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         June 30, 2005
                               ------------------------------

                                       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 |X| No |_|

                      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 July 30, 2005, there were 1,683,341 shares outstanding.
                                          -----------------------------


<PAGE>
<TABLE>
<CAPTION>
                                 SALISBURY BANCORP, INC. AND SUBSIDIARY

                                            TABLE OF CONTENTS




Part I. FINANCIAL INFORMATION                                                                   Page
<S>  <C>                                                                                           <C>
Item 1.  Financial Statements:                                                                     3

         Condensed Consolidated Balance Sheets - June 30, 2005 (unaudited)
                                     and December 31, 2004                                         4
         Condensed Consolidated Statements of Income - three and six months ended June 30, 2005
                                     and 2004  (unaudited)                                         5
         Condensed  Consolidated Statements of Cash Flows - six months ended June 30, 2005
                                     and  2004 (unaudited)                                         6

         Notes to Condensed Consolidated Financial Statements (unaudited)                          7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations    10

Item 3.  Quantitative and Qualitative Disclosures about Market Risk                               19

Item 4.  Controls and Procedures                                                                  19


Part II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                                        19

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                              19

Item 3.  Defaults Upon Senior Securities                                                          19

Item 4.  Submission of Matters to a Vote of Security Holders                                      19

Item 5.  Other Information                                                                        19

Item 6.  Exhibits                                                                                 19

Signatures                                                                                        20

</TABLE>

                                       2
<PAGE>

                         Part I - FINANCIAL INFORMATION
                          Item 1. Financial Statements









                                       3
<PAGE>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------
                  (amounts in thousands, except per share data)
                       June 30, 2005 and December 31, 2004
                       -----------------------------------
<TABLE>
<CAPTION>
                                                                            June 30,    December 31,
                                                                              2005          2004
                                                                              ----          ----
ASSETS                                                                     (unaudited)
------
<S>                                                                         <C>          <C>
Cash and due from banks                                                     $   8,038    $   7,284
Interest bearing demand deposits with other banks                                 931        1,181
Money market mutual funds                                                       1,026          942
Federal funds sold                                                                  0        2,271
                                                                            ---------    ---------
                 Cash and cash equivalents                                      9,995       11,678
Investments in available-for-sale securities (at fair value)                  154,220      178,655
Investments in held-to-maturity securities (fair values of $209,000 as of
   June 30, 2005 and $220,000 as of December 31, 2004)                            207          218
Federal Home Loan Bank stock, at cost                                           5,413        5,413
Loans held-for-sale                                                               398          375
Loans, less allowance for loan losses of $2,673,000 as of June 30, 2005
   and $2,512,000 as of December 31, 2004                                     206,209      201,978
Investment in real estate                                                          75           75
Premises and equipment                                                          6,399        5,934
Goodwill                                                                        9,509        9,509
Core deposit intangible                                                         1,740        1,822
Accrued interest receivable                                                     2,297        2,257
Cash surrender value of life insurance policies                                 3,355        3,294
Due from broker                                                                   813            0
Other assets                                                                    2,618        1,893
                                                                            ---------    ---------
              Total assets                                                  $ 403,248    $ 423,101
                                                                            =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
   Noninterest-bearing                                                      $  65,068    $  65,017
   Interest-bearing                                                           222,424      233,825
                                                                            ---------    ---------
                 Total deposits                                               287,492      298,842
Federal Home Loan Bank advances                                                69,922       79,213
Due to broker                                                                       0        1,083
Other liabilities                                                               3,225        3,263
                                                                            ---------    ---------
           Total liabilities                                                  360,639      382,401
                                                                            ---------    ---------
Stockholders' equity:
   Common stock, par value $.10 per share; authorized 3,000,000 shares;
     issued and outstanding, 1,683,341 shares at June 30, 2005 and
     1,682,401 shares at December 31, 2004                                        168          168
    Paid-in capital                                                            13,068       13,032
   Retained earnings                                                           30,018       28,223
   Accumulated other comprehensive loss                                          (645)        (723)
                                                                            ---------    ---------
           Total stockholders' equity                                          42,609       40,700
                                                                            ---------    ---------
                  Total liabilities and stockholders' equity                $ 403,248    $ 423,101
                                                                            =========    =========
</TABLE>

