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

                                    FORM 10-Q

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

                  For the Quarterly period ended: June 30, 2006

[ ]   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: 0-28815

                     FIRST LITCHFIELD FINANCIAL CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its Charter)

           Delaware                                             06-1241321
           --------                                             ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation of organization)                              Identification No.)

   13 North Street, Litchfield, CT                            06759
   -------------------------------                            -----
(Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (860) 567-8752

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 past 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 a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer      Accelerated filer       Non-accelerated filer X
                        ----                   -----                      ---

Indicate by check mark whether the  registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).

                                Yes      No   X
                                    ----    ----

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common equity,  as of the latest  practicable  date:  2,139,930 shares of Common
Stock, par value $.01 per share, were outstanding at July 28, 2006.


                                       1
<PAGE>

                     FIRST LITCHFIELD FINANCIAL CORPORATION
                                    FORM 10-Q
                                      INDEX

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                         <C>
Part I - Financial Information

Item 1 - Financial Statements

         Consolidated Balance Sheets - June 30, 2006 and
         December 31, 2005 (unaudited) ....................................................  3

         Consolidated Statements of Income - Three and six months ended
         June 30, 2006 and 2005 (unaudited) ...............................................  4

         Consolidated Statements of Comprehensive Income - Six months ended
         June 30, 2006 and 2005 (unaudited) ...............................................  5

         Consolidated Statements of Cash Flows - Six months ended
         June 30, 2006 and 2005 (unaudited) ...............................................  6

         Notes to Consolidated Financial Statements  (unaudited) ..........................  7

         Item 2 - Management's Discussion and Analysis of Financial Condition
         and Results of Operations ........................................................  15

         Item 3 - Quantitative and Qualitative Disclosures about Market Risk ..............  26

         Item 4 - Controls and Procedures .................................................  27

Part II - Other Information

         Item 1 - Legal Proceedings .......................................................  27

         Item 1A - Risk Factors ...........................................................  28

         Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds .............  28

         Item 3 - Defaults upon Senior Securities .........................................  28

         Item 4 - Submission of Matters to a Vote of Security Holders .....................  28

         Item 5 - Other Information .......................................................  29

         Item 6 - Exhibits ................................................................  29

Signatures ................................................................................. 31
</TABLE>


                                       2
<PAGE>

                         Part 1 - FINANCIAL INFORMATION
                         ------------------------------

Item 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS  (Unaudited)                                                     June 30,       December 31,
                                                                                                2006             2005
                                                                                           -------------    -------------
<S>                                                                                        <C>              <C>
ASSETS
    Cash and due from banks                                                                $  17,233,378    $  18,711,537
                                                                                           -------------    -------------
                                                          CASH AND CASH EQUIVALENTS           17,233,378       18,711,537
                                                                                           -------------    -------------
   Securities:
      Available for sale securities, at fair value                                           180,172,849      182,900,358
      Held to maturity securities (fair value $43,871-2006 and $47,933-2005)                      44,918           49,035
                                                                                           -------------    -------------
                                                                   TOTAL SECURITIES          180,217,767      182,949,393
                                                                                           -------------    -------------

   Federal Home Loan Bank stock, at cost                                                       4,201,200        4,201,200
   Federal Reserve Bank stock, at cost                                                           225,850          225,850
   Other restricted stock, at cost                                                                80,000           50,000

   Loans Receivable, net of allowance for loan losses of
                 $1,969,978 -2006, $1,759,611-2005
                                                                          NET LOANS          269,644,398      240,681,739

   Premises and equipment, net                                                                 4,785,099        4,247,328
   Deferred income taxes                                                                       2,989,304        1,812,116
   Accrued interest receivable                                                                 2,609,386        2,349,092
   Cash surrender value of insurance                                                           9,450,155        9,263,737
   Other assets                                                                                3,390,234        3,068,954
                                                                                           -------------    -------------

                                                                       TOTAL ASSETS        $ 494,826,771    $ 467,560,946
                                                                                           =============    =============
LIABILITIES
   Deposits:
      Noninterest bearing                                                                  $  68,759,953    $  66,907,502
      Interest bearing                                                                       234,343,517      210,962,859
                                                                                           -------------    -------------
                                                                     TOTAL DEPOSITS          303,103,470      277,870,361
                                                                                           -------------    -------------

   Federal Home Loan Bank advances                                                            67,400,000       73,616,000
   Repurchase agreements with financial institutions                                          73,700,000       66,700,000
   Repurchase agreements with customers                                                       13,611,991        9,974,172
   Junior subordinated debt issued by unconsolidated trust                                    10,104,000        7,011,000
   Due to broker for security purchases                                                               --        3,675,373
    Accrued expenses and other liabilities                                                     2,681,452        2,744,303
                                                                                           -------------    -------------

                                                                  TOTAL LIABILITIES          470,600,913      441,591,209
                                                                                           -------------    -------------
SHAREHOLDERS' EQUITY
   Preferred stock $.00001 par value; 1,000,000 shares authorized, no shares outstanding
   Common stock $.01 par value
      Authorized - 5,000,000 shares
      2006 - Issued - 2,247,961 shares, outstanding - 2,139,930 shares
      2005 - Issued - 2,246,815 shares, outstanding - 2,136,370 shares                            22,480           22,468
   Capital surplus                                                                            23,063,587       22,995,010
   Retained earnings                                                                           6,900,837        6,443,479
   Less: Treasury stock at cost- 108,031 shares-2006, 110,445 shares-2005                       (685,756)        (701,061)
   Accumulated other comprehensive loss-net unrealized loss
     on available for sale securities (net of taxes)                                          (5,075,290)      (2,790,159)
                                                                                           -------------    -------------
                                                         TOTAL SHAREHOLDERS' EQUITY           24,225,858       25,969,737
                                                                                           -------------    -------------

                                         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $ 494,826,771    $ 467,560,946
                                                                                           =============    =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

<TABLE>
<CAPTION>
                                                           Three Months Ended June 30,       Six Months Ended June 30,
                                                               2006            2005            2006            2005
                                                           ------------    ------------    ------------    ------------
<S>                                                        <C>             <C>             <C>             <C>
INTEREST AND DIVIDEND INCOME
   Interest and fees on loans                              $  4,081,705    $  3,473,840    $  7,906,320    $  6,759,452

   Interest and dividends on securities:
       Mortgage-backed                                          830,888         956,404       1,691,881       1,991,697
       US Treasury and other                                    725,156         599,089       1,439,751       1,190,717
       State & municipal securities                             368,057         197,072         737,267         392,741
       Corporate bonds & other securities                       168,632          51,515         275,034         100,929
   Other interest income                                         10,481           1,678          11,875           9,103
                                                           ------------    ------------    ------------    ------------
                    TOTAL INTEREST AND DIVIDEND INCOME        6,184,919       5,279,598      12,062,128      10,444,639
                                                           ------------    ------------    ------------    ------------

INTEREST EXPENSE
   Interest on deposits:
       Savings                                                   25,008          29,957          49,636          59,522
       Money market                                             359,224         236,472         661,510         476,330
       Time certificates of deposit in denominations
            $100,000 or more                                    204,507         188,021         427,836         351,667
       Other time certificates of deposit                       779,678         347,322       1,311,929         689,176
                                                           ------------    ------------    ------------    ------------
                            TOTAL INTEREST ON DEPOSITS        1,368,417         801,772       2,450,911       1,576,695
   Interest on Federal Home Loan Bank advances                  648,045         393,013       1,321,881         641,524
   Interest on repurchase agreements                            820,065         487,621       1,549,610         916,896
   Interest on subordinated debt                                148,378         106,399         277,905         202,424
                                                           ------------    ------------    ------------    ------------
                                TOTAL INTEREST EXPENSE        2,984,905       1,788,805       5,600,307       3,337,539
                                                           ------------    ------------    ------------    ------------
                                   NET INTEREST INCOME        3,200,014       3,490,793       6,461,821       7,107,100
PROVISION FOR LOAN LOSSES                                       105,000         100,623         210,000         201,246
                                                           ------------    ------------    ------------    ------------
                             NET INTEREST INCOME AFTER
                             PROVISION FOR LOAN LOSSES        3,095,014       3,390,170       6,251,821       6,905,854
                                                           ------------    ------------    ------------    ------------
NONINTEREST INCOME
   Banking service charges and fees                             291,444         245,997         558,423         468,161
   Trust                                                        281,896         246,813         541,872         475,486
   Losses on the sales of available for sale securities         (17,633)        (44,076)        (17,633)        (44,076)
   Other                                                        148,770         149,194         289,310         312,160
                                                           ------------    ------------    ------------    ------------
                              TOTAL NONINTEREST INCOME          704,477         597,928       1,371,972       1,211,731
                                                           ------------    ------------    ------------    ------------
NONINTEREST EXPENSE
   Salaries                                                   1,330,910       1,137,359       2,560,006       2,265,833
   Employee benefits                                            305,313         331,844         729,921         712,961
   Net occupancy                                                235,580         168,729         456,255         354,220
   Equipment                                                    115,274         105,778         235,080         207,238
   Legal fees                                                    95,864          58,681         146,842          94,988
   Directors fees                                                33,825          36,695          74,350          73,765
   Computer services                                            250,658         220,412         475,504         424,121
   Supplies                                                      43,725          39,451          83,510          83,260
   Commissions, services and fees                               116,660          61,189         261,151         128,600
   Postage                                                       33,754          33,392          72,009          64,893
   Advertising                                                  228,311         112,947         332,728         177,257
   Other                                                        493,658         472,179         952,425         855,662
                                                           ------------    ------------    ------------    ------------
                            TOTAL NONINTEREST EXPENSES        3,283,532       2,778,656       6,379,781       5,442,798
                                                           ------------    ------------    ------------    ------------
                            INCOME BEFORE INCOME TAXES          515,959       1,209,442       1,244,012       2,674,787
PROVISION FOR INCOME TAXES                                       40,516         323,685         145,209         731,395
                                                           ------------    ------------    ------------    ------------
                                            NET INCOME     $    475,443    $    885,757    $  1,098,803    $  1,943,392
                                                           ============    ============    ============    ============
INCOME PER SHARE
                            BASIC NET INCOME PER SHARE     $       0.22    $       0.41    $       0.51    $       0.91
                                                           ============    ============    ============    ============
                          DILUTED NET INCOME PER SHARE     $       0.22    $       0.41    $       0.51    $       0.90
                                                           ============    ============    ============    ============

