SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934

                   For the fiscal year ended December 31, 2008

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

For the transition period from ________________to ______________

                         Commission file number 0-24751
                                                -------

                             SALISBURY BANCORP, INC.
             (Exact name of Registrant as specified in its charter)

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

     5 Bissell Street, Lakeville, CT                           06039
----------------------------------------                    ----------
(Address of Principal Executive Offices)                    (Zip Code)

Registrant's telephone number, including area code: 860-435-9801
                                                    ------------

Securities  registered  pursuant to Section 12 (b) of the Act:  Common stock par
                                                                ----------------
value $.10 per share
--------------------

Securities registered pursuant to Section 12 (g) of the Act: None
                                                             ----

Name of exchange on which registered: NYSE AMEX
                                      ---------

Indicate by check mark if the  registrant  is a  well-known  seasoned  issuer as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ]   Accelerated filer   [ ]
Non-accelerated filer [ ]   Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company. Yes [ ] No [X]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked price of such common  equity,  as of the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter: June 30, 2008: $47,326,639.

Note.  If a  determination  as to  whether a  particular  person or entity is an
affiliate cannot be made without  involving an unreasonable  effort and expense,
the  aggregate  market value of the common stock held by  non-affiliates  may be
calculated  on the basis of  assumptions,  reasonable  under the  circumstances,
provided that the assumptions are set forth in this Form.

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

The Company had 1,685,861 shares outstanding as of March 20, 2009.

                       DOCUMENTS INCORPORATED BY REFERENCE

Incorporated  by  reference  in Part III of this Form 10-K are  portions  of the
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 27, 2009.



                                TABLE OF CONTENTS
                                -----------------

                                                                           Page
                                                                           ----
Part I
   Item 1 - Business                                                        1

      (a)  General Development of the Business                              1
      (b)  Financial Information about Industry Segments                    1
      (c)  Narrative Description of Business                                2
      (d)  Financial Information about Geographic Areas                     7

   Item 1 A - Risk Factors- Not Applicable                                  11

   Item 1 B - Unresolved Staff Comments- Not Applicable                     11

   Item 2 -Properties                                                       11

   Item 3 - Legal Proceedings                                               12

   Item 4 - Submission of Matters to a Vote of Security Holders             12

Part II
   Item 5 - Market for Registrant's Common Equity, Related Shareholder
            Matters and Issuer Purchases of Equity Securities               12

   Item 6 - Selected Financial Data- Not Applicable                         14

   Item 7 - Management's Discussion and Analysis of Financial Condition
            and Results of Operation                                        14

   Item 7A - Quantitative and Qualitative Disclosures about Market Risk
             Not Applicable                                                 23

   Item 8 - Financial Statements and Supplementary Data                     25

   Item 9 - Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure                                        26

   Item 9A(T)- Controls and Procedures                                      26

   Item 9B - Other Information                                              26

Part III
   Item 10 - Directors, Executive Officers and Corporate Governance         26

   Item 11 - Executive Compensation                                         27

   Item 12 - Security Ownership of Certain Beneficial Owners and
             Management and Related Shareholder Matters                     27

   Item 13 - Certain Relationships and Related Transactions,
             and Director Independence                                      27

   Item 14 - Principal Accountant Fees and Services                         27

Part IV
   Item 15 - Exhibits, Financial Statement Schedules                        28

Signatures                                                                  29

                                        i



PART I

ITEM 1.  BUSINESS

(a)   General Development of the Business

Salisbury Bancorp,  Inc. (NYSE AMEX:SAL) (Company) is a Connecticut  corporation
that was formed in 1998. Its primary  activity is to act as the holding  company
for its sole  subsidiary,  the Salisbury  Bank and Trust Company  (Bank),  which
accounts for most of the Company's net income. The Bank assumed its present name
in 1925 following the  acquisition  by the Robbins  Burrall Trust Company of the
Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in
1909 as the  successor  to a  private  banking  firm  established  in 1874.  The
Salisbury  Savings Society was  incorporated in 1848. The Bank is chartered as a
state bank and trust company by the State of  Connecticut,  and its deposits are
insured by the Federal  Deposit  Insurance  Corporation  in accordance  with the
Federal  Deposit  Insurance Act. The Bank's main office is at 5 Bissell  Street,
Lakeville,  Connecticut  06039. Its telephone number is (860) 435-9801,  and its
website address is:  www.salisburybank.com.  The Company makes available free of
charge  on the  Bank's  website  a link to its  Annual  Reports  on  Form  10-K,
Quarterly  Reports on Forms 10-Q and Current  Reports on Form 8-K promptly after
filing such reports with the  Securities  and Exchange  Commission  (SEC).  Also
available on the website are the respective  Charters of the Board's  Nominating
and Governance  Committee,  Audit Committee and Human Resources and Compensation
Committee.

The Bank currently operates seven (7) full service offices, which are located in
North Canaan, Lakeville,  Salisbury and Sharon, Connecticut,  South Egremont and
Sheffield,  Massachusetts  and Dover  Plains,  New York and a Trust  and  Wealth
Advisory Services Division in Lakeville,  Connecticut. In addition, the Bank has
received regulatory approval to operate a branch office in Millerton,  New York,
which is expected to open in 2009.

(b)   Financial Information about Industry Segments

The Company's products and services are all of a nature of a commercial bank and
trust  company.  The  Bank is a  full-service  bank  offering  a wide  range  of
commercial and personal banking services, including the following:

      Lending

Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's  assets.  The  portfolio  consists  of many types of loans.  These
include residential mortgages,  home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term  loans,  Small  Business  Administration  (SBA) loans and real estate
loans for business customers.

The primary  lending  activity has been the  origination of first mortgage loans
for the purchase,  refinance or  construction  of residential  properties in the
Bank's  market  area.  Loans  secured by  mortgages  on a  borrower's  principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time  provide a  significant  yet  relatively  stable  source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary  mortgage market.  This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.

The Bank also  originates  a variety of other loans for  consumer  and  business
purposes.  Although these loans represent a smaller percentage of the total loan
portfolio,  the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.

      Investments

The Company's investment portfolio is also an important component of the Balance
Sheet.  It provides a source of earnings in the form of interest  and  dividends
and plays a role in the interest rate risk management of the Company.

The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2008, the portfolio totaled  $155,916,000,  which
represents  approximately  31.45% of total assets,  and it produced interest and
dividend  income of $7,985,000  for the year 2008 as compared to $8,115,000  for
2007.

                                        1



      Deposits and Borrowings

The Bank's primary  sources of funds are it's core  deposits,  Federal Home Loan
Bank of Boston  (FHLBB)  advances  and  principal  payments  on loans.  Although
competition for funds from non-banking institutions remains aggressive, the Bank
continues  its  efforts  to build  account  relationships  with  its  customers.
Deposits totaled $344,925,000 at December 31, 2008 as compared with $317,741,000
at December 31, 2007.

Advances  from the FHLBB  totaled  $87,914,000  at December 31, 2008 as compared
with $95,011,000 at December 31, 2007.

For  additional  information  relating  to  the  asset,  deposit  and  borrowing
components of the Company,  see Item 7, Management's  Discussion and Analysis of
Financial  Condition and Results of Operation and the accompanying  Consolidated
Financial Statements, and Notes thereto.

      Fiduciary Activities

The Bank  provides  trust,  investment  and financial  planning  services to its
customers.

The Bank has a full service Trust and Investment  Services  Division.  Among the
services offered are:  custody and agency  accounts,  estate planning and estate
settlement.  Another  service is that of serving as Guardian or  Conservator  of
estates   and   managing   the   financial    position   of   Guardianships   or
Conservatorships. Self directed IRAs and Pension plans are also offered.

      Other Services

The Company also offers safe deposit rentals,  foreign exchange,  a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.

(c)   Narrative Description of Business

Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (Bank).

The Bank is a full-service  commercial bank and its activities encompass a broad
range of services,  which include a complete menu of deposit services,  multiple
mortgage  products  and  various  other  types of loans  for both  business  and
personal needs. Full trust and investment services are also available.  The Bank
owns and operates two  subsidiaries,  SBT Realty,  Inc.,  which is  incorporated
under the laws of the State of New York, and SBT Mortgage  Service  Corporation,
which is incorporated  under the laws of the State of  Connecticut.  SBT Realty,
Inc.  holds and manages bank owned real estate  situated in New York State.  SBT
Mortgage Service  Corporation,  a Passive Investment Company (PIC) was formed to
take  advantage of favorable  Connecticut  corporate tax benefits,  which result
when a Bank transfers a portion of its mortgage  portfolio to a PIC. In general,
the PIC will earn mortgage  interest  income and may dividend funds to the Bank.
In turn, those funds will be exempt from the Connecticut corporate business tax.

      Competition

The Company and the Bank encounter  competition in all phases of their business.
There are  numerous  financial  institutions  that have  offices in the areas in
which  the  Company  and  Bank  compete  in  northwestern  Connecticut,  western
Massachusetts and proximate areas of New York State.

The offices of the Bank are located in Litchfield County, Connecticut, Berkshire
County,  Massachusetts  and Dutchess County,  New York. The Bank maintains seven
(7) banking offices within these three counties and also attracts customers from
nearby  Columbia  County,  New York.  The  Bank's  market  area  within the four
counties is served by  approximately  43 commercial banks and savings banks. The
Bank's 3.14% market share of deposits  within these four counties  suggests that
there is potential to further grow and expand the market share of the Bank.

Banks  compete  on the basis of price,  including  rates  paid on  deposits  and
charged on  borrowings,  convenience  and quality of  service.  Savings and loan
associations  are able to  compete  aggressively  with  commercial  banks in the
important area of consumer  lending.  Credit unions and small loan companies are
significant  factors in the consumer  market.  Insurance  companies,  investment
firms, credit and mortgage companies,  brokerage firms cash management accounts,
money-market  funds and retailers are all  significant  competitors  for various
types of business.  Insurance companies,  investment  counseling firms and other
businesses  and  individuals  actively  compete  with the Bank for  personal and
corporate  trust  services and  investment  counseling  services.  Many non-bank
competitors are not subject to the extensive  regulation described below

                                        2



under "Legislation, Regulation and Supervision" and in certain respects may have
a competitive advantage over banks in providing certain services.

In marketing its services,  the Bank  emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers.  Moreover,  the Bank competes for both deposits and loans by offering
competitive  rates and  convenient  business  hours.  In addition  to  providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine  networks and offers internet banking  services,
which  allow  the  Bank to  deliver  certain  financial  services  to  customers
regardless of their proximity to the primary service area of the Bank.

Connecticut  grants banking  powers for thrift  institutions  thereby  improving
their  competitive  position  with other  banks.  In addition,  the  Connecticut
Interstate  Banking  and  Branching  Act  permits  acquisitions  and  mergers of
Connecticut  banks  and bank  holding  companies  with  banks  and bank  holding
companies in other states.  Accordingly, it is possible for large super-regional
organizations  to enter many new  markets,  including  the market  served by the
Bank.  Certain  competitors,  by virtue of their size and  resources,  may enjoy
certain  efficiencies  and competitive  advantages over the Bank in the pricing,
delivery, and marketing of their products and services. It is possible that such
legislative  authority  will  increase  the  number  or the  size  of  financial
institutions competing with the Bank for deposits and loans in its market place,
although  it is  impossible  to predict  the  effect  upon  competition  of such
legislation.

      Legislation, Regulation and Supervision

General
-------

Virtually  every  aspect of the  business  of banking is subject to  regulation,
including  such  matters  as the  amount of  reserves  that must be  established
against various deposits,  the establishment of branches,  mergers,  non-banking
activities and other  operations.  Numerous laws and regulations  also set forth
special  restrictions and procedural  requirements with respect to the extension
of credit,  credit practices,  the disclosure of credit terms and discrimination
in credit transactions.

The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations  and their  effects  on the Bank.  Proposals  to change the laws and
regulations   governing  the  banking  industry  are  frequently  introduced  in
Congress,  in the state  legislatures  and before the  various  bank  regulatory
agencies.  The  likelihood and timing of any changes and the impact such changes
might  have  on the  Bank's  future  business  and  earnings  are  difficult  to
determine.

Federal Reserve Board Regulation
--------------------------------

The Company is a registered  bank holding company under the Bank Holding Company
Act of 1956, as amended (BHCA). It is subject to the supervision and examination
of the Board of Governors of the Federal Reserve System (Federal  Reserve Board)
and files with the Federal Reserve Board the reports as required under the BHCA.

The BHCA generally  requires prior approval by the Federal  Reserve Board of the
acquisition by the Company of substantially  all of the assets or more than five
percent (5%) of the voting  stock of any bank.  The BHCA also allows the Federal
Reserve Board to determine (by order or by  regulation)  what  activities are so
closely  related to banking as to be a proper  incident  of  banking,  and thus,
whether  the  Company  can engage in such  activities.  The BHCA  prohibits  the
Company and the Bank from engaging in certain tie-in  arrangements in connection
with any extension of credit, sale of property or furnishing of services.