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

                                       4
<PAGE>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                  (amounts in thousands, except per share data)
                             June 30, 2005 and 2004
                                   (unaudited)
<TABLE>
<CAPTION>
                                                             Six Months Ended   Three Months Ended
                                                                 June 30,            June 30,
                                                              2005      2004      2005      2004
                                                              ----      ----      ----      ----
<S>                                                         <C>       <C>       <C>       <C>
Interest and dividend income:
   Interest and fees on loans                               $ 6,449   $ 4,324   $ 3,239   $ 2,161
   Interest and dividends on securities:
       Taxable                                                2,239     2,119     1,137     1,097
       Tax-exempt                                             1,282     1,063       626       531
   Dividends on equity securities                               101        46        53        20
   Other interest                                                32        18        14         6
                                                            -------   -------   -------   -------

         Total interest and dividend income                  10,103     7,570     5,069     3,815
                                                            -------   -------   -------   -------
Interest expense:
   Interest on deposits                                       1,887     1,216       979       597
   Interest on Federal Home Loan Bank advances                1,502     1,326       765       676
                                                            -------   -------   -------   -------
         Total interest expense                               3,389     2,542     1,744     1,273
                                                            -------   -------   -------   -------
Net interest and dividend income                              6,714     5,028     3,325     2,542
Provision for loan losses                                       180       120        90        60
                                                            -------   -------   -------   -------
         Net interest and dividend income after provision
         for loan losses                                      6,534     4,908     3,235     2,482
                                                            -------   -------   -------   -------
Noninterest income:
   Trust department income                                      777       707       389       353
   Service charges on deposit accounts                          303       306       159       161
   Gains on sales of available-for-sale securities, net         837       642       351       286
   Gains on sales of loans held-for-sale                        136       149        45        99
   Other income                                                 562       410       282       223
                                                            -------   -------   -------   -------
         Total noninterest income                             2,615     2,214     1,226     1,122
                                                            -------   -------   -------   -------
Noninterest expense:
   Salaries and employee benefits                             3,510     2,522     1,702     1,260
   Occupancy expense                                            349       163       163        73
   Equipment expense                                            374       281       187       150
   Trust department expense                                     217       179       121       129
   Data processing                                              393       300       196       149
   Insuranc                                                       5        58        35        29
   Printing and stationery                                      148       113        89        68
   Professional fees                                            134       115        60        61
   Legal expense                                                 68        62        42        37
  Amortization of core deposit intangible                        82        34        41        17
  Other expense                                                 641       510       329       287
                                                            -------   -------   -------   -------
         Total noninterest expense                            5,991     4,337     2,965     2,260
                                                            -------   -------   -------   -------
         Income before income taxes                           3,158     2,785     1,496     1,344
Income taxes                                                    521       617       188       248
                                                            -------   -------   -------   -------
         Net income                                         $ 2,637   $ 2,168   $ 1,308   $ 1,096
                                                            =======   =======   =======   =======
Earnings per common share                                   $  1.57   $  1.52   $   .78   $   .77
                                                            =======   =======   =======   =======

Dividends per share                                         $   .50   $   .48   $   .25   $   .24
                                                            =======   =======   =======   =======
</TABLE>

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

                                       5
<PAGE>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY
                     --------------------------------------

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 -----------------------------------------------
                             (amounts in thousands)
                     Six months ended June 30, 2005 and 2004
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                  2005        2004
                                                                  ----        ----
<S>                                                             <C>         <C>
Cash flows from operating activities:
   Net income                                                   $  2,637    $  2,168
Adjustments to reconcile net income to net cash provided by
       operating activities:
         Amortization of securities, net                             152         162
         Gain on sales of available-for-sale securities, net        (837)       (642)
         Provision for loan losses                                   180         120
         Change in loans held-for-sale                               (23)        (95)
         Depreciation and amortization                               245         133
         Amortization of core deposit intangible                      82          34
         Amortization of fair value adjustments, net                  30           0
         (Increase) decrease in interest receivable                  (44)         47
         Deferred tax benefit                                        (27)         (5)
         Increase in prepaid expenses                               (899)       (173)
         Decrease (increase) in other assets                         231        (170)
         (Increase) decrease in taxes receivable                    (125)         77
         Decrease in accrued expenses                               (137)       (229)
         Increase in interest payable                                  1           3
         Increase in other liabilities                                60          14
                                                                --------    --------