   Dividends Per Share                                     $       0.15    $       0.14    $       0.30    $       0.28
                                                           ============    ============    ============    ============
</TABLE>


                                       4
<PAGE>
FIRST LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

<TABLE>
<CAPTION>
Three months ended June 30,                                                             2006          2005
                                                                                    -----------    ----------
<S>                                                                                 <C>            <C>
Net income                                                                          $   475,443    $  885,757
Unrealized holding (losses) gains on securities:
        Unrealized holding (losses) gains arising during the period, net of taxes    (1,065,351)    1,557,205
                                                                                    -----------    ----------

Comprehensive (loss) income                                                         $  (589,908)   $2,442,962
                                                                                    ===========    ==========

Six months ended June 30,                                                                  2006          2005
                                                                                    -----------    ----------

Net income                                                                          $ 1,098,803    $1,943,392
Unrealized holding (losses) gains on securities:
        Unrealized holding (losses) gains arising during the period, net of taxes    (2,285,131)       39,350
                                                                                    -----------    ----------

Comprehensive (loss) income                                                         $(1,186,328)   $1,982,742
                                                                                    ===========    ==========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5
<PAGE>

FIRST LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

<TABLE>
<CAPTION>
                                                                           Six Months Ended June 30,
                                                                             2006            2005
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                               $  1,098,803    $  1,943,392
Adjustments to reconcile net income to net cash (used in)
  provided by operating activities:
        Amortization and accretion of premiums and discounts
           on investment securities, net                                      113,570         178,340
        Provision for loan losses                                             210,000         201,246
        Depreciation and amortization                                         225,102         197,654
        Losses on sales of available for sale securities                       17,633          44,076
        Gain on disposals of premises and equipment                              (100)             --
        Increase in accrued interest receivable                              (260,294)       (127,384)
        Increase in other assets                                             (220,722)       (302,595)
        Increase in cash surrender value of insurance                        (186,418)       (186,168)
        (Increase) decrease in deferred loan origination costs                (15,516)        (61,332)
        (Decrease) increase in accrued expenses and other liabilities      (3,671,165)        579,154
                                                                         ------------    ------------

            Net cash (used in) provided by operating activities            (2,689,107)      2,466,383
                                                                         ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
        Proceeds from maturities and principal payments                     7,289,510      10,771,636
        Purchases                                                         (10,862,401)     (8,998,005)
        Proceeds from sales                                                 2,706,878      11,547,754
Held to maturity mortgage-backed securities:
        Proceeds from maturities and principal payments                         4,117          16,280
Purchase of Federal Home Loan Bank stock                                      (30,000)       (728,800)
Investment in First Litchfield Statutory Trust II                             (93,000)             --
Net increase in loans                                                     (25,684,148)    (23,020,212)
Purchase of loans                                                          (3,472,995)             --
Proceeds from the sale of premises and equipment                                  100              --
Purchase of premises and equipment                                           (762,873)     (1,086,867)
                                                                         ------------    ------------

        Net cash used in investing activities                             (30,904,812)    (11,498,214)
                                                                         ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings, money market and
  demand deposits                                                          (6,063,325)    (14,495,792)
Net increase (decrease) in certificates of deposit                         31,296,434      (4,238,697)
Proceeds from Federal Home Loan Bank advances                              17,000,000      24,000,000
Repayments on Federal Home Loan Bank advances                             (10,000,000)     (9,000,000)
Net (decrease) increase in Federal Home Loan Bank overnight borrowings    (13,216,000)     11,403,000
Net increase in repurchase agreements with financial institutions           7,000,000       2,300,000
Net increase in repurchase agreements with customers                        3,637,819       3,460,395
Proceeds from issuance of subordinated debt                                 3,093,000              --
Proceeds from the exercise of stock options                                     8,744          22,440
Dividends paid on common stock                                               (640,912)       (567,653)
                                                                         ------------    ------------

        Net cash provided by financing activities                          32,115,760      12,883,693
                                                                         ------------    ------------

        Net (decrease) increase in cash and cash equivalents               (1,478,159)      3,851,862

CASH AND CASH EQUIVALENTS, at beginning of period                          18,711,537      12,222,713
                                                                         ------------    ------------

CASH AND CASH EQUIVALENTS, at end of period                              $ 17,233,378    $ 16,074,575
                                                                         ============    ============

SUPPLEMENTAL INFORMATION
Cash paid during the period for:
        Interest on deposits and borrowings                              $  5,675,524    $  3,163,429
                                                                         ============    ============
        Income taxes                                                     $    900,400    $    850,500
                                                                         ============    ============
Non-cash investing and financing activities:
        Accrued dividends declared                                       $    641,445    $    568,034
                                                                         ============    ============
        Treasury stock contributed to the ESOP                           $     67,592    $         --
                                                                         ============    ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       6
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.    The consolidated  balance sheet at December 31, 2005 has been derived from
      the audited financial statements at that date, but does not include all of
      the information and footnotes required by accounting  principles generally
      accepted  in  the  United   States  of  America  for  complete   financial
      statements.

2.    The accompanying  unaudited  consolidated financial statements and related
      notes have been  prepared  pursuant  to the rules and  regulations  of the
      Securities and Exchange Commission.  Accordingly,  certain information and
      footnote disclosures normally included in financial statements prepared in
      accordance with  accounting  principles  generally  accepted in the United
      States  of  America  have  been   omitted   pursuant  to  such  rules  and
      regulations.  The  accompanying  financial  statements  and related  notes
      should be read in conjunction with the audited financial statements of the
      Company and notes thereto for the fiscal year ended December 31, 2005.

      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.
      The results of operations for the three and six months ended June 30, 2006
      are not  necessarily  indicative of the results of operations  that may be
      expected for all of 2006.

3.    The  Company is  required  to present  basic  income per share and diluted
      income  per share in its  statements  of  income.  Basic  income per share
      amounts are computed by dividing net income by the weighted average number
      of common shares outstanding. Diluted income per share assumes exercise of
      all potential common stock in weighted average shares outstanding,  unless
      the effect is  antidilutive.  The  Company is also  required  to provide a
      reconciliation of the numerator and denominator used in the computation of
      both basic and diluted income per share.

      The following is information about the computation of net income per share
      for the three and six month periods ended June 30, 2006 and 2005. The 2005
      information  has been  restated  to give  retroactive  effect to all stock
      dividends for the periods presented.

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             June 30, 2006
                                                   ----------------------------------
                                                      Net                  Per Share
                                                    Income      Shares      Amount
                                                    ------      ------      ------
<S>                                                <C>         <C>         <C>
      Basic Net Income Per Share
         Income available to common shareholders   $ 475,443   2,137,961   $     .22
                                                                           =========

      Effect of Dilutive Securities
         Options Outstanding                              --      11,323

      Diluted Net Income Per Share
         Income available to common shareholders   ---------   ---------
         plus assumed conversions                  $ 475,443   2,149,284   $     .22
                                                   =========   =========   =========
</TABLE>


                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                                June 30, 2005
                                                   ---------------------------------------
                                                       Net                      Per Share
                                                     Income        Shares        Amount
                                                     ------        ------        ------
<S>                                                <C>             <C>         <C>
      Basic Net Income Per Share
         Income available to common shareholders   $   885,757     2,129,111   $       .41
                                                                               ===========

      Effect of Dilutive Securities
         Options Outstanding                                --        23,684

      Diluted Net Income Per Share
         Income available to common shareholders   -----------   -----------
         plus assumed conversions                  $   885,757     2,152,795   $       .41
                                                   ===========   ===========   ===========

<CAPTION>

                                                              Six Months Ended
                                                               June 30, 2006
                                                   ---------------------------------------
                                                       Net                      Per Share
                                                     Income        Shares        Amount
                                                     ------        ------        ------
<S>                                                <C>             <C>         <C>
      Basic Net Income Per Share
         Income available to common shareholders   $ 1,098,803     2,137,166   $       .51
                                                                               ===========

      Effect of Dilutive Securities
         Options Outstanding                                --        11,247

      Diluted Net Income Per Share
         Income available to common shareholders   -----------   -----------
         plus assumed conversions                  $ 1,098,803     2,148,413   $       .51
                                                   ===========   ===========   ===========

<CAPTION>

                                                             Six Months Ended
                                                              June 30, 2005
                                                   ---------------------------------------
                                                       Net                      Per Share
                                                     Income        Shares        Amount
                                                     ------        ------        ------
<S>                                                <C>             <C>         <C>
      Basic Net Income Per Share
         Income available to common shareholders   $ 1,943,392     2,128,866   $       .91
                                                                               ===========

      Effect of Dilutive Securities
         Options Outstanding                                --        24,135

      Diluted Net Income Per Share
         Income available to common shareholders   -----------   -----------
         plus assumed conversions                  $ 1,943,392     2,153,001   $       .90
                                                   ===========   ===========   ===========
</TABLE>

4.    Other  comprehensive  income,  which is comprised  solely of the change in
      unrealized  gains  and  losses on  available  for sale  securities,  is as
      follows:

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                      June 30, 2006
                                                                         -----------------------------------------
                                                                         Before-Tax                    Net-of-Tax
                                                                           Amount          Taxes         Amount
                                                                         ----------       -------      ----------
<S>                                                                      <C>            <C>            <C>
Unrealized holding losses arising during the period                      $(1,631,801)   $   554,812    $(1,076,989)
Add: reclassification adjustment for amounts recognized in net income         17,633         (5,995)        11,638
                                                                         -----------    -----------    -----------

Unrealized holding loss on available for sale securities, net of taxes   $(1,614,168)   $   548,817    $(1,065,351)
                                                                         ===========    ===========    ===========
</TABLE>


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                                                                    June 30, 2005
                                                                         ------------------------------------
                                                                         Before-Tax                Net-of-Tax
                                                                           Amount        Taxes       Amount
                                                                           ------        -----       ------
<S>                                                                      <C>          <C>          <C>
Unrealized holding gains arising during the period                       $2,315,325   $ (787,210)  $1,528,115
Add: reclassification adjustment for amounts recognized in net income        44,076      (14,986)      29,090
                                                                         ----------   ----------   ----------

Unrealized holding gain on available for sale securities, net of taxes   $2,359,401   $ (802,196)  $1,557,205
                                                                         ==========   ==========   ==========

