SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended      September 30, 2004
                               ------------------------------

                                       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 0-24751
                                                -------

                             Salisbury Bancorp, Inc.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

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

5 Bissell Street      Lakeville     Connecticut                    06039
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)

Registrants Telephone Number, Including Area Code     (860) 435-9801
                                                  ----------------------

              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

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 whether the registrant is an accelerated filer. Yes |_|
No |X|

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

  Indicate the number of shares outstanding of each of the issuer's classes of
    common stock, as of the latest practicable date: as of October 31, 2004,
                    there were 1,682,401 shares outstanding.
                               -----------------------------


<PAGE>

                             SALISBURY BANCORP, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                               <C>
Part I. FINANCIAL INFORMATION                                                    Page

Item 1.  Financial Statements:                                                     3

         Condensed Consolidated Balance Sheets -September 30, 2004 (unaudited)
                 and December 31, 2003                                             4
         Condensed Consolidated Statements of Income -three and nine months
                 ended September 30, 2004 and 2003  (unaudited)                    5
         Condensed Consolidated Statements of Cash Flows -nine months ended
                 September 30, 2004 and 2003 (unaudited)                           6

         Notes to Condensed Consolidated Financial Statements (unaudited)          8

Item 2.  Management's Discussion and Analysis of Financial Condition and
                 Results of Operations                                            12

Item 3.  Quantitative and Qualitative Disclosures about Market Risk               20

Item 4.  Controls and Procedures                                                  20

Part II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                        21

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds              21

Item 3.  Defaults Upon Senior Securities                                          21

Item 4.  Submission of Matters to a Vote of Security Holders                      21

Item 5.  Other Information                                                        21

Item 6.  Exhibits                                                                 21

Signatures                                                                        22
</TABLE>


                                       2
<PAGE>

                          Part I--FINANCIAL INFORMATION
                          Item 1. Financial Statements.


                                       3
<PAGE>

                             SALISBURY BANCORP, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                  (amounts in thousands, except per share data)
                    September 30, 2004 and December 31, 2003

<TABLE>
<CAPTION>
                                                                              SEPTEMBER 30,  DECEMBER 31,
                                                                                  2004          2003
                                                                                  ----          ----
                                                                              (unaudited)
<S>                                                                            <C>            <C>
ASSETS
------
Cash & due from banks                                                          $  8,920       $  7,688
Interest bearing demand deposits with other banks                                 8,727          1,668
Money market mutual funds                                                           480            501
Federal funds sold                                                                   30          2,272
                                                                               --------       --------
         Cash and cash equivalents                                               18,157         12,129
Investment in available-for-sale securities (at fair value)                     177,094        143,020
Investments in held to maturity securities (fair values of $222 as
    of September 30, 2004 and $235 as of December 31, 2003)                         221            229
Federal Home Loan Bank stock, at cost                                             5,413          3,771
Loans, less allowance for loan losses of $2,462 as of September 30, 2004
   and $1,664 as of December 31, 2003                                           201,848        139,563
Loans held-for-sale                                                                 156            275
Investment in real estate                                                            75             75
Premises and equipment                                                            5,735          2,892
Goodwill                                                                          9,764          2,358
Core deposit intangible                                                           1,863            732
Accrued interest receivable                                                       2,247          1,876
Cash surrender value of life insurance policies                                   3,271          3,154
Other assets                                                                      1,511          1,026
                                                                               --------       --------
Total Assets                                                                   $427,355       $311,100
                                                                               ========       ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
      Noninterest-bearing                                                      $ 65,961       $ 43,631
      Interest-bearing                                                          232,741        174,826
                                                                               --------       --------
         Total Deposits                                                         298,702        218,457
Federal Home Loan Bank advances                                                  81,218         60,897
Due to Brokers                                                                    2,292              0
Other liabilities                                                                 3,886          2,896
                                                                               --------       --------
         Total Liabilities                                                      386,098        282,250
                                                                               --------       --------
Shareholders' equity:
   Common stock, par value $.10 per share; authorized 3,000,000 shares;
      issued and outstanding 1,682,401 shares at September 30, 2004
      and 1,424,078 shares at December 31, 2003                                     168            142
   Paid-in capital                                                               13,032          2,327
   Retained earnings                                                             27,571         25,695
   Accumulated other comprehensive income                                           486            686
                                                                               --------       --------
         Total Shareholders' Equity                                              41,257         28,850
                                                                               --------       --------
 Total Liabilities and Shareholders' Equity                                    $427,355       $311,100
                                                                               ========       ========
</TABLE>

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


                                       4
<PAGE>

                             SALISBURY BANCORP, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                  (amounts in thousands, except per share data)
                           September 30, 2004 and 2003
                                   (unaudited)

<TABLE>
<CAPTION>
                                                             Nine Months Ended     Three Months Ended
                                                               September 30           September 30
                                                              2004       2003       2004        2003
                                                             ------     ------     ------      ------
<S>                                                          <C>        <C>        <C>         <C>
Interest and dividend income:
   Interest and fees on loans                                $6,700     $6,947     $2,376      $2,315
   Interest and dividends on securities:
   Taxable                                                    3,253      3,239      1,134         959
   Tax-exempt                                                 1,614      1,555        551         530
   Dividends on equity securities                                71         83         25          29
   Other interest                                                37         30         19          16
                                                             ------     ------     ------      ------
         Total interest and dividend income                  11,675     11,854      4,105       3,849
                                                             ------     ------     ------      ------
 Interest expense:
   Interest on deposits                                       1,876      2,211        660         684
   Interest on Federal Home Loan Bank advances                2,056      2,092        730         632
                                                             ------     ------     ------      ------
         Total interest expense                               3,932      4,303      1,390       1,316
                                                             ------     ------     ------      ------
Net interest and dividend income                              7,743      7,551      2,715       2,533
Provision for loan losses                                       180        113         60          38
                                                             ------     ------     ------      ------
         Net interest and dividend income after provision
         for loan losses                                      7,563      7,438      2,655       2,495
                                                             ------     ------     ------      ------
Other income:
   Trust department income                                    1,007        862        300         300
   Service charges on deposit accounts                          463        403        157         134
   Gain on sales of available-for-sale securities, net        1,029        767        387         212
   Gain on sale of loans held-for-sale                          212        198         63         150
   Other income                                                 627        587        217         159
                                                             ------     ------     ------      ------
         Total other income                                   3,338      2,817      1,124         955
                                                             ------     ------     ------      ------
Other expense:
   Salaries and employee benefits                             4,142      3,461      1,620       1,196
   Occupancy expense                                            259        266         96          84
   Equipment expense                                            404        420        123         179
   Data processing                                              465        419        165         147
   Insurance                                                     87         77         29          26
   Printing and stationery                                      153        129         40          40
   Legal expense                                                 69         88          7          17
  Amortization of core deposit intangible                        56         51         22          17
  Other expense                                               1,687      1,163        883         368
                                                             ------     ------     ------      ------
         Total other expense                                  7,322      6,074      2,985       2,074
                                                             ------     ------     ------      ------
         Income before income taxes                           3,579      4,181        794       1,376
Income taxes (benefit)                                          615      1,136         (2)        361
                                                             ------     ------     ------      ------
         Net income                                          $2,964     $3,045     $  796      $1,015
                                                             ======     ======     ======      ======
Earnings per common share                                    $ 2.05     $ 2.14     $  .54      $  .71
                                                             ======     ======     ======      ======
</TABLE>

