
                                         Gross        Gross
                           Amortized   unrealized   unrealized   Fair
                             Cost        gains        losses     value
                           ---------   ----------   ----------   -----
                                          (In thousands)
<S>                         <C>            <C>         <C>       <C>
Investment securities
U.S. Government Agencies    $1,613         $8          $(23)     $1,598
                            ------        ---          ----      ------
   Totals                   $1,613         $8          $(23)     $1,598
                            ======        ===          ====      ======
</TABLE>


                                       49




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE C - (continued)

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

<TABLE>
<CAPTION>
                                            December 31, 2002
                             ----------------------------------------------
                                           Gross        Gross
                             Amortized   unrealized   unrealized     Fair
                                Cost       gains        losses       value
                             ---------   ----------   ----------   --------
                                             (In thousands)
<S>                          <C>           <C>           <C>       <C>
Investment securities
U.S. Treasury and Notes      $ 20,110      $  103        $  --     $ 20,213
U.S. Government Agencies      301,224       2,376           (3)     303,597
Mortgage-backed securities      6,256           6           --        6,262
Corporate notes                 3,878         495         (297)       4,076
Marketable equity
   securities and other        36,383         242         (148)      36,477
                             --------      ------        -----     --------
   Totals                    $367,851      $3,222        $(448)    $370,625
                             ========      ======        =====     ========
</TABLE>

<TABLE>
<CAPTION>
                                            December 31, 2001
                             ----------------------------------------------
                                           Gross        Gross
                             Amortized   unrealized   unrealized    Fair
                               Cost        gains        losses      value
                             ---------   ----------   ----------   --------
                                             (In thousands)
<S>                          <C>            <C>         <C>        <C>
Investment securities
U.S. Treasury and Notes      $ 30,012       $ 34        $    (8)   $ 30,038
U.S. Government Agencies      170,610        589         (1,043)    170,156
Mortgage-backed securities      2,493          6             --       2,499
Corporate notes                   751          1           (113)        639
Marketable equity
   securities and other        37,547         87             --      37,634
                             --------       ----        -------    --------
   Totals                    $241,413       $717        $(1,164)   $240,966
                             ========       ====        =======    ========
</TABLE>

     The amortized cost and fair value of investment securities available for
sale and held to maturity, by contractual maturity, at December 31, 2002 and
2001 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, 2002
                               ----------------------------------------
                                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        $  1,078    $  1,051     $ --      $ --
Due after one through five
   years                        143,467     144,797       --        --
Due after five through ten
   years                        127,385     128,372      168       169
Due after ten years              59,538      59,928      665       666
Marketable equity securities
   and other                     36,383      36,477       --        --
                               --------    --------     ----      ----
   Totals                      $367,851    $370,625     $833      $835
                               ========    ========     ====      ====
</TABLE>


                                       50




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE C - (continued)

     Gross gains realized on the sales of investment securities for the years
ended December 31, 2002, 2001 and 2000 were $1.54 million, $637,000 and $13.29
million, respectively. Losses were not material for these periods.

     As of December 31, 2002 and 2001, securities sold under agreements to
repurchase with a book value of approximately $64.84 million and $56.75 million,
respectively, were outstanding. As of December 31, 2002 and 2001, the Company
did not have any investment securities of any one issuer where the carrying
value exceeded 10% of shareholders' equity.

     On November 7, 2002, we sold our 24.9% interest in a merchant credit card
processing company for $285,000, which represents our initial purchase price in
December 1999. We accounted for our interest in this company under the equity
method of accounting and have recorded approximately $200,000 in net losses
since December 1999. In addition, the Bank had loans outstanding totaling
$295,000 to this company which are being repaid as a result of this transaction.
The purchase price to Berkshire and the amounts owed to the Bank are being paid
in the form of a note to be held by the Bank.

               Common Stock of Executone Information Systems, Inc.

     In 1995, Unistar Gaming Corp. ("UGC") acquired Unistar Entertainment, Inc.,
a privately held Colorado corporation ("Unistar"). As a result of the
acquisition, approximately 27.5% of the outstanding Common Stock of UGC (the
"UGC Common Stock") was owned by the Company, and approximately 72.5% of the UGC
Common Stock was owned by the former stockholders of Unistar. Unistar held an
exclusive contract with the Coeur d'Alene Indian Tribe in Idaho to develop and
manage what would be the first national lottery in the United States. The shares
of UGC Common Stock which were owned by the Company were purchased for
approximately $5 million comprised primarily of cash, portfolio securities and a
note payable. In December 1995, the Company increased its stake in UGC to
approximately 31.5% by purchasing an additional 400,000 shares of UGC Common
Stock from a UGC stockholder for a cash purchase price of $.50 per share.

     In December 1995, the Company sold its minority equity interest in Unistar
Gaming Corp. ("UGC") to Executone, a Virginia corporation whose common stock
trades on the NASDAQ National Market System. The Company's investment in UGC was
approximately $5.2 million.

     In exchange for its interest in UGC, the Company received shares of
Executone Common Stock, all of which were sold in open market transactions
during 1998, and shares of Executone Series A and Series B Preferred Stock (the
"Executone Preferred Stock"). In 1997, the Company fully reserved the carrying
value, approximately $2.1 million, of its shares of Executone Preferred Stock
and recorded a deferred tax asset of $925,000.

     In March 1999, Executone exercised its right to redeem and convert the
Executone Preferred Stock into Executone Common Stock and on April 6, 1999, in
exchange for its shares of Executone Preferred Stock, the Company received
4,193,204 shares of Executone Common Stock with a market value of approximately
$17.7 million.

     At December 31, 2002 and 2001, the Company owned 130,000 shares of
Executone Common Stock which have been classified as available-for-sale
securities, all other shares having been sold during 1999 and 2000.


                                       51




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE D - LOANS

     Major classifications of loans are as follows:

<TABLE>
<CAPTION>
                                    December 31,   December 31,
                                       2002           2001
                                    ------------   ------------
                                          (In thousands)
<S>                                   <C>            <C>
Commercial and professional loans     $ 16,704       $ 19,130
Secured by real estate
   1 - 4 family                        180,730        165,195
   Multi family                          8,958         11,186
   Non-residential                      65,809         51,893
Consumer                                 4,051          4,689
Other                                       --            140
                                      --------       --------
                                       276,252        252,233
Deferred loan fees                        (755)          (193)
Allowance for loan losses               (2,315)        (2,030)
                                      --------       --------
                                      $273,182       $250,010
                                      ========       ========
</TABLE>

      Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>
                         For The Years Ended December 31,
                         --------------------------------
                              2002     2001     2000
                             ------   ------   ------
                                  (In thousands)
<S>                          <C>      <C>      <C>
Balance at beginning
   of year                   $2,030   $1,108   $  923
Provision charged to
   operations                   387      287       55
Loans charged off               199       97       --
Recoveries                       97       41      130
Acquisition of GSB
   Financial Corp                --      691       --
                             ------   ------   ------
Balance at end of year       $2,315   $2,030   $1,108
                             ======   ======   ======
</TABLE>

     The Company had $59,000, $9,000 and $0 non accrual loans as of December 31,
2002, 2001 and 2000, respectively. The Company did not have any impaired loans
as of December 31, 2002, 2001 and 2000. The Company had approximately $0,
$58,000 and $0 of loans past due more than 90 days and still accruing interest
as of December 31, 2002, 2001 and 2000, respectively.