<CAPTION>

                                                                                   Six Months Ended
                                                                                     June 30, 2006
                                                                         ------------------------------------
                                                                         Before-Tax                Net-of-Tax
                                                                           Amount        Taxes       Amount
                                                                           ------        -----       ------
<S>                                                                      <C>          <C>          <C>
Unrealized holding losses arising during the period                      $(3,479,952) $ 1,183,183  $(2,296,769)
Add: reclassification adjustment for amounts recognized in net income         17,633       (5,995)      11,638
                                                                         -----------  -----------  -----------

Unrealized holding loss on available for sale securities, net of taxes   $(3,462,319) $ 1,177,188  $(2,285,131)
                                                                         ===========  ===========  ===========

<CAPTION>

                                                                                  Six Months Ended
                                                                                    June 30, 2005
                                                                         ------------------------------------
                                                                         Before-Tax                Net-of-Tax
                                                                           Amount        Taxes       Amount
                                                                           ------        -----       ------
<S>                                                                      <C>          <C>          <C>
Unrealized holding gains arising during the period                       $    15,545  $    (5,285) $    10,260
Add: reclassification adjustment for amounts recognized in net income         44,076      (14,986)      29,090
                                                                         -----------  -----------  -----------

Unrealized holding gain on available for sale securities, net of taxes   $    59,621  $   (20,271) $    39,350
                                                                         ===========  ===========  ===========
</TABLE>

5.    The Bank has a  noncontributory  defined benefit pension plan (the "Plan")
      that covers  substantially  all employees  who have  completed one year of
      service  and have  attained  age 21.  The  benefits  are based on years of
      service  and the  employee's  compensation  during  the last five years of
      employment.  The Bank's  funding  policy was to contribute  amounts to the
      Plan sufficient to meet the minimum funding  requirements set forth in the
      Employee  Retirement  Income  Security Act of 1974,  plus such  additional
      amounts as the Bank may determine to be appropriate from time to time. The
      actuarial  information has been calculated using the projected unit credit
      method.  During the first  quarter of 2005,  the Bank's  pension  plan was
      curtailed  as the Bank's  Board of  Directors  approved  the  cessation of
      benefit accruals under the Plan effective April 30, 2005.  Because of this
      action,  commencing  with the Plan year  beginning  November 15, 2005,  no
      further contributions will be made by the Bank.

      Components  of net  periodic  benefit cost for the three months ended June
      30:

                                                     2006          2005
                                                   --------      --------
      Service cost                                 $     --      $     --
      Interest cost                                  48,290        52,516
      Expected return on plan assets                (53,715)      (58,310)
      Amortization of unrealized loss                17,455        13,222
                                                   --------      --------
      Net periodic benefit cost                    $ 12,030      $  7,428
                                                   ========      ========


                                       9
<PAGE>

Components of net periodic benefit cost for the six months ended June 30:

                                                      2006           2005
                                                 ---------      ---------
      Service cost                               $      --      $      --
      Interest cost                                 96,580        105,032
      Expected return on plan assets              (107,430)      (116,620)
      Amortization of unrealized loss               34,910         26,444
                                                 ---------      ---------
      Net periodic benefit cost                  $  24,060      $  14,856
                                                 =========      =========

6.    The  Bank is a  member  of the  Federal  Home  Loan  Bank of  Boston  (the
      "FHLBB").  As a member of the FHLBB, the Bank has access to a pre-approved
      line of credit of up to 2% of its total  assets and the capacity to borrow
      up to 30% of its total assets.  In accordance  with an agreement  with the
      FHLBB, the Bank is required to maintain qualified  collateral,  as defined
      in the  FHLBB  Statement  of  Products  Policy,  free and  clear of liens,
      pledges and encumbrances  for the advances.  FHLBB stock and certain loans
      which aggregate  approximately 100% of the outstanding advance are used as
      collateral.  Federal  Home Loan Bank  advances  as of June 30, 2006 are as
      follows:

                      due 7/01/06     $ 3,900,000 @ 5.70%
                      due 7/18/06       4,500,000 @ 2.33%
                      due 7/16/07       4,500,000 @ 2.59%
                      due 8/27/07       5,000,000 @ 3.76%
                      due 7/18/08       4,500,000 @ 3.27%
                      due 6/24/10       5,000,000 @ 4.15%
                      due 5/29/12       5,000,000 @ 4.32%
                      due 9/04/12       5,000,000 @ 4.38%
                      due 12/14/15     20,000,000 @ 3.93%
                      due 5/5/16       10,000,000 @ 4.53%
                                      -----------
                              Total   $67,400,000
                                      ===========

      As of June 30, 2006, the Bank had borrowings under  repurchase  agreements
      with financial  institutions  totaling  $73,700,000.  This amount includes
      borrowings:

                      due 8/21/06    $14,500,000 @ 5.25%
                      due 8/24/06      4,000,000 @ 5.27%
                      due 8/29/06      8,000,000 @ 5.28%
                      due 1/28/07      4,000,000 @ 3.60%
                      due 2/19/07     10,000,000 @ 2.74%
                      due 2/25/07      4,650,000 @ 2.40%
                      due 10/27/07     7,000,000 @ 3.26%
                      due 4/26/08      7,000,000 @ 4.19%
                      due 7/28/08      5,000,000 @ 3.25%
                      due 7/31/08      5,000,000 @ 3.27%
                      due 2/25/09      4,550,000 @ 3.20%
                                     -----------
                         Total       $73,700,000
                                     ===========


                                       10
<PAGE>

7.    A  reconciliation  of the  anticipated  income tax  expense  (computed  by
      applying the Federal statutory income tax rate of 34% to the income before
      taxes) to the provision for income taxes as reported in the  statements of
      income is as follows:

<TABLE>
<CAPTION>
                                                        For the three months ended June 30,
                                                             2006                  2005
                                                       -----------------    -----------------
<S>                                                    <C>           <C>    <C>           <C>
Provision for income taxes at statutory Federal rate   $ 175,426     34%    $ 411,210     34%
Increase (decrease) resulting from:
   Tax exempt income                                    (154,029)   (30)      (98,981)    (8)
   Nondeductible interest expense                         13,767      3         4,777     --
   Other                                                   5,352      1         6,679      1
                                                       -----------------    -----------------
Provision for income taxes                             $  40,516      8%    $ 323,685     27%
                                                       =================    =================

<CAPTION>

                                                         For the six months ended June 30,
                                                              2006                 2005
                                                       -----------------    -----------------
<S>                                                    <C>           <C>    <C>           <C>
Provision for income taxes at statutory Federal rate   $ 422,964     34%    $ 909,428     34%
Increase (decrease) resulting from:
   Tax exempt income                                    (314,689)   (25)     (197,525)    (7)
   Nondeductible interest expense                         26,226      2         8,951     --
   Other                                                  10,708      1        10,541     --
                                                       -----------------    -----------------
Provision for income taxes                             $ 145,209     12%    $ 731,395     27%
                                                       =================    =================
</TABLE>

8.    The amortized cost, gross unrealized  gains,  gross unrealized  losses and
      approximate  fair values of securities  which are  classified as available
      for sale and held to maturity at June 30, 2006 and  December  31, 2005 are
      as follows:

<TABLE>
<CAPTION>
AVAILABLE FOR SALE                                               June 30, 2006
                                        ---------------------------------------------------------------
                                                            Gross            Gross
                                          Amortized      Unrealized       Unrealized          Fair
                                            Cost            Gains           Losses            Value
                                        -------------   -------------    -------------    -------------
<S>                                     <C>             <C>              <C>              <C>
Debt Securities:
   U.S. Treasury securities             $   4,293,464   $          --    $     (53,322)   $   4,240,142
   U.S. Government Agency securities       57,963,771              --       (2,507,690)      55,456,081
   State and Municipal Obligations         31,193,249          78,908         (623,303)      30,648,854
   Corporate and Other Bonds               11,271,115          22,500         (123,615)      11,170,000
                                        -------------   -------------    -------------    -------------
                                          104,721,599         101,408       (3,307,930)     101,515,077
                                        -------------   -------------    -------------    -------------

Mortgage-Backed Securities:
   GNMA                                     4,566,352              --          (83,695)       4,482,657
   FNMA                                    56,762,657           5,559       (3,279,899)      53,488,317
   FHLMC                                   19,812,074              --       (1,028,170)      18,783,904
                                        -------------   -------------    -------------    -------------
                                           81,141,083           5,559       (4,391,764)      76,754,878
                                        -------------   -------------    -------------    -------------

Marketable Equity Securities                2,000,000              --          (97,106)       1,902,894
                                        -------------   -------------    -------------    -------------

Total available for sale securities     $ 187,862,682   $     106,967    $  (7,796,800)   $ 180,172,849
                                        =============   =============    =============    =============
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
AVAILABLE FOR SALE                                             December 31, 2005
                                        ---------------------------------------------------------------
                                                            Gross            Gross
                                          Amortized      Unrealized       Unrealized          Fair
                                            Cost            Gains           Losses            Value
                                        -------------   -------------    -------------    -------------
<S>                                     <C>             <C>              <C>              <C>
Debt Securities:
    U.S. Treasury securities            $   4,292,659   $          --    $     (58,746)   $   4,233,913
    U.S. Government Agency securities      57,955,558         125,130       (1,319,233)      56,761,455
    State and Municipal Obligations        34,727,011         255,067         (238,212)      34,743,866
    Corporate and Other Bonds               5,916,080           7,457          (21,037)       5,902,500
                                        -------------   -------------    -------------    -------------

                                          102,891,308         387,654       (1,637,228)     101,641,734
                                        -------------   -------------    -------------    -------------

Mortgage-Backed Securities:
   GNMA                                     5,142,926              --         (107,149)       5,035,777
   FNMA                                    58,192,401          26,658       (2,153,239)      56,065,820
   FHLMC                                   18,901,237           3,865         (712,594)      18,192,508
                                        -------------   -------------    -------------    -------------
                                           82,236,564          30,523       (2,972,982)      79,294,105
                                        -------------   -------------    -------------    -------------

Marketable Equity Securities                2,000,000              --          (35,481)       1,964,519
                                        -------------   -------------    -------------    -------------

Total available for sale securities     $ 187,127,872   $     418,177    $  (4,645,691)   $ 182,900,358
                                        =============   =============    =============    =============