Federal  legislation  permits  adequately  capitalized bank holding companies to
venture across state lines to offer banking services  through bank  subsidiaries
to  a  wide  geographic   market.  It  is  possible  for  large   super-regional
organizations  to enter many new  markets,  including  the market  served by the
Bank,  although  it is  impossible  to assess  what impact this will have on the
Company or the Bank.

The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company  and  certain  other  activities,  on  investments  in  their  stock  or
securities,  and on the  taking  by the  Bank of such  stock  or  securities  as
collateral security for loans to any borrower.

Under the BHCA and the  regulations of the Federal  Reserve  System  promulgated
thereunder  (Regulation  Y), no corporation may become a bank holding company as
defined  therein,  without  prior  approval of the Federal  Reserve  Board.  The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it  wishes  to  acquire  voting  shares  of any  other  bank,  if after  such
acquisition  it would own or control  more than five  percent (5%) of the voting
shares of such bank.  The BHCA  imposes  limitations  upon the Company as to the
types of business in which it may engage.

Regulation  Y requires  bank holding  companies  to provide the Federal  Reserve
Board with written notice before  purchasing or redeeming  equity  securities if
the gross consideration for the purchase or redemption, when aggregated with the
net

                                        3



consideration  paid by the Company for all such purchases or redemptions  during
the preceding  twelve (12) months,  is equal to ten percent (10%) or more of the
Company's   consolidated   net  worth.   For  purposes  of  Regulation  Y,  "net
consideration"  is the  gross  consideration  paid by a  company  for all of its
equity  securities  purchased  or redeemed  during the  period,  minus the gross
consideration  received for all of its equity  securities sold during the period
other than as part of a new issue.  However,  a bank holding  company  generally
need not obtain Federal Reserve Board approval of any equity security redemption
when:  (i) the bank  holding  company's  capital  ratios  exceed  the  threshold
established  for  "well-capitalized"  state member banks before and  immediately
after the redemption;  (ii) the bank holding company is well-managed;  and (iii)
the bank  holding  company  is not the  subject  of any  unresolved  supervisory
issues.  However,  letters  issued by the Federal  Reserve Board to the industry
dated  February  24, 2009 and March 27, 2009 advise bank  holding  companies  to
inform the Federal  Reserve Board of proposed stock  repurchases  resulting in a
net reduction of common or preferred  stock below the amount of such  instrument
outstanding at the beginning of the quarter in which the repurchase  occurs.  In
addition,  as a recipient of TARP CPP funds,  the Company must  communicate with
the  Treasury  as well as the  Federal  Reserve  Board in  advance  of any stock
redemptions. Generally, during the first three years the Company participates in
the TARP CPP, the approval of the Treasury  will be required  before the Company
could repurchase any common stock. The Company may redeem the TARP CPP Preferred
Stock at any time in consultation with the Treasury and its primary  supervisory
agencies.

Gramm-Leach-Bliley Act
----------------------

The  Gramm-Leach-Bliley  Financial  Services  Modernization  Act of 1999 (GLBA),
provides bank holding companies,  banks,  securities firms, insurance companies,
and  investment  management  firms the option of  engaging  in a broad  range of
financial  and  related  activities  by opting to  become a  "financial  holding
company." The Company qualified and registered as a financial holding company on
May 3, 2000. Financial holding companies are subject to oversight by the Federal
Reserve Board,  in addition to other  regulatory  agencies.  Under the financial
holding  company  structure,  bank holding  companies  have  greater  ability to
purchase or establish nonbank  subsidiaries that are financial in nature or that
engage in  activities  incidental  or  complementary  to a  financial  activity.
Additionally, pursuant to the GLBA, securities and insurance firms are permitted
to  purchase  full-service  banks.  While the GLBA  facilitates  the  ability of
financial  institutions  to offer a wide  range  of  financial  services,  large
financial  institutions would appear to be the beneficiaries of the GLBA because
many  community  banks  lack the  capital  and  management  resources  needed to
facilitate broad expansion of financial services.

Sarbanes-Oxley Act
------------------

The purpose of the  Sarbanes-Oxley  Act is to protect investors by improving the
accuracy  and  reliability  of  corporate   disclosures  made  pursuant  to  the
securities laws, and for other purposes.

The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 (Exchange Act)
to  prohibit a  registered  public  accounting  firm from  performing  specified
nonaudit services  contemporaneously  with a mandatory audit. The Sarbanes-Oxley
Act also vests the audit  committee  of an issuer  with  responsibility  for the
appointment,  compensation,  and oversight of any registered  public  accounting
firm employed to perform audit  services.  The  Sarbanes-Oxley  Act, among other
things,  also  requires  each  committee  member  to be a member of the board of
directors of the issuer, and to be otherwise independent. The Sarbanes-Oxley Act
further requires the chief executive  officer and chief financial  officer of an
issuer to make certain  certifications  as to each annual or  quarterly  report.
Pursuant to the Sarbanes-Oxley Act the SEC has adopted rules to require:

      o     Disclosure  of  all  material  off-balance  sheet  transactions  and
            relationships  that may have a material  effect  upon the  financial
            status of an issuer; and

      o     The presentation of pro forma financial information in a manner that
            is not  misleading  and  which is  reconcilable  with the  financial
            condition  of  the  issuer  under  generally   accepted   accounting
            principles.

The  Sarbanes-Oxley  Act also prohibits  insider  transactions  in the Company's
stock during a lock out period of Company's  pension  plans,  and any profits of
such  insider  transactions  are  to  be  disgorged.  In  addition,  there  is a
prohibition of Company loans to its executives, except in certain circumstances.
The  Sarbanes-Oxley  Act also provides for mandated  internal control report and
assessment with the annual report and an attestation and a report on such report
by the Company's auditor. The SEC also requires an issuer to institute a code of
ethics  for  senior  financial  officers  of  the  Company.   Furthermore,   the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.

The Patriot Act
---------------

The terrorist  attacks in September,  2001 have impacted the financial  services
industry and led to federal  legislation that attempts to address certain issues
involving financial  institutions.  In 2001,  President Bush signed into law the
Uniting and  Strengthening  America by Providing  Appropriate  Tools Required to
Intercept and Obstruct  Terrorism Act of 2001 (the "Patriot  Act"). On March 10,
2006, the President signed  legislation  making permanent certain  provisions of
the Patriot Act.

Part of the Patriot Act is the  International  Money  Laundering  Abatement  and
Financial  Anti-Terrorism  Act of 2001 (IMLA).  IMLA authorizes the Secretary of
the Treasury,  in consultation with the heads of other government  agencies,  to
adopt special measures applicable to banks, bank holding companies, and/or other
financial  institutions.  These measures may include enhanced  recordkeeping and
reporting  requirements for certain  financial  transactions that are of primary
money laundering concern, due diligence  requirements  concerning the beneficial
ownership of certain types of accounts,  and  restrictions  or  prohibitions  on
certain types of accounts with foreign financial institutions.

Among its other  provisions,  IMLA requires each financial  institution  to: (i)
establish an anti-money laundering program; (ii)

                                        4



establish due diligence  policies,  procedures  and controls with respect to its
private banking accounts and  correspondent  banking accounts  involving foreign
individuals   and  certain   foreign  banks;   and  (iii)  avoid   establishing,
maintaining,  administering,  or managing  correspondent  accounts in the United
States  for,  or on  behalf  of, a foreign  bank  that does not have a  physical
presence in any country.  In  addition,  IMLA  contains a provision  encouraging
cooperation  among  financial  institutions,   regulatory  authorities  and  law
enforcement authorities with respect to individuals,  entities and organizations
engaged in, or  reasonably  suspected  of engaging in,  terrorist  acts or money
laundering  activities.  IMLA expands the  circumstances  under which funds in a
bank account may be forfeited and requires  covered  financial  institutions  to
respond under certain  circumstances  to requests for  information  from federal
banking agencies within 120 hours. IMLA also amends the BHCA and the Bank Merger
Act to require the federal banking  agencies to consider the  effectiveness of a
financial  institution's  anti-money  laundering  activities  when  reviewing an
application under these acts.

State Regulation
----------------

The Company is  incorporated  in the State of Connecticut  and is subject to the
Connecticut  Business  Corporation Act and the Connecticut  Bank Holding Company
Statutes.  As a state-chartered bank and member of the Federal Deposit Insurance
Corporation  (FDIC),  the Bank is subject to regulation  both by the Connecticut
Banking  Commissioner  and the  FDIC.  Applicable  laws and  regulations  impose
restrictions and  requirements in many areas,  including  capital  requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and  investments,  consumer  protection,  employment  practices  and other
matters.   Any  new  regulations  or  amendments  to  existing  regulations  may
materially  affect  the  services  offered,   expenses  incurred  and/or  income
generated by the Bank.

The Connecticut Banking Commissioner  regulates the Bank's internal organization
as well as its deposit,  lending and investment activities.  The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations.  The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Connecticut banking statutes also restrict the ability of a bank to declare cash
dividends to its shareholders.

Subject to certain  limited  exceptions,  loans made to any one  obligor may not
exceed fifteen percent (15%) of the Bank's capital,  surplus,  undivided profits
and loan reserves. In addition,  under Connecticut law, the beneficial ownership
of more than ten percent  (10%) of any class of voting  securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the  Connecticut  Banking  Commissioner.  In  addition,  the Bank is
subject to some supervision and regulations by the Commonwealth of Massachusetts
and the State of New York in connection with its branch offices in such states.

FDIC Regulation
---------------

The Bank's  deposits are insured under the Federal  Deposit  Insurance Act up to
maximum  limits by the Deposit  Insurance  Fund (DIF) and are subject to deposit
insurance assessments.

Congress has  temporarily  increased  FDIC deposit  insurance  from  $100,000 to
$250,000 per depositor  through December 31, 2009.  Effective April 1, 2006, the
federal deposit  insurance limits on certain  retirement  accounts  increased so
that  such  retirement  accounts  are  separately  insured  up to  $250,000.  In
addition,  the Bank participates in the Temporary  Liquidity  Guarantee Program,
whereby  non-interest  bearing checking  accounts and NOW accounts with interest
rates no higher than 0.50 % will be FDIC insured in full.

FDIC  insurance of deposits may be  terminated  by the FDIC,  after notice and a
hearing,  upon a finding by the FDIC that the insured institution has engaged in
unsafe or unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
condition  imposed by the FDIC. A bank's failure to meet the minimum capital and
risk-based capital  guidelines  discussed below would be considered to be unsafe
and unsound banking practices. The Bank, as a Connecticut-chartered FDIC-insured
bank,  is  regulated  by the FDIC in many of the  areas  also  regulated  by the
Connecticut  Banking  Commissioner.  The FDIC  also  conducts  its own  periodic
examinations of the Bank, and the Bank is required to submit financial and other
reports to the FDIC on a quarterly and annual basis, or as otherwise required by
the FDIC.  FDIC-insured  banks, such as the Bank, pay premium assessments to the
FDIC for the insurance of deposits.

The Bank must meet certain  minimum capital  requirements,  including a leverage
capital ratio and a risk-based  capital ratio. See "MANAGEMENT'S  DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION".

A few  years ago the FDIC  adopted  a  risk-based  insurance  assessment  system
designed to tie what banks pay for deposit  insurance  more closely to the risks
they pose.  The FDIC also adopted a schedule of rates that the FDIC could adjust
up or down, depending on the needs of the DIF.

Recently,  the FDIC adopted a restoration  plan that would  increase the reserve
ratio to the 1.15%  threshold  within  seven years.

                                        5



As part of that plan, in December,  2008, the FDIC voted to increase  risk-based
assessment  rates  due to  deteriorating  financial  conditions  in the  banking
industry.  Changes  to  the  risk-based  assessment  system  include  increasing
premiums for institutions that rely on excessive  amounts of brokered  deposits,
including CDARS,  increasing premiums for excessive use of secured  liabilities,
including  Federal  Home Loan  Bank  advances,  lowering  premiums  for  smaller
institutions with very high capital levels, and adding financial ratios and debt
issuer  ratings to the premium  calculations  for banks with over $10 billion in
assets,  while  providing a reduction for their  unsecured debt. It is generally
expected  that rates will  continue  to  increase  in the near future due to the
significant cost of bank failures beginning in the third quarter of 2008 and the
increase in the number of troubled banks.  The FDIC recently  announced that, in
view of the significant  decrease in the deposit  insurance funds' reserves,  it
will  impose a special  assessment  in the second  quarter  of 2009.  Banks must
continue  to  pay  base  premium  rates  on  top  of  any  special   assessment.
Furthermore,  banks may be subject to an "emergency"  special assessment in 2009
in addition to other special  assessments and regular premium rates.  The amount
of an emergency special  assessment  imposed on a bank will be determined by the
FDIC if such amount is  necessary  to provide  sufficient  assessment  income to
repay amounts  borrowed  from the U.S.  Department  of Treasury  (Treasury);  to
provide  sufficient  assessment income to repay obligations  issued to and other
amounts borrowed from insured depository institutions;  or for any other purpose
the FDIC may deem necessary.