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


                                       5
<PAGE>

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

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 -----------------------------------------------
                             (amounts in thousands)
                  Nine months ended September 30, 2004 and 2003
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                   2004         2003
                                                                   ----         ----
<S>                                                             <C>          <C>
Cash flows from operating activities:
   Net income                                                   $  2,964     $  3,045
Adjustments to reconcile net income to net cash provided by
       operating activities:
         Accretion of securities, net                                231          300
         Gain on sales of available-for-sale securities, net       1,029         (767)
         Provision for loan losses                                   180          113
         Net decrease in loans held-for-sale                         119            0
         Depreciation and amortization                               285          300
         Amortization of core deposit intangible                      60           51
         Net accretion of fair value adjustments                      (4)         (11)
         (Increase) decrease in interest receivable                 (371)         126
         Increase in prepaid expenses                               (414)        (202)
         Decrease (increase) increase in other assets              1,009         (118)
         (Decrease) increase in taxes payable                        (69)         137
         Decrease in accrued expenses                                (89)        (265)
         Increase (decrease) in interest payable                     100          (92)
         Increase in other liabilities                             1,188           50
                                                                --------     --------

Net cash provided by operating activities                          6,218        2,667
                                                                --------     --------

Cash flows from investing activities:
  Purchase of Federal Home Loan Bank stock                          (351)        (826)
  Purchases of available-for-sale securities                     (99,049)     (63,840)
  Proceeds from sales of available-for-sale securities            78,524       32,049
  Proceeds from maturities of available-for-sale securities       28,200       26,734
  Proceeds from maturities of held-to-maturity securities              9           89
  Investment in life insurance policies                                0       (3,000)
  Loan originations and principal collections, net                (7,694)      (9,245)
  Recoveries of loans previously charged-off                          17           24
  Capital expenditures                                              (772)        (437)
  Cash paid to Canaan National Bancorp, Inc. shareholders         (6,020)           0
  Cash and cash equivalents acquired from Canaan National
     Bancorp, Inc. net of expenses paid of $310,000                2,487            0
                                                                --------     --------

Net cash used in investing activities                             (4,649)     (18,452)
                                                                --------     --------
</TABLE>

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


                                       6
<PAGE>

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

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 -----------------------------------------------
                             (amounts in thousands)
                  Nine months ended September 30, 2004 and 2003
                                   (unaudited)
                                   (continued)

<TABLE>
<CAPTION>
                                                                   2004         2003
                                                                   ----         ----
<S>                                                              <C>          <C>
Cash flows from financing activities:
   Net increase in demand deposits, NOW and
       savings accounts                                             5,892          893
   Net decrease in time deposits                                   (1,188)        (774)
   Advances from Federal Home Loan Bank (FHLB)                     34,295       26,325
   Principal payments on advances from Federal Home Loan Bank     (33,561)     (10,756)
   Dividends paid                                                  (1,011)        (982)
   Issuance of common stock                                            32           24
                                                                 --------     --------
Net cash provided by financing activities                           4,459       14,730
                                                                 --------     --------
Net increase in cash and cash equivalents                           6,028       (1,055)
Cash and cash equivalents at beginning of year                     12,129       10,620
                                                                 --------     --------
Cash and cash equivalents at end of period                       $ 18,157     $  9,565
                                                                 ========     ========

Supplemental disclosures:
   Interest paid                                                 $  3,832     $  4,395
   Income taxes paid                                                  545          999

Canaan National Bancorp, Inc. merger:
      Cash and cash equivalents acquired                         $  2,797
      Securities portfolio including FHLB stock acquired           44,124
      Loans acquired                                               54,787
      Fixed assets acquired                                         2,356
      Other assets acquired                                         1,193
      Identifiable intangible assets                                1,191
                                                                 --------
                                                                  106,448
                                                                 --------
      Deposits assumed                                             75,541
      Borrowings assumed                                           19,587
      Other liabilities assumed                                     1,698
                                                                 --------
                                                                   96,826
                                                                 --------
      Net assets acquired                                           9,622
      Merger costs                                                 17,028
                                                                 --------
          Goodwill                                               $  7,406
                                                                 ========
</TABLE>

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


                                       7
<PAGE>

                             SALISBURY BANCORP, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 1 - BASIS OF PRESENTATION
------------------------------

The  accompanying   condensed  consolidated  interim  financial  statements  are
unaudited and include the accounts of Salisbury  Bancorp,  Inc. (the "Company"),
those of  Salisbury  Bank and  Trust  Company  (the  "Bank"),  its  wholly-owned
subsidiary  and the Bank's  subsidiary,  S.B.T.  Realty,  Inc. The  consolidated
financial statements have been prepared in accordance with accounting principles
generally  accepted in the United States of America (GAAP) for interim financial
information and with the instructions to SEC Form 10-Q. Accordingly, they do not
include  all  the  information  and  footnotes  required  by GAAP  for  complete
financial  statements.  All significant  intercompany  accounts and transactions
have been eliminated in the consolidation.  These financial  statements reflect,
in the  opinion  of  Management,  all  adjustments,  consisting  of only  normal
recurring  adjustments,  necessary  for a fair  presentation  of  the  Company's
financial  position and the results of its operations and its cash flows for the
periods  presented.  Operating  results for the nine months ended  September 30,
2004 are not necessarily  indicative of the results that may be expected for the
year ending  December 31, 2004.  These  financial  statements  should be read in
conjunction  with the financial  statements  and notes  thereto  included in the
Company's 2003 Annual Report on Form 10-K.

The year-end  condensed  balance  sheet data was derived from audited  financial
statements, but does not include all disclosures required by GAAP.