<CAPTION>

HELD TO MATURITY                                                 June 30, 2006
                                        ---------------------------------------------------------------
                                                            Gross            Gross
                                          Amortized      Unrealized       Unrealized          Fair
                                             Cost           Gains            Losses           Value
                                        -------------   -------------    -------------    -------------
<S>                                     <C>             <C>              <C>              <C>
Mortgage-Backed Securities:
GNMA                                    $      44,918   $          --    $      (1,047)   $      43,871
                                        =============   =============    =============    =============

<CAPTION>

HELD TO MATURITY                                               December 31, 2005
                                        ---------------------------------------------------------------
                                                            Gross            Gross
                                          Amortized      Unrealized       Unrealized          Fair
                                             Cost           Gains            Losses           Value
                                        -------------   -------------    -------------    -------------
<S>                                     <C>             <C>              <C>              <C>
Mortgage-Backed Securities:
GNMA                                    $      49,035   $          --    $      (1,102)   $      47,933
                                        =============   =============    =============    =============
</TABLE>

      At June 30, 2006,  gross  unrealized  holding losses on available for sale
      and held to maturity securities totaled $7,797,847. Of the securities with
      unrealized  losses,  there were fifty-one  securities  that have been in a
      continuous unrealized loss position for a period of twelve months or more.
      The unrealized losses on these securities  totaled  $6,463,467 at June 30,
      2006.  Management  does not believe that any of the unrealized  losses are
      other than temporary as they relate primarily to debt and  mortgage-backed
      securities  issued  by  U.S.  Government  and  U.S.  Government  sponsored
      agencies,  and are due to changes in the interest  rate  environment.  The
      Company has both the intent and the ability to hold these securities until
      maturity or until the fair value fully recovers.  In addition,  management
      considers the issuers of the securities to be  financially  sound and that
      the Company will receive all contractual principal and interest related to
      these investments.  As a result, management believes that these unrealized
      losses will not have a negative  impact on future  earnings or a permanent
      effect on capital.  However,  management periodically evaluates investment
      alternatives to properly  manage the overall balance sheet.  The timing of
      sales  and   reinvestments   is  based  on  various   factors,   including
      management's evaluation of interest rate risks and liquidity needs.


                                       12
<PAGE>

9.    A summary of the Bank's loan  portfolio  at June 30, 2006 and December 31,
      2005 is as follows:

                                                2006             2005
                                           -------------    -------------

     Real estate--residential mortgage     $ 162,064,141    $ 145,927,290
     Real estate--commercial mortgage         47,657,152       42,144,448
     Real estate--construction                35,435,959       28,549,180
     Commercial                               17,520,012       21,150,306
     Installment                               8,591,578        4,334,274
     Other                                        41,257           47,091
                                           -------------    -------------
                         TOTAL LOANS         271,310,099      242,152,589
     Net deferred loan origination costs         304,277          288,761
     Allowance for loan losses                (1,969,978)      (1,759,611)
                                           -------------    -------------
                         NET LOANS         $ 269,644,398    $ 240,681,739
                                           =============    =============

10.   A summary of the Bank's deposits at June 30, 2006 and December 31, 2005 is
      as follows:

                                                         2006           2005
                                                    ------------   ------------
 Noninterest bearing:
     Demand                                         $ 68,759,953   $ 66,907,502
                                                    ------------   ------------
 Interest bearing:
     Savings                                          43,775,005     48,502,205
     Money market                                     76,053,420     79,241,996
     Time certificates of deposit in
       denominations of $100,000 or more              53,789,129     27,134,125
     Other time certificates of deposit               60,725,963     56,084,533
                                                    ------------   ------------
          Total Interest bearing deposits            234,343,517    210,962,859
                                                    ------------   ------------
                                   TOTAL DEPOSITS   $303,103,470   $277,870,361
                                                    ============   ============

      Included  in  deposits  as of June 30,  2006  and  December  31,  2005 are
      approximately  $16,667,000  and  $3,073,000,   respectively,  of  brokered
      deposits which have varying maturities through May 2007.

11.   At June  30,  2006,  the  Company  had one  fixed  option  plan,  which is
      described  below.  Effective  January 1, 2006,  the Company  adopted  SFAS
      No.123  (revised),  "Share-Based  Payment"  (SFAS  123(R))  utilizing  the
      modified prospective  approach.  Prior to the adoption of SFAS 123(R), the
      Company  accounted for stock option grants in accordance  with APB Opinion
      No. 25,  "Accounting  for Stock Issued to Employees"  (the intrinsic value
      method),  and  accordingly,  recognized no compensation  expense for stock
      option  grants.  Because  there  were no  unvested  share-based  awards at
      January 1, 2006,  the adoption of this  statement had no initial effect on
      the Company's financial statements.

      A stock option plan for officers and outside directors was approved by the
      shareholders during 1994. The price and number of options in the plan have
      been adjusted for all stock dividends and splits.

      The stock option plan for directors automatically granted each director an
      initial  option of 3,376 shares of the Company's  common stock.  Automatic
      annual grants of an additional 573 shares for each director were given for
      each of the four following years.

      The stock option plan for officers  grants  options based upon  individual
      officer performance.

      Under both the  director  and  officer  plans,  the price per share of the
      option is the fair market value of the Company's  stock at the date of the
      grant. No option may be exercised until 12 months after it is


                                       13
<PAGE>

      granted at which time options fully vest.  Options are  exercisable  for a
      period of ten years from the grant thereof.

      Activity in the option plan for officers and outside directors for the six
      months ended June 30, 2006 and 2005 is summarized as follows:  (The number
      of  shares  and price per share  have been  adjusted  to give  retroactive
      effect to all stock dividends and splits.)

<TABLE>
<CAPTION>
                                                                     2006                                2005
                                                       --------------------------------      --------------------------------
                                                                          Weighted                              Weighted
                                                       Number of      Average Exercise       Number of      Average Exercise
                                                        Shares         Price Per Share        Shares         Price Per Share
                                                       ---------      -----------------      ---------      -----------------
<S>                                                       <C>         <C>                       <C>         <C>
       Options outstanding at the
           beginning of the year                          28,965      $           10.74         38,608      $            9.96
                Granted                                       --                     --             --                     --
                Exercised                                  1,146                   7.63          2,865                   7.83
                Cancelled                                     --                     --             --                     --
                                                       ---------      -----------------      ---------      -----------------
       Options outstanding and exercisable at the
           end of the year                                27,819      $           10.86         35,743      $           10.14
                                                       =========      =================      =========      =================
</TABLE>

      The intrinsic  value of options  outstanding  and  exercisable at June 30,
      2006 and 2005 is $436,383 and $652,113,  respectively. The intrinsic value
      of options  exercised  during the six months  ended June 30, 2006 and 2005
      was $21,682 and $58,876, respectively.

      There are no pro forma  disclosures  required for the three and six months
      ended June 30, 2006 and 2005 because there was no share-based compensation
      attributed  to those  periods,  as no awards were granted or vested during
      those periods.


                                       14
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

First Litchfield Financial  Corporation (the "Company"),  a Delaware corporation
formed in 1988, is the one-bank  holding  company for The First National Bank of
Litchfield  (the "Bank"),  a national bank supervised and examined by the Office
of the  Comptroller  of the  Currency  (the  "OCC").  The Bank is the  Company's
primary subsidiary and only source of income. The Bank has two subsidiaries, The
Lincoln  Corporation  and Litchfield  Mortgage  Service  Corporation,  which are
Connecticut  corporations.  The  purpose of The Lincoln  Corporation  is to hold
property such as real estate,  personal property,  securities,  or other assets,
acquired by the Bank through  foreclosure  or otherwise to compromise a doubtful
claim or  collect  a debt  previously  contracted.  The  purpose  of  Litchfield
Mortgage Service  Corporation is to operate as a passive  investment  company in
accordance with Connecticut law.

Both the Company and the Bank are headquartered in Litchfield,  Connecticut. The
Bank is a full-service  commercial bank serving both  individuals and businesses
generally within Northwestern  Connecticut.  Deposits are insured up to specific
limits of the Federal Deposit Insurance Act by the Deposit Insurance Fund, which
is administered by the Federal Deposit Insurance Corporation. The Bank's lending
activities include loans secured by residential and commercial mortgages.  Other
loan products  include  consumer and business  installment  lending,  as well as
other  secured  and  nonsecured  lending.  The Bank has nine  banking  locations
located in the towns of Canton, Torrington, Litchfield, Washington, Marble Dale,
Goshen and Roxbury,  Connecticut.  The newest banking  facility,  located in New
Milford, Connecticut,  opened in July of 2006. On July 14, 2006 the OCC approved
the Bank's application to change the location of the Torrington Fair Supermarket
branch to open a full service branch in Torrington,  Connecticut.  The office is
scheduled to open in October,  2006. In 1975,  the Bank was granted Trust powers
by the OCC. The Bank's Trust Department provides trust and fiduciary services to
individuals, nonprofit organizations and commercial customers. Additionally, the
Bank  offers  non-deposit  retail  investment  products  such as  mutual  funds,
annuities and insurance through its relationship with Infinex Investments, Inc.

During the second quarter of 2003, the Company formed a statutory  trust,  First
Litchfield Statutory Trust I. The Company owns 100% of the Trust's common stock.
The Trust  has no  independent  assets or  operations  and  exists  for the sole
purpose of issuing trust  securities and investing the proceeds in  subordinated
debentures  issued by the Company.  On June 26, 2003, the Trust issued its first
series of trust  preferred  securities.  During the second  quarter of 2006, the
Company formed a second  statutory trust,  First  Litchfield  Statutory Trust II
("Trust II"). The Company owns 100% of Trust II's common stock.  Trust II exists
for the sole purpose of issuing trust  securities  and investing the proceeds in
subordinated  debentures  issued by the Company.  In June, 2006, Trust II issued
its first series of trust preferred securities.

As of June 30, 2006, the Company had total assets of $494,826,771,  which was an
increase of approximately  $27.3 million or 5.8% from year-end 2005 total assets
of  $467,560,946.  The increase in assets  resulted  from  increases in the loan
portfolio. The increase in assets was funded primarily by increased deposits.


                                       15
<PAGE>

The following  discussion and analysis of the Company's  consolidated  financial
condition  and  results of  operations  should be read in  conjunction  with the
consolidated  financial  statements  and  notes  to the  consolidated  financial
statements.