The  Community  Reinvestment  Act  (CRA)  requires  the  Bank  to  identify  the
communities  served by its  offices  and to  identify  the  types of credit  the
institution  is prepared to extend  within such  communities.  The FDIC conducts
examinations  of  insured  institutions'  CRA  compliance  and  rates  banks  as
"Outstanding",    "Satisfactory",    "Needs   to   Improve"   and   "Substantial
Noncompliance".  As of its last CRA  examination,  the Bank received a rating of
"Satisfactory".  Failure to receive at least a "Satisfactory" rating may inhibit
a bank from  engaging in certain  activities,  including  acquisitions  of other
financial institutions, which require regulatory approval based, in part, on CRA
compliance  considerations.  Similarly,  failure  of the Bank to  maintain a CRA
rating of  "Satisfactory"  or  better  would  preclude  it or the  Company  from
engaging in any new financial activities pursuant to the GLBA.

Recent  Legislative and Regulatory  Initiatives to Address  Difficult Market and
--------------------------------------------------------------------------------
Economic Conditions
-------------------

On  October 3, 2008,  President  Bush  signed  into law the  Emergency  Economic
Stabilization  Act of 2008 (EESA) which,  among other  measures,  authorizes the
Treasury to purchase from financial  institutions and their holding companies up
to $700 billion in mortgage loans, mortgage-related securities and certain other
financial instruments,  including debt and equity securities issued by financial
institutions and their holding companies,  under a Troubled Asset Relief Program
Capital  Purchase  Program  (TARP  CPP).  The  purpose of TARP CPP is to restore
confidence and stability to the U.S.  banking system and to encourage  financial
institutions to increase their lending to customers and to each other. Under the
TARP CPP,  the  Treasury is  purchasing  equity  securities  from  participating
institutions.  The  Series  A  Preferred  Stock  and  warrant  offered  by  this
prospectus were issued by the Company to the Treasury  pursuant to the TARP CPP.
The EESA also increased  federal deposit insurance on most deposit accounts from
$100,000 to $250,000. This increase is in place until the end of 2009 and is not
covered by deposit insurance premiums paid by the banking industry.

The EESA followed,  and has been followed by,  numerous  actions by the Board of
Governors of the Federal Reserve System,  the U.S. Congress,  the Treasury,  the
FDIC, the SEC and others to address the current liquidity and credit crisis that
has followed the  sub-prime  meltdown  that  commenced in 2007.  These  measures
include homeowner relief that encourage loan restructuring and modification; the
establishment  of  significant  liquidity  and credit  facilities  for financial
institutions  and  investment  banks;  the  lowering of the federal  funds rate;
emergency action against short selling  practices;  a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide  back-stop  liquidity to commercial  paper issuers;  and  coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.

On February 17, 2009, the American  Recovery and Reinvestment Act of 2009 (ARRA)
was signed into law. ARRA, more commonly known as the economic  stimulus bill or
economic recovery package, is intended to stimulate the economy and provides for
broad infrastructure, education and health spending.

On October  14,  2008,  the FDIC  announced  the  establishment  of a  temporary
liquidity   guarantee   program  to  provide  full  deposit  insurance  for  all
non-interest bearing transaction accounts and guarantees of certain newly issued
senior  unsecured  debt issued by  FDIC-insured  institutions  and their holding
companies.  Insured institutions were automatically covered by this program from
October  14, 2008 until  December  5, 2008,  unless they opted out prior to that
date. Under the program,  the FDIC will guarantee timely payment of newly issued
senior  unsecured  debt issued on or before June 30, 2009. The debt includes all
newly issued unsecured senior debt including promissory notes,  commercial paper
and inter-bank funding. The aggregate coverage for an institution may not exceed
125% of its debt  outstanding on September 30, 2008 that was scheduled to mature
before June 30, 2009, or, for certain insured institutions, 2% of liabilities as
of September 30, 2008.  The  guarantee  will extend to June 30, 2012 even if the
maturity of the debt is after that date.

The purpose of these legislative and regulatory actions is to stabilize the U.S.
banking  system.  The  EESA,  the  ARRA  and the  other  regulatory  initiatives
described  above may not have their desired  effects.  If the  volatility in the
markets  continues  and  economic  conditions  fail to improve  or  worsen,  the
Company's business, financial condition, results of operations and cash

                                        6



flows could be materially and adversely affected.

The Securities  Purchase  Agreement Between the Company and the Treasury Permits
the Treasury to Impose Certain Additional Restrictions on the Company So Long as
the Company Participates in the TARP CPP.

The securities  purchase agreement the Company entered into with the Treasury in
connection with the Bank's participation in the TARP CPP permits the Treasury to
unilaterally amend the terms of the securities purchase agreement to comply with
any changes in federal  statutes after the date of its  execution.  ARRA imposed
additional  executive  compensation  and  expenditure  limits on all current and
future TARP recipients,  including the Company, until the Company has repaid the
Treasury.  These  additional  restrictions  may impede the Company's  ability to
attract  and  retain  qualified  executive  officers.  ARRA  also  permits  TARP
recipients to repay the Treasury  without penalty or requirement that additional
capital be raised,  subject to the  Treasury's  consultation  with the Company's
primary federal regulator while the securities purchase agreement required that,
for a period of three years,  the Series A Preferred  Stock could generally only
be repaid if the Company raised  additional  capital to repay the securities and
such capital qualified as Tier 1 capital.  Additional  unilateral changes in the
securities  purchase  agreement  could have a negative  impact on the  Company's
financial condition and results of operations.

Capital Resources
-----------------

On March 13,  2009,  under the TARP CPP, the Company sold 8,816 shares of senior
preferred stock to the Treasury, having a liquidation amount equal to $1,000 per
share, or $8,816,000.  Although the Company is currently  well-capitalized under
regulatory guidelines,  the Board of Directors believed it was advisable to take
advantage  of the TARP CPP to raise  additional  capital to ensure  that  during
these uncertain times, the Company is  well-positioned  to support the Company's
existing operations as well as anticipated future growth. Additional information
concerning  the TARP CPP is  included in Note 22 to the  Consolidated  Financial
Statements.

Employees
---------

The Company's  current  workforce at March 20, 2009 consists of 144 employees of
whom 127 were full time and 17 were part time. The employees are not represented
by a collective bargaining unit.

(d)   Financial Information about Geographic Areas

The Company does not have any foreign business operations or export sales of its
own. However,  the Company provides  financial services including wire transfers
and foreign currency exchange to various businesses involved in foreign trade.

STATISTICAL  DISCLOSURE  REQUIRED PURSUANT TO SECURITIES  EXCHANGE ACT, INDUSTRY
GUIDE 3

The statistical disclosures required pursuant to Industry Guide 3, not contained
in  Management's  Discussion and Analysis of Financial  Condition and Results of
Operations, are presented on the following pages of this Report on Form 10-K.

                                                                     Page(s) of
Item of Guide 3                                                      This Report
---------------                                                      -----------

I.    Distribution of Assets, Liabilities and Shareholders'
      Equity; Interest Rates and Interest Differential                    17

II.   Investment Portfolio                                                 8

III.  Loan Portfolio                                                       9

IV.   Summary of Loan Loss Experience                                     10

V.    Deposits                                                            21

VI.   Return on Equity and Assets                                          9

VII.  Short-Term Borrowings                                               11

                                        7



Investment Portfolio

The Company  categorizes  investments into three groups and further provides for
the  accounting  and  reporting  treatment  of each  group.  Investments  may be
classified as  held-to-maturity,  available-for-sale,  or trading. The Bank does
not purchase or hold any  investment  securities for the purpose of trading such
investments.  The  following  tables  set  forth  the  carrying  amounts  of the
investment securities as of December 31:



(dollars in thousands)                                                   2008       2007       2006
                                                                     ------------------------------
                                                                                  
Available-for-sale securities:
(at fair value)
Equity securities                                                    $      0   $    160   $    181
Preferred stock                                                            20      1,825      2,512
U.S. Treasury securities and other U.S. government corporations
   and agencies                                                        41,271     46,859     54,146
Obligations of states and political subdivisions                       55,696     56,979     45,236
Mortgage-backed securities                                             53,540     41,554     54,417
                                                                     ------------------------------
                                                                     $150,527   $147,377   $156,492
                                                                     ==============================

Held-to-maturity securities
(at amortized cost)
Mortgage-backed securities                                           $     66   $     71   $     75
                                                                     ==============================

Federal  Home Loan Bank stock                                        $  5,323   $  5,176   $  4,664
                                                                     ==============================


For the following table, yields are not presented on a fully  taxable-equivalent
("FTE") basis.

The scheduled maturities of held-to-maturity  securities and  available-for-sale
securities  (other than equity  securities)  were as follows as of December  31,
2008:



(dollars in thousands)
                                                        Maturing             Maturing
                                                        After 1              After 5              Maturing
                                                        but within           but within           After 10
                                                        5 Years              10 Years             Years
                                                        Amount       Yield   Amount       Yield   Amount     Yield   Total
                                                        ----------           ----------           --------
                                                                                                
Held-to-maturity securities
---------------------------
  (at amortized cost)
Mortgage-backed securities                              $        0           $        0           $     66    5.35%  $     66
                                                        ==========           ==========           ========           ========

Available-for-sale securities
-----------------------------
  (at fair value)
U.S. Treasury
securities and other U.S. government corporations
   and agencies                                         $        0           $    1,001    5.50%  $ 40,270    6.00%  $ 41,271

Obligations of states and political subdivisions                 0                    0             55,696    4.43%    55,696

Mortgage-backed securities                                   1,435    2.30%         728    4.99%    51,377    5.52%    53,540
                                                        ----------           ----------           --------           --------
                                                        $    1,435           $    1,729           $147,343           $150,507
                                                        ==========           ==========           ========           ========


                                        8



Loan Portfolio Analysis by Category
(dollars in thousands)



                                                            December 31
                                          2008        2007        2006        2005        2004
                                     ----------------------------------------------------------
                                                                      
Commercial, financial and
   agricultural                      $  20,785   $  20,629   $  16,465   $  15,354   $  15,127
Real Estate-construction and
   land development                     33,343      28,928      21,169      18,814      14,290
Real Estate - residential              177,048     158,600     145,395     135,619     130,414
Real Estate-commercial                  62,796      53,823      50,859      40,889      35,487
Consumer                                 5,551       8,005       8,816       7,900       9,122
Term federal funds                           0           0      12,000           0           0
Other                                      175         376          69          47          69
                                     ----------------------------------------------------------
                                       299,698     270,361     254,773     218,623     204,509
Deferred costs, net                        393         306         168           0           0
Allowance for loan losses               (2,724)     (2,475)     (2,474)     (2,626)     (2,512)
Unearned income                              0          (1)         (3)         (8)        (19)
                                     ----------------------------------------------------------
   Net loans                         $ 297,367   $ 268,191   $ 252,464   $ 215,989   $ 201,978
                                     ==========================================================


While a majority of the Bank's  loans are secured by real estate  located in the
Bank's market area, there are no specific industry  concentrations in the Bank's
loan portfolio.

The following table shows the maturity of commercial, financial and agricultural
loans,  real  estate  commercial  loans  and real  estate-construction  and land
development  loans  outstanding  as of December 31, 2008.  Also provided are the
amounts  due after  one (1) year  classified  according  to the  sensitivity  to
changes in interest rates.