     The Company, 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,
2002, loans to these related parties amounted to $13.9 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 at December
31, 2002, resulted in new loans of $5.2 million and repayments of approximately
$369,000.


                                       52




<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:

<TABLE>
<CAPTION>
                                 Estimated     December 31,   December 31,
                                useful lives       2002           2001
                               -------------   ------------   ------------
                                                     (In thousands)
<S>                            <C>                <C>           <C>
Land                           Indefinite         $ 1,817       $ 1,817
Buildings                      39 years               838           838
Furniture and equipment        3 to 10 years        2,196         1,594
Leasehold improvements         2 to 10 years          612           585
Construction in progress                            5,056         3,765
                                                  -------       -------
                                                   10,519         8,599
Accumulated depreciation and
   amortization                                    (1,543)       (1,153)
                                                  -------       -------
Total                                             $ 8,976       $ 7,446
                                                  =======       =======
</TABLE>

     Depreciation and amortization expense was approximately $279,000, $249,000
and $104,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

NOTE F - DEPOSITS

     The aggregate amount of jumbo certificates of deposits greater than
$100,000 were approximately $108.72 million, $68.88 million and $55.32 million
as of December 31, 2002, 2001 and 2000, respectively.

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

<TABLE>
<CAPTION>
       December 31, 2002
       -----------------
         (In thousands)
<S>         <C>
2003        $299,691
2004          12,167
2005              63
2006              46
2007              12
            --------
            $311,979
            ========
</TABLE>


                                       53




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

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,
                                            ---------------------------
                                              2002      2001      2000
                                            -------   -------   -------
                                               (Dollars in Thousands)
<S>                                         <C>       <C>       <C>
Securities sold under repurchase
   agreements and federal funds purchased

   Balance at year-end                      $46,673   $53,756   $23,127
   Average during the year                  $38,433   $13,372    12,367
   Maximum month-end balance                $47,407   $53,756    24,495
   Weighted average rate during the year       1.79%     3.62%     5.85%
   Rate at December 31                         1.46%     1.67%     5.75%
</TABLE>

     Long-Term Borrowings At December 31, 2002, advances from the Federal Home
Loan Bank ("FHLB") totaling $57,699,000 will mature within one to ten 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 4.69%. Unused lines of credit at the FHLB were $33.21 million at December 31,
2002.

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

<TABLE>
<CAPTION>
   Year       Amount
----------   -------
<S>          <C>
2003         $   500
2004               0
2005           1,000
2006           7,935
2007          34,264
Thereafter    14,000
             -------

Total        $57,699
             =======
</TABLE>

NOTE H - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                       Year Ended December 31, 2002
                                  (in thousands, except per share data)
                                 ---------------------------------------
                                    Income         Shares      Per share
                                 (numerator)   (denominator)    amount
                                 -----------   -------------   ---------
<S>                                 <C>            <C>           <C>
Basic earnings per share
   Net income available to
      common stockholders           $5,597         2,292         $2.44
Effect of dilutive securities
   Options                              --            11          (.01)
                                    ------         -----         -----
Diluted earnings per share
   Net income available to
      common stockholders plus
      assumed conversions           $5,597         2,303         $2.43
                                    ======         =====         =====
</TABLE>


                                       54




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE H - (continued)

     Options to purchase 115,375 shares of common stock for $30.00 to $38.00 per
share were outstanding during the year ended December 31, 2002. These options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price for the
Company's common stock during this period.

<TABLE>
<CAPTION>
                                       Year Ended December 31, 2001
                                  (in thousands, except per share data)
                                 ---------------------------------------
                                    Income         Shares      Per share
                                 (numerator)   (denominator)    amount
                                 -----------   -------------   ---------
<S>                                 <C>             <C>          <C>
Basic earnings per share
   Net income available to
      common stockholders           $3,299          2,326        $1.41
Effect of dilutive securities
   Options                              --             10           --
                                    ------          -----        -----
Diluted earnings per share
   Net income available to
      common stockholders plus
      assumed conversions           $3,299          2,336        $1.41
                                    ======          =====        =====
</TABLE>

     Options to purchase 119,375 shares of common stock for $30.00 to $38.00 per
share were outstanding during the year ended December 31, 2001. These options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price for the
Company's common stock during this period.

<TABLE>
<CAPTION>
                                       Year Ended December 31, 2000
                                  (in thousands, except per share data)
                                 ---------------------------------------
                                    Income         Shares      Per share
                                 (numerator)   (denominator)    amount
                                 -----------   -------------   ---------
<S>                                <C>             <C>           <C>
Basic earnings per share
   Net income available to
      common stockholders          $12,066         2,095         $5.76
Effect of dilutive securities
   Options                              --             1            --
                                   -------         -----         ------
Diluted earnings per share
   Net income available to
      common stockholders plus
      assumed conversions          $12,066         2,094         $5.76
                                   =======         =====         =====
</TABLE>

     Options to purchase 48,875 shares of common stock for $31.75 to $38.00 per
share were outstanding during the year ended December 31, 2000. These options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price for the
Company's common stock during this period.