FINANCIAL CONDITION

Total assets as of June 30, 2006 were  $494,826,771,  an increase of $27,265,825
or 5.8% from year-end 2005 total assets of $467,560,946.

Net loans as of June 30,  2006 were  $269,644,398,  reflecting  an  increase  of
$28,962,659  or 12.0%,  as compared to the year-end 2005 level of  $240,681,739.
Loan growth during the first six months of 2006 was realized in the residential,
construction and commercial  mortgage portfolios as well as in the consumer loan
portfolio.

At June 30, 2006, the residential mortgage loan portfolio totaled  $162,064,141,
which was an  increase of 11.1% from  year-end  2005.  Growth in these  mortgage
products was primarily in fixed rate loans.  Commercial  mortgage  loans totaled
$47,657,152,  which is an increase  of 13.1% from their  year-end  balance.  The
growth in commercial  mortgage loans is due to the Bank's emphasis on commercial
lending in its new markets.  Growth in  commercial  mortgage  products is also a
result of preference of the  commercial  customer  towards  longer term mortgage
financing.  During the first six  months of 2006,  construction  mortgage  loans
increased by $6,886,779,  or 24.1%, and totaled $35,435,959 as of June 30, 2006.
The increase in the construction mortgage portfolio was primarily in residential
real estate loans. The commercial loan portfolio  decreased  $3,630,294 or 17.2%
from its year-end 2005 balance.  Customer preference towards longer term secured
financing  alternatives  is the  reason  for this  decrease.  At June 30,  2006,
consumer loans totaled $8,591,578 and increased $4,257,304 from year end. During
the second  quarter of 2006, the Bank purchased a portfolio of consumer loans in
the   secondary   market.   The  reason  for  the   acquisition   was  portfolio
diversification as well as acceptable levels of credit risk and yield.

As of June 30, 2006, the securities portfolio totaled  $180,217,767,  which is a
1.5%  decrease  from the year-end  2005  balance.  The decrease in the portfolio
resulted   primarily  from  principal   payments  received  on   mortgage-backed
securities  as well as called state and  municipal  securities.  Liquidity  from
these securities was utilized to fund the loan portfolio  growth.  This decrease
is  consistent  with  Management's  strategy  to shift  earning  assets from the
investment portfolio into the loan portfolio.

Cash and cash equivalents  totaled  $17,233,378 which is a decrease of 7.9% from
year-end 2005. Variations in cash letter activity as of the end of the reporting
periods is the cause of this  decrease.  As of June 30,  2006 and  December  31,
2005, there were no Federal Funds Sold.

Total  liabilities were  $470,600,913 as of June 30, 2006, which was an increase
of $29,009,704 from total liabilities of $441,591,209 as of year-end 2005. Total
deposits increased  $25,233,109,  or 9.1%, as compared to their year-end levels.
Demand  deposits  increased  by  $1,852,451,  or 2.8%,  while  interest  bearing
deposits increased by $23,380,658, or 11.1%. Growth in deposits is due primarily
to the Bank's new branch facilities in nearby markets. Additionally,  growth has
been experienced in commercial



                                       16
<PAGE>

deposits due to the focus on meeting the banking needs of commercial businesses.
Also,  innovative  deposit  products  and  relationship  money  market  deposits
contributed to the growth in deposits as well as the Bank's success in retaining
those  deposits  which might have  migrated to non-bank  investments.  Decreases
experienced  in both  savings  and  money  market  deposits  were the  result of
customers  shifting into higher yielding  certificates  of deposit.  Included in
time  certificates  of  deposit in  denominations  of  $100,000  or more are $14
million in brokered  certificates  of deposit.  These  deposits  have  remaining
maturities of between three and six months and represent a cost efficient source
of funding for meeting the Company's liquidity needs.

As of June 30, 2006,  repurchase  agreements with customers totaled $13,611,991,
which was an  increase of  $3,637,819  from the  year-end  2005  balance.  These
accounts  represent  overnight  investments  by commercial  and  municipal  cash
management customers. Advances under Federal Home Loan Bank borrowings decreased
by $6,216,000 while repurchase agreements with financial  institutions increased
by $7,000,000.  Management  considers  interest rate levels, the yield curve and
the Company's  current and future  liquidity  needs in  determining  the funding
structures utilized by the Bank.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005

Summary

Net interest  income is the single  largest  source of the Company's net income.
Net  interest  income is  determined  by several  factors  and is defined as the
difference  between interest and dividend income from earning assets,  primarily
loans and investment  securities,  and interest expense on deposits and borrowed
money.   Although  there  are  certain   factors  which  can  be  controlled  by
management's  policies and actions,  certain  other factors  exist,  such as the
general level of credit  demand,  Federal  Reserve Board  monetary  policy,  and
changes in tax law that are beyond the control of management.

Net income for the second calendar quarter of 2006 totaled $475,443,  which is a
decrease of $410,314 or 46.3% from second  quarter  2005  earnings of  $885,757.
Quarterly  basic and  diluted net income per share for 2006 were $.22 per share,
compared to $.41 per basic and diluted share for the same period in 2005.

Net Interest Income

Net interest  income is comprised  of the  following  for the three months ended
June 30,

                                                 2006           2005
                                             -----------    -----------

Interest and dividend income                 $ 6,184,919    $ 5,279,598
Tax-equivalent adjustments                       169,165         94,783
Interest expense                              (2,984,905)    (1,788,805)
                                             -----------    -----------

Net interest income (tax equivalent basis)   $ 3,369,179    $ 3,585,576
                                             ===========    ===========

The following table presents the Company's average balance sheets (computed on a
daily basis), net interest income, and interest rates for the three months ended
June 30, 2006 and 2005.  Average loans outstanding  include  nonaccruing  loans.
Interest income is presented on a tax-equivalent  basis which reflects a federal
tax rate of 34% for all periods presented.


                                       17
<PAGE>

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                            Three months ended June 30, 2006                Three months ended June 30, 2005
                                       -------------------------------------------   --------------------------------------------
                                                         Interest                                      Interest
                                          Average         Earned/       Yield/          Average         Earned/       Yield/
                                          Balance          Paid          Rate           Balance          Paid          Rate
                                       -------------    -----------   -----------    -------------    -----------   -----------
<S>                                    <C>              <C>             <C>          <C>              <C>               <C>
Assets
Interest Earning Assets:
Loans                                  $ 255,826,000    $ 4,082,117     6.38%        $ 234,785,000    $ 3,474,303       5.92%
Investment Securities                    191,186,000      2,261,486     4.73%          172,877,000      1,898,400       4.39%
Other interest earning assets              1,894,000         10,481     2.21%              507,000          1,678       1.32%
                                       -------------    -----------                  -------------    -----------

Total interest earning assets            448,906,000      6,354,084     5.66%          408,169,000      5,374,381       5.27%
                                                        -----------   ------                          -----------   --------

Allowance for loan losses                 (1,908,000)                                   (1,530,000)
Cash and due from banks                   13,807,000                                    14,410,000
Bank premises and equipment                4,677,000                                     3,672,000
Net unrealized loss on
  securities                              (6,396,000)                                   (2,582,000)
Other assets                               17,223000                                    15,296,000
                                       -------------                                 -------------

Total Average Assets                   $ 476,309,000                                 $ 437,435,000
                                       =============                                 =============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                       $  45,223,000         25,008     0.22%        $  56,978,000         29,957       0.21%
Money Market deposits                     73,180,000        359,224     1.96%           88,647,000        236,472       1.07%
Time deposits                            105,928,000        984,185     3.72%           83,186,000        535,343       2.57%
Borrowed funds                           159,024,000      1,616,488     4.07%          121,497,000        987,033       3.25%
                                       -------------    -----------                  -------------    -----------

Total interest bearing liabilities       383,355,000      2,984,905     3.11%          350,308,000      1,788,805       2.04%
                                                        -----------   ------                          -----------   --------

Demand deposits                           66,332,000                                    60,043,000
Other liabilities                          1,549,000                                     1,827,000
Shareholders' Equity                      25,073,000                                    25,257,000
                                       -------------                                 -------------

Total liabilities and equity           $ 476,309,000                                 $ 437,435,000
                                       =============                                 =============

Net interest income                                     $ 3,369,179                                   $ 3,585,576
                                                        ===========                                   ===========
Net interest spread                                                     2.55%                                           3.23%
Net interest margin                                                     3.00%                                           3.51%
</TABLE>

RATE/VOLUME ANALYSIS

<TABLE>
<CAPTION>
                                                    Three months ended
                                                6/30/06 Compared to 6/30/05
                                                 Increase (Decrease) Due to
                                             -------------------------------------

                                              Volume        Rate          Total
                                             ---------    ---------    -----------
<S>                                          <C>          <C>          <C>
Interest earned on
Loans                                        $ 324,373    $ 283,441    $   607,814
Investment securities                          210,031      153,055        363,086
Other interest income                            7,066        1,737          8,803
                                             ---------    ---------    -----------
Total interest earning assets                  541,470      438,233        979,703
                                             ---------    ---------    -----------

Interest paid on:
Deposits                                       (15,998)     582,643        566,645
Borrowed money                                 347,105      282,350        629,455
                                             ---------    ---------    -----------
Total interest bearing liabilities             331,107      864,993      1,196,100
                                             ---------    ---------    -----------

Increase (decrease) in net interest income   $ 210,363    $(426,760)   $  (216,397)
                                             =========    =========    ===========
</TABLE>

Tax-equivalent  net  interest  income for the second  quarter of 2006  decreased
$216,397 or 6.0% from the second  quarter of 2005.  Of the $216,397  decrease in
the net interest income,  $426,760 was due to decreased  income  attributable to
the increased costs of interest bearing liabilities which were significantly


                                       18
<PAGE>

above the increased  earnings from the higher yields on earning  assets.  Higher
levels of earning  assets  resulted in increased  net interest  income  totaling
$210,363 which offset the lower interest income due to increased funding costs.

Average  earning assets for the second quarter of 2006 totaled $449 million,  an
overall increase of $41 million from the second quarter of 2005. Loans increased
by $21 million or 8.9%.  The increase in earning  assets  resulted in additional
tax  equivalent  interest  income of  $541,470.  The  funding of this growth was
through  borrowed  money,  time and demand  deposits.  This funding,  which also
offset  decreases  in savings  and money  market  deposits,  increased  interest
expense by $331,107.