NOTE 2 -COMPREHENSIVE INCOME
----------------------------

Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting
Comprehensive  Income,"  establishes  standards for disclosure of  comprehensive
income,  which  includes  net income and any  changes in equity  from  non-owner
sources  that are not recorded in the income  statement  (such as changes in the
net  unrealized  gains  (losses)  on  securities).   The  purpose  of  reporting
comprehensive income is to report a measure of all changes in equity that result
from recognized  transactions and other economic events of the period other than
transactions  with owners in their capacity as owners.  The Company's one source
of other comprehensive income is the net unrealized gain (loss) on securities.

Comprehensive Income

                                      Nine months ended      Three months ended
                                         September 30            September 30
                                       2004        2003        2004       2003
                                       ----        ----        ----       ----

Net income                           $ 2,964     $ 3,045     $   796    $ 1,015
Net unrealized (losses) gains
 on securities during period            (200)     (1,239)      2,928     (1,991)
                                     -------     -------     -------    -------
Comprehensive income (loss)          $ 2,764     $ 1,806     $ 3,724    $  (976)
                                     =======     =======     =======    =======


                                       8
<PAGE>

NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------

In  October  2002,  the FASB  issued  SFAS No.  147,  "Acquisitions  of  Certain
Financial  Institutions"  ("SFAS No. 147"), an amendment of SFAS Nos. 72 and 144
and FASB Interpretation No. 9. SFAS No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions", and FASB Interpretation No. 9, "Applying APB
Opinions  No.  16 and 17  When a  Savings  and  Loan  Association  or a  Similar
Institution Is Acquired in a Business Combination  Accounted for by the Purchase
Method",  provided  interpretive  guidance on the  application  of the  purchase
method to  acquisitions  of  financial  institutions.  Except  for  transactions
between two or more mutual  enterprises,  SFAS No. 147 removes  acquisitions  of
financial  institutions from the scope of both Statement 72 and Interpretation 9
and requires that those  transactions  be accounted for in accordance  with SFAS
No.  141,  "Business  Combinations"  and  SFAS  No.  142,  "Goodwill  and  Other
Intangible  Assets."  Thus,  the  requirement  in paragraph 5 of Statement 72 to
recognize  (and  subsequently   amortize)  any  excess  of  the  fair  value  of
liabilities assumed over the fair value of tangible and identifiable  intangible
assets  acquired  as an  unidentifiable  intangible  asset no longer  applies to
acquisitions within the scope of SFAS No. 147. In addition,  SFAS No. 147 amends
SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets",
to include in its scope  long-term  customer-relationship  intangible  assets of
financial institutions such as depositor- and  borrower-relationship  intangible
assets and credit cardholder intangible assets.  Consequently,  those intangible
assets are subject to the same  undiscounted cash flow  recoverability  test and
impairment  loss  recognition  and  measurement  provisions  that  SFAS No.  144
requires for other long-lived assets that are held and used. Paragraph 5 of SFAS
No. 147, which relates to the  application of the purchase method of accounting,
was effective for acquisitions for which the date of acquisition was on or after
October 1, 2002.  The  provisions in paragraph 6 related to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets were effective on October 1, 2002.  Transition  provisions for previously
recognized unidentifiable intangible assets in paragraphs 8-14 were effective on
October 1, 2002, with earlier application permitted.

In accordance with paragraph 9 of SFAS No. 147, the Company,  has  reclassified,
as of September  30,  2002,  it's  recognized  unidentifiable  intangible  asset
related  to branch  acquisition(s).  This  asset was  reclassified  as  goodwill
("reclassified  goodwill"). The amount reclassified was $2,357,884, the carrying
amount as of January 1, 2002. The  reclassified  goodwill is being accounted for
and reported  prospectively as goodwill under SFAS No. 142, with no amortization
expense.  In accordance  with SFAS No. 147, the Company tested its  reclassified
goodwill for impairment as of December 31, 2003. The Company determined that its
reclassified goodwill as of that date was not impaired.

Also in accordance  with  paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company  reclassified  its then existing core deposit  intangible  asset and
accounted for it as an asset apart from the unidentifiable  intangible asset and
not as goodwill.

In April 2003, the FASB issued SFAS No. 149,  "Amendment of Statement No. 133 on
Derivative  Instruments and Hedging  Activities"  ("SFAS No. 149"), which amends
and clarifies  financial  accounting and reporting for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities under SFAS No. 133,  "Accounting for Derivative  Instruments
and Hedging Activities." This Statement (a) clarifies under what circumstances a
contract  with  an  initial  net  investment  meets  the   characteristic  of  a
derivative;  (b) clarifies when a derivative contains a financing component; (c)
amends the  definition  of an  underlying  to conform to  language  used in FASB
Interpretation No. 45, "Guarantor's  Accounting and Disclosure  Requirements for
Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others;" and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are
effective for contracts  entered into or modified after June 30, 2003. There was
no  substantial  impact on the Company's  consolidated  financial  statements on
adoption of this Statement.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments  with  Characteristics  of both  Liabilities  and Equity" ("SFAS No.
150").  This  Statement   establishes   standards  for  the  classification  and
measurement  of  certain  financial  instruments  with  characteristics  of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were  previously  classified  as equity must be  classified as a liability.
Most of the  guidance in SFAS No. 150 is  effective  for  financial  instruments
entered into or modified  after May 31, 2003,  and otherwise is effective at the
beginning  of the first  interim  period  beginning  after June 15,  2003.  This
Statement  did not  have  any  material  effect  on the  Company's  consolidated
financial statements.


                                       9
<PAGE>

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable  Interest  Entities"  ("FIN  46"),  in an  effort  to  expand  upon and
strengthen  existing  accounting  guidance that  addresses when a company should
include in its financial  statements the assets,  liabilities  and activities of
another entity. In December 2003, the FASB revised  Interpretation  No. 46, also
referred  to as  Interpretation  46(R)  ("FIN  46(R)").  The  objective  of this
interpretation  is not to restrict the use of variable  interest entities but to
improve  financial  reporting  by  companies  involved  with  variable  interest
entities.  Until now, one company  generally has included  another entity in its
consolidated  financial  statements  only if it  controlled  the entity  through
voting  interests.  This  interpretation  changes  that by  requiring a variable
interest  entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's  residual returns or both. The
Company was required to apply FIN 46, as revised,  to all entities subject to it
no later than the end of the first reporting period ending after March 15, 2004.
However,  prior to the required  application of FIN 46, as revised,  the Company
applied  FIN 46 or FIN  46(R)  to  those  entities  that  are  considered  to be
special-purpose  entities  as of the end of the  first  fiscal  year or  interim
period ending after December 15, 2003. The adoption of this  interpretation  has
not had a material effect on the Company's consolidated financial statements.