                                       55




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE I - INCOME TAXES

     The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                  Years Ended December 31,
                           -------------------------------------
                              2002         2001          2000
                           ----------   ----------   -----------
<S>                        <C>          <C>          <C>
Current                    $4,216,000   $1,702,000   $ 8,390,000
Deferred Taxes (Benefit)      133,000      426,000    (1,522,000)
                           ----------   ----------   -----------
                           $4,349,000   $2,128,000   $ 6,868,000
                           ==========   ==========   ===========
</TABLE>

     A reconciliation of the provision for income taxes for the years ended
December 31, 2002, 2001 and 2000 and the amount computed by applying the
statutory Federal income tax rate to income from continuing operations follows:

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                 ------------------------------------
                                    2002         2001         2000
                                 ----------   ----------   ----------
<S>                              <C>          <C>          <C>
Effective Tax Reconciliation
Tax at statutory rate            $3,381,000   $1,846,000   $6,438,000
State and City, net of federal
   income tax benefit               940,000      612,000      756,000
Nondeductible expenses,
   including goodwill                    --      217,000     (144,000)
Tax exempt income                   (53,000)     (44,000)    (182,000)
Other                                81,000     (503,000)          --
                                 ----------   ----------   ----------
Actual provision for
   income taxes                  $4,349,000   $2,128,000   $6,868,000
                                 ==========   ==========   ==========
</TABLE>

     The tax effect of the principal temporary differences at December 31, 2002
and 2001 are as follows:

<TABLE>
<CAPTION>
                                           December 31,
                                     ------------------------
                                        2002          2001
                                     -----------   ----------
<S>                                  <C>           <C>
Net deferred tax assets
   Net operating losses              $        --   $  107,000
   Loan loss provision                 1,095,000      973,000
   Depreciation                           20,000       33,000
   Other                                 (15,000)     120,000
   Unrealized loss, minimum
      pension liability adjustment       136,000           --
   Unrealized (gain) loss on
      investment securities           (1,124,000)     132,000
                                     -----------   ----------
Net deferred tax asset
   included in other assets          $  (112,000)  $1,365,000
                                     ===========   ==========
</TABLE>

     As a result of the acquisition of GSB Financial, the Company computed a net
deferred tax asset of approximately $556,000 which included a deferred tax
liability on unrealized holding gains of $48,000 during 2001.


                                       56




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE J - ESTIMATED TAX LIABILITIES

     The Company was a party to a tax sharing agreement, as amended, (the "Tax
Sharing Agreement") with The Cooper Companies, Inc. ("TCC") and Cooper
Development Company ("CDC") related to the Cooper Labs, Inc. ("CLI") liquidation
on June 27, 1985. The above companies agreed that: (i) in the event that the
amount of tax liability, including interest and penalties, shall be ultimately
determined to be greater or less than $10,000,000, then such excess or
deficiency shall be shared 50%, 25%, and 25% by TCC, CDC, and the Company,
respectively, and (ii) they are jointly and severally liable. Since 1985, the
Company has adjusted its accrual for interest charges related to potential
assessments. On July 18, 2000, the Company was notified that all remaining
issues covered by the Tax Sharing Agreement had been resolved. Based upon the
information available and after consultation with its tax advisors, in 2000, the
Company reversed approximately $808,000 of reserves deemed no longer necessary.

NOTE K - STOCK PLANS

     In March 1999, the stockholder's 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 200,000 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 115,375 and 120,875 as of December 31, 2002 and 2001,
respectively. As of December 31, 2002 and 2001, 62,126 options and 70,721
options, respectively, were outstanding as a result of the GSB acquisition. The
Company did not grant options in 2002.

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

<TABLE>
<CAPTION>
                                                 December 31,
                        -------------------------------------------------------------
                               2002                 2001                  2000
                        ------------------   ------------------   -------------------
                                  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    191,596    $29.74     50,375    $36.67     212,375    $13.83
Granted                      --    $   --    152,496    $27.68       5,000    $31.75
Cancelled                (6,509)   $27.13     (7,443)   $29.84    (151,000)   $ 7.21
Exercised                (7,586)   $21.75     (3,832)   $23.59     (16,000)   $10.08
                        -------              -------              --------
Outstanding at
   end of year          177,501    $30.30    191,596    $29.74      50,375    $36.67
                        =======              =======              ========
Exercisable at
   end of year          167,500    $33.09     84,799    $31.63      45,375    $37.21
                        =======              =======              ========
Weighted average fair
   value of options
   granted during the
   year                            $   --               $ 9.54                $11.14
                                   =======              ======                ======
</TABLE>


                                       57




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE K - (continued)

     The following table summarizes information about options outstanding at
December 31, 2002:

<TABLE>
<CAPTION>
                  Options Outstanding                        Options Exercisable
--------------------------------------------------------   -----------------------
                    Number         Weighted                   Number
                   outstanding     average      Weighted   outstanding    Weighted
                       at         remaining      average       at          average
   Range of       December 31,   contractual    exercise   December 31,   exercise
exercise prices       2002       life (years)    price        2002          price
---------------   ------------   ------------   --------   ------------   --------
<S>                  <C>            <C>          <C>         <C>           <C>
$17.94 - 26.34        54,447        5.59         $25.20       45,981       $25.05
 27.79 - 38.00       123,054        4.02          32.56      121,519        36.13
                     -------                                 -------
                     177,501                                 167,500
                     =======                                 =======
</TABLE>

NOTE L - EMPLOYEE BENEFIT PLANS

1.   Retirement Income Plan

     The Company has a Retirement Income Plan (the "Retirement Plan"), a
noncontributory plan covering substantially all full-time, non-union United
States employees of the Company. Benefits were based upon a combination of
employee compensation and years of service. The Company paid the entire cost of
the plan for its employees and funded such costs as they accrued. The Company's
funding policy was to make annual contributions within minimum and maximum
levels required by applicable regulations. The Company's 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, the Company did not accrue
benefits for future services; however, the Company did continue to contribute as
necessary for any unfunded liabilities. In 2000, the Company reinstated the
Retirement Plan to cover substantially all full-time, non-union United States
employees of the Company.

     Assumptions used in the accounting were:

<TABLE>
<CAPTION>
                                  December 31,
                                  ------------
                                  2002    2001
                                  ----    ----
<S>                               <C>     <C>
Discount rates-liability          7.25%   7.50%
Long-term rate of return-assets   8.50%   8.50%
</TABLE>


                                       58




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE L - (continued)

     A summary of the components of net periodic pension cost for the years
ended December 31, 2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                            December 31,
                                 ---------------------------------
                                   2002        2001        2000
                                 ---------   ---------   ---------
<S>                              <C>         <C>         <C>
Service cost-benefits earned
   during the period             $  48,883   $  68,214   $  50,075
Interest cost on projected
   benefit obligation               98,897     103,364      98,525
Expected return on plan assets    (148,973)   (177,560)   (184,740)
Net amortization and deferral       18,370      10,913      (5,121)
                                 ---------   ---------   ---------
Net pension cost/(income) of
   defined benefit plan          $  17,177   $   4,931   $ (41,261)
                                 =========   =========   =========
</TABLE>

     The following table sets forth the funded status and amounts recognized in
the Company's balance sheet for its defined benefit plan at December 31, 2002
and 2001:

<TABLE>
<CAPTION>
                                           December 31,
                                     -------------------------
                                        2002          2001
                                     -----------   -----------
<S>                                  <C>           <C>
Actuarial present value of vested
   accumulated benefit obligations   $ 1,435,631   $ 1,413,923
Actuarial present value of
   accumulated benefit obligations     1,441,790     1,416,491
                                     -----------   -----------
Projected benefit obligations        $(1,441,790)  $(1,496,907)
Fair value of plan assets              1,515,166     1,809,700
                                     -----------   -----------
Excess of projected benefit
   obligation over fair value
   of plan assets                         73,376       312,793
Unrecognized prior service cost          175,984       194,354
Unrecognized net loss                    342,903       102,293
Adjustment required to recognize
   minimum liability                           0             0
                                     -----------   -----------
Prepaid pension cost, included
   in other assets                   $   592,263   $   609,440
                                     ===========   ===========
</TABLE>


                                       59




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE L - (continued)

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.
Upon the notice of termination, all participant benefits vest 100%.