Net cash provided by operating activities                          1,526       1,444
                                                                --------    --------

Cash flows from investing activities:
  Purchase of Federal Home Loan Bank stock                             0        (351)
  Purchases of available-for-sale securities                     (49,235)    (64,474)
  Proceeds from sales of available-for-sale securities            46,170      33,877
  Proceeds from maturities of available-for-sale securities       26,419      15,512
  Proceeds from maturities of held-to-maturity securities             11           6
  Loan originations and principal collections, net                (4,523)     (3,818)
  Recoveries of loans previously charged-off                          14           9
  Capital expenditures                                              (710)       (370)

Net cash provided by (used in) investing activities               18,146     (19,609)
                                                                --------    --------

Cash flows from financing activities:
   Net (decrease) increase in demand deposits, NOW and
       savings accounts                                           (5,780)      3,024
   Net decrease in time deposits                                  (5,557)     (1,707)
   Proceeds from Federal Home Loan Bank advances                  11,560      15,000
   Principal payments on advances from Federal Home Loan Bank    (20,786)       (441)
   Dividends paid                                                   (828)       (637)
   Proceeds from issuance of common stock                             36          24
                                                                --------    --------

Net cash (used in) provided by financing activities              (21,355)     15,263
                                                                --------    --------

Net decrease in cash and cash equivalents                         (1,683)     (2,902)
Cash and cash equivalents at beginning of year                    11,678      12,129
                                                                --------    --------
Cash and cash equivalents at end of period                      $  9,995    $  9,227
                                                                ========    ========

Supplemental disclosures:
   Interest paid                                                $  3,388    $  2,539
   Income taxes paid                                                 673         545
</TABLE>

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

                                       6
<PAGE>

                     SALISBURY BANCORP, INC. AND SUBSIDIARY

              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"),
its wholly owned subsidiary  Salisbury Bank and Trust Company (the "Bank"),  and
the  Bank's   subsidiaries,   S.B.T.  Realty,  Inc.  and  SBT  Mortgage  Service
Corporation  (the  "PIC")  formed  in April  2004.  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 six months ended June 30, 2005 are
not  necessarily  indicative  of the results  that may be expected  for the year
ending  December  31,  2005.  These  financial  statements  should  be  read  in
conjunction  with the financial  statements  and notes  thereto  included in the
Company's 2004 Annual Report on Form 10-K.

On September 10, 2004 Canaan  National  Bancorp,  Inc.  merged with and into the
Company.  The merger was accounted for using the purchase  method of accounting.
Accordingly,  the assets acquired and liabilities  assumed have been recorded by
the Company at their fair values at the consummation date.  Financial  statement
amounts  for  Canaan  National  Bancorp,  Inc.  are  included  in the  Company's
consolidated financial statements beginning on the acquisition date.

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  holding  gain  (loss) on
securities.

Comprehensive Income (Loss)

<TABLE>
<CAPTION>
                                                     Six months ended        Three  months ended
                                                          June 30,                June 30,
                                                      2005       2004         2005        2004
                                                      ----       ----         ----        ----
                                                  (amounts in thousands)    (amounts in thousands)
<S>                                                <C>         <C>          <C>         <C>
Net income                                         $   2,637   $   2,168    $   1,308   $   1,096
Net change in unrealized holding losses or gains
 on securities during period                              78      (3,128)       1,373      (3,936)
                                                   ---------   ---------    ---------   ---------
Comprehensive income (loss)                        $   2,715   $    (960)   $   2,681   $  (2,840)
                                                   =========   =========    =========   =========
</TABLE>

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

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


                                       7
<PAGE>

entity's  residual  returns or both. The Company is 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 shall apply 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  did not have an impact 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 of operations.

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payments"  ("SFAS  123R").  This  Statement  revises  FASB  Statement  No.  123,
"Accounting  for Stock Based  Compensation"  and  supersedes APB Opinion No. 25,
"Accounting  for Stock  Issued to  Employees,"  and its  related  implementation
guidance.  SFAS  123R  requires  that the cost  resulting  from all  share-based
payment transactions be recognized in the consolidated financial statements.  It
establishes   fair  value  as  the  measurement   objective  in  accounting  for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity  instruments held by employee share ownership plans.
This  Statement  was  effective for the Company as of the beginning of the first
interim or annual  reporting  period that begins after June 15,  2005.  However,
since the issuance of SFAS 123R, the SEC has delayed the effective date. The new
effective  date is January 1, 2006. The Company does not believe the adoption of
this Statement will have a material impact on the Company's  financial  position
or results of operations.