In  December  2003,  the FASB issued SFAS No. 132  (revised  2003),  "Employers'
Disclosures about Pensions and Other  Postretirement  Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement  revises   employers'   disclosures  about  pension  plans  and  other
postretirement  benefit plans. It does not change the measurement or recognition
of those plans  required by SFAS No. 87,  "Employers'  Accounting for Pensions,"
SFAS No. 88, "Employers'  Accounting for Settlements and Curtailments of Defined
Benefit  Pension  Plans  and  for  Termination  Benefits,"  and  SFAS  No.  106,
"Employers'  Accounting for  Postretirement  Benefits Other Than Pensions." This
Statement  retains  the  disclosure  requirements  contained  in SFAS  No.  132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it  replaces.  It  requires  additional  disclosures  to those  in the  original
Statement 132 about  assets,  obligations,  cash flows and net periodic  benefit
cost of defined benefit  pension plans and other defined benefit  postretirement
plans.  This Statement is effective for financial  statements  with fiscal years
ending after December 15, 2003 and interim periods  beginning after December 15,
2003. Adoption of this Statement did not have a material impact on the Company's
consolidated financial statements.

In December  2003,  the  American  Institute  of  Certified  Public  Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain
Loans or Debt  Securities  Acquired  in a  Transfer."  SOP 03-3  requires  loans
acquired  through a transfer,  such as a business  combination,  where there are
differences  in expected  cash flows and  contractual  cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual cash
flows over  expected  cash flows is not to be  recognized  as an  adjustment  of
yield,  loss accrual,  or valuation  allowance.  Valuation  allowances cannot be
created nor "carried  over" in the initial  accounting  for loans  acquired in a
transfer on loans subject to SFAS 114,  "Accounting  by Creditors for Impairment
of a Loan." This SOP is effective for loans  acquired in fiscal years  beginning
after December 15, 2004,  with early adoption  encouraged.  The Company does not
believe the  adoption of SOP 03-3 will have a material  impact on the  Company's
financial position or results or operations.


                                       10
<PAGE>

NOTE 4 - EMPLOYEES' DEFINED BENEFIT PENSION PLAN
------------------------------------------------

The following  summarizes the net periodic benefit cost for the three months and
nine months ended September 30:

<TABLE>
<CAPTION>
                                               Nine Months Ended            Three Months Ended
                                                 September 30,                 September 30,
                                               2004          2003          2004            2003
                                            -----------------------     -------------------------
<S>                                         <C>           <C>           <C>             <C>
Components of net periodic benefit cost:
   Service cost                             $ 180,701     $ 141,078     $  81,006       $  47,026
   Interest cost                              165,401       111,024        83,780          37,008
   Expected return on plan assets            (147,336)      (80,258)      (70,016)        (26,753)
   Amortization of:
      Prior service costs                      89,842           669        89,396*            223
      Transition obligation (asset)            53,423         6,504        49,087**         2,168
      Actuarial (gain) loss                    45,701             0        31,693               0
Settlements and curtailments                        0             0             0               0
                                            ---------     ---------     ---------       ---------
   Net periodic benefit cost                $ 387,732     $ 179,017     $ 264,946       $  59,672
                                            =========     =========     =========       =========
</TABLE>

*     Includes a one-time charge of $89,172 to reconcile unrecognized amounts
      with amortization schedule.

**    Includes a one-time charge of $46,921 to reconcile unrecognized amounts
      with amortization schedule.

The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:

Discount rate                      6.00%      6.00%            6.00%       6.00%
Average wage increase      Graded table%*     6.00%    Graded table%*      6.00%
Return on plan assets              7.25%      7.25%            7.25%       7.25%

*     5% at age 20 grading down to 3% at age 60 and beyond (effective to
      approximately 3.25%)


                                       11
<PAGE>

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

Business
--------

The following  provides  Management's  comments on the  financial  condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"),  a Connecticut
corporation  which is the holding  company for Salisbury  Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has five (5) full
service offices including a Trust Department  located in the towns of Lakeville,
Salisbury,   Sharon  and  North   Canaan,   Connecticut   and  South   Egremont,
Massachusetts.  The Company and Bank were formed in 1998 and 1848, respectively.
In order to  provide a strong  foundation  for  building  shareholder  value and
servicing  customers,   the  Company  remains  committed  to  investing  in  the
technological  and human  resources  necessary to  developing  new  personalized
financial products and services to meet the needs of customers.  This discussion
should be read in conjunction  with Salisbury  Bancorp,  Inc.'s Annual Report on
Form 10-K for the year ended  December 31, 2003. On September  10, 2004,  Canaan
National  Bancorp,  Inc.  merged  with and into the  Company  and those  offices
acquired opened as branch offices of the Bank on September 13, 2004.

RESULTS OF OPERATIONS
---------------------
Overview
--------

The  Company's  net income for the nine  months  ended  September  30,  2004 was
$2,964,000. This compares to earnings of $3,045,000 for the same period in 2003.
Earnings per share for the nine months ended  September  30, 2004 totaled  $2.05
per share which  compared to earnings  per share of $2.14 for the  corresponding
period in 2003.  The decrease is primarily  the result of costs  relating to the
merger with Canaan  National  Bancorp,  Inc. and the  upgrading of the Company's
core account processing system.

The Company's assets at September 30, 2004 totaled $427,355,000 which represents
growth of  $116,255,000  or 37.4% since  December  31,  2003.  This  increase is
primarily  attributable to the Bank's merger with Canaan National Bancorp, Inc.,
which was completed during September 2004. In connection with this  transaction,
the Bank received  approximately  $54,000,000 in loans,  a securities  portfolio
totaling approximately $44,000,000,  and recorded goodwill of $7.4 million. Also
included in the merger were Canaan  National  Bancorp,  Inc.'s  fixed assets and
bank  premises.  During  the first  nine  months of 2004,  non-performing  loans
increased  $1,264,000  to  $1,874,000.  Management  does not  believe  that this
increase  is  indicative  of any  trends,  but rather is  attributable  to a few
specific loans.  Deposits at September 30, 2004 totaled $298,702,000 as compared
to total  deposits  of  $218,457,000  at  December  31,  2003.  The  increase is
primarily  attributable to the  approximately  $76,000,000 in deposits that were
assumed in the merger with of Canaan National Bancorp, Inc.