<TABLE>
<CAPTION>
                                               December 31,
                                             ---------------
                                              2002     2001
                                             ------   ------
                                              (In thousands)
<S>                                          <C>      <C>
Change in benefit obligation
   Benefit obligation at beginning of year   $1,193   $1,116
   Service cost                                  --       --
   Interest cost                                 84       85
   Actual loss                                   85       81
   Benefits paid                                (91)     (89)
                                             ------   ------
   Benefits obligations at end of year        1,271    1,193

Change in plan assets
   Fair value of plan assets
      at beginning of year                    1,309    1,518
   Actual return on plan assets                (917)    (127)
   Employer contribution                         --        7
   Benefits paid                                (91)     (89)
                                             ------   ------
   Fair value of plan assets
      at end of year                          1,127    1,309
   Funded status                               (144)     116
   Unrecognized net actuarial loss              340       80
                                             ------   ------
   Prepaid benefit cost (included in
      other assets)                          $  196   $  196
                                             ======   ======
</TABLE>

Net pension cost included the following components:

<TABLE>
<CAPTION>
                                     Year Ended December 31,
                                     -----------------------
                                           2002   2001
                                           ----   ----
                                         (In thousands)
<S>                                        <C>    <C>
Service cost                               $ --   $ --
Interest cost on projected benefit
   obligation                                84     85
Expected return on plan assets              (88)   (99)
Purchase accounting change                   --     61
                                           ----   ----
Net periodic benefit cost                  $  4   $ 47
                                           ====   ====
</TABLE>

     The assumed discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.25% and 8.00% in 2002 and 2001, respectively.


                                       60




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE L - (continued)

3.   Postretirement Welfare Plan

     In addition to pension benefits, 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.

<TABLE>
<CAPTION>
                                              December 31,
                                             -------------
                                              2002    2001
                                             -----   -----
                                             (In thousands)
<S>                                          <C>     <C>
Change in benefit obligation
   Benefit obligation at beginning of year   $ 712   $ 667
   Service cost                                 --      --
   Interest cost                                50      51
   Actual gain                                   9      48
   Benefits paid                               (53)    (54)
                                             -----   -----
   Benefits obligation at end of year          718     712
                                             -----   -----

Change in plan assets
   Fair value of plan assets
      at beginning of year                      --      --
   Actual return on plan assets                 --      --
   Employer contribution                        53      54
   Benefits paid                               (53)    (54)
                                             -----   -----
   Fair value of plan assets
      at end of year                            --      --
                                             -----   -----

   Funded status                              (718)   (712)
   Unrecognized net actuarial loss              13       4
                                             -----   -----
   Accrued benefit cost (included in
      other liabilities)                     $ 705   $ 708
                                             =====   =====
</TABLE>

Net benefit cost included the following components:

<TABLE>
<CAPTION>
                               Year Ended December 31,
                               -----------------------
                                     2002   2001
                                     ----   ----
                                    (In thousands)
<S>                                   <C>    <C>
Service cost                          $--    $--
Interest cost on projected
   benefit obligation                  50     51
Actual return on plan assets           --     --
                                      ---    ---
Net periodic benefit cost             $50    $51
                                      ===    ===
</TABLE>

     The assumed discount rate used in determining the actuarial present value
of the projected benefit obligation was 7.25% and 8.00% in 2002 and 2001,
respectively.


                                       61




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE L - (continued)

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.

     Goshen Bank had a 401(k) profit sharing plan which covered substantially
all employees of the Goshen Bank prior to the acquisition by Berkshire. Each
employee could contribute up to 10% of their salary. Goshen Bank matched 100% of
the employee contribution up to a maximum of 3% of the employee's salary. This
plan was terminated and merged into the Bank's plan effective October 2001.

     The expense was $105,000 for the year ended December 31, 2002, $57,000 for
both the Bank and Goshen Bank plans for the year ended December 31, 2001 and
$29,000 for the Bank's plan for the year ended December 31, 2000.

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,
2002 and 2001, the balance accumulated under these arrangements was
approximately $248,000 and $242,000, 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.

NOTE M - COMMITMENTS AND CONTINGENCIES

1. Leases and Other Commitments

     The Company leases certain of its operating facilities under non-cancelable
operating leases expiring in 2003 through 2007. 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:

<TABLE>
<CAPTION>
Year Ending    (In thousands)
December 31,
------------
<S>                <C>
    2003           $  900
    2004              534
    2005              413
    2006              292
    2007              979
                   ------
                   $3,118
                   ======
</TABLE>

     Rental expense was approximately $811,000, $717,000 and $335,000 for the
fiscal years ended December 31, 2002, 2001 and 2000, respectively. Included in
rental expense was approximately $255,000, $255,000 and $18,000 for the fiscal
years ended December 31, 2002, 2001 and 2000, respectively, which was paid to a
company affiliated with a director of the Company.


                                       62




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE N - 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, 2002 and 2001 are outlined
below.

     For cash and cash equivalents, the recorded book values of $6.31 million
and $10.38 million at December 31, 2002 and 2001, 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.

<TABLE>
<CAPTION>
                                                December 31,
                                ---------------------------------------------
                                         2002                  2001
                                ---------------------   ---------------------
                                Carrying    Estimated   Carrying    Estimated
                                 amount    fair value    amount    fair value
                                --------   ----------   --------   ----------
                                              (In thousands)
<S>                             <C>         <C>         <C>         <C>
Investment securities           $371,458    $371,460    $242,579    $242,564
Loans, net of unearned income    275,497     278,252     252,040     289,482
Time Deposits                    311,979     312,117     199,951     200,237
</TABLE>

     The net loan portfolio at December 31, 2002 and 2001 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 values of the securities sold under agreements to repurchase and
other long-term borrowings totaling $104.37 million and $96.03 million are
estimated to approximate their recorded book balances at December 31, 2002 and
2001, respectively.