                                                                                Due after
                                                                 Due in one     one year to    Due after
(dollars in thousands)                                           year or less   five years    five years
                                                                 ---------------------------------------
                                                                                     
Commercial, financial, agricultural and real estate commercial   $      1,218   $     7,120   $   75,243
Real estate-construction and land development                          32,758           585            0
                                                                 ---------------------------------------
                                                                 $     33,976   $     7,705   $   75,243
                                                                 =======================================

Maturities after
   one year with:
   Fixed interest rates                                                         $     3,761   $   12,725
   Variable interest rates                                                            3,944       62,518
                                                                                ------------------------
                                                                                $     7,705   $   75,243
                                                                                ========================


Return on Equity and Assets

The following table summarizes  various financial ratios of the Company for each
of the last three (3) years:



                                                                At or for the
                                                           -----------------------
                                                           Year ended December 31,
                                                           -----------------------
                                                            2008     2007    2006
                                                           ------   -----   ------
                                                                   
Return on average total assets
   (net income divided by average total assets)               .23%    .85%    1.02%

Return on average shareholders' equity
   (net income divided by average shareholders' equity)      2.52%   8.50%    9.83%

Dividend payout ratio
   (total declared dividends per share
      divided by net income per share)                     169.70%  47.79%   41.11%

Equity to assets ratio
   (average shareholders' equity divided by
      average total assets)                                  9.19%   9.94%   10.37%


Nonaccrual, Past Due and Restructured Loans

At December 31, 2008,  there were eleven (11)  nonaccrual  loans  aggregating $5
million  in the Bank's  portfolio,  ten of which  were  secured by real  estate,
compared with eleven (11)  nonaccrual  loans  aggregating $1 million at December
31, 2007. While the increase in dollar amount of nonaccrual loans is a matter to
which management is devoting significant attention, it is important to note that
ten of the  eleven  nonaccrual  loans are  secured  by real  estate  and are not
considered likely to ultimately result in losses based upon the current value of
real estate collateral.

                                        9



However,  the  growth of  nonaccrual  loans is a  concern,  and will be  closely
monitored.  In the month following the month in which a mortgage loan becomes 90
days past due,  the Bank  generally  stops  accruing  interest  unless there are
unusual circumstances which warrant an exception.  Generally the only loan types
that the Bank  reclassifies  to  nonaccrual  are those secured by real estate or
large commercial loans on which substantial  collateral  exists.  Other types of
loans are generally charged off when they become 120 days or more delinquent.

Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)



                                                          December 31
                                         2008      2007       2006       2005      2004
                                       -------------------------------------------------
                                                                 
Nonaccrual                             $5,075   $ 1,008   $    886   $    694   $ 1,739
90 days or more past due                  100       816         78         79       528
                                       -------------------------------------------------
Total nonperforming loans              $5,175   $ 1,824   $    964   $    773   $ 2,267
                                       =================================================

Total nonperforming loans as per-
   centage of the loan portfolio         1.72%     0.67%      0.38%      0.35%     1.11%
Allowance for loan losses as a per-
   centage of nonperforming loans       52.64%   135.69%    256.64%    339.72%   110.81%


        Information with respect to nonaccrual and restructured loans at
                 December 31, 2008, 2007 and 2006 is as follows:



(dollars in thousands)                                               Year Ended December 31
                                                                       2008    2007    2006
                                                                     ----------------------
                                                                             
Interest income that would have been recorded under original terms   $  382   $  77   $  66
Less gross interest recorded                                             36      48      37
                                                                     ----------------------
Foregone interest                                                    $  346   $  29   $  29
                                                                     ======================




Summary of Loan Loss Experience
(dollars in thousands)                                Year Ended December 31
                                           2008      2007      2006      2005      2004
                                        ------------------------------------------------
                                                                 
Balance of the allowance for
   loan losses at beginning of year     $ 2,475   $ 2,474   $ 2,626   $ 2,512   $ 1,664
Charge-offs:
   Commercial, financial and
      agricultural                          924        20        25         7         0
   Consumer                                 151        83       107       128        70
                                        ------------------------------------------------
      Total charge-offs                   1,075       103       132       135        70
                                        ------------------------------------------------

Recoveries:
   Commercial, financial and
      agricultural                           18        55         6         0         0
   Consumer                                  27        49        61        39        28
                                        ------------------------------------------------
      Total recoveries                       45       104        67        39        28
                                        ------------------------------------------------
Net charge-offs (recoveries)              1,030        (1)       65        96        42
Provision (benefit) charged to
   operations                             1,279         0       (87)      210       250
Balance acquired from CNB                     0         0         0         0       640
                                        ------------------------------------------------
Balance at end of year                  $ 2,724   $ 2,475   $ 2,474   $ 2,626   $ 2,512
                                        ================================================
Ratio of net charge-offs
   to average loans outstanding             .36%      .00%      .02%      .05%      .03%
Ratio of allowance for loan losses
   to year end loans                        .91%      .92%      .97%     1.20%     1.23%


                                       10



Allocation  of the  Allowance  for Loan Losses;  Percentage  of loans by type to
total loans*



(dollars in thousands)
                                                                          December 31
                                   2008                 2007                 2006                 2005                 2004
                            ------------------   ------------------   ------------------   -------------------   ------------------
                             Amount   Percent*    Amount   Percent*    Amount   Percent*    Amount   Percent *    Amount   Percent*
                                                                                             
Commercial, financial and
   agricultural             $   272       6.94%  $   505       7.63%  $   342       6.46%  $   495        7.02%  $   613       7.40%
Real estate construction
   and land development         386      11.13%      118      10.70%       85       8.31%       95        8.61%       83       6.99%
Real estate mortgage          1,901      80.03%    1,615      78.57%    1,832      77.03%    1,761       80.74%    1,614      81.12%
Consumer                         97       1.85%      201       2.96%      173       3.46%      247        3.61%      198       4.46%
Term Federal Funds                0          0%        0          0%        0       4.71%        0                     0
Other loans                      68        .05%       36        .14%       42        .03%       28         .02%        4        .03%
                            -------   --------   -------   --------   -------   --------   -------   ---------   -------   --------
                            $ 2,724     100.00%  $ 2,475     100.00%  $ 2,474     100.00%  $ 2,626      100.00%  $ 2,512     100.00%
                            =======   ========   =======   ========   =======   ========   =======   =========   =======   ========


Provisions to the  allowance  for loan losses are charged to operating  expenses
and are based on past experience,  current economic  conditions and management's
judgment of the amount necessary to cover losses inherent in the portfolio.  The
Bank records  provisions  for estimated loan losses,  which are charged  against
earnings, in the period they are established.

Short-Term Borrowings
(dollars in thousands)                                   December 31
                                                 2008       2007       2006
                                              -------------------------------
Federal Home Loan Bank Advances
   Average interest rate
      At year end                                  3.35%      4.74%      4.97%
      For the year                                 4.16%      4.30%      5.00%
Average amount outstanding during the year    $  94,698   $ 87,649   $ 71,471
Maximum amount outstanding at any month       $ 107,878   $ 95,143   $ 90,403
Amount outstanding at year end                $  87,914   $ 95,011   $ 83,093

ITEM 1A. RISK FACTORS - Not Applicable

ITEM 1B. UNRESOLVED STAFF COMMENTS - Not Applicable

ITEM 2. PROPERTIES

The Bank serves its  customers  from its seven (7) offices  which are located in
North Canaan, Lakeville, Salisbury and Sharon, Connecticut,  Sheffield and South
Egremont,  Massachusetts and Dover Plains, New York. The Bank's trust and wealth
advisory  services  division is located in a separate  building  adjacent to the
main office of the Bank in  Lakeville,  Connecticut.  In addition,  the Bank has
received approval to open a full-service  branch office in Millerton,  New York.
The Bank has  purchased  the  property  for the branch  and  expects to open the
branch in the third quarter of 2009.

The Bank leases the  following  properties:  a branch  office at 51 Main Street,
South  Egremont,  Massachusetts;  a branch office at 73 Main Street,  Sheffield,
Massachusetts;  and a branch office at 5 Dover Village Plaza,  Dover Plains, New
York.

The  following  table  includes  all  property  owned by the Bank,  but does not
include Other Real Estate Owned.

      OFFICES                                    LOCATION

      Main Office                            5 Bissell Street
                                          Lakeville, Connecticut

      Trust and Wealth Advisory             19 Bissell Street
      Services Division                   Lakeville, Connecticut

      Salisbury Office                        18 Main Street
                                          Salisbury, Connecticut

      Sharon Office                            29 Low Road
                                           Sharon, Connecticut

                                       11



      Canaan Operations                         94 Main Street
                                          North Canaan, Connecticut

      Canaan Office                            100 Main Street
                                          North Canaan, Connecticut

      Millerton Branch Site                     87 Main Street
      (site of proposed branch office,       Millerton, New York
      which is expected to open in
      2009)

ITEM 3. LEGAL PROCEEDINGS

The Bank  individually and in its capacity as a former Co-trustee of a Revocable
Trust (Trust),  has been named as a defendant in litigation currently pending in
Connecticut Complex Litigation Docket in Stamford, CT (Action).

The Action  involves a dispute  over title to certain real  property  located in
Westport,  Connecticut that was conveyed by the grantor to the Trust on or about
August  8,  2007.  Subsequent  to this  conveyance,  the Bank  granted a loan of
$3,386,609 to the Trust, which was secured by an open-end commercial mortgage in
favor of the Bank on the Westport  property.  The underlying loan is outstanding
as of December 31, 2008.

The gravamen of the  plaintiff's  claim in the Action is that he had an interest
in  the  Westport  real  property  transferred  to the  Trust  of  which  he was
wrongfully divested on account of the actions of the defendants.  In the Action,
the plaintiff  seeks to quiet title to the property and to recover money damages
from the defendants for the alleged wrongful divestiture of his claimed interest
in the property.

In  addition  to the  mortgage  on the  property,  the Bank,  at the time of the
financing referenced above,  acquired a lender's title insurance policy from the
Chicago  Title and Insurance  Company,  which is providing a defense to the Bank
under a reservation  of rights.  The Bank denies any  wrongdoing and is actively
defending  the  case.  The Bank has filed a motion to  dismiss  and/or  stay the
lawsuit pending  resolution of a parallel action pending in New York Surrogate's
Court to which the Bank is not a party.  No discovery has been taken to date. At
this time,  the Company is unable to reasonably  evaluate the likely  outcome of
the Action, or to reasonably estimate the amount of any potential loss, if any.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the Company's 2008 fiscal year.

PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED SHAREHOLDER
            MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The  Company's  common stock is traded on The NYSE AMEX under the symbol  "SAL".
The  following  table  presents the high and low sales  prices of the  Company's
common stock.



                                      2008 Quarters                            2007 Quarters
                          -------------------------------------   -------------------------------------
                              4th       3rd       2nd       1st       4th       3rd       2nd       1st
                          -------------------------------------   -------------------------------------
                                                                        
Range of Stock prices:
   High                   $ 29.25   $ 31.10   $ 34.45   $ 34.10   $ 34.95   $ 34.10   $ 36.90   $ 38.50
   Low                    $ 21.50   $ 26.80   $ 28.65   $ 19.90   $ 30.75   $ 31.00   $ 32.30   $ 34.70


Holders

There  were  approximately  750  holders  of record of the  common  stock of the
Company as of March 20, 2009.  This number  includes  brokerage  firms and other
financial  institutions  which hold stock in their  name,  but which is actually
owned by third parties.

Dividends

Dividends are currently considered four times a year, and the Company expects to
follow such practice in the future. During the year 2008, the Company declared a
cash  dividend each quarter of $.28 per share.  Dividends  declared for the year
2008

                                       12



totaled  $1.12 per share which  compared to total  dividends  of $1.08 that were
declared in the year 2007. At their March 27, 2009 meeting, the Directors of the
Company  declared  a cash  dividend  of $.28 per share for the first  quarter of
2009. The dividend will be paid on April 30, 2009 to  shareholders  of record as
of April 16, 2009.  Payments of all dividends  are dependent  upon the condition
and earnings of the Company.  The Company's  ability to pay dividends is limited
by the prudent banking  principles  applicable to all bank holding companies and
by  the  provisions  of  Connecticut   Corporate  law,  which  provide  that  no
distribution  may be made by a  company  if,  after  giving it  effect:  (1) the
company  would  not be able to pay its  debts as they  become  due in the  usual
course of business or (2) the company's  total assets would be less than the sum
of its total  liabilities  plus amounts  needed to satisfy any  preferred  stock
rights.  In addition,  provided  the  Preferred  Stock  issued to the  Treasury,
described in Note 22 to the Consolidated  Financial  Statements,  is held by the
Treasury,  the Common Stock dividend may not be increased without the consent of
the  Treasury  for  three  (3)  years  from  the date of the  investment  by the
Treasury.  On February 24, 2009,  and March 27, 2009 the Federal  Reserve  Board
issued supervisory  guidance to all bank holding companies regarding the payment
of  dividends  as well as stock  redemptions  and  repurchases  by bank  holding
companies.  Such guidance  expressed the view that the Board of Directors should
ensure that  dividends  are prudent  relative to the  financial  position of the
institution  and that a bank holding  company should inform the Federal  Reserve
Board in advance of declaring a dividend that exceeds earnings for the period or
that could  result in a material  adverse  change to an  organization's  capital
structure.  The  supervisory  guidance  further stated that dividends  should be
eliminated,  deferred,  or limited if net income from the past four  quarters is
not sufficient to fund the dividend or if prospective  earnings retention is not
consistent  with  capital  needs or the  condition  and future  prospects of the
institution or if the bank holding  company is in danger of not meeting  minimum
regulatory capital returns.