As a result of the Company's third quarter financial  performance,  the Board of
Directors  declared a third  quarter  cash  dividend  of $.24 per common  share,
payable  October 29, 2004 to  shareholders  of record as of September  30, 2004.
This is the same as the cash dividend of $.24 per common share that was declared
for the first and second quarters of 2004.

The Company's risk based capital ratios at September 30, 2004, which include the
risk weighted assets and capital of the Bank, were 12.57% for tier 1 capital and
13.69% for total risk based capital.  The Company's  leverage ratio was 8.82% at
September 30, 2004.

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

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


                                       12
<PAGE>

                      NINE MONTHS ENDED SEPTEMBER 30, 2004
               AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003

Net Interest Income
-------------------

The Company's  earnings are primarily  dependent  upon net interest and dividend
income,  and to a lesser  extent  its  noninterest  income,  from its  community
banking  operations.  Net interest and dividend income is the difference between
interest and dividends earned on the loan and securities portfolios and interest
paid on  deposits  and  advances  from the Federal  Home Loan Bank.  Noninterest
income is primarily derived from the Trust Department, service charges and other
fees  related to deposit and loan  accounts  and from gains taken on the sale of
available-for-sale  securities.  For the following discussion,  net interest and
dividend income is presented on a fully  taxable-equivalent  ("FTE") basis.  FTE
interest income restates reported interest income on tax exempt securities as if
such  interest  were  taxed  at the  Company's  federal  tax rate of 34% for all
periods presented.

(amounts in thousands)
Nine months ended September 30                   2004         2003
                                                 ----         ----
Total Interest and Dividend Income             $11,675      $11,854
(financial statements)
Tax Equivalent Adjustment                          831          801
                                               -------      -------
Total Interest and Dividend Income
      (on an FTE basis)                         12,506       12,655
Total Interest Expense                           3,932        4,303
                                               -------      -------
Net Interest and Dividend Income-FTE           $ 8,574      $ 8,352
                                               =======      =======

Interest and dividend income on an FTE basis for the nine months ended September
30,  2004,  as  compared  to the same  period  in 2003,  decreased  $149,000  or
approximately  1.2%.  The  decrease  was  primarily  the result of a decrease in
interest and fees on loans,  due to competition  and an economic  environment of
generally lower interest rates.

Interest  expense  on  deposits  for the  first  nine  months  of  2004  totaled
$1,876,000,  a  decrease  of 15.2%  compared  to the same  period in 2003.  This
decrease is primarily the result of an economic  environment  of lower  interest
rates. Although Federal Home Loan Bank advances have increased, interest expense
on these  advances  decreased  $36,000  or 1.7% to  $2,056,000.  Total  interest
expense for the nine months ending September 30, 2004 was $3,932,000, a decrease
of $371,000 or 8.6% when compared to the same period in 2003.

Overall,  net interest and dividend income (on an FTE basis) increased  $222,000
or 2.7% to $8,574,000  for the period ended  September 30, 2004 when compared to
the same period in 2003.

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

Noninterest  income totaled  $3,338,000 for the nine months ended  September 30,
2004. This is an increase of $521,000 or 18.5% compared to the nine months ended
September 30, 2003. Continuing growth of the Trust Department has resulted in an
increase in trust  department  income of $145,000 or 16.8% to $1,007,000 for the
first nine months of 2004,  compared to the same period in 2003.  Gains on sales
of  available-for-sale  securities  increased  34.2% to $1,029,000 for the first
nine months of 2004 compared to the corresponding  period in 2003.This  increase
is primarily attributable to management's efforts to maximize the spreads in the
portfolio.  During the nine month period ended  September  30, 2004,  there were
opportunities  in the  market  that  resulted  in  taking  gains on sales  while
increasing  the yields in the  portfolio  at the same time.  Service  charges on
deposit  accounts  totaled  $463,000 which reflects an increase of 14.9% for the
period ended September 30, 2004 when compared to the first nine months of 2003.


                                       13
<PAGE>

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

Noninterest  expense  increased  20.5%  for the  first  nine  months  of 2004 as
compared to the same period in 2003. The  components of noninterest  expense and
the changes in the period were as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                              2004       2003      Change     % Change
--------------------------------------------------------------------------------------
<S>                                          <C>        <C>        <C>          <C>
 Salaries and employee benefits              $4,142     $3,461     $  681        19.7
 Occupancy expense                              259        266         (7)       (2.6)
 Equipment expense                              404        420        (16)       (3.8)
 Data processing                                465        419         46        11.0
 Insurance                                       87         77         10        13.0
 Printing and stationery                        153        129         24        18.6
 Legal expense                                   69         88        (19)      (21.6)
Amortization of core deposit intangible          56         51          5         9.8
Nonrecurring expenses of merger and data
   processing conversion                        546          0        546       100.0
Other expense                                 1,141      1,163        (22)       (1.9)
                                             ------     ------     ------
       Total other expense                   $7,322     $6,074     $1,248        20.5
                                             ======     ======     ======
</TABLE>

The increase in salary and employee  benefits is primarily due to an increase in
staff  attributable  to the merger with Canaan  National  Bancorp,  Inc. and the
required  employee time needed to make the extensive  system changes relating to
the core processing system,  along with salary increases and the increase in the
cost  of  employee   benefits.   The  increase  in  data  processing  costs  are
attributable to the changes made in the core processing  system during the third
quarter coupled with additional costs related to the merger.  In connection with
the merger with Canaan National Bancorp,  Inc. and the related conversion to the
new data processing system, the Company incurred various  nonrecurring  expenses
aggregating $546,000.

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

The income tax provision  for the first nine months of 2004 totaled  $615,000 in
comparison to $1,136,000  for the same nine month period in 2003.  This decrease
is primarily  attributable  to a decrease in taxable  income.  In addition,  the
Company formed a passive  investment  company.  A passive  investment  company's
structure is such that income earned results in a reduction of tax liability for
the Company.

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

Overall,  net income totaled  $2,964,000 for the nine months ended September 30,
2004.  This compares to net income of $3,045,000  for the same period in 2003, a
decrease of 2.7% and  represents  earnings of $2.05 per share.  This compares to
earnings per share of $2.14 for the  corresponding  period in 2003. The decrease
in net  income is  primarily  the  result of  additional  expenses  relating  to
enhancing the core account processing system along with the additional  expenses
associated with the merger with Canaan National Bancorp, Inc.