     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.


                                       63




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE N - (continued)

     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 are approximately $53,000 and $22,000 at December 31, 2002
and 2001, respectively.

NOTE O - 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:

<TABLE>
<CAPTION>
                                             December 31,
                                          -----------------
                                            2002     2001
                                          -------   -------
                                            (In thousands)
<S>                                       <C>       <C>
Commitments to extend credit              $13,432   $ 7,718
Standby letters of credit and financial
   guarantees written                         750       529
                                          -------   -------
                                          $14,182   $ 8,247
                                          =======   =======
Interest rate caps-notional amount        $20,000   $20,000
                                          =======   =======
</TABLE>

     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,
2002 varies up to 100%.


                                       64




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE O - (continued)

     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 a 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"
("SFAS No. 133"), 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. The accounting for changes in fair value of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship. 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. The Company
performs an assessment, both at the inception of the hedge and quarterly
thereafter, to determine whether these are highly effective in offsetting
changes in the value of the hedged items. The change in fair value of the swaps
attributed to hedge ineffectiveness was not material for the years ended
December 31, 2002 and 2001.

NOTE P - 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, 2002, the Bank meets all capital adequacy
requirements to which it is subject.

     As of December 31, 2002, 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.


                                       65




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

Note P - (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, 2002 and 2001
(dollars in thousands):

<TABLE>
<CAPTION>
                                                                                     To be well
                                                                                 capitalized under
                                                                For capital      prompt corrective
                                               Actual        adequacy purposes   action provisions
                                           ---------------   -----------------   -----------------
                                           Amount    Ratio    Amount    Ratio     Amount    Ratio
                                           ------    -----    ------    -----    -------    -----
<S>                                        <C>       <C>      <C>       <C>      <C>       <C>
December 31, 2002
Total Capital (to Risk-Weighted Assets)
   Company                                 $80,811   12.3%    $23,801   >=8.0%   $    --     N/A
   Bank                                     53,687   19.4%     22,193   >=8.0%    27,741   >=10.0%
Tier I Capital (to Risk-Weighted Assets)
   Company                                  78,496   26.4%     11,900   >=4.0%        --     N/A
   Bank                                     51,372   18.5%     11,096   >=4.0%    16,645   >= 6.0%
Tier I Capital (to Average Assets)
   Company                                  78,496   27.2%     25,468   >=4.0%        --     N/A
   Bank                                     51,372    7.8%     26,210   >=4.0%    32,763   >= 5.0%
</TABLE>

<TABLE>
<CAPTION>
                                                                                     To be well
                                                                                 capitalized under
                                                                For capital      prompt corrective
                                               Actual        adequacy purposes   action provisions
                                           ---------------   -----------------   -----------------
                                           Amount    Ratio    Amount    Ratio    Amount    Ratio
                                           ------    -----    ------    -----    ------    -----
<S>                                         <C>      <C>      <C>       <C>      <C>      <C>

December 31, 2001
Total Capital (to Risk-Weighted Assets)
  Company                                   79,867   20.5%    20,097    >=8.0%       --     N/A
  Bank                                      48,110   20.4%    18,841    >=8.0%   23,551   >=10.0%
Tier I Capital (to Risk-Weighted Assets)
  Company                                   77,837   31.0%    10,048    >=4.0%       --     N/A
  Bank                                      46,080   19.6%     9,421    >=4.0%   14,130   >= 6.0%
Tier I Capital (to Average Assets)
  Company                                   77,837   20.5%    15,194    >=4.0%       --     N/A
  Bank                                      46,080    9.6%    19,190    >=4.0%   23,988   >= 5.0%
</TABLE>


                                       66




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE Q - 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)

<TABLE>
<CAPTION>
                                                 December 31,
                                              -----------------
                                                2002      2001
                                              -------   -------
<S>                                           <C>       <C>
ASSETS

Cash                                          $ 7,439   $16,449
Equity investment in subsidiaries              71,276    64,225
Investment in securities available for sale     6,147     3,993
Loans                                           8,420     6,478
Accrued interest receivable                       430        37
Premises and equipment                          5,056     3,764
Other assets                                      294     1,371
                                              -------   -------
Total assets                                  $99,062   $96,317
                                              =======   =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Other liabilities                             $   537   $   325

Stockholders' equity
Common stock                                      256       256
Additional paid-in capital                     89,890    89,914
Retained earnings                              16,145    11,053
Accumulated other comprehensive income
   (loss), net                                  1,480      (281)
Common stock in treasury, at cost              (9,246)   (4,950)
                                              -------   -------
Total stockholders' equity                     98,525    95,992
                                              -------   -------
                                              $99,062   $96,317
                                              =======   =======
</TABLE>


                                       67




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE Q - (continued)

                         CONDENSED STATEMENTS OF INCOME
                                 (In Thousands)

<TABLE>
<CAPTION>
                            For The Years Ended December 31,
                            --------------------------------
                                 2002     2001     2000
                                ------   ------   -------
<S>                             <C>      <C>      <C>
INCOME
Interest income from
   the Bank                     $  207   $  836   $ 1,750
Interest income                  1,149    1,079     2,011
Gain on sales of
   investment securities             7       31    13,288
Other income (loss)                (73)     (92)      759
                                ------   ------   -------
Total income                     1,290    1,854    17,808

EXPENSES
Salaries and employee
   benefits                        243      217       111

Other expenses                     505      661       648
                                ------   ------   -------
Total expenses                     748      878       759
                                ------   ------   -------
Income before income
   taxes and equity in
   undistributed net
   income of the Bank              542      976    17,049

Equity in undistributed
   net income of the Bank        5,405    2,199       723
                                ------   ------   -------
Income before taxes              5,947    3,175    17,772
Provision (benefit) for
   income taxes                    350     (124)    5,706
                                ------   ------   -------
Net income                      $5,597   $3,299   $12,066
                                ======   ======   =======
</TABLE>


                                       68




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE Q - (continued)

                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                         For The Years Ended December 31,
                                         --------------------------------
                                           2002      2001       2000
                                         -------   --------   --------
<S>                                      <C>       <C>        <C>
  Operating activities:
Net income                               $ 5,597   $  3,299   $ 12,066
Adjustments to reconcile net
   income to net cash provided by
   (used in) operating activities:
Gain on sales of investment securities        (7)       (31)   (13,288)
Equity in undistributed net income of
   the Bank                               (5,405)    (2,199)      (723)
Increase (decrease in other
   liabilities                               214     (1,153)    (5,932)
(Increase) decrease in other assets          840      3,624       (445)
                                         -------   --------   --------

 Net cash provided by (used in)
   operating activities                    1,239      3,540     (8,322)
                                         -------   --------   --------