The net interest  margin for the second quarter of 2006 was 3.00%, a decrease of
51 basis  points  from the  second  quarter  of 2005.  The  decrease  in the net
interest  margin is  attributable to the increased cost of funds which rose at a
faster rate than the yield on earning assets. Additionally, the shift in funding
from savings and money market deposits into more expensive time certificates and
borrowed  money  contributed  to the decrease in margin.  Funding  costs totaled
3.11% for the second  quarter of 2006, an increase of 107 basis points  compared
to funding  costs of 2.04% for the second  quarter of 2005. In  comparison,  the
yield on earning assets for the second quarter of 2006 totaled 5.66%,  which was
an increase of only 39 basis points over the earning  asset yield for the second
quarter  of  2005.  The  flattened  yield  curve  experienced  during  2006  has
significantly diminished the marginal return on earning asset growth.

Provisions for Loan Losses

The provision for loan losses for the second  quarter of 2006 totaled  $105,000,
which is a slight  increase over the  provision for the second  quarter of 2005.
The provision for loan losses is  determined  quarterly and assessed  along with
the adequacy of the loan loss reserve.  Growth in commercial  lending as well as
growth within the overall  portfolio and into new markets resulted in this level
of provision. (See page 24 for a discussion of the Allowance for Loan Losses.)

During the second  quarter of 2006,  the Company  recorded  net  charge-offs  of
$3,384  compared  to net  charge-offs  of  $1,959  for the same  period in 2005.
Recovery  and  charge-off  activity  continue  to be  associated  with  consumer
lending.

Noninterest Income

Noninterest income for the second quarter of 2006 totaled $704,477,  an increase
of $106,549 or 17.8% from the $597,928 earned for the second quarter of 2005 due
to  increases  in trust  income and banking  service  charges and fees.  Banking
service  charges  and fees for the second  quarter of 2006  totaled  $291,444 an
increase  of $45,447 or 18.5% from fees  earned for the second  quarter of 2005.
This  increase was due to increased  activity from deposit  overdrafts  and cash
management  services.  Trust fees totaled  $281,896,  which was $35,083 or 14.2%
above the second quarter 2005 level. The increase in trust fees is due to higher
levels of  investment  management  income as well as estate fees  earned  during
2006. Other noninterest income totaled $148,770, which was similar to the amount
earned in the second  quarter of 2005.  Sales of available  for sale  securities
during the  second  quarter of 2006 were for the  purpose of  increasing  future
income on the  portfolio as well as  decreasing  the interest  rate risk.  These
sales  resulted in a loss of $17,633 for the quarter.  This loss compares to the
second quarter 2005 loss of $44,076 which was done for similar purposes.


                                       19
<PAGE>

Noninterest Expense

For  the  three  months  ended  June  30,  2006,   noninterest  expense  totaled
$3,283,532,  an increase  of $504,876 or 18.2% from the similar  period in 2005.
Salary costs increased by $193,551 due mostly to additional staffing for the new
branches in Canton and New Milford,  Connecticut..  Offsetting some of the costs
were  decreases  in  employee  benefits  expense due to the  curtailment  of the
pension plan during 2005.

Occupancy and equipment  expense totaled $350,854,  increasing  $76,347 or 27.8%
from the second  quarter of 2005.  Although  increased  utility and  maintenance
expense  contributed  to the  increase,  additional  rental  expense for the New
Milford  branch  represents  the  majority of the  increase.  Legal fees for the
second quarter of 2006 totaled $95,864 which was an increase of $37,183 from the
second quarter of 2005. Professional advice related to new products and services
are the primary  reason for the increased  expense.  External  computer  service
expense  increased by $30,246 from the second quarter of 2005, due to processing
costs for expanded bank and trust products. Advertising expense totaled 228,311,
up $115,364 or 102.1% from second  quarter  2005 costs.  Much of the increase in
advertising  relates to new branch  promotions.  Commissions,  services and fees
expenses  totaled  $116,660  which is an  increase  of $55,471 or 90.7% from the
second  quarter of 2005.  Costs  incurred for core  processor  due diligence and
compliance advice resulted in the increase.  Other  noninterest  expense totaled
$493,659 for the quarter,  which was $21,480 or 4.5% above 2005 costs. Increased
costs for computer  consulting and software  expense  related to bank growth and
technology needs were the causes of the increase.  Additionally  contributing to
the increase was insurance expense and exam and audit fees.

Income Taxes

For the three month period ended June 30, 2006,  the  provision for income taxes
totaled $40,516, which is a decrease of 87.5% from the same period in 2005. This
decrease is due to the level of pretax  income  which was down by 57.3% from the
second  quarter of 2005.  Additionally,  due to a higher ratio of  tax-exempt to
pretax income,  the effective tax rate for the second quarter of 2006 was 8%, as
compared to the second quarter 2005 effective tax rate of 27%.

RESULTS OF  OPERATIONS - SIX MONTHS  ENDED JUNE 30, 2006  COMPARED TO SIX MONTHS
ENDED JUNE 30, 2005

Summary

Net  income for the  Company  for the six months  ended  June 30,  2006  totaled
$1,098,803, decreasing $844,589 or 43.5% from 2005 earnings of $1,943,392. Basic
and diluted net income per share for the six month period were $.51,  per share.
These  results  compare below 2005 levels of $.91 and $.90 for basic and diluted
net income per share, respectively.

Net Interest Income

Net interest  income is comprised of the following for the six months ended June
30,


                                       20
<PAGE>

                                                    2006            2005
                                                ------------    ------------
   Interest and dividend income                 $ 12,062,128    $ 10,444,639
   Tax-equivalent adjustments                        341,030         189,815
   Interest expense                               (5,600,307)     (3,337,539)
                                                ------------    ------------

   Net interest income (tax equivalent basis)   $  6,802,851    $  7,296,915
                                                ============    ============

The following table presents the Company's average balance sheets (computed on a
daily basis),  net interest income,  and interest rates for the six months ended
June 30, 2006 and 2005.  Average loans outstanding  include  nonaccruing  loans.
Interest income is presented on a tax-equivalent  basis which reflects a federal
tax rate of 34% for all periods presented.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

<TABLE>
<CAPTION>
                                            Six months ended June 30, 2006                 Six months ended June 30, 2005
                                       ------------------------------------------   -------------------------------------------
                                                          Interest                                     Interest
                                          Average          Earned/       Yield/        Average          Earned/       Yield/
                                          Balance           Paid          Rate         Balance           Paid          Rate
                                       -------------    -------------   --------    -------------    -------------   --------
<S>                                    <C>              <C>                 <C>     <C>              <C>                 <C>
Assets
Interest Earning Assets:
Loans                                  $ 249,764,000    $   7,907,076       6.33%   $ 229,165,000    $   6,760,325       5.90%
Investment Securities                    190,931,000        4,484,207       4.70%     175,242,000        3,865,026       4.41%
Other interest earning assets              1,172,000           11,875       2.03%       1,691,000            9,103       1.08%
                                       -------------    -------------               -------------    -------------

Total interest earning assets            441,867,000       12,403,158       5.61%     406,098,000       10,634,454       5.24%
                                                        -------------   --------                     -------------   --------

Allowance for loan losses                 (1,854,000)                                  (1,478,000)
Cash and due from banks                   14,045,000                                   14,341,000
Bank premises and equipment                4,583,000                                    3,249,000
Net unrealized loss on
  securities                              (5,451,000)                                  (2,391,000)
Foreclosed real estate                            --                                           --
Other assets                              16,639,000                                   15,000,000
                                       -------------                                -------------

Total Average Assets                   $ 469,829,000                                $ 434,819,000
                                       =============                                =============

Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
Savings deposits                       $  46,153,000           49,636       0.22%   $  57,471,000           59,522       0.21%
Money Market deposits                     74,103,000          661,510       1.79%      94,486,000          476,330       1.01%
Time deposits                             98,829,000        1,739,765       3.52%      84,902,000        1,040,843       2.45%
Borrowed funds                           159,862,000        3,149,396       3.94%     112,510,000        1,760,844       3.13%
                                       -------------    -------------               -------------    -------------

Total interest bearing liabilities       378,947,000        5,600,307       2.96%     349,369,000        3,337,539       1.91%
                                                        -------------   --------                     -------------   --------

Demand deposits                           63,476,000                                   58,600,000
Other liabilities                          1,890,000                                    1,820,000
Shareholders' Equity                      25,516,000                                   25,030,000
                                       -------------                                -------------

Total liabilities and equity           $ 469,829,000                                $ 434,819,000
                                       =============                                =============

Net interest income                                     $   6,802,851                                $   7,296,915
                                                        =============                                =============
Net interest spread                                                         2.65%                                        3.33%
Net interest margin                                                         3.08%                                        3.59%
</TABLE>

RATE/VOLUME ANALYSIS
                                                Six months ended
                                           6/30/06 Compared to 6/30/05
                                            Increase (Decrease) Due to
                                     -----------------------------------------

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

Interest earned on:
Loans                                $   632,177    $   514,574    $ 1,146,751
Investment securities                    359,042        260,139        619,181
Other interest income                     (3,431)         6,203          2,772
                                     -----------    -----------    -----------
Total interest earning assets            987,788        780,916      1,768,704
                                     -----------    -----------    -----------
Interest paid on:
Deposits                                (126,313)     1,000,529        874,216
Borrowed money                           859,845        528,707      1,388,552
                                     -----------    -----------    -----------
Total interest bearing liabilities       733,532      1,529,236      2,262,768
                                     -----------    -----------    -----------
Increase in net interest income      $   254,256    $  (748,320)   $  (494,064)
                                     ===========    ===========    ===========


                                       21
<PAGE>

The $494,064  decrease in net interest income is reflective of decreased  income
of $748,320 resulting from the decrease in net interest spread. Increased volume
of  earning  assets,   net  of  the  increase  in  volume  of  interest  bearing
liabilities,  contributed $254,256 in net interest income,  partially offsetting
this decrease.

Tax  equivalent  net  interest  income for the first six months of 2006  totaled
$6,802,851,  which was a decrease  of  $494,064  or 6.8% from the same period in
2005. Earning assets for the first half of 2006 increased by nearly $36 million,
or 8.8%.  Earning asset growth was in the loan and  investment  portfolio  which
both  increased by 9.0% over the previous  year.  The increase in earning assets
was funded entirely by borrowed money.