                      THREE MONTHS ENDED SEPTEMBER 30, 2004
              AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003

Net Interest Income
-------------------

For the following discussion, net interest and dividend income is presented on a
fully  taxable-equivalent  ("FTE") basis. FTE interest income restates  reported
interest  income on tax exempt loans and  securities  as if such  interest  were
taxed at the Company's federal tax rate of 34% for all periods presented.

(amounts in thousands)
Three months ended September 30                  2004        2003
                                                 ----        ----
Total Interest and Dividend Income              $4,105      $3,849
(financial statements)
Tax Equivalent Adjustment                          284         273
                                                ------      ------
Total Interest and Dividend Income
(on an FTE basis)                                4,389       4,122
Total Interest Expense                           1,390       1,316
                                                ------      ------
Net Interest and Dividend Income-FTE            $2,999      $2,806
                                                ======      ======


                                       14
<PAGE>

Interest  and  dividend  income  on an FTE  basis  for the  three  months  ended
September 30, 2004 increased $267,000 or approximately 6.5% compared to the same
period in 2003. The increase is primarily attributable to an increase in earning
assets  that is the result of the merger  with Canaan  National  Bancorp,  Inc.,
which closed in September 2004.

Interest  expense on  deposits  decreased  $24,000 or 3.5% for the period  ended
September 30, 2004 compared to the same period in 2003.  Although total deposits
have increased,  a continuing  economic  environment of lower interest rates has
caused this decrease.  Federal Home Loan Bank advances have increased.  Interest
expense on these advances have increased  $98,000 or 15.5% and totaled  $730,000
for the three  months ended  September  30, 2004  compared to the  corresponding
period in 2003. Total interest expense for the three months ending September 30,
2004 was $1,390,000  compared to total  interest  expense for the same period in
2003 of $1,316,000 an increase of $74,000 or 5.6%.

Overall,  net interest and dividend income (on an FTE basis) increased  $193,000
to  $2,999,000  for the three month period ended  September 30, 2004 compared to
the corresponding period in 2003.

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

Noninterest  income totaled  $1,124,000 for the three months ended September 30,
2004,  an increase  of  $169,000 or 17.7% as compared to $955,000  for the three
months ended September 30, 2003. Gains on sales of available-for-sale securities
totaled $387,000 for the third quarter of 2004 as compared to the  corresponding
period in 2003, an increase of $175,000 or 83.0%.

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

Noninterest  expense  totaled  $2,985,000  for  the  three  month  period  ended
September 30, 2004,  and increase of $911,000 or 43.9% as compared to $2,074,000
for the same  period in 2003.  The  components  of  noninterst  expense  and the
changes in the period were as follows:

<TABLE>
<CAPTION>
                                              2004       2003      Change    % Change
-------------------------------------------------------------------------------------
<S>                                          <C>        <C>        <C>         <C>
 Salaries and employee benefits              $1,620     $1,196     $  424       35.5
 Occupancy expense                               96         84         12       14.3
 Equipment expense                              123        179        (56)     (31.3)
 Data processing                                165        147         18       12.2
 Insurance                                       29         26          3       11.5
 Printing and stationery                         40         40          0          0
 Legal expense                                    7         17        (10)      58.8
Amortization of core deposit intangible          22         17          5       29.4
Nonrecurring expenses of merger and data
   processing conversion                        506          0        506      100.0
Other expense                                   377        368          9        2.4
                                             ------     ------     ------
       Total other expense                   $2,985     $2,074     $  911       43.9
                                             ======     ======     ======
</TABLE>

Salary and employee  benefit  expenses  increased due to an increase in staff as
the  result of the  Canaan  National  Bancorp,  Inc.  merger,  as well as salary
increases  and the  increase in the cost of employee  benefits of the  Company's
staff during the first nine months of 2004.  As part of a continuing  commitment
to technology, and as the result of the previously mentioned merger, preparation
time and resources  have resulted in an increase in salary  expenses.  Equipment
expenses have decreased as a result of a reduction in  unscheduled  facility and
equipment  maintenance  and  repair  costs  for the  three  month  period  ended
September 30, 2004 as compared to the same period in 2003. Data processing costs
increased  in 2004 when  compared to the same period in 2003.  This  increase is
primarily  the result of costs related to  maintaining  two  processing  systems
during the merger.  In connection with the merger with Canaan National  Bancorp,
Inc. and the related  conversion to the new data processing  system, the Company
incurred various nonrecurring expenses aggregating $506,000.

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

The income tax benefit  for the three  month  period  ended  September  30, 2004
totaled $2,000 in comparison to an income tax provision of $361,000 for the same
three month period in 2003 reflecting a decrease in taxable income.


                                       15
<PAGE>

In addition,  the Company formed a passive investment company.  The structure of
the company  creates tax advantages  that result in a reduction of tax liability
for the Company.

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

Overall,  net income totaled  $796,000 for the three months ended  September 30,
2004.  This compares to net income of $1,015,000  for the same period in 2003, a
decrease  of  $219,000  or  21.6%.  Earnings  per share  for the  quarter  ended
September  30, 2004 totaled $.54 per share.  This compares to earnings per share
of $.71 for the  corresponding  period in 2003.  The  decrease  in net income is
attributable to an increase in expenses that are directly related to the changes
in the core processing  system  enhancements and the merger with Canaan National
Bancorp,  Inc.,  which was  consummated  during  the third  quarter  of 2004 and
appears to be not indicative of any trend.

FINANCIAL CONDITION
-------------------

Total assets at September 30, 2004 were  $427,355,000,  compared to $311,100,000
at December 31,  2003,  an increase of 37.4%.  The increase  reflects the assets
acquired from the merger with Canaan National Bancorp, Inc.

Securities
----------

During the nine months ended  September  30,  2004,  the  securities  portfolio,
including  Federal  Home  Loan Bank  stock,  increased  $35,708,000  or 24.3% to
$182,728,000   from   $147,020,000   at  December  31,  2003.  The  increase  is
attributable to the assets acquired as part of the merger previously  mentioned.
The make up of the  securities  portfolio is diversified  among U.S.  Government
sponsored agencies,  mortgage-backed  securities and securities issued by states
of the United States and political subdivisions of the states.

Securities   are   classified   in   the   portfolio   as   either    securities
available-for-sale  or securities  held-to-maturity.  Almost all  securities are
classified as available-for-sale.  The securities reported as available-for-sale
are stated at fair value in the financial statements of the Company.  Unrealized
gains and losses on holdings  (accumulated other comprehensive  income/loss) are
not included in earnings,  but are reported as a net amount (less  expected tax)
in a separate  component of capital until  realized.  At September 30, 2004, the
unrealized gain net of tax was $486,000. This compares to an unrealized gain net
of tax of $686,000 at December 31, 2003. The  securities  reported as securities
held-to-maturity are stated at amortized cost.