   Investing activities:
Investment in subsidiaries and
   affiliates                                 --         --       (390)
Cash paid for acquisition                     --    (20,222)        --
Proceeds from sales of common stock           --         --     13,267
Investment securities available
   for sale
   Purchases                              (2,965)        --         --
   Sales                                     775      1,124      4,421
Net (increase) decrease in loans          (1,942)     1,465      1,927
Purchase of premises and equipment        (1,292)    (3,764)        --
                                         -------   --------   --------
Net cash provided by (used in)
   investing activities                   (5,424)   (21,397)    19,290
                                         -------   --------   --------

   Financing activities:
Proceeds from exercise of
   common stock options                      102         90         28
Acquisition of treasury stock             (4,422)    (4,983)    (5,254)
Dividends paid                              (505)      (598)    (1,293)
                                         -------   --------   --------
Net cash (used in) financing
   activities                             (4,825)    (5,491)    (6,519)
                                         -------   --------   --------

   Net increase (decrease) in
      cash and cash equivalents           (9,010)   (23,348)     4,384
   Cash and cash equivalents at
      beginning of year                   16,449     39,797     35,413
                                         -------   --------   --------
   Cash and cash equivalents at
      end of year                        $ 7,439   $ 16,449   $ 39,797
                                         =======   ========   ========

Supplemental disclosures of cash
   flow information:
   Cash used to pay income taxes         $   146   $  1,385   $  6,418
</TABLE>


                                       69




<PAGE>


                     BERKSHIRE BANCORP INC. AND SUBSIDIARIES
             Notes to Consolidated Financial Statements (continued)

NOTE R - 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
                                 --------   -------   ------------   -----------
<S>                               <C>       <C>          <C>           <C>
               2002
Interest income                   $ 7,316   $ 8,097      $ 8,495       $ 8,334
Interest expense                   (3,050)   (3,358)      (3,564)       (3,444)
                                  -------   -------      -------       -------
Net interest income                 4,266     4,739        4,931         4,890
Provision for loan losses             (50)     (107)        (200)          (30)
Gain on sale of securities            196       127          681           535
Other operating income                273       218          117           140
Other operating expenses           (2,399)   (2,802)      (2,898)       (2,681)
                                  -------   -------      -------       -------
Income before taxes                 2,286     2,175        2,631         2,854
Provision (benefit) for taxes         980       988        1,118         1,263
                                  -------   -------      -------       -------
Net income                        $ 1,306   $ 1,187      $ 1,513       $ 1,591
                                  =======   =======      =======       =======

Per share data
   Net income per common share
   Basic                          $   .55   $   .51      $   .67       $   .71
                                  =======   =======      =======       =======
   Diluted                        $   .55   $   .51      $   .67       $   .70
                                  =======   =======      =======       =======
</TABLE>

<TABLE>
<CAPTION>
                                                Three Months Ended
                                 -----------------------------------------------
                                 March 31   June 30   September 30   December 31
                                 --------   -------   ------------   -----------
<S>                               <C>       <C>          <C>           <C>
               2001
Interest income                   $ 3,728   $ 6,789      $ 7,186       $ 7,238
Interest expense                   (1,712)   (3,531)      (3,435)       (3,199)
                                  -------   -------      -------       -------
Net interest income                 2,016     3,258        3,751         4,039
Provision for loan losses             (10)      (37)        (115)         (125)
Gain on sale of securities              3       480           12           142
Other operating income                165       258          174           189
Other operating expenses           (1,267)   (2,326)      (2,464)       (2,716)
                                  -------   -------      -------       -------
Income before taxes                   907     1,633        1,358         1,529
Provision (benefit) for taxes         501       705          714           208
                                  -------   -------      -------       -------
Net income                        $   406   $   928      $   644       $ 1,321
                                  =======   =======      =======       =======

Per share data
   Net income per common share
   Basic                          $   .21   $   .37      $   .26       $   .57
                                  =======   =======      =======       =======
   Diluted                        $   .21   $   .37      $   .26       $   .57
                                  =======   =======      =======       =======
</TABLE>


                                       70




<PAGE>


ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

     Not Applicable.


                                       71




<PAGE>


                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant.

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

<TABLE>
<CAPTION>
Name                    Age   Position(s)
----                    ---   ----------------------------
<S>                     <C>   <C>
Steven Rosenberg        54    President, Director
William L. Cohen        61    Director
Thomas V. Guarino       49    Director
Moses Marx              67    Director
Randolph B. Stockwell   56    Director
Moses Krausz            62    President of The Berkshire Bank
David Lukens            53    Senior Vice President, Chief Financial Officer of
                                 The Berkshire Bank
</TABLE>

     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 1990. 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 been a private
investor for over five 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. Guarino was elected a director in March 2001. He served as a
director of Goshen Savings Bank from 1996, and chairman of the Board of
Directors of GSB Financial Corporation from April 1998, until the
respective mergers of those companies into The Berkshire Bank and the
Company in March 2001. Mr. Guarino is the President and Senior Portfolio
Manager of the Hudson Valley Investment Advisors, Inc., an investment
management and advisory company, a position he has held since 1995. Prior
to that, he had been, since 1988, a Vice President of Fleet Investment
Advisors, Inc. and was Vice President in charge of investments of Norstar
Bank of the Hudson Valley from 1981 to 1988.

     Mr. Marx was elected a director in May 1995. Mr. Marx has been a
general partner in United Equities Company (a securities brokerage firm)
since 1954 and a general partner in United Equities (Commodities) Company
(a commodities brokerage firm) since 1972. He is also President of Momar
Corp. (a private investment company). Mr. Marx is a director of The Cooper
Companies, Inc.

     Mr. Stockwell was elected a director in July 1988. He has been 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 Berkshire Bank
since March 1992 and Chief Executive Officer since November 1993. Prior to
joining The Berkshire 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 Berkshire Bank since December 1999. 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.


                                       72




<PAGE>


Audit Committee Members, Financial Expert and Independence

     The Board of Directors of the Company has established an Audit
Committee comprised of three independent directors, Messrs. William L.
Cohen, Thomas V. Guarino and Randolph B. Stockwell. All of the members of
the Audit Committee meet the independence requirements under current
National Association of Securities Dealers corporate governance standards
for companies whose securities are quoted on NASDAQ. Based upon their
education and relevant experience, the Board of Directors has determined
that Messrs. Guarino and Stockwell each qualify as financial experts as
defined by the Sarbanes-Oxley Act of 2002 and the Securities and Exchange
Commission.