The following table presents cash dividends  declared per share for the last two
years:



                                       2008 Quarters                           2007 Quarters
                          -------------------------------------   -------------------------------------
                              4th       3rd       2nd       1st       4th       3rd       2nd       1st
                          -------------------------------------   -------------------------------------
                                                                        
Cash dividends declared   $  0.28   $  0.28   $  0.28   $  0.28   $  0.27   $  0.27   $  0.27   $  0.27


The dividends  paid to  shareholders  of the Company are funded  primarily  from
dividends  received by the Company  from the Bank.  Reference  should be made to
Note  15  of  the  Consolidated   Financial  Statements  for  a  description  of
restrictions on the ability of the Bank to pay dividends to the Company.

                      Equity Compensation Plan Information

The information  required by this item pursuant to Item 201(d) of Regulation S-K
regarding securities authorized for issuance under equity compensation plans (as
of December 31, 2008) is contained  in, and  incorporated  by reference  to, the
Company's  Definitive  Proxy Statement for the Annual Meeting of Shareholders to
be  held  on  May  27,  2009  under  the  Section  "Equity   Compensation   Plan
Information".

                     Recent Sales of Unregistered Securities

The  shareholders  of the Company voted to approve the Directors  Stock Retainer
Plan  (Plan) at the 2001  Annual  Meeting  of  Shareholders.  The Plan  provides
non-employee directors of the Company with shares of Common Stock as a component
of their compensation for services as non-employee directors. The maximum number
of shares of Common  Stock  that may be issued  pursuant  to the plan is 15,000.
Each year a grant under the Plan consists of 120 shares of Common Stock for each
non-employee  director  who served for  twelve  months and a prorated  number of
shares to reflect the number of months served for any new non-employee director.
On May 16,  2008,  840 shares were issued  pursuant to the Plan.  The next grant
date under the Plan will immediately  precede the Annual Meeting of Shareholders
which is to be held on May 27, 2009, and will be in the amount of 120 shares per
director.  All such issuances are exempt from registration  under the Securities
Act of 1933, as amended  pursuant to Section 4(2), as they are transactions by a
company not  involving  any public  offering.  In  November,  2008,  the Company
applied for  participation in the Treasury TARP CPP under the EESA and the rules
and regulations promulgated thereunder (collectively,  Act). On January 7, 2009,
the Treasury  preliminarily  approved the Company's application in the amount of
$8,816,000.  At  the  time  of  Treasury  preliminary  approval,  the  Company's
Certificate  of  Incorporation  did not permit the issuance of Preferred  Stock.
Accordingly,  a Special Meeting of Shareholders of the Company was held on March
10,  2009,  and  Shareholders  voted to approve an  amendment  to the  Company's
Certificate of  Incorporation to authorize a class of 25,000 shares of preferred
stock, par value $0.01 per share.

The Company  closed the TARP CPP  transaction on March 13, 2009 in the amount of
$8,816,000.  The Company issued to the Treasury 8,816 shares of Preferred  Stock
together  with a warrant to purchase  57,671  shares of Company  common stock at
$22.93  per  share,  which  warrant,  if  exercised  in full,  would  dilute the
percentage  ownership of the holders of Company  common  stock by  approximately
3.3%. If the Company redeems all of the shares of Preferred  Stock, it has first
refusal  rights to buy back the warrant or the shares  received upon exercise of
the warrant at their fair market value if they are then held by the Treasury. As
a condition of the closing, the Company amended the change in control agreements
described  in  Note  9  to  Consolidated  Financial  Statements.  The  amendment
prohibits  any  payments  relating  to the change in control  agreements  to the
specified  officers during the period in which any obligation  arising under the
TARP CPP remains outstanding.

                                       13



The  Preferred  Stock  qualifies as Tier 1 capital for  regulatory  purposes and
ranks senior to the  Company's  common stock in the payment of dividends or upon
liquidation.  The  Preferred  Stock  purchased by the Treasury pays a cumulative
dividend  rate of 5% per annum for the first  five years it is  outstanding  and
thereafter at a rate of 9% per annum.  The Preferred Stock is non-voting,  other
than voting rights on matters that could  adversely  affect the Preferred  Stock
and in the event the Company is in arrears on six quarterly dividend payments on
the Preferred  Stock, in which case, the holder of the Preferred Stock may elect
two directors to the Company's  Board of Directors until all dividends have been
paid in full for four consecutive  quarterly dividends.  The Preferred Stock may
be  redeemed  by the  Company at 100% of its issue  price plus any  accrued  and
unpaid  dividends.  The Treasury's  consent will be required for any increase in
Company  common stock  dividends per share or any  repurchase of Company  common
stock until the earlier of the third  anniversary  of the date of the investment
or the  transfer by the Treasury of all of the shares of  Preferred  Stock.  See
also the Form 8-K filed by the  Company  on March 19,  2009 with  respect to the
sale of Series A Preferred  Stock and Warrant to purchase  Common Stock and Note
22 to Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA - Not Applicable

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS            Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATION                  and Subsidiary

Salisbury Bancorp, Inc. (Company), a Connecticut corporation, formed in 1998, is
the holding company for Salisbury Bank and Trust Company,  (Bank). The Company's
sole  subsidiary  is the Bank,  formed in 1848 which has seven (7) full  service
offices located in the towns of North Canaan,  Lakeville,  Salisbury and Sharon,
Connecticut, South Egremont and Sheffield,  Massachusetts, and Dover Plains, New
York.  A full Trust and  Wealth/Advisory  Services  Division is also  located in
Lakeville,  Connecticut.  The Management's Discussion and Analysis of Results of
Operations and Financial Condition that follows presents  Management's  comments
on the  consolidated  operating  results of the  Company.  In order to provide a
foundation for building shareholder value and servicing  customers,  the Company
remains  committed  to  investing  in  the  technological  and  human  resources
necessary for developing and delivering new personalized  financial products and
services  in order to better  serve both  current  and future  customers  in the
tri-state area. The following  discussion should be read in conjunction with the
Company's  consolidated  financial  statements and the notes to the consolidated
financial  statements  that are  presented as part of this Annual Report on Form
10-K.

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

This Annual  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 the Bank,  may include  forward-looking
statements relating to such matters as:

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

(b)   expectations for increased  revenues and earnings for the Company and Bank
      through growth resulting from acquisitions,  attraction 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 Act of
1995.

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

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

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

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

(d)   the impact of technological advances; and

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

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

                                       14



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

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

RESULTS OF OPERATION
--------------------

Comparison of the Years Ended December 31, 2008 and 2007
--------------------------------------------------------

Overview
--------

The Company's assets at December 31, 2008 totaled $495,754,000 compared to total
assets of  $461,960,000 at December 31, 2007. Net loans  outstanding,  including
loans held-for-sale  totaled $299,682,000 at December 31, 2008. This compares to
net loans  outstanding of  $268,311,000  at December 31, 2007, and represents an
increase  of  $31,371,000  or 11.69%.  New  business  development  efforts  were
primarily  attributable  to the growth.  This growth was primarily  funded by an
increase in deposits.  Deposits at December 31, 2008  totaled  $344,925,000  and
compared to total  deposits of  $317,741,000  at December 31,  2007.  This is an
increase of $27,184,000 or 8.56%.

The Company's earnings totaled $1,106,000 or $0.66 per average share outstanding
in 2008.  This  compares to earnings of  $3,800,000  or $2.26 per average  share
outstanding in 2007.  Earnings were impacted as a result of the U.S.  Government
placing  FHLMC  (Freddie  Mac) into  conservatorship  during the  quarter  ended
September  30,  2008.  This  necessitated  the Company to take a  write-down  of
Freddie Mac preferred stock during that quarter which totaled  $2,856,000 and an
additional  write-down of $99,365 in the quarter ended  December 31, 2008 for an
overall  total of  $2,955,365.  However,  the total tax benefit in the amount of
$1,004,824  was  recognized  as a result of these  charges in the quarter  ended
December  31,  2008,  because  applicable  law  at  the  time  forced  financial
institutions  to treat the loss as a capital loss. On October 3, 2008,  the EESA
was enacted,  which includes a provision  permitting  banks to recognize  losses
relating  to the  Freddie  Mac  preferred  stock as an  ordinary  loss,  thereby
allowing  a tax  benefit  for both tax and  financial  reporting  purposes.  The
overall tax effected  impact for the year ended  December 31, 2008 resulted in a
charge to earnings of $1,950,541.

The nation's  economy is in a recession  and the Bank's market area is beginning
to feel the effects of economic conditions.  The Bank's 2008 loan loss provision
expense  totaled  $1,279,000  compared  to $0 in 2007.  Non-performing  loans at
December 31, 2008 totaled  $5,175,000 or 1.71% of total loans  outstanding which
compares to $1,824,000 or 0.67% for the corresponding  period in 2007. Net loans
charged-off during 2008 totaled  $1,030,000  compared to net recoveries of loans
of $1 thousand  dollars in 2007.  At December 31, 2008,  the  allowance for loan
losses totaled  $2,724,000 which  represented  0.9% of total loans  outstanding.
Other Real Estate Owned totaled  $204,534 at December 31, 2008. The property has
since been sold.

During the fourth quarter of 2008,  the Bank prepaid a $19 million  advance from
the Federal  Home Loan Bank of Boston at a cost of $674,000 net of tax. The Bank
took such  action as part of a program  to  restructure  a portion of the Bank's
borrowings. The borrowings which were at a rate of 5.97% are being replaced with
new Federal Home Loan Bank advances that have lower interest rates and a revised
maturity schedule. While the prepayment resulted in a one time after tax expense
in the fourth quarter of 2008, overall,  the restructuring is expected to result
in a decrease in future borrowing expense which is intended to increase earnings
per share in 2009 and future years.

The Bank's risk-based capital ratios at December 31, 2008 were 10.53% for Tier 1
risk based capital and 11.34% for total risk based capital.  The Bank's leverage
ratio was 7.52% at  December  31,  2008.  This  compares  to a Tier 1 risk based
capital  ratio at December 31, 2007 of 13.74%,  a total risk based capital ratio
of 14.69% and a leverage  ratio of 8.06%.  Dividends  declared on the  Company's
common stock  amounted to $1.12 per share in 2008 compared to $1.08 per share in
2007.

Net Interest and Dividend Income
--------------------------------

The Company earns income from two basic  sources.  The primary source is through
the management of its financial assets and liabilities and involves  functioning
as a financial  intermediary.  The Company  accepts  funds from  depositors  and
borrows  funds and either lends the funds to borrowers or invests those funds in
various types of securities.  A second source is fee income,  which is discussed
in the noninterest income section of this analysis.

                                       15



Net interest  income is the  difference  between the interest and fees earned on
loans,  interest and  dividends  earned on  securities  (the  Company's  earning
assets) and the interest expense paid on deposits and borrowed funds,  primarily
in the form of  advances  from the Federal  Home Loan Bank.  The amount by which
interest  income will exceed interest  expense  depends on two factors:  (1) the
volume or  balance  of  earning  assets  compared  to the  volume or  balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those  interest-earning  assets  compared  with the interest  rate paid on those
interest-bearing deposits and borrowed funds. For this discussion,  net interest
income is  presented  on an FTE basis.  FTE interest  income  restates  reported
interest  income on tax exempt loans and  securities  as if such  interest  were
taxed at the  applicable  State and  Federal  income  tax rates for all  periods
presented.

(dollars in thousands)                            December 31,
                                                  2008       2007
                                              -------------------
Interest and Dividend Income
(financial statements)                        $ 26,557   $ 26,152
Tax Equivalent Adjustment                        1,260      1,202
                                              --------   --------
   Total Interest and Dividend
      Income (on an FTE basis)                  27,817     27,354

Interest Expense                               (10,825)   (12,432)
                                              --------   --------
Net Interest and Dividend Income-FTE          $ 16,992   $ 14,922
                                              ========   ========

The Company's  2008 total  interest and dividend  income on an FTE basis for the
period ended December 31, 2008 increased  $463,000 or 1.69% when compared to the
same period in 2007.  The increase is primarily  attributable  to an increase in
earning assets.

Interest  expense  on  deposits  in  2008  decreased  $1,567,000  or  19.11%  to
$6,633,000  compared to $8,200,000 for the  corresponding  period in 2007.  This
decrease  reflects an economic  environment of generally  lower interest  rates.
Interest  expense  for Federal  Home Loan Bank  advances  decreased  $146,000 to
$4,086,000 in 2007  compared to $4,232,000 in 2007.  The decrease was the result
of a decrease  in  advances  during the year.  In  addition,  the Bank  recorded
interest  expense  totaling  $106,000  for  interest  on  securities  sold under
agreements  to  repurchase  which was a new product that was  introduced  during
2008.  Competition  remains  aggressive  and  interest  margins  continue  to be
pressured,  however,  net interest and dividend income on an FTE basis increased
$2,070,000  or  13.87%  over 2007 and  totaled  $16,992,000  for the year  ended
December 31, 2008  compared to net interest and dividend  income on an FTE basis
of $14,922,000 for the year ended December 31, 2007.

Net  interest  margin  is  net  interest  and  dividend  income  expressed  as a
percentage  of average  earning  assets.  It is used to measure  the  difference
between the  average  rate of interest  and  dividends  earned on assets and the
average rate of interest that must be paid to support those assets.  To maintain
its net  interest  margin,  the  Company  must manage the  relationship  between
interest earned and paid. The Company's 2008 net interest margin on an FTE basis
was  3.75%.  This  compares  to a net  interest  margin of 3.54%  for 2007.  The
following table reflects average balances, interest earned or paid and rates for
the two years ended  December  31,  2008 and 2007.  The  average  loan  balances
include  non-accrual  loans  and  loans  currently  past due 90 days  and  still
accruing.  Interest  earned on loans  also  includes  fees on loans such as late
charges  that are not  deemed to be  material.  Interest  earned  on tax  exempt
securities in the table is presented on an FTE basis.  A federal tax rate of 34%
was used in performing  these  calculations.  Actual tax exempt income earned in
2008 was  $2,446,000  with a yield of 4.32%.  Actual tax  exempt  income in 2007
totaled $2,332,000 with a yield of 4.28%.

                                       16



YIELD ANALYSIS
Average Balances, Interest Earned/Paid and Rates



                                                     Years Ended December 31
(dollars in thousands)                           2008                           2007
                                               INTEREST                       INTEREST
                                    AVERAGE     EARNED/   YIELD    AVERAGE     EARNED/   YIELD
                                    BALANCE      PAID      RATE    BALANCE      PAID      RATE
                                                                       
ASSETS
Interest-Earning Assets:
Loans                              $ 287,924   $ 18,449   6.41%   $ 258,714   $ 17,969   6.95%
Taxable Securities                   104,070      5,538   5.32%     106,775      5,783   5.42%
Tax-Exempt Securities*                56,647      3,706   6.54%      54,541      3,533   6.48%
Federal Funds                          3,758         99   2.63%         643         31   4.82%
Other Interest-Earning                 1,332         25   1.88%       1,071         38   3.55%
                                   --------------------           --------------------
Total Interest-Earning Assets        453,731     27,817   6.13%     421,744     27,354   6.49%
                                               --------                       --------
Allowance for Loan Losses             (2,711)                        (2,467)
Cash & Due From Banks                  6,479                          6,554
Premises, Equipment                    7,241                          6,645
Net unrealized loss on AFS
   Securities                         (7,232)                        (3,468)
Other Assets                          20,555                         20,619
                                   ---------                      ---------
Total Average Assets               $ 478,063                      $ 449,627
                                   =========                      =========

LIABILITIES AND SHAREHOLDERS'
   EQUITY
Interest-Bearing Liabilities:
NOW/Money Market Deposits          $  88,431      1,270   1.44%   $  80,180      1,854   2.31%
Savings Deposits                      63,185        926   1.47%      47,063        814   1.73%
Time Deposits                        116,959      4,437   3.79%     119,052      5,532   4.65%
Borrowed Funds                        94,698      4,192   4.43%      87,649      4,232   4.83%
                                   --------------------           --------------------
Total Interest-Bearing
   Liabilities                       363,273     10,825   2.98%     333,944     12,432   3.72%
                                               --------                       --------
Demand Deposits                       67,681                         66,304
Other Liabilities                      3,193                          4,673
Shareholders' Equity                  43,916                         44,706
                                   ---------                      ---------
Total Liabilities and
   Shareholders' Equity            $ 478,063                      $ 449,627
                                   =========                      =========
Net Interest Income                            $ 16,992                       $ 14,922
                                               ========                       ========
Net Interest Spread                                       3.15%                          2.77%
Net Interest Margin                                       3.75%                          3.54%


*     Presented on a fully taxable equivalent ("FTE") basis

                                       17



Volume and Rate Variance Analysis of Net Interest and Dividend Income



(Taxable equivalent basis)
(dollars in thousands)                      2008 over 2007                  2007 over 2006
                                    ------------------------------    ---------------------------
                                     Volume       Rate      Total      Volume     Rate     Total
                                    ------------------------------    ---------------------------
                                                                       
Increase (decrease) in:
Interest income on:
   Loans                            $ 2,030   $ (1,550)  $    480     $ 1,981   $  301   $ 2,282
   Taxable investment securities       (147)       (98)      (245)       (256)     156      (100)
Tax-exempt investment securities        136         37        173         489     (108)      381
Other interest income                   136        (81)        55          (1)     (10)      (11)
                                    ------------------------------    ---------------------------
Total interest income               $ 2,155   $ (1,692)  $    463     $ 2,213   $  339   $ 2,552

Interest expense on:
NOW/Money Market deposits           $   191   $   (775)  $   (584)    $    18   $   24   $    42
Savings deposits                        279       (167)       112         (24)     198       174
Time deposits                           (97)      (998)    (1,095)        528      570     1,098
Borrowed funds                          340       (380)       (40)        808     (149)      659
                                    ------------------------------    ---------------------------
Total interest expense              $   713   $ (2,320)  $ (1,607)    $ 1,330   $  643   $ 1,973
                                    ------------------------------    ---------------------------

Net interest margin                 $ 1,442   $    628   $  2,070     $   883   $ (304)  $   579
                                    ==============================    ===========================


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

Noninterest  income  totaled  $2,241,000  for the year ended  December  31, 2008
compared to $4,465,000 for the year ended December 31, 2007.  This is a decrease
of  $2,224,000 or 49.81%.  While gains on sales and calls of  available-for-sale
securities  had a net  increase  of  $305,000  or 104%,  US  Government  actions
relating to Freddie Mac necessitated a write-down of Freddie Mac Preferred stock
totaling $2,955,000. Trust Wealth Advisory Services income increased $214,000 to
$2,264,000,  primarily as a result of the efforts of new  business  development,
which has increased assets under management.

Service  charges on  deposit  accounts  totaled  $830,000  for 2008.  This is an
increase of $86,000 or 11.57% when compared to total service charges of $744,000
in 2007.  The increase can be attributed to an increase in the number of deposit
accounts.  Mortgage  refinancing  activity  during 2008 generated  revenues from
gains on sales of loans  that  totaled  $292,000,  which  compares  to  revenues
totaling  $317,000  for the  corresponding  period in 2007.  Competition  in the
secondary  mortgage market continues to be very aggressive.  Other income during
fiscal 2008 totaled $1,209,000.  This compares to other income of $1,037,000 for
2007,  representing  an increase of $172,000 or 16.59%.  This category of income
primarily  consists of fees  associated  with the  origination  and servicing of
mortgage loans as well as gains reflecting the sale of mortgage loans.

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

Overall,  noninterest  expense  increased 18.46% for the year ended December 31,
2008 as compared to 2007. The increases in salaries and employee  benefits along
with the increases in occupancy and equipment expense are primarily a reflection
of additional  staffing and operational  costs  associated with the operation of
our Dover Plains,  New York branch which opened in August of 2007.  The increase
in data processing and insurance  costs are primarily  attributable to increases
associated  with growth in volumes of business of the Company,  especially  with
the addition of the new branch.  Professional fees increased $338,000 or 36.25%.
This  increase  is  primarily  attributable  to an  increase  in  audit  expense
resulting from additional services required due to compliance  requirements such
as the Sarbanes-Oxley Act and other regulatory  compliance.  In addition,  Legal
and Consultant fees also increased  which is the result of various  research and
marketing  initiatives  during the year.  During the fourth quarter of 2008, the
Bank  prepaid  a $19  million  advance  from  the  FHLB of  Boston  at a cost of
$864,000.The Bank took such action as part of a program to restructure a portion
of the Bank's  borrowings.  The borrowings which were at a rate of 5.97% will be
replaced  with new FHLB  advances  that have  much  lower  interest  rates and a
revised maturity schedule. While the prepayment resulted in a one time after tax
expense of  $674,000  the  restructuring  is expected to result in a decrease in
future  borrowing  expense which is intended to positively  impact  earnings per
share in 2009 and future  years.  The  increase  in other  expense is  primarily
attributable to normal operational expenses associated with growth.

                                       18



The  components  of  noninterest  expense  and the changes in the period were as
follows (amounts in thousands):



                                              2008       2007    $ Change  % Change
-----------------------------------------------------------------------------------
                                                               
Salaries and employee benefits             $  8,330   $  7,724    $  606      7.85%
Occupancy expense                               961        802       159     19.82
Equipment expense                               898        819        79      9.64
Data processing                               1,339      1,194       145     12.14
Insurance                                       278        163       115     70.55
Printing and stationery                         277        280        (3)    (1.07)
Professional fees                             1,269        931       338     36.30
Prepayment fee FHLB advance                     864          0       864    100.00
Amortization of core deposit intangible         164        164         0       .00
Other expense                                 1,629      1,437       192     13.36
                                           ---------  --------    ------
   Total noninterest expense               $ 16,009   $ 13,514    $2,495     18.46
                                           ========   ========    ======


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

In 2008, the Company's  income tax benefit totaled $421,000 and an effective tax
rate of (61.5)%.  This  compares to an income tax  provision  of $870,000 and an
effective  tax rate of 18.63%  for the same  period in 2007.  This  decrease  is
primarily attributable to a decrease in taxable income.

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

Overall,  net income totaled $1,106,000 for the year ended December 31, 2008 and
represents earnings per average share outstanding of $0.66. This compares to net
income of  $3,800,000  for the year ended  December  31,  2007,  which  reflects
earnings per average share outstanding of $2.26.

FINANCIAL CONDITION

Comparison of December 31, 2008 and 2007
----------------------------------------

Total assets at December 31, 2008 were $495,754,000  compared to $461,960,000 at
December 31, 2007. This  represented an increase of 7.32% or $33,794,000.  Total
loans outstanding including loans held-for-sale  increased $31,620,000 or 11.68%
to  $302,406,000  at year-end  2008 as loan demand  remained  very active during
2008. Deposits increased 8.6% to $344,925,000 over the prior year, mainly due to
new business development  initiatives  implemented during the year which focused
on growing customer relationship deposits.

Securities Portfolio
--------------------

The Company  manages the securities  portfolio in accordance with the investment
policy  adopted by the Board of Directors.  The primary  objectives  are to earn
interest and dividend income,  provide  liquidity to meet cash flow needs and to
manage interest rate risk and  asset-quality  diversifications  of the Company's
assets. The securities  portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2008, the securities  portfolio,  including Federal
Home Loan Bank of Boston stock, totaled $155,916,000. This represents a decrease
of $3,292,000 or 2.16% over year-end 2007.

Securities     are     classified     in     the     portfolio     as     either
securities-available-for-sale  or  securities-held-to-maturity.  Securities  for
which the Company has the ability and positive intent to hold until maturity are
reported as held-to-maturity.  These securities are carried at cost adjusted for
amortization  of premiums and accretion of discounts.  Securities  that are held
for indefinite  periods of time and which  management  intends to use as part of
its  asset/liability  management  strategy,  or that may be sold in  response to
changes in interest  rates,  changes in  prepayment  risk,  increases in capital
requirements  or other similar  factors,  are classified as  available-for-sale.
These  securities  are stated at fair value in the  financial  statements of the
Company. Temporary differences between available-for-sale  securities' amortized
cost and fair market value are not  included in earnings,  but are reported as a
net amount (less expected tax) in a separate  component of capital  (accumulated
other comprehensive  income or loss, net of tax) until realized.  The cost basis
of  individual  securities  is written  down to estimated  fair value  through a
charge to earnings when  decreases in value below  amortized cost are considered
to be other than temporary.  At December 31, 2008, the unrealized holding losses
on available-for-sale  securities, net of taxes was $6,968,000. This compares to
an unrealized  loss net of taxes of $2,273,000 at December 31, 2007. The Company
monitors the market value fluctuations of its securities  portfolio on a monthly
basis as well as associated credit ratings to determine potential  impairment of
a security.

Federal Funds Sold
------------------

Federal funds sold at December 31, 2008 totaled $200,000.  Federal funds sold at
December 31, 2007 totaled $300,000.  This variance represents a normal operating
range of funds for daily cash needs.

                                       19



Lending
-------

Net loans, not including loans  held-for-sale,  represents  approximately 60% of
total assets at December 31, 2008.  The Company makes  substantially  all of its
loans to customers  located  within the  Company's  service  area.  New business
development  during the year coupled with an increase in loan demand resulted in
an increase in net loans  outstanding to  $297,367,000  at December 31, 2008, as
compared  to  $268,191,000  at  December  31,  2007.  This  is  an  increase  of
$29,176,000  or 10.88%.  Although the largest  dollar  volumes of loan  activity
continue to be in the  residential  mortgage  area,  the  Company  offers a wide
variety of loan types and terms along with competitive pricing to customers. The
Company's  credit  function is designed to ensure  adherence  to prudent  credit
standards despite competition for loans in the Company's market area.

The following table  represents the composition of the loan portfolio  comparing
December 31, 2008 to December 31, 2007:



                                                 December 31, 2008   December 31, 2007
                                                 -----------------   -----------------
                                                        (amounts in thousands)
                                                               
Commercial, financial and agricultural               $  20,785           $  20,629
Real Estate-construction and land development           33,343              28,928
Real Estate-residential                                177,048             158,600
Real Estate-commercial                                  62,796              53,823
Consumer                                                 5,551               8,005
Other                                                      175                 376
                                                     ---------           ---------
                                                       299,698             270,361
Deferred costs, net                                        393                 306
Unearned income                                              0                  (1)
Allowance for loan losses                               (2,724)             (2,475)
                                                     ---------           ---------
   Net loans                                         $ 297,367           $ 268,191
                                                     =========           =========


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

Total loans  outstanding as of December 31, 2008 were  $299,698,000 and compares
to total loans outstanding of $270,361,000 at December 31, 2007. This growth can
be attributed  primarily to an increase in both  residential and commercial real
estate  loan  demand as well as the Bank's  new  business  development  program.
Approximately  91% of the Company's loan  portfolio  continues to be real estate
secured.

Credit  risk is  inherent  in the  business  of  extending  loans.  The  Company
continually  monitors the loan portfolio to ensure that loan quality will not be
sacrificed for growth or otherwise compromise the Company's objectives.  Because
of the risk associated with extending loans, the Company  maintains an allowance
or reserve for loan and lease losses  through  charges to earnings.  The Company
evaluates the adequacy of the allowance on a monthly basis. Such evaluations are
based on assessments of credit quality and trends within the portfolio and "risk
rating" of loans by senior  management,  which is reviewed by the Company's Loan
Committee on a regular basis. Loans are initially risk rated when originated. If
there is  deterioration  in the  credit  quality,  the risk  rating is  adjusted
accordingly.

The  Allowance  for Loan and Lease  Losses  (ALLL) at December  31, 2008 totaled
$2,724,000 representing 52.64% of nonperforming loans of $5,175,000 and 0.91% of
total loans outstanding of $299,698,000.  This compares to an ALLL of $2,475,000
which was 135.69% of nonperforming loans of $1,824,000 and $0.92% of total loans
outstanding of $270,361,000  at December 31, 2007. A separate  component that is
evaluated is the  Allowance  for Off Balance  Sheet  Commitments,  which totaled
$34,000 at December 31, 2008 and 2007,  respectively.  A total of  $1,075,000 in
loans were charged-off during 2008 compared to $103,000 during 2007.  Recoveries
of previously charged-off loans totaled $45,000 during 2008 compared to $104,000
in recoveries  for 2007.  The ALLL also includes a component  resulting from the
application of the  measurement  criteria of Statements of Financial  Accounting
Standards No. 114,  Accounting by Creditors for Impairment of a Loan (SFAS 114).
Impaired  loans receive  individual  evaluation of the allowance  necessary on a
monthly  basis.  Loans  to be  considered  for  impairment  are  defined  in the
Company's Loan Policy as commercial loans with balances  outstanding of $100,000
or more and residential real estate mortgages with balances of $300,000 or more.
Such loans are considered impaired when it is probable that the Company will not
be able to collect all  principal and interest due according to the terms of the
note.

Any such  commercial  loan and/or  residential  mortgage will be considered  for
impairment under any of the following circumstances:

      1.    Non-accrual status;

      2.    Loans over 90 days delinquent;

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

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

                                       20



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

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

Concentrations  of credit and local  economic  factors are also  evaluated  on a
periodic basis.  Historical averages of net losses by loan types are examined as
well as trends by type. The Bank's loan mix over the same period of time is also
analyzed. A loan loss allocation is made for each type of loan multiplied by the
loan mix percentage for each loan type to produce a weighted average factor.

While management estimates loan losses using the best available information,  no
assurances  can be given that  future  additions  to the  allowance  will not be
necessary  based on changes  in  economic  and real  estate  market  conditions,
identification  of  additional  problem  loans or other  factors.  Additionally,
despite the excellent  overall quality of the loan portfolio and expectations of
the Company to continue to grow its existing portfolio,  future additions to the
allowance  may be  necessary to maintain  adequate  reserve  coverage.  Overall,
management is of the opinion that the ALLL is adequate as of December 31, 2008.

Deposits
--------

The Company offers a variety of deposit  accounts with a range of interest rates
and  terms.   Deposits  at  year  end  2008  totaled  $344,925,000  compared  to
$317,741,000   at  year  end  2007.   The  Company   continues  its  efforts  to
competitively price products and develop and maintain  relationship banking with
its  customers.  The flow of deposits  is  influenced  significantly  by general
economic  conditions,  changes in money market rates,  prevailing interest rates
and the aggressive competition from nonbanking entities.

During 2008, there was a change in the mix of deposits. Money Market and savings
balances increased, as illustrated by the table below.

The average  daily amount of deposits by category and the average  rates paid on
such deposits are summarized in the following table:

(dollars in thousands)           Year ended December 31
                                2008               2007
                          ------------------------------------
                           Average            Average
                           Balance    Rate    Balance    Rate
                          ------------------------------------
Demand                    $  67,681          $  66,304
NOW                          24,517    .22%     24,822    .26%
Money Market                 63,914   1.90%     55,358   3.23%
Savings                      63,185   1.47%     47,063   1.73%
Time                        116,959   3.79%    119,052   4.65%
                          ---------          ---------
                          $ 336,256   1.97%  $ 312,599   2.62%
                          =========          =========

Maturities of time  certificates of deposits of $100,000 or more  outstanding at
December 31 are summarized as follows:

(dollars in thousands)                        December 31
                                            2008       2007
                                          -------------------
Three months or less                      $  3,784   $  7,603
Over three months through six months         3,982     17,429
Over six months through one year            13,063     15,114
Over one year                               18,505     10,975
                                          --------   --------

Total                                     $ 39,334   $ 51,121
                                          ========   ========

Borrowings
----------

As part of its  operating  strategy,  the  Company  utilizes  advances  from the
Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase  interest income.  These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of  maturities.  At December  31,  2008,  the Company had  $87,914,000  in
outstanding advances from the Federal Home Loan Bank compared to $95,011,000 at

                                       21



December 31, 2007.  Management  expects that it will  continue  this strategy of
supplementing  deposit  growth  with  advances  from  Federal  Home Loan Bank of
Boston. (See Note 8 of the Notes to Consolidated Financial Statements.)

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

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

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

The Bank uses  asset/liability  modeling software to develop scenario  analyses,
which  measure  the impact that  changing  interest  rates have on net  interest
income.  These model simulations are projected out over a two year time horizon,
assuming  proportional  upward and downward  interest rate movements of 100, 200
and 300 basis points. Simulations are projected out in two ways:

      (1)   using the same balance sheet as the Bank had on the simulation date,
            and

      (2)   using a growing  balance sheet based on recent  growth  patterns and
            strategies.

As interest rates rise or fall, these  simulations  incorporate  expected future
lending  rates,  current and  expected  future  funding  sources  and cost,  the
possible  exercise of options,  changes in prepayment  rates,  and other factors
which may be important in determining the future growth of net interest  income.
The  rates  the  Company  earns  on its  assets  and  the  rates  it pays on its
liabilities are generally fixed for a contractual  period of time.  Imbalance in
these contractual  maturities can create significant earnings volatility because
market  interest rates change over time. In a period of rising  interest  rates,
the interest income earned on assets may not increase as rapidly as the interest
paid on liabilities. In a period of declining interest rates the interest income
earned  on  assets  may  decrease   more  rapidly  than  the  interest  paid  on
liabilities.  This would  primarily be attributed to accelerated  prepayments on
loans and securities  that are  significantly  influenced by movements in market
rates.

The net interest margin may be adversely  affected by several possible  interest
rate environments. Foremost, a continued flat or inverted yield curve may result
in shorter term market  interest rates that equal or exceed those of longer term
rates.  This  could  further  increase  the  Bank's  cost  of   interest-bearing
liabilities and outpace the yield on earning assets  resulting in additional net
interest rate spread compression.

Liquidity
---------

Liquidity is the ability to raise funds on a timely basis at an acceptable  cost
in order to meet cash needs. Liquidity is essential to provide adequate funds to
meet anticipated financial and contractual obligations, including withdrawals by
depositors,  debt service  requirements as well as to fund customers'  needs for
credit.  The Company's  primary funding sources are customer  deposits,  readily
marketable  investment  securities and loan payments.  Wholesale funding is also
used to manage  liquidity in the form of brokered  deposits or  borrowings.  The
Company's  subsidiary,  the Bank,  is a member of the Federal  Home Loan Bank of
Boston, which provides a source of available borrowings for liquidity.

At  December  31,  2008,  the  Company  had  approximately  $47,859,000  in loan
commitments outstanding. Management believes that the current level of liquidity
is ample to meet the  Company's  needs  for  both the  present  and  foreseeable
future.

Capital
-------

At December  31,  2008,  the Company had  $38,939,000  in  shareholders'  equity
compared to $45,564,000 at December 31, 2007.  This represents a net decrease of
$6,625,000  or  14.54%.   This  decrease  is  primarily  the  result  of  recent
fluctuations  in the  securities  market and reflects a change in net unrealized
holding losses on available-for-sale  securities,  net of taxes of $6,968,000 at
December  31, 2008,  compared to  unrealized  holding  losses of  $2,273,000  at
December 31, 2007.  Other  components  also  contribute to the change in capital
since December 2007. Earnings for the year totaled  $1,106,000.  The application
of SFAS No.158,  resulted in other comprehensive loss, net of tax of $892,000 in
2008. The Company declared  dividends in 2008 resulting in a decrease in capital
of $1,888,000. The Company issued 840 new shares of common stock under the terms
of the Director  Stock  Retainer Plan during the second  quarter of 2008,  which
resulted in an increase in capital of $28,000.

Maintaining  strong capital is essential to bank safety and soundness.  However,
the effective management of capital resources

                                       22



requires generating attractive returns on equity to build value for shareholders
while maintaining  appropriate levels of capital to fund growth, meet regulatory
requirements and be consistent with prudent industry practices.

Subsequent Event
----------------

The Company is  participating in the TARP CPP under the EESA. On March 13, 2009,
the Company issued to the Treasury 8,816 shares of Preferred Stock and a Warrant
to purchase  57,671  shares of Common Stock at $22.93 per share for an aggregate
consideration of $8,816,000,  which  immediately  became capital of the Company.
Such Warrant,  if exercised in full, would dilute the percentage of ownership of
common  shareholders  by  approximately  3.3%. If the Company redeems all of the
shares of  Preferred  Stock,  it has the right of first  refusal to buy back the
Warrant or the shares received upon exercise of the Warrant at fair market value
if such shares are then held by the Treasury.  The Preferred  Stock qualifies as
Tier 1 capital for regulatory  purposes and ranks senior to the Company's common
stock in the payment of  dividends  or upon  liquidation.  The  Preferred  Stock
purchase by the Treasury pays a cumulative dividend rate of 5% per annum for the
first five years it is outstanding and thereafter at a rate of 9% per annum. The
Preferred  Stock may be  redeemed by the Company at 100% of its issue price plus
any accrued and unpaid  dividends.  The Treasury's  consent will be required for
any increase in Company  common stock  dividends per share or any  repurchase of
Company  common stock until the earlier of the third  anniversary of the date of
the investment or the transfer by the Treasury of all of the shares of Preferred
Stock.  Additional  information  regarding this event is set forth in Note 22 of
the  Notes  to  Consolidated  Financial  Statements  included  in Item 8 of this
report.

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

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

Off-Balance Sheet Arrangements
------------------------------

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing  needs of its customers.  In the
opinion of management,  these off-balance  sheet  arrangements are not likely to
have a  material  effect  on  the  Company's  financial  condition,  results  of
operations,  or liquidity.  (See Note 13 of the Notes to Consolidated  Financial
Statements).

ITEM 7A.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK - Not
--------------------------------------------------------------------------------
Applicable.
-----------

Statement of Management's Responsibility
----------------------------------------

Management is responsible for the integrity and objectivity of the  consolidated
financial  statements  and other  information  appearing in this Form 10-K.  The
consolidated  financial  statements  were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required.  To fulfill their  responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls.  These controls include the selection
and training of management and supervisory personnel;  an organization structure
providing for  delegation of authority and  establishment  or  responsibilities;
communication of requirements for compliance with approved  accounting,  control
and  business  practices  throughout  the  organization;  business  planning and
review;  and a program of  internal  audit.  Management  believes  the  internal
accounting  controls  in  use  provide  reasonable  assurance  that  assets  are
safeguarded,  that  transactions  are executed in accordance  with  management's
authorization  and that  financial  records  are  reliable  for the  purpose  of
preparing financial  statements.  Shatswell,  MacLeod and Company, P.C. has been
engaged to provide an  independent  opinion on the fairness of the  consolidated
financial statements. Their report appears in this Annual Report on Form 10-K.

Management's Report on Internal Control Over Financial Reporting
----------------------------------------------------------------

The management of the Company is responsible  for  establishing  and maintaining
adequate internal control over financial reporting. The internal control process
has  been  designed  under  our  supervision  to  provide  reasonable  assurance
regarding the  reliability  of financial  reporting and the  preparation  of the
Company's  financial  statements for external  reporting  purposes in accordance
with accounting principles generally accepted in the United States of America.

Management  conducted  an  assessment  of the  effectiveness  of  the  Company's
internal control over financial reporting as of December 31, 2008, utilizing the
framework  established in Internal Control -- Integrated Framework issued by the
Committee

                                       23



of Sponsoring  Organizations of the Treadway  Commission  (COSO).  Based on this
assessment,  management has determined that the Company's  internal control over
financial reporting as of December 31, 2008 is effective.

Our internal control over financial  reporting  includes policies and procedures
that (1)  pertain to the  maintenance  of  records  that  accurately  and fairly
reflect,  in reasonable  detail,  the transactions and dispositions of assets of
the Company;  (2) provide  reasonable  assurances  that:  (a)  transactions  are
recorded  as  necessary  to  permit  preparation  of  financial   statements  in
accordance with accounting principles generally accepted in the United States of
America and (b) receipts and expenditures are being made only in accordance with
authorizations  of management and the directors of the Company;  and (3) provide
reasonable   assurance   regarding  the   prevention  or  timely   detection  of
unauthorized acquisition, use, or disposition of the Company's assets that could
have a material effect on the Company's financial statements.

This  Annual  Report  does not include an  attestation  report of the  Company's
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's  report was not subject to attestation by the Company's
registered  public  accounting  firm pursuant to temporary rules of the SEC that
permit the Company to provide only management's report in this Annual Report.

All  internal  control  systems,  no matter  how well  designed,  have  inherent
limitations.  Therefore,  even those  systems  determined  to be  effective  can
provide  only   reasonable   assurance  with  respect  to  financial   statement
preparation   and   presentation.   Also,   projections  of  any  evaluation  of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.


                                                         
   /s/John F. Perotti         /s/ Richard J. Cantele, Jr.          /s/ John F. Foley
------------------------   ------------------------------      --------------------------
     John F. Perotti            Richard J. Cantele, Jr.              John F. Foley
     Chairman & CEO             President & COO                CFO, Treasurer & Secretary


                                       24



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements
------------------------------------------

Report of Independent Registered Public
   Accounting Firm, March 16, 2009 ......................................   F-1

Consolidated Balance Sheets at December 31, 2008 and 2007 ...............   F-2

Consolidated Statements of Income for the Years Ended
   December 31, 2008 and 2007 ...........................................   F-3

Consolidated Statements of Changes in Shareholders' Equity
   for the Years Ended December 31, 2008 and 2007 .......................   F-4

Consolidated Statements of Cash Flows for the Years Ended
   December 31, 2008 and 2007 ...........................................   F-5

Notes to Consolidated Financial Statements for the
   Years Ended December 31, 2008 and 2007 ...............................   F-7

Salisbury Bancorp, Inc. (parent company only)
   Balance Sheet at December 31, 2008 and 2007 ..........................   F-26

Statements of Income for the Years Ended
   December 31, 2008 and 2007 ...........................................   F-26

Statements of Cash Flows for the Years Ended
   December 31, 2008 and 2007 ...........................................   F-27

Quarterly Results of Operations (unaudited) .............................   F-27

                                       25



                    [SHATSWELL, MACLEOD & COMPANY, P.C. LOGO]

To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------

We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2008 and 2007 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows of the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

                                          /s/ Shatswell, MacLeod & Company, P.C.

                                              SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts
March 16, 2009

             83 PINE STREET o WEST PEABODY, MASSACHUSETTS 01960-3635
              o TELEPHONE (978) 535-0206 o FACSIMILE (978) 535-9908
              smc@shatswell.com                  www.shatswell.com

                                       F-1



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

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------

                           December 31, 2008 and 2007
                           --------------------------



                                                                          2008             2007
                                                                     -------------    -------------
                                                                                
ASSETS
------
Cash and due from banks                                              $   7,082,317    $  12,810,681
Interest-bearing demand deposits with other banks                          900,487          726,623
Money market mutual funds                                                1,476,999        1,340,891
Federal Funds sold                                                         200,000          300,000
                                                                     -------------    -------------
         Cash and cash equivalents                                       9,659,803       15,178,195
Investments in available-for-sale securities (at fair value)           150,526,964      147,377,154
Investments in held-to-maturity securities (fair values of $66,502
   and $71,435 as of December 31, 2008 and 2007, respectively)              66,443           70,798
Federal Home Loan Bank stock, at cost                                    5,323,000        5,176,100
Loans held-for-sale                                                      2,314,250          120,000
Loans, less allowance for loan losses of $2,724,024 and $2,474,893
   as of December 31, 2008 and 2007, respectively                      297,367,434      268,191,275
Investment in real estate                                                   75,000           75,000
Other real estate owned                                                    204,534                0
Premises and equipment                                                   7,123,671        6,803,198
Goodwill                                                                 9,828,712        9,828,712
Core deposit intangible                                                  1,165,068        1,329,283
Accrued interest receivable                                              2,704,385        2,538,607
Cash surrender value of life insurance policies                          3,824,653        3,688,021
Deferred taxes                                                           4,196,819          381,162
Other assets                                                             1,373,424        1,202,893
                                                                     -------------    -------------
         Total assets                                                $ 495,754,160    $ 461,960,398
                                                                     =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
   Noninterest bearing                                               $  65,479,271    $  69,214,697
   Interest-bearing                                                    279,445,961      248,526,572
                                                                     -------------    -------------
         Total deposits                                                344,925,232      317,741,269
Securities sold under agreements to repurchase                          11,203,289                0
Federal Home Loan Bank advances                                         87,913,667       95,011,155
Due to broker                                                            7,631,919                0
Other liabilities                                                        5,140,721        3,644,376
                                                                     -------------    -------------
         Total liabilities                                             456,814,828      416,396,800
                                                                     -------------    -------------
Shareholders' equity:
   Common stock, par value $.10 per share; authorized 3,000,000
     shares; issued and outstanding, 1,685,861 shares in 2008
     and 1,685,021 shares in 2007                                          168,586          168,502
   Paid-in capital                                                      13,157,883       13,130,247
   Retained earnings                                                    34,518,331       35,583,443
   Accumulated other comprehensive loss                                 (8,905,468)      (3,318,594)
                                                                     -------------    -------------
         Total shareholders' equity                                     38,939,332       45,563,598
                                                                     -------------    -------------
         Total liabilities and shareholders' equity                  $ 495,754,160    $ 461,960,398
                                                                     =============    =============


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

                                       F-2



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

                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------

                     Years Ended December 31, 2008 and 2007
                     --------------------------------------



                                                                       2008            2007
                                                                   ------------    ------------
                                                                             
Interest and dividend income:
   Interest and fees on loans                                      $ 18,448,530    $ 17,968,801
   Interest on debt securities:
     Taxable                                                          5,336,344       5,457,879
     Tax-exempt                                                       2,445,805       2,332,374
   Dividends on equity securities                                       202,458         324,329
   Other interest                                                       124,129          68,762
                                                                   ------------    ------------
       Total interest and dividend income                            26,557,266      26,152,145
                                                                   ------------    ------------

Interest expense:
   Interest on deposits                                               6,633,358       8,200,214
   Interest on securities sold under agreements to repurchase           105,993               0
   Interest on Federal Home Loan Bank advances                        4,085,756       4,232,221
                                                                   ------------    ------------
       Total interest expense                                        10,825,107      12,432,435
                                                                   ------------    ------------
       Net interest and dividend income                              15,732,159      13,719,710
Provision for loan losses                                             1,279,099               0
                                                                   ------------    ------------
       Net interest and dividend income after provision
         for loan losses                                             14,453,060      13,719,710
                                                                   ------------    ------------

Noninterest income:
   Trust department income                                            2,263,735       2,050,000
   Loan commissions                                                       1,544          22,131
   Service charges on deposit accounts                                  829,975         743,901
   Gain on sales and calls of available-for-sale securities, net        600,331         294,984
   Write-down of available-for-sale securities                       (2,955,365)              0
   Gain on sales of loans held-for-sale                                 291,854         316,736
   Other income                                                       1,208,899       1,036,911
                                                                   ------------    ------------
       Total noninterest income                                       2,240,973       4,464,663
                                                                   ------------    ------------

Noninterest expense:
   Salaries and employee benefits                                     8,330,147       7,723,691
   Occupancy expense                                                    960,757         801,558
   Equipment expense                                                    897,597         819,474
   Data processing                                                    1,339,391       1,193,887
   Insurance                                                            277,910         163,024
   Printing and stationery                                              277,310         280,172
   Professional fees                                                  1,269,013         931,352
   Amortization of core deposit intangible                              164,215         164,216
   Prepayment fee on Federal Home Loan Bank advance                     864,324               0
   Other expense                                                      1,628,773       1,436,945
                                                                   ------------    ------------
       Total noninterest expense                                     16,009,437      13,514,319
                                                                   ------------    ------------
       Income before income taxes                                       684,596       4,670,054
Income tax (benefit) expense                                           (421,285)        870,006
                                                                   ------------    ------------
       Net income                                                  $  1,105,881    $  3,800,048
                                                                   ============    ============
Earnings per common share                                          $        .66    $       2.26
                                                                   ============    ============


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

                                       F-3



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

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
           ----------------------------------------------------------

                     Years Ended December 31, 2008 and 2007
                     --------------------------------------



                                              Number                                                 Accumulated
                                                of                                                      Other
                                              Shares         Common       Paid-in       Retained    Comprehensive
                                              Issued          Stock       Capital       Earnings         Loss          Total
                                             ---------    -----------   -----------   -----------   -----------     -----------
                                                                                                  
Balance, December 31, 2006                   1,684,181    $   168,418   $13,099,881   $33,602,991   $(2,522,109)    $44,349,181
Comprehensive income:
   Net income                                                                           3,800,048
   Other comprehensive loss, net of tax
     effect                                                                                            (796,485)
       Comprehensive income                                                                                           3,003,563
Issuance of 840 shares for Directors' fees         840             84        30,366                                      30,450
Dividends declared ($1.08 per share)                                                   (1,819,596)                   (1,819,596)
                                             ---------    -----------   -----------   -----------   -----------     -----------
Balance, December 31, 2007                   1,685,021        168,502    13,130,247    35,583,443    (3,318,594)     45,563,598
Comprehensive loss:
   Net income                                                                           1,105,881
   Other comprehensive loss, net of tax
     effect                                                                                          (5,586,874)
       Comprehensive loss                                                                                            (4,480,993)
Cumulative effect of a change in
   accounting principles - initial
   application of EITF Issue No. 06-4                                                    (283,065)                     (283,065)
Issuance of 840 shares for Directors' fees         840             84        27,636                                      27,720
Dividends declared ($1.12 per share)                                                   (1,887,928)                   (1,887,928)
                                             ---------    -----------   -----------   -----------   -----------     -----------
Balance, December 31, 2008                   1,685,861    $   168,586   $13,157,883   $34,518,331   $(8,905,468)    $38,939,332
                                             =========    ===========   ===========   ===========   ===========     ===========


Reclassification disclosure for the years ended December 31:



                                                                                        2008           2007
                                                                                    ------------   ------------
                                                                                             
Unrealized holding losses on available-for-sale securities
   Net unrealized holding losses on available-for-sale securities                   $ (9,468,788)  $ (1,344,871)
   Reclassification adjustment for net realized losses (gains) in net income           2,355,034       (294,984)
                                                                                    ------------   ------------
                                                                                      (7,113,754)    (1,639,855)
   Income tax benefit                                                                  2,418,675        557,551
                                                                                    ------------   ------------
   Unrealized holding losses on available-for-sale securities, net of tax             (4,695,079)    (1,082,304)
                                                                                    ------------   ------------
Comprehensive (loss) income - defined benefit pension plan                            (1,351,205)       433,058
   Income tax benefit (expense)                                                          459,410       (147,239)
                                                                                    ------------   ------------

   Comprehensive (loss) income - defined benefit pension plan, net of tax