Lending
-------

New  business  development  during the third  quarter of 2004,  coupled with the
loans  acquired  as part of the  previously  described  merger,  resulted  in an
increase in total loans  outstanding to $204,310,000 at September 30, 2004. This
compares to total loans  outstanding of  $141,227,000 at December 31, 2003. This
is an increase of $63,083,000 or 44.7%.

The following table  represents the composition of the loan portfolio  comparing
September 30, 2004 to December 31, 2003:

                                          September 30, 2004   December 31, 2003
                                          ------------------   -----------------
                                                 (amounts in thousands)
Commercial, financial and agricultural        $  13,551           $   9,149
Real Estate-construction and land
   development                                   13,193              15,307
Real Estate-residential                         130,885              90,806
Real Estate-commercial                           34,535              19,200
Consumer                                          9,797               6,692
Other                                             2,349                  73
                                              ---------           ---------
                                                204,310             141,227
Allowance for loan losses                        (2,462)             (1,664)
                                              ---------           ---------
Loans, net                                    $ 201,848           $ 139,563
                                              =========           =========


                                       16
<PAGE>

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

Total net loans at  September  30, 2004  increased  44.7% to  $201,848,000  when
compared to total net loans of $139,563,000 at December 31, 2003, reflecting the
merger  with  Canaan  National  Bancorp,  Inc as well as growth  within the loan
portfolio.   As  a  result  of  the  merger,  the  Bank  received  approximately
$54,000,000 in loans. At September 30, 2004 approximately 87% of the Bank's loan
portfolio  was  related to real  estate  products.  The  concentration  remained
consistent as  approximately  89% of the portfolio was related to real estate at
December 31, 2003. There were no material changes in the composition of the loan
portfolio during this period.

Credit risk is inherent in the business of extending  loans.  The Bank  monitors
the quality of the  portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise  compromise the Bank's objectives.  Because of this risk
associated with extending loans, the Bank maintains an allowance for loan losses
through charges to earnings.  The loan loss provision for the nine-month  period
ended  September  30, 2004 was $180,000  compared to $113,000 in the  comparable
period of 2003.

The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation  methods or  assumptions  that the Bank
uses in making this  determination  during the period ended  September 30, 2004.
Such evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which are submitted to the Bank's Board of Directors
for  approval.  Loans are  initially  risk  rated when  originated.  If there is
deterioration in the credit, the risk rating is adjusted accordingly.

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

      1.    Non-accrual status;

      2.    Loans over 90 days delinquent;

      3.    Troubled debt restructures consummated after December 31, 1994; or

      4.    Loans  classified  as "doubtful"  meaning that they have  weaknesses
            which  make  collection  or  liquidation  in full,  on the  basis of
            currently   existing   facts,   conditions,   and   values,   highly
            questionable and improbable.

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

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

The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management  recognizes the higher risk involved
in such  loans.  Concentrations  of credit and local  economic  factors are also
evaluated on a periodic  basis.  Historical  average net losses by loan type are
examined as well as trends by type.  The Bank's loan mix over the same period of
time is also  analyzed.  A loan  loss  allocation  is made for each type of loan
multiplied by the loan mix  percentage  for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
nine months ended September 30, 2004.

At  September  30,  2004,  the  allowance  for loan losses  totaled  $2,462,000,
representing 131.4% of nonperforming  loans, which totaled $1,874,000,  and 1.2%
of total loans of $204,310,000. This compares to an allowance for loan losses of
$1,664,000,  representing 272.8% of nonperforming loans, which totaled $610,000,
and 1.2% of total loans of $141,227,000 at December 31, 2003. A total of $38,000
of loans were charged off by the Bank during the nine months ended September 30,
2004.  These  charged-off  loans  consisted  primarily of consumer  loans.  This
compares to loans  charged off during the nine month period ended  September 30,
2003 which totaled $142,000. A total of


                                       17
<PAGE>

$17,000 of  previously  charged-off  loans was  recovered  during the nine month
period ended September 30, 2003.  Recoveries for the same period in 2003 totaled
$24,000.  While  management  estimates  loan  losses  using  the best  available
information,  no assurances can be given that future  additions to the allowance
will not be  necessary  based on  changes in  economic  and real  estate  market
conditions, further information obtained regarding problem loans, identification
of additional problem loans or other factors. Additionally,  future additions to
the allowance may be necessary to maintain adequate coverage ratios.

DEPOSITS
--------

The Company offers a variety of deposit  accounts with a range of interest rates
and terms.  The following  table  illustrates  the  composition of the Company's
deposits at September 30, 2004 and December 31, 2003:

                            September 30, 2004   December 31, 2003
                            ------------------   -----------------
                                    (amounts in thousands)

Demand                           $ 65,961            $ 43,631
NOW                                28,533              21,437
Money Market                       43,271              38,357
Savings                            68,062              47,729
Time                               92,875              67,303
                                 --------            --------
Total Deposits                   $298,702            $218,457
                                 ========            ========

Deposits constitute the principal funding source of the Company's assets.

Borrowings
----------

The Company  utilizes  advances  from the Federal  Home Loan Bank as part of its
operating  strategy to supplement  deposit  growth and fund its asset growth,  a
strategy that is designed to increase  interest income.  These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of  maturities.  At September  30, 2004,  the Company had  $81,218,000  in
outstanding  advances from the Federal Home Loan Bank compared to $60,897,000 at
December 31, 2003.  Management  expects that it will  continue  this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.

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

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

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

To  quantify  the extent of these  risks  both in its  current  position  and in
actions it might take in the future,  interest rate risk is monitored  using gap
analysis which identifies the differences  between assets and liabilities  which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability  balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.

An interest rate sensitivity gap is defined as the difference between the amount
of  interest-earning  assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same  period.  A gap is  considered  positive  when the amount of interest  rate
sensitive  assets exceeds the amount of interest rate sensitive  liabilities.  A
gap  is  considered   negative  when  the  amount  of  interest  rate  sensitive
liabilities  exceeds the amount of interest rate sensitive  assets. At September
30, 2004, the Company was slightly asset  sensitive  (positive  gap). This would
suggest that during a period of rising interest rates, the Company would be in a
better  position  to invest in higher  yielding  assets  resulting  in growth in
interest income. To the contrary, during a


                                       18
<PAGE>

period of falling  interest  rates, a positive gap would result in a decrease in
interest income. The level of interest rate risk at September 30, 2004 is within
the limits approved by the Board of Directors.