Principal Accountant 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, 2002   December 31, 2001
                                                               -----------------   -----------------
<S>                                                                <C>                 <C>
Audit Fees                                                         $111,399            $ 86,500

Audit Related Fees: Professional services rendered for                6,498              12,381
employee benefit plan audits, accounting assistance in
connection with acquisitions and consultations related to
financial accounting and reporting standards

Tax Fees                                                             71,009              59,478

All Other Fees: Professional services rendered for corporate             --                  --
support
</TABLE>

ITEM 11. Executive Compensation

     The following table shows the compensation paid in or with respect to
each of the last three fiscal years to the individual who served as the
Company's Chief Executive Officer for the fiscal ended December 31, 2002,
and to each of the other executive officers who were paid more than
$100,000 during the fiscal year ended December 31, 2002.

                         Summary Compensation Table (1)

<TABLE>
<CAPTION>
                                          Annual Compensation
                                          -------------------
                                                                 All Other
  Name and Principal Position      Year    Salary     Bonus     Compensation
--------------------------------   ----   --------   --------   ------------
<S>                                <C>    <C>        <C>          <C>
Steven Rosenberg                   2002   $167,500   $     --     $    --
   President, Chief Executive      2001   $152,500   $     --     $    --
   Officer and Chief Financial
   Officer                         2000   $125,000   $     --     $    --

Moses Krausz                       2002   $347,288   $175,000     $10,050(2)
   President and Chief Executive   2001   $330,750   $175,000     $ 9,300(2)
   Officer of The Berkshire Bank   2000   $310,000   $175,000     $ 8,665(2)

David Lukens                       2002   $125,000   $ 24,000     $ 5,367(3)
   Senior Vice President and       2001   $115,000   $ 24,000     $ 4,988(3)
   Chief Financial Officer of
   The Berkshire Bank              2000   $103,500   $ 18,000     $   812(3)
</TABLE>

----------
(1)  Does not include one employee of The Berkshire Bank, not deemed to be an
     executive officer of the Company, who was paid $122,000 in fiscal 2000.
     Does not include the annual retirement credits of 5% of gross wages under
     the Company's Retirement Income Plan.

(2)  Consists of contributions by the Company to a 401(k) account of $6,000,
     $5,250 and $5,250, respectively, in 2002, 2001 and 2000, and income
     associated with life insurance coverage in excess of $50,000.


                                       73




<PAGE>


(3)  Consists of contributions by the Company to a 401(k) account of $4,470 and
     $4,170, respectively, in 2002 and 2001, and income associated with life
     insurance coverage in excess of $50,000 in 2002, 2001 and 2000.

                        Option Grants in Last Fiscal Year

     There were no stock option grants during the fiscal year ended December 31,
2002.

         Aggregated Option Exercises and Fiscal Year-End Option Values

     The following table sets forth information concerning options exercised
during the fiscal year ended December 31, 2002, and the number of options owned
and the value of any in-the-money unexercised options as of December 31, 2002 by
any of the individuals named in the Summary Compensation Table.

<TABLE>
<CAPTION>
                                            Number of
                                           Unexercised
                    Shares                 Options at
                   Acquired              Fiscal Year-End     Value of Unexercised
                      on        Value          (#)         In-the-Money Options at
                   Exercise   Realized     Exercisable       Fiscal Year-End ($)
Name                  (#)        ($)     /Unexercisable    Exercisable/Unexercisable
----               --------   --------   ---------------   -------------------------
<S>                  <C>        <C>        <C>                     <C>
Steven Rosenberg     -0-        -0-        10,000 / 0              43,100 / 0
Moses Krausz         -0-        -0-        50,000 / 0              86,200 / 0
David Lukens         -0-        -0-        10,000 / 0              34,350 / 0
</TABLE>

----------
Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end market
value of the common stock. An Option is "in-the-money" if the fiscal year end
fair market value of the Common Stock exceeds the option exercise price.

Compensation of Directors

     Each director who is not also an employee of the Company (a "Non-Employee
Director") receives a stipend of $12,000 per annum and $1,000 for each day
during which he participates in a meeting of the Board or a Committee of the
Board. Each Non-Employee Director also receives fees ranging from $100 to $1,000
for telephonic meetings of the Board or a Board Committee depending upon the
length of the meeting. In addition, see "1999 Stock Incentive Plan" below.

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 200,000 shares of common stock of
the Company may be issued pursuant to the 1999 Stock Incentive Plan (subject to
appropriate adjustment in the event of changes in the corporate structure of the
Company). Officers, directors and other key employees of the Company or any
subsidiary 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, 2002,
options to acquire 187,419 shares of common stock have been granted under this
plan and 12,581 options are available for future grants.


                                       74




<PAGE>


Retirement Income Plan

     The Company has a Retirement Income Plan (the "Retirement Plan"), a
noncontributory plan covering substantially all full-time, non-union United
States employees of the Company. Benefits were based upon a combination of
employee compensation and years of service. The Company paid the entire cost of
the plan for its employees and funded such costs as they accrued. The Company's
funding policy was to make annual contributions within minimum and maximum
levels required by applicable regulations. The Company's 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, the Company did not accrue
benefits for future services; however, the Company did continue to contribute as
necessary for any unfunded liabilities. In 2000, the Company reinstated the
Retirement Plan to cover substantially all full-time, non-union United States
employees of the Company.

     A participant in the 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. The Company pays the entire cost of the Plan for
its employees and funds such costs as they accrue.

     The estimated annual benefits payable under the Plan upon retirement (at
the normal retirement age of 65) for Messrs. Rosenberg and Lukens are
approximately $160,000 and $15,000, respectively. In accordance with the laws
currently governing the Plan, the estimated annual benefit payable to Mr.
Rosenberg is not expected to increase. Mr. Krausz is not a participant in the
Plan. (see Note L of Notes to Consolidated Financial Statements).

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
         Equity Compensation Plans.

     The following table sets forth certain information as of March 14, 2003
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors and executive
officers, and (iii) all executive officers and directors as a group.

<TABLE>
<CAPTION>
                                        Number of      Percent
                                         Shares       of Class
                                       ----------     --------
<S>                                    <C>             <C>
William Cohen                              2,500 (1)     *
Thomas V. Guarino                         31,781 (2)    1.4%
Moses Krausz                              64,800 (3)    2.8%
David Lukens                              10,200 (4)     *
Moses Marx                             1,048,620 (5)   46.8%
160 Broadway
New York, NY 10038
Steven Rosenberg                          20,861 (6)     *
Randolph B. Stockwell                      8,000 (7)     *
All executive officers and directors
as a group (7 persons)                 1,186,762 (8)   51.1%
</TABLE>

----------
* Less than 1%

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


                                       75




<PAGE>


(2)  Includes 13,195 shares issuable upon the exercise of options which have
     been granted to Mr. Guarino under the Company's 1999 Stock Incentive Plan.
     Includes 2,286 shares held in trust for minor children and 301 shares held
     by Mr. Guarino's wife

(3)  Includes 50,000 shares issuable upon the exercise of options which have
     been granted to Mr. Krausz under the Company's 1999 Stock Incentive Plan.
     Does not include 503 shares owned by Mr. Krausz's spouse.