The  decline in net  interest  income is  reflective  of the  erosion of the net
interest margin. The net interest margin (net interest income divided by average
earning assets) was 3.08% for the six-month  period ended June 30, 2006. The net
interest  margin  decreased 51 basis points from the margin of 3.59% for the six
months ended June 30, 2005. The flat and inverted yield curve experienced during
the first six months of 2006 is the cause of the decline in net interest margin.
Traditionally,  the Company's funding costs are at short term, lower rates while
assets earn rates at higher,  longer term  levels.  Over the past year,  funding
costs  have  increased  105 basis  points,  from  1.91% to 2.96%.  However,  the
tax-equivalent  yield on earning  assets has only  increased 38 basis points for
the same period.  Continued  emphasis on deposit growth  through  promotions and
branching into new markets should help alleviate further margin erosion.

Provisions for Loan Losses

The provision for loan losses for the first six months of 2006 totaled $210,000,
which was a slight increase over the provision for the first six months of 2005.
The provision for loan losses is  determined  quarterly and assessed  along with
the adequacy of the allowance for loan losses. The growth in the loan portfolio,
an increased emphasis in commercial  lending,  expansion into contiguous markets
and cautious economic expectations, resulted in this level of provision.

During the first six months of 2006, the Company recorded net recoveries of $367
compared to net charge-offs of $2,444 for the first half of 2005. Charge-off and
recovery activity  primarily relates to small dollar losses in the consumer loan
and credit card portfolios.

Noninterest Income

Year to date  noninterest  income as of June 30,  2006  totaled  $1,371,972,  up
$160,241,  or  13.2%,  from  noninterest  income  from the same  period in 2005.
Banking service charges and fees totaled $558,423, increasing $90,262, or 19.3%,
from the  previous  year.  The  increase  in  service  charge  income  is due to
increased fee income from deposit  overdraft  fees,  cash  management  services,
credit card interchange  income and loan referral fees. Trust fee income totaled
$541,872 which represents an increase of $66,386,  or 14.0%,  from the first six
months  of  2005.  This  increase  is due to  fees  from  investment  management
services.  Customers are finding the Bank's investment management services to be
an attractive wealth management tool. Other noninterest  income totaled $289,310
which is a decrease of $22,850, or 7.3%, from the first six months of 2005. This
decrease  is due  mostly to lower  levels of fee income  from the Bank's  retail
investment products. During the first six months of 2006 and 2005, the


                                       22
<PAGE>

Bank recorded  losses on the sales of available  for sale  securities of $17,633
and $44,076, respectively.  These sales were made for the purpose of positioning
the portfolio for future income and reducing interest rate risk.

Noninterest Expense

Six-month  noninterest  expense  as of June 30,  2006  totaled  $6,379,781,  and
represented an increase of $936,983, or 17.2%, from the same period of 2005. The
opening of the Bank's Canton branch in February,  as well as costs  incurred for
the opening of the New Milford branch in July, 2006, were the primary causes for
the increases in salary,  advertising,  legal, postage,  equipment and occupancy
expenses.

Other  noninterest  expenses  totaled  $952,425 which was an increase of $96,763
from the first six months of 2005.  Increased  costs for  computer  software and
consulting,  insurance  fees and exam and audit  expense,  reflect the Company's
expansion  as  well  as  the  costs  of  compliance  in the  current  regulatory
environment.

Income Taxes

The  provision  for  income  taxes  for the first  six  months  of 2006  totaled
$145,209,  a decrease of  $586,186  or 80.1% from the same  period in 2005.  The
decrease in income tax expense is due to lower taxable income levels due both to
lower  pretax  earnings  as well as to a higher  proportion  of  non-taxable  to
taxable income.  The effective tax rate for the first six months of 2006 was 12%
compared to 27% for the first six months of 2005.

LIQUIDITY

Management's  objective  is to ensure  continuous  ability to meet cash needs as
they arise.  Such needs may occur from time to time as a result of  fluctuations
in loan  demand  and the level of total  deposits.  Accordingly,  the Bank has a
liquidity  policy that provides  flexibility  to meet cash needs.  The liquidity
objective is achieved through the maintenance of readily  marketable  investment
securities as well as a balanced flow of asset maturities and prudent pricing on
loan and deposit products.

The Bank is a member of the Federal Home Loan Bank system which provides  credit
to its  member  banks.  This  enhances  the  liquidity  position  of the Bank by
providing a source of  available  overnight  as well as  short-term  borrowings.
Additionally, federal funds, borrowings through the use of repurchase agreements
and the sale of mortgage  loans in the  secondary  market are  available to fund
short term cash needs. (See note 6 to the Consolidated  Financial Statements for
information on Federal Home Loan Bank Borrowings and repurchase agreements.)

As of June 30, 2006, the Company had $83,590,270 in loan  commitments and credit
lines  outstanding.  Since some commitments are expected to expire without being
drawn upon, the total commitment amount therefore does not necessarily represent
all future cash  requirements.  The funding of these commitments are anticipated
to  be  through  deposits,  loan  and  security  amortizations  and  maturities.
Management  believes  liquidity is adequate to meet its present and  foreseeable
needs.


                                       23
<PAGE>

CAPITAL

At June 30,  2006,  total  shareholders'  equity  was  $24,225,858  compared  to
$25,969,737  at December 31, 2005.  From a regulatory  perspective,  the capital
ratios of the Company  and the Bank place each entity in the  "well-capitalized"
categories  under  applicable  regulations.  The various  capital  ratios of the
Company and the Bank are as follows as of June 30, 2006:

                                          Minimum
                                       Regulatory
                                   Capital Levels   The Company       The Bank
                                   --------------   -----------       --------
TIER 1:
  Leverage capital ratio                       4%          8.18%          7.51%

  Risk-based capital ratio                     4%         13.29%         12.21%

  Total risk-based capital ratio               8%         13.96%         12.88%

ALLOWANCE FOR LOAN LOSSES AND CRITICAL ACCOUNTING POLICIES

In the ordinary course of business,  the Bank has made a number of estimates and
assumptions  relating  to the  reporting  results of  operations  and  financial
condition in preparing its financial  statements in conformity  with  accounting
principles  generally  accepted in the United States of America.  Actual results
could differ significantly from those estimates under different  assumptions and
conditions.  The Company believes the following  discussion addresses the Bank's
only critical  accounting policy,  which is the policy that is most important to
the portrayal of the Bank's  financial  results and requires  management's  most
difficult,  subjective and complex  judgments,  often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.

The Bank makes  provisions for loan losses on a quarterly basis as determined by
a continuing  assessment of the adequacy of the  allowance for loan losses.  The
Bank performs an ongoing review of loans in accordance  with an individual  loan
rating system to determine  the required  allowance for loan losses at any given
date. The review of loans is performed to estimate potential exposure to losses.
Management's judgment in determining the adequacy of the allowance is inherently
subjective  and is  based  on an  evaluation  of the  known  and  inherent  risk
characteristics  and size of the loan  portfolios,  the  assessment  of  current
economic and real estate  market  conditions,  estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination  reports and  evaluations  of  impaired  loans,  and other  relevant
factors.  Loans, including impaired loans, are charged against the allowance for
loan losses when management  believes that the  uncollectibility of principal is
confirmed.  Any  subsequent  recoveries  are credited to the  allowance for loan
losses when received.  In connection with the determination of the allowance for
loan losses and the  valuation of  foreclosed  real estate,  management  obtains
independent appraisals for significant properties, when considered necessary.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component  relates to loans that are  classified  as either  doubtful,
substandard  or special  mention.  For such loans  that are also  classified  as
impaired,  an  allowance  is  established  when the  discounted  cash  flows (or
collateral value or observable  market price) of the impaired loan is lower than
the carrying value of that loan.  The general  component  covers  non-classified
loans and is based on historical loss experience adjusted for qualitative


                                       24
<PAGE>

factors.  An  unallocated  component is maintained to cover  uncertainties  that
could affect management's estimate or probable losses. The unallocated component
of the allowance  reflects the margin of imprecision  inherent in the underlying
assumptions.

There were no material changes in loan  concentration or loan quality that had a
significant  effect on the  allowance  for loan losses  calculation  at June 30,
2006. In addition,  there were no material changes in the estimation methods and
assumptions  used in the Company's  allowance for loan losses  calculation,  and
there were no material  reallocations  of the allowance among different parts of
the loan portfolio.

At June 30, 2006,  the allowance for loan losses was equivalent to 354% of total
non-performing  assets as compared with 632% of total  non-performing  assets at
December 31, 2005.  Both  comparisons  are  favorably  impacted by the excellent
asset quality of the loan  portfolio  and extremely low level of  non-performing
assets. As of June 30, 2006,  non-performing assets were .21% of total loans. As
of December 31, 2005,  non-performing  assets  totaled .11% of total loans.  The
ratio of the  allowance for loan losses to total loans at June 30, 2006 remained
at the year end 2005 level of .73%.

Changes in the allowance for loan losses for the periods ended June 30, 2006 and
2005 are as shown below:

                                                      Six months ended June 30,
                                                        2006            2005
                                                    -----------     -----------

Balance at beginning of the year                    $ 1,759,611     $ 1,389,947
Provision for loan losses                               210,000         201,246
Loans charged off                                        (8,812)        (18,590)
Recoveries of loans previously charged off                9,179          16,146
                                                    -----------     -----------

Balance at end of period                            $ 1,969,978     $ 1,588,749
                                                    ===========     ===========

The following table  summarizes the Bank's other real estate owned (OREO),  past
due and  nonaccrual  loans,  and  nonperforming  assets as of June 30,  2006 and
December 31, 2005.

<TABLE>
<CAPTION>
                                                       June 30, 2006       December 31, 2005
                                                       -------------       -----------------
<S>                                                  <C>                    <C>
Nonaccrual loans                                     $       557,046        $        273,330

Other real estate owned                                           --                      --
                                                     ---------------        ----------------

Total nonperforming assets                           $       557,046        $        273,330
                                                     ===============        ================

Loans past due in excess of 90 days and
  accruing interest                                  $            --        $          4,884
                                                     ===============        ================
</TABLE>

POTENTIAL PROBLEM LOANS

As of June 30, 2006, there were no potential  problem loans not disclosed above,
which  cause  management  to  have  serious  doubts  as to the  ability  of such
borrowers to comply with their present loan repayment terms.