Liquidity
---------

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

At  September  30,  2004  the  Company  had  approximately  $43,498,000  in loan
commitments outstanding. Management believes that the current level of liquidity
is adequate  to meet the  Company's  needs for both the present and  foreseeable
future.

Capital
-------

At September 30, 2004,  the Company had  $41,257,000  in  shareholders'  equity.
Earnings for the nine month period ended September 30, 2004 totaled  $2,964,000.
Market  conditions  resulted in a decrease in  accumulated  other  comprehensive
income of $200,000. A review and analysis of such securities has determined that
there has been no credit  deterioration and that the market price decline is due
to the current  interest rate  environment.  Management deems the securities are
not other than  temporarily  impaired.  The Company has declared three quarterly
dividends in 2004 resulting in a decrease in capital of $1,088,000.  The Company
issued  840 new shares of common  stock  under the terms of the  Director  Stock
Retainer  Plan in April 2004 that resulted in an increase in capital of $32,000.
Under current regulatory definitions, the Company and the Bank are considered to
be "well capitalized" for capital adequacy purposes.  As a result, the Bank pays
the lowest federal deposit  insurance  deposit  premiums  possible.  One primary
measure of capital  adequacy  for  regulatory  purposes is based on the ratio of
risk-based  capital to risk-weighted  assets.  This method of measuring  capital
adequacy helps to establish capital  requirements that are more sensitive to the
differences  in risk  associated  with  various  assets.  It takes into  account
off-balance  sheet  exposure in  assessing  capital  adequacy  and it  minimizes
disincentives  to holding liquid,  low-risk  assets.  At September 30, 2004, the
Company  had a total  risk-based  capital  ratio of 13.69%  compared to 16.4% at
December 31, 2003.  Maintaining  strong  capital is essential to bank safety and
soundness.  However,  the  effective  management of capital  resources  requires
generating  attractive  returns on equity to build value for shareholders  while
maintaining  appropriate  levels of  capital  to fund  growth,  meet  regulatory
requirements  and be  consistent  with prudent  industry  practices.  Management
believes  that the  capital  levels  of the  Company  and Bank are  adequate  to
continue to meet the foreseeable capital needs of the institutions.  As a result
of the merger, each shareholder of Canaan National Bancorp, Inc. received 1.3371
shares of the Company,  in addition to $31.20 in cash,  for each share of Canaan
National Bancorp, Inc. stock. As of September 10, 2004 a total of 257,670 shares
of the Company were issued to shareholders of Canaan National Bancorp,  Inc. and
the  Company  paid to  such  shareholders  approximately  $6.0  million  cash in
aggregate.  Fractional  shares of the Company were not issued as a result of the
merger,  but were paid at a price of $41.06 per share.  At September 30, 2004, a
total of 1,682,401 shares of Company common stock were issued and outstanding.

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

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


                                       19
<PAGE>

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

This Form 10-Q and future  filings made by the Company with the  Securities  and
Exchange Commission,  as well as other filings,  reports and press releases made
or issued by the Company and the Bank,  and oral  statements  made by  executive
officers  of the Company and the Bank,  may include  forward-looking  statements
relating to such matters as:

(a)   assumptions  concerning future economic and business  conditions and their
      effect on the  economy in general  and on the markets in which the Company
      and the Bank do business; and

(b)   expectations for revenues and earnings for the Company and Bank.

Such forward-looking  statements are based on assumptions rather than historical
or current facts and, therefore,  are inherently  uncertain and subject to risk.
For those  statements,  the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.

The Company  notes that a variety of factors  could cause the actual  results or
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations described or implied by such forward-looking  statements. The risks
and uncertainties  that may effect the operation,  performance,  development and
results of the Company's and Bank's business include the following:

(a)   the risk of adverse changes in business conditions in the banking industry
      generally and in the specific markets in which the Bank operates;

(b)   changes in the  legislative  and regulatory  environment  that  negatively
      impact the Company  and Bank  through  increased  operating  expenses  and
      capital requirements;

(c)   increased competition from other financial and non-financial institutions;

(d)   the impact of technological advances; and

(e)   other risks  detailed from time to time in the Company's  filings with the
      Securities and Exchange Commission.

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

       Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The main  components  of market risk for the Company are interest  rate risk and
liquidity  risk.  The Company  manages  interest  rate risk and  liquidity  risk
through an ALCO Committee  comprised of outside Directors and senior management.
The committee monitors compliance with the Bank's  Asset/Liability  Policy which
provides  guidelines to analyze and manage gap, which is the difference  between
the amount of assets  and the  amounts of  liabilities  which  mature or reprice
during  specific  time  frames.  Model  simulation  is used to measure  earnings
volatility under both rising and falling rate scenarios.  The Company's interest
rate risk and  liquidity  position has not  significantly  changed from year end
2003. (See discussion regarding Interest Rate Risk above.)

                        Item 4. Controls and Procedures.

The Company's Chief  Executive  Officer and Chief  Financial  Officer  concluded
that,  based  upon  an  evaluation  as of  September  30,  2004,  the  Company's
disclosure  controls and  procedures  are  effective to ensure that  information
required  to be  disclosed  by the  Company in reports  that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported  within the time periods  specified in the SEC rules and forms.  During
the nine month  period  ended  September  30,  2004 there were no changes in the
Company's  internal  control  over  financial   reporting  that  has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.


                                       20
<PAGE>

                           Part II - OTHER INFORMATION

Item 1. - Legal Proceedings. Not applicable

Item 2.  -Unregistered  Sales of  Equity  Securities  and Use of  Proceeds.  Not
applicable

Item 3. - Defaults Upon Senior Securities. Not applicable

Item 4. - Submission of Matters to a Vote of Security Holders. Not applicable

Item 5. - Other Information - Not applicable

Item 6. - Exhibits

      11    Computation of Earnings per Share.

      31.1- Rule 13a-14(a)/15d-14(a) Certification.

      31.2- Rule 13a-14(a)/15d-14(a) Certification.

      32-   Section 1350 Certifications.


                                       21
<PAGE>

                             SALISBURY BANCORP, INC.

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                         Salisbury Bancorp, Inc.


Date: November 15, 2004                  by: /s/ John F. Perotti
      -----------------                      -------------------
                                             John F. Perotti
                                             President/Chief Executive Officer


Date: November 15, 2004                  by: /s/ John F. Foley
      -----------------                      -----------------
                                             John F. Foley
                                             Chief Financial Officer


                                       22