(4)  Includes 10,000 shares issuable upon the exercise of options which have
     been granted to Mr. Lukens under the Company's 1999 Stock Incentive Plan.

(5)  Includes 1,000 shares issuable upon the exercise of options which have been
     granted to Mr. Marx under the Company's 1999 Stock Incentive Plan and
     125,000 shares owned by Momar Corporation. Does not include 43,067 shares
     owned by Eva and Esther, L.P. of which Mr. Marx has an 80.5% limited
     partnership interest. Mr. Marx's daughters and their husbands are the
     general partners of Eva and Esther, L.P.

(6)  Includes 10,000 shares issuable upon the exercise of options which have
     been granted to Mr. Rosenberg under the Company's 1999 Stock Incentive
     Plan.

(7)  Includes 1,000 shares issuable upon the exercise of options which have been
     granted to Mr. Stockwell under the Company's 1999 Stock Incentive Plan.

(8)  Includes 86,195 shares of Common Stock which are issuable upon the exercise
     of outstanding options.

Equity Compensation Plans

     The following table details information regarding the Company's existing
equity compensation plans as of December 31, 2002.

<TABLE>
<CAPTION>
                                                                                    (c)
                                                                           Number of securities
                                   (a)                    (b)             remaining available for
                        Number of securities to     Weighted-average       future issuance under
                        be issued upon exercise    exercise price of     equity compensation plans
                        of outstanding options,   outstanding options,     (excluding securities
Plan Category             warrants and rights     warrants and rights     reflected in column (a)
-------------           -----------------------   --------------------   -------------------------
<S>                             <C>                     <C>                       <C>
Equity compensation             177,501                 $30.30                    12,581
plans approved by
security holders

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

Total                           177,501                 $30.30                    12,581
</TABLE>

ITEM 13. Certain Relationships and Related Transactions.

     In April 2001 and June 1999, the Company made term loans in the principal
amount of $2,000,000 and $2,000,000, respectively, to Pharmaceutical Holdings
Corp., a Delaware corporation, the principal stockholder of which is Momar. Such
loans were made on substantially the same terms, including interest rate, as
those prevailing at that time for comparable loans to unrelated parties and did
not involve more than normal risk of collectibility or present other unfavorable
features. The notes, which bear interest at the prime rate plus 0.50%, are due
in March 2003 and June 2003.

     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. The Company 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, $237,000 in fiscal
2002 and 2001, 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.


                                       76




<PAGE>


     In December 1999, the Bank loaned $1,500,000 to Ecogen, Inc., a corporation
in which Mr. Marx may be deemed a principal stockholder. The loan was guaranteed
by Momar. Contemporaneously with the making of the loan, Momar purchased a 100%
interest in such loan on a non-recourse basis for a purchase price equal to the
outstanding balance of the loan. The Bank services such loan on behalf of Momar
for no additional consideration. Such loan was made on substantially the same
terms, including interest rate and collateral, as those prevailing at that time
for comparable loans to unrelated parties and did not involve more than normal
risk of collectibility or present other unfavorable features. In July 2002, the
loan was repaid in full.

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

ITEM 14.  Controls and Procedures

Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Annual Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of 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 controls and procedures for financial reporting" ("Internal Controls")
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,
subject to the limitations noted above, the Disclosure Controls are effective to
timely alert management to material information relating to the Company during
the period when its periodic reports are being prepared.

In accordance with SEC requirements, the CEO/CFO notes that, since the date of
the Controls Evaluation to the date of this Annual Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.


                                       77




<PAGE>


                                     PART IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

     (a)  Documents filed as part of this Report:

     (i)  Financial Statements

     Report of Independent Certified Public Accountants

     Consolidated Balance Sheets as of December 31, 2002 and 2001

     Consolidated Statements of Income for the Years Ended December 31, 2002,
     2001 and 2000

     Consolidated Statements of Stockholders' Equity for the Years Ended
     December 31, 2002, 2001 and 2000

     Consolidated Statements of Cash Flows for the Years Ended December 31,
     2002, 2001 and 2000

     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.

     (iii) 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).

 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      Stock Incentive Plan for Non-Employee Directors of the Company
          (incorporated by reference to Exhibit 10.15 to the Company's Annual
          Report on Form 10-K for the Fiscal Year Ended October 31, 1991).

10.2      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).'D'

10.3      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).'D'

10.4      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).'D'

10.5      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).


                                       78




<PAGE>


10.6      Amendment No. 1 to Employment Agreement, dated August 1, 2001, by and
          between The Berkshire Bank and Moses Krausz (incorporated by reference
          to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
          Quarterly Period Ended September 30, 2001).'D'

10.7      Amendment No. 1 to Employment Agreement, dated June 3, 2002, by and
          between The Berkshire Bank and David Lukens (incorporated by reference
          to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
          Quarterly Period Ended June 30, 2002).'D'

21.       Subsidiaries of the Company.

23.       Consent of Independent Certified Public Accountant

99.1      Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.

----------
'D' Denotes a management compensation plan or arrangement.

          (b)  Reports on Form 8-K.
          None.


                                       79




<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company 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 21, 2003
                                              --------------

     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 Company
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 21, 2003
--------------------------
    Steven Rosenberg


/s/ William Cohen            Director                March 21, 2003
--------------------------
    William Cohen


/s/ Thomas V. Guarino        Director                March 21, 2003
--------------------------
    Thomas V. Guarino


/s/ Moses Marx               Director                March 21, 2003
--------------------------
    Moses Marx


/s/ Randolph B. Stockwell    Director                March 21, 2003
--------------------------
    Randolph B. Stockwell


                                       80




<PAGE>


           Certification of Principal Executive and Financial Officer

I, Steven Rosenberg the Chief Executive Officer, President and Chief Financial
Officer of Berkshire Bancorp Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Berkshire Bancorp Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
     information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

     b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

     a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal
     controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 21, 2003


                                              /s/ Steven Rosenberg
                                              ----------------------------------
                                              Steven Rosenberg,
                                              Chief Executive Officer, President
                                              and Chief Financial Officer


                                       81



         Statement of Differences Most Commonly Used Symbols

The dagger symbol shall be expressed as............................... 'D'
The greater-than-or-equal-to sign shall be expressed as................ >=