                                       8
<PAGE>

NOTE 4 - DEFINED BENEFIT PENSION PLAN
-------------------------------------

The following  summarizes the net periodic benefit cost for the three months and
six months ended June 30:

<TABLE>
<CAPTION>
                                                    Three Months Ended                   Six Months Ended
                                                        June 30,                             June 30,
                                                2005               2004               2005               2004
                                           ---------------------------------     ---------------------------------
<S>                                        <C>                <C>                <C>                <C>
Components of net periodic benefit cost:
   Service cost                            $      149,743     $       49,848     $      233,285     $       99,695
   Interest cost                                   84,483             40,810            145,413             81,621
   Expected return on plan assets                 (83,578)           (38,660)          (133,806)           (77,320)
   Amortization of:
      Prior service costs                             223                223                446                446
      Transition obligation                           693              2,168              1,386              4,336
      Actuarial loss                               15,256              7,004             32,668             14,008
                                           --------------     --------------     --------------     --------------
   Net periodic benefit cost               $      166,820     $       61,393     $      279,392     $      122,786
                                           ==============     ==============     ==============     ==============

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%

</TABLE>


* 5%  at  Age  20  grading  down  to 3% at  Age  60  and  beyond  (effective  to
approximately 3.25% on average).


                                       9
<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 six (6) full
service  offices  including  a Trust  Department  located  in the towns of North
Canaan,  Lakeville,  Salisbury and Sharon,  Connecticut  and Sheffield 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, 2004.

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

Overview
--------

The Company's net income for the six months ended June 30, 2005 was  $2,637,000,
an increase of  $469,000  or 21.63%  over the same period  ended June 30,  2004.
Earnings  per share  also  increased  3.29% and  amounted  to $1.57 per share as
compared  to $1.52  earnings  per share for the same  period  one year ago.  The
improvement  in net income is  primarily  the result of an  increase  in earning
assets as a result of the merger with Canaan National Bancorp, Inc. on September
10, 2004.

The  Company's  assets at June 30, 2005 totaled  $403,248,000  compared to total
assets  of  $423,101,000  at  December  31,  2004.  The  decrease  is  primarily
attributable  to a reduction in the securities  portfolio.  During the first six
months  of 2005  total  loans  outstanding  increased  $4,392,000  or  2.15%  to
$208,882,000.  This  compares  to total loans  outstanding  of  $204,490,000  at
December  31,  2004.  The Bank  continues  to  monitor  the  quality of the loan
portfolio  to ensure  that loan  quality  will not be  sacrificed  for growth or
otherwise  compromise  the  Company's  objectives.  Nonperforming  loans totaled
$2,021,000  at June  30,  2005  as  compared  to  nonperforming  loans  totaling
$2,267,000  at December  31,  2004.  This  represents  a decrease of $246,000 or
10.85%.  Deposits at June 30,  2005  totaled  $287,492,000  as compared to total
deposits  of  $298,842,000  at  December  31,  2004.  Although  at June 30 total
deposits on the balance sheet reflected a decrease of $11,350,000  when compared
to December  31, 2004,  average  deposits for the six months ended June 30, 2005
totaled $296,273,000.  The decrease at quarter end is primarily  attributable to
seasonal cash flows.

As a result of the Company's second quarter financial performance,  the Board of
Directors  declared a second  quarter  cash  dividend of $.25 per common  share,
which was paid on July 29, 2005 to  shareholders  of record as of June 30, 2005.
This is the same as the cash dividend of $.25 per common share that was paid for
the first quarter of 2005.  Year-to-date  dividends  total $.50 per common share
for this year. This compares to total year-to-date  dividends of $.48 per common
share one year ago. The Company's  risk based  capital  ratios at June 30, 2005,
which include the risk weighted  assets and capital of the Bank, were 13.89% for
tier 1 capital and 15.14% for total risk based capital.  The Company's  leverage
ratio was 7.58% at June 30, 2005 which  compares to 7.53% for the  corresponding
period in 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."


                                       10
<PAGE>

                         SIX MONTHS ENDED JUNE 30, 2005
                  AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2004

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

The Company's  earnings are primarily  dependent  upon net interest and dividend
income,  and to a lesser  extent  its  non-interest  income  from its  community
banking  operations.  Net interest and dividend income is the difference between
interest and dividends earned on the loan and securities  portfolio and interest
paid on deposits  and  advances  from the Federal  Home Loan Bank.  Non-interest
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)
Six months ended June 30                          2005      2004
                                                  ----      ----
Total Interest and Dividend Income              $10,103   $ 7,570
(financial statements)
Tax Equivalent Adjustment                           660       548
                                                -------   -------
Total Interest and Dividend Income
      (on an FTE basis)                          10,763     8,118
Total Interest Expense                            3,389     2,542
                                                -------   -------
Net Interest and Dividend Income-FTE            $ 7,374   $ 5,576
                                                =======   =======

Total interest and dividend income on an FTE basis for the six months ended June
30, 2005,  when  compared to the same period in 2004,  increased  $2,645,000  or
approximately 32.58%. The increase was primarily  attributable to an increase in
earning assets as well as an economic  environment  experiencing  an increase in
interest rates.

Interest  expense  on  deposits  for  the  first  six  months  of  2005  totaled
$1,887,000,  an  increase of 55.18%  compared  to the same period in 2004.  This
increase is primarily the result of the additional  deposit  accounts  resulting
from the merger with Canaan National Bancorp,  Inc. in September of 2004 as well
as an economic environment of generally higher interest rates.  Although Federal
Home Loan Bank  advances have  decreased  during the six month period ended June
30, 2005,  interest  expense on these advances  increased  13.27% to $1,502,000.
This increase in interest expense is attributable to an economic  environment of
increasing  interest rates coupled with  generally  higher rates on Federal Home
Loan  Bank  advances  that  were  acquired  in  connection  with the  previously
mentioned merger. Total interest expense for the six months ending June 30, 2005
was  $3,389,000,  an increase  of  $847,000 or 33.32% when  compared to the same
period in 2004.

Overall, net interest and dividend income (on an FTE basis) increased $1,798,000
or 32.25% to $7,374,000  for the period ended June 30, 2005 when compared to the
same period in 2004.

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

Noninterest  income  totaled  $2,615,000 for the six months ended June 30, 2005.
This is an  increase of $401,000  or 18.11%  compared to  noninterest  income of
$2,214,000  for the six months  ended June 30,  2004.  Continuing  growth of the
Trust Department has resulted in an increase in trust income of $70,000 or 9.90%
to $777,000 for the first six months of 2005,  compared to $707,000 for the same
period in 2004.  This  increase  was  partially  offset by an  increase in Trust
Department  expense,  which  increased  $38,000  or  21.23%.  Gains  on sales of
available-for-sale  securities  increased  30.37% to $837,000  for the first six
months of 2005 compared to the corresponding period in 2004.


                                       11
<PAGE>

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

Noninterest  expense  increased  38.14%  for the  first  six  months  of 2005 as
compared to the same period in 2004. The increases in the  noninterest  expenses
listed in the table  below are all  primarily  attributable  to the merger  with
Canaan  National  Bancorp,  Inc.  with the  exception  of the  Trust  Department
expense,  which reflects  additional costs associated with the continuing growth
of new accounts in the department. The components of noninterest expense and the
changes in the period were as follows (amounts in thousands):

                                             2005      2004     Change%  Change
-------------------------------------------------------------------------------
Salaries and employee benefits              $3,510    $2,522    $  988     39.2
Occupancy expense                              349       163       186    114.1
Equipment expense                              374       281        93     33.1
Trust department expense                       217       179        38     21.2
Data processing                                393       300        93     31.0
Insurance                                       75        58        17     29.3
Printing and stationery                        148       113        35     31.0
Professional fees                              134       115        19     16.5
Legal expense                                   68        62         6      9.7
Amortization of core deposit intangible         82        34        48    141.2
Other expense                                  641       510       131     25.7
                                            ------    ------    ------
       Total noninterest expense            $5,991    $4,337    $1,654     38.1
                                            ======    ======    ======

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

The income tax  provision  for the first six months of 2005 totaled  $521,000 in
comparison  to $617,000 for the same six month period in 2004.  Although  income
before taxes increased, there was a decrease in taxable income. In addition, the
Company  formed a  passive  investment  company  in April  of  2004.  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  $2,637,000 for the six months ended June 30, 2005
and  represents  earnings  of $1.57 per share.  This  compares  to net income of
$2,168,000  for the same period in 2004,  an increase of 21.63% and  compares to
earnings  per  share  of  $1.52  for  the  corresponding  period  in  2004.  The
improvement  in net income is  primarily  the result of an  increase  in earning
assets resulting from the merger with Canaan National Bancorp, Inc.


                                       12
<PAGE>

                        THREE MONTHS ENDED JUNE 30, 2005
                 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2004

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 June 30                                        2005     2004
                                                                 ------   ------
 Total Interest and Dividend Income                              $5,069   $3,815
(financial statements)
Tax Equivalent Adjustment                                           322      274
                                                                 ------   ------
     Total Interest and Dividend Income (on an FTE basis)         5,391    4,089
Total Interest Expense                                            1,744    1,273
                                                                 ------   ------
Net Interest and Dividend Income-FTE                             $3,647   $2,816
                                                                 ======   ======

Total  interest and  dividend  income on an FTE basis for the three months ended
June 30, 2005 increased  $1,302,000 or approximately 31.84% compared to the same
period in 2004.  The  increase  was  primarily  attributable  to an  increase in
earning assets as well as an economic environment with generally higher interest
rates.

Interest  expense on  deposits  increased  $382,000 or 63.99% for the quarter to
$979,000  compared to $597,000  for the same quarter in 2004.  This  increase is
primarily the result of the increased  deposit base and an economic  environment
of increasing interest rates. Federal Home Loan Bank advances have decreased for
the three month  period ended June 30, 2005 when  compared to the  corresponding
period in 2004. Interest expense on these advances however, increased $89,000 or
13.17% and totaled $765,000 for the three months ended June 30, 2005 compared to
the  corresponding  period in 2004.  Total interest expense for the three months
ending June 30, 2005 was $1,744,000  compared to total interest  expense for the
same period in 2004 of  $1,273,000,  an  increase  of  $471,000 or 37.00%.  This
increase is a reflection an economic  environment  of rising  interest rates and
the result of generally higher interest rates on Federal Home Loan Bank advances
that were acquired in  connection  with the merger of Canaan  National  Bancorp,
Inc. with the Company.

Overall,  net interest and dividend income (on an FTE basis) increased  $831,000
or 29.51% to  $3,647,000  for the three  month  period  ended June 30, 2005 when
compared to the corresponding period in 2004.

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

Noninterest  income totaled  $1,226,000 for the three months ended June 30, 2005
as compared to  $1,122,000  for the three months ended June 30, 2004 an increase
of $104,000 or 9.27%.  Continuing growth of the Trust Department has resulted in
an increase in income of $36,000 or 10.20% to $389,000 for the second quarter of
2005 compared to the same period in 2004.  Gains on sales of  available-for-sale
securities  totaled  $351,000  for the  second  quarter of 2005 as  compared  to
$286,000  for the  corresponding  period in 2004.  This  increase  is  primarily
attributable to  management's  efforts to maximize the spreads in the portfolio.
During the  quarter  there were  opportunities  in the market  that  resulted in
taking gains on sales while  increasing  the yields in the portfolio at the same
time.


                                       13
<PAGE>

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

Noninterest expense totaled $2,965,000 for the three month period ended June 30,
2005 as  compared  to  $2,260,000  for the same  period in 2004,  an increase of
$705,000 or 31.20%.  The  increases  listed in the table below are all primarily
attributable to the merger with Canaan National Bancorp,  Inc. The components of
noninterest  expense and the  changes in the period were as follows  (amounts in
thousands):

                                            2005      2004     Chan     % Change
--------------------------------------------------------------------------------
Salaries and employee benefits             $1,702    $1,260    $  442      35.1
Occupancy expense                             163        73        90     123.3
Equipment expense                             187       150        37      24.7
Trust department expense                      121       129        (8)     (6.2)
Data processing                               196       149        47      31.5
Insurance                                      35        29         6      20.7
Printing and stationery                        89        68        21      30.9
Professional fees                              60        61        (1)     (1.6)
Legal expense                                  42        37         5      13.5
Amortization of core deposit intangible        41        17        24     141.1
Other expense                                 329       287        42      14.6
                                           ------    ------    ------
       Total noninterest expense           $2,965    $2,260    $  705      31.2
                                           ======    ======    ======

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

The income tax  provision for the three month period ended June 30, 2005 totaled
$188,000  in  comparison  to $248,000  for the same three month  period in 2004.
Although income before taxes increased, there was a decrease in taxable income.

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

Overall,  net income totaled $1,308,000 for the three months ended June 30, 2005
and  represents  earnings  of $.78 per  share.  This  compares  to net income of
$1,096,000  for the same  period in 2004,  an increase of $212,000 or 19.34% and
compares to earnings per share of $.77 for the corresponding period in 2004. The
improvement  in net income is  primarily  the result of an  increase  in earning
assets and reduced income taxes, and is partially offset by the current economic
condition of compressing interest spreads.

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

Total assets at June 30, 2005 were  $403,248,000,  compared to  $423,101,000  at
December 31, 2004, a decrease of 4.69%.  The decrease is primarily the result of
sales and calls of  available-for-sale  securities in the  portfolio  during the
period ended June 30, 2005.

Securities
----------

During the six months ended June 30, 2005, the securities  portfolio,  including
Federal Home Loan Bank stock,  decreased  $24,446,000 or 13.26% to  $159,840,000
from  $184,286,000  at December 31, 2004. The decrease is primarily a reflection
of  portfolio  securities  being  sold and called  during  the  period  with the
proceeds being used to fund loan growth and reduce total advances outstanding at
the Federal Home Loan Bank of Boston.

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
holding gains and losses on  available-for-sale  securities  (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 June 30, 2005, the unrealized  loss net of tax was $645,000.  This
compares to an unrealized  loss net of tax of $723,000 at December 31, 2004. The
unrealized  losses in these  securities  are  attributable  to changes in market
interest  rates.  Management  deems  the  securities  that are


                                       14
<PAGE>

currently in an unrealized loss position as not other than temporarily impaired.
The securities reported as securities  held-to-maturity  are stated at amortized
cost.

Lending
-------

New  business  development  during the first half of 2005  coupled  with a small
increase in loan demand  resulted in an increase in total loans  outstanding  to
$208,882,000  at June 30,  2005.  This  compares to total loans  outstanding  of
$204,490,000  at December 31, 2004.  This is an increase of $4,392,000 or 2.15%.
Competition for loans remains  aggressive in the Bank's market area,  especially
in the residential mortgage loan market.

The following table  represents the composition of the loan portfolio  comparing
June 30, 2005 to December 31, 2004:

                                               June 30, 2005  December 31, 2004
                                               -------------  -----------------
                                                    (amounts in thousands)
Commercial, financial and agricultural            $  14,683      $  15,127
Real Estate-construction and land
     development                                     14,391         14,290
Real Estate-residential                             133,166        130,414
Real Estate-commercial                               37,770         35,487
Consumer                                              8,513          9,122
Other                                                   372             69
                                                  ---------      ---------
                                                    208,895        204,509
Unearned income                                         (13)           (19)
Allowance for loan losses                            (2,673)        (2,512)
                                                  ---------      ---------
   Net Loans                                      $ 206,209      $ 201,978
                                                  =========      =========

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

Total net loans at June 30, 2005 increased 2.09% to  $206,209,000  when compared
to total net loans of  $201,978,000  at  December  31,  2004.  At June 30,  2005
approximately  89% of the Bank's  loan  portfolio  was  related  to real  estate
products.  The  concentration  remained  consistent as approximately  88% of the
portfolio  was  related  to real  estate at  December  31,  2004.  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 six-month  period
ended June 30, 2005 was $180,000  compared to $120,000 in the comparable  period
of 2004.

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 June 30, 2005.  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.

A loan is considered  impaired when, based on current information and events, it
is probable  that the Bank will be unable to collect the  scheduled  payments of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  Factors  considered by management in determining  impairment include
payment status,  collateral  value, and the probability of collecting  scheduled
principal and interest  payments when due. Loans that  experience  insignificant
payment delays and payment shortfalls  generally are not classified as impaired.
Management  determines the significance of payment delays and payment shortfalls
on a case-by-case  basis,  taking into  consideration  all of the  circumstances
surrounding  the loan and the borrower,  including the length of the delay,  the
reasons for the delay, the borrower's  prior payment records,  and the amount of
the  shortfall in relation to the  principal  and interest  owed.  Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the  present  value of  expected  future  cash  flows  discounted  at the loan's
effective  interest rate, the loan's  obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.


                                       15
<PAGE>

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly,  the Bank  does  not  separately  identify  individual
consumer and residential loans for impairment disclosures.

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
six months ended June 30, 2005.

At June 30, 2005, the allowance for loan losses totaled $2,673,000, representing
132.26% of nonperforming  loans,  which totaled  $2,021,000,  and 1.28% of total
loans  of  $208,882,000.  This  compares  to an  allowance  for loan  losses  of
$2,512,000,   representing   110.81%  of  nonperforming   loans,  which  totaled
$2,267,000,  and 1.23% of total loans of  $204,490,000  at December  31, 2004. A
total of  $33,000 of loans were  charged  off by the Bank  during the six months
ended June 30, 2005.  These  charged-off  loans consisted  primarily of consumer
loans. This compares to loans charged off during the six month period ended June
30, 2004 which totaled  $24,000.  A total of $14,000 of  previously  charged-off
loans was recovered during the six month period ended June 30, 2005.  Recoveries
for the same period in 2004 totaled  $9,000.  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 June 30, 2005 and December 31, 2004:

                                           June 30, 2005  December 31, 2004
                                           -------------  -----------------
                                               (amounts in thousands)

Demand                                        $ 65,068       $ 65,017
NOW                                             25,040         29,569
Money Market                                    53,344         49,206
Savings                                         58,148         63,588
Time                                            85,892         91,462
                                              --------       --------
Total Deposits                                $287,492       $298,842
                                              ========       ========

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  June  30,  2005,  the  Company  had  $69,922,000  in
outstanding  advances from the Federal Home Loan Bank compared to $79,213,000 at
December 31, 2004.  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.


                                       16
<PAGE>

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 June 30,
2005,  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 period of falling interest rates, a
positive  gap would  result  in a  decrease  in  interest  income.  The level of
interest  rate risk at June 30, 2005 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
fluctuation 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 June 30, 2005 the Company had
approximately  $49,552,000 in loan commitments outstanding.  Management believes
that the current  level of  liquidity is ample to meet the  Company's  needs for
both the present and foreseeable future.

Capital
-------

At June 30,  2005,  the Company had  $42,609,000  in  stockholders'  equity,  an
increase  of 4.69 % when  compared to December  31,  2004  stockholders'  equity
totaling  $40,700,000.  Earnings  for the  six-month  period ended June 30, 2005
totaled  $2,637,000.  Market  conditions  resulted in a decrease in  accumulated
other comprehensive loss to $645,000 from $723,000 at December 31, 2004.

A review and analysis of securities has determined that there has been no credit
deterioration and that the unrealized loss on securities  available-for-sale  is
due to the current interest rate environment and management deems the securities
to be not  other  than  temporarily  impaired.  The  Company  has  declared  two
quarterly dividends resulting in a decrease in capital of $841,000.  The Company
issued  940 new shares of common  stock  under the terms of the  Director  Stock
Retainer Plan that resulted in an increase in capital of $36,000.  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 June 30, 2005, the Company had a risk-based capital
ratio of 15.14%  compared to 12.13% at December  31,  2004.  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.


                                       17
<PAGE>

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 interest rates 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.

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;
(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.


                                       18
<PAGE>

       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 the interest rate  sensitivity  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.  Please refer to Interest Rate Risk and Liquidity under Item 2.
The Company's  interest rate risk and liquidity  position has not  significantly
changed from year end 2004.

                        Item 4. Controls and Procedures.

The Company's Chief  Executive  Officer and Chief  Financial  Officer  concluded
that,  based upon an  evaluation as of June 30, 2005,  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 six
month period ended June 30, 2005 there were no changes in the Company's internal
control over financial  reporting that  materially  affected,  or are reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.


                           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.


                                       19
<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: August 12, 2005                                by:  /s/ John F. Perotti
    -----------------                                    --------------------
                                                         John F. Perotti
                                                         Chief Executive Officer

Date: August 12, 2005                                by: /s/ John F. Foley
      ---------------                                    -----------------
                                                         John F. Foley
                                                         Chief Financial Officer



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