OFF BALANCE SHEET ARRANGEMENTS

The Company is a party to financial  instruments with off-balance  sheet risk in
the normal course of business to meet the financing  needs of its customers such
as letters of credit. In the opinion of


                                       25
<PAGE>

management,  these  off-balance  sheet  arrangements  are not  likely  to have a
material effect on the Company's financial condition,  results of operation,  or
liquidity.

At June 30,  2006,  there  have been no  significant  changes  in the  Company's
off-balance sheet arrangements from December 31, 2005.

FORWARD-LOOKING STATEMENTS

This Quarterly Report 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  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  increased  revenues  and  earnings  for the  Company and Bank
through growth resulting from acquisitions,  attractions of new deposit and loan
customers   and  the   introduction   of  new   products  and   services.   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 Reform
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 affect the operations,  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  nonfinancial  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  and the Bank's  financial  position  and
results of operation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main components of market risk for the Company are equity price risk, credit
risk, interest rate risk and liquidity risk.

The  Company  manages  interest  rate risk and  liquidity  risk  through an ALCO
Committee  comprised of senior  management  and other  officers.  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. The Company manages its interest-rate risk sensitivity  through the
use of a simulation  model that projects the impact of rate shocks,  rate cycles
and rate forecast estimates on net interest income.  These simulations take into
consideration factors such as maturities, reinvestment rates, prepayment speeds,
repricing  limits  and other  factors.  The  results  of these  simulations  are
compared to earnings  tolerance  limits set forth in the Bank's  Asset/Liability
Policy.


                                       26
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

The Company  maintains  disclosure  controls and procedures that are designed to
ensure that information  required to be disclosed in the Company's  Exchange Act
report is recorded,  processed,  summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and  communicated  to the Company's  management,  including its Chief  Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure  based closely on the  definition of "disclosure
controls and  procedures"  in Rule  13a-15(e).  In designing and  evaluating the
disclosure controls and procedures,  management recognized that any controls and
procedures,  no  matter  how  well  designed  and  operated,  can  provide  only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit of
possible controls and procedures.

As of the end of the period covered by this report,  the Company  carried out an
evaluation,  under the supervision and with the  participation  of the Company's
management,  including the Company's Chief  Executive  Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's  disclosure  controls  and  procedures.  Based on the  foregoing,  the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.

There are no changes in the Company's internal control over financial  reporting
that occurred during the second quarter of 2006 that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.

                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor the Bank (or any of their properties) are the subject of
any material  pending legal  proceedings  other than routine  litigation that is
incidental  to their  business  with the  possible  exception  of the  following
matter.

On September  9, 2003,  the Bank  commenced an action in Superior  Court for the
Judicial  District of Litchfield,  Connecticut in a matter  captioned "The First
National   Bank  of   Litchfield   v.  Theresa   Sullivan  and  John   Sullivan:
CV-03-0091476-S"  in an effort to collect principal and past due interest due on
two (2) loans,  which the Bank extended several years earlier and upon which the
Borrowers defaulted.  The aggregate principal balance outstanding on the two (2)
loans was approximately $135,000. The Borrowers  counterclaimed against the Bank
alleging that the Bank, through current and former employees, engaged in conduct
in violation of covenants of good faith and fair dealing pursuant to both common
law and Connecticut statutes and that the Bank's conduct constitutes a violation
of the Connecticut  Uniform Trade Practices Act. The Borrowers seek a variety of
unspecified  damages including money damages,  interest,  punitive damages,  and
"such other and further relief as the Court deems fair and just."

The Bank is conducting  discovery  with respect to the merits of the  underlying
action and counterclaim.  While the outcome of such litigation is unresolved, it
is not  expected  to  have  any  material  adverse  effect  upon  the  financial
statements of the Company.


                                       27
<PAGE>

Item 1A. Risk Factors.  There have been no significant  changes in the Company's
Risk  Factors  disclosed  in its  Annual  Report on Form 10K for the year  ended
December 31, 2005.

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

The Annual Meeting of Shareholders  of First  Litchfield  Financial  Corporation
(the "Company") was held on Wednesday, May 17, 2006.

      1. Election of Directors.
         ----------------------

            The vote for  re-electing  each of the  three (3)  Directors  listed
below to serve for a term of three years were as follows:

                                                          Withholding
                                             For          Authority

Joseph J. Greco       Number of Shares:      1,567,518          3,199
                      Percentage of          ---------    -----------
                      Shares Voted:              99.80%          0.20%
                      Percentage of Shares   ---------    -----------
                      Entitled to Vote:          73.37%          0.15%
                                             ---------    -----------

                                                          Withholding
                                             For          Authority

Perley H. Grimes, Jr. Number of Shares:      1,414,053        156,664
                      Percentage of          ---------    -----------
                      Shares Voted:              90.03%          9.97%
                      Percentage of Shares   ---------    -----------
                      Entitled to Vote:          66.19%          7.33%
                                             ---------    -----------

                                                          Withholding
                                             For          Authority

Charles E. Orr        Number of Shares:      1,567,709          3,008
                      Percentage of          ---------    -----------
                      Shares Voted:              99.81%          0.19%
                      Percentage of Shares   ---------    -----------
                      Entitled to Vote:          73.38%          0.14%
                                             ---------    -----------


                                       28
<PAGE>

George M. Madsen, Alan B. Magary,  Gregory D. Oneglia,  William J. Sweetman, and
Patricia D. Werner are currently  serving terms on the Board of Directors  which
expire at the 2007 Annual Meeting of Shareholders. Kathleen A. Kelley and H. Ray
Underwood are currently  serving terms on the Board of Directors which expire at
the 2008 Annual  Meeting of  Shareholders.  Additionally,  Patrick J. Boland and
John A Brighenti  are  currently  serving terms on the Board of Directors in the
class to expire at the 2008 Annual  Meeting.  Messrs.  Brighenti and Boland were
elected to the Board of  Directors at the June 29, 2006 Board  Meeting.  At that
meeting,  the Board voted to  increase  the number  Directors  from 10 to 12 and
elected Messrs. Brighenti and Boland to fill the vacancies.

      2. Appointment of Auditors.
         ------------------------

      Votes cast "FOR,"  "AGAINST"  and  "ABSTAIN" on the proposal to ratify the
appointment  of McGladrey & Pullen,  LLP to act as  independent  auditors of the
current fiscal year were as follows:

        "FOR APPROVAL"            "AGAINST APPROVAL"          "ABSTAIN"

           1,552,680                    2,353                   15,684
     ---------------------    -------------------------    ------------------
            Number                    Number                    Number

           72.68%                       0.11%                    0.73%
     ---------------------    -------------------------    ------------------
                      (Percent of shares entitled to vote)

            98.85%                      0.15%                    1.00%
     ---------------------    -------------------------    ------------------
                (Percent of shares actually voted at the meeting)

Item 5.  Other Information - Not applicable

Item 6. Exhibits

                                  EXHIBIT INDEX

Exhibit
   No.     Exhibit
-------    -------

3.1        Certificate   of   Incorporation   of  First   Litchfield   Financial
           Corporation,  as amended.  Exhibit is  incorporated  by  reference to
           Exhibit 3.1 set forth in the Company's Registration Statement on Form
           10-SB as filed with the Securities and Exchange Commission on January
           7, 2000.

3.2        Bylaws of First Litchfield Financial Corporation, as amended. Exhibit
           is  incorporated  by  reference  to  Exhibit  3.2  set  forth  in the
           Company's  Registration  Statement  on Form  10-SB as filed  with the
           Securities and Exchange Commission on January 7, 2000.

4.         Specimen  Common  Stock  Certificate.   Exhibit  is  incorporated  by
           reference  to  Exhibit  4. set  forth in the  Company's  Registration
           Statement  on Form 10-SB as filed with the  Securities  and  Exchange
           Commission on January 7, 2000.


                                       29
<PAGE>

10.60      The  First  National  Bank  of  Litchfield   Supplemental   Executive
           Retirement Agreement between Joseph J. Greco and the Bank dated April
           27, 2006.

10.61      The  First  National  Bank  of  Litchfield   Supplemental   Executive
           Retirement  Agreement  between  Carroll A. Pereira and the Bank dated
           April 27, 2006.

10.62      The  First  National  Bank  of  Litchfield   Supplemental   Executive
           Retirement  Agreement  between  Joelene  E.  Smith and the Bank dated
           April 27, 2006.

10.63      The First National Bank of Litchfield  Executive Incentive Retirement
           Agreement between Frederick F. Judd, III and the Bank dated April 28,
           2006.

10.64      Executive Change in Control Agreement between Joseph J. Greco and the
           Company and the Bank dated May 26, 2006.

10.65      Executive Change in Control  Agreement between Carroll A. Pereira and
           the Company and the Bank dated May 26, 2006.

10.66      Executive  Change in Control  Agreement  between Joelene E. Smith and
           the Company and the Bank dated May 26, 2006.

10.67      Executive Change in Control Agreement between Robert E. Teittinen and
           the Company and the Bank dated May 26, 2006.

10.68      Executive Change in Control  Agreement between Frederick F. Judd, III
           and the Company and the Bank dated May 26, 2006.

10.69      Form of Employee Change in Control Agreement.

21.        List of  Subsidiaries  of  First  Litchfield  Financial  Corporation.
           Exhibit is  incorporated  by reference to Exhibit 21 set forth in the
           Company's 10-K for the year ended December 31, 2005 as filed with the
           Securities and Exchange Commission on March 31, 2006.

31.1       Rule 13a-14(a)/15-14(a)  Certification of the Chief Executive Officer
           of the Company.

31.2       Rule 13a-14(a)/15-14(a)  Certification of the Chief Financial Officer
           of the Company.

32.0       Certification of the Chief Executive  Officer and the Chief Financial
           Officer of the  Company,  pursuant to 18 U.S.C.  ss.1350,  as adopted
           pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


                                       30
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: August 14, 2006                FIRST LITCHFIELD FINANCIAL
                                       CORPORATION

                                          By:   /s/ Joseph J. Greco
                                            -----------------------
                                               Joseph J. Greco, President and
                                               Chief Executive Officer


Dated: August 14, 2006                    By: /s/ Carroll A. Pereira
                                            ------------------------
                                               Carroll A. Pereira
                                               Principal Financial and
                                               Accounting Officer


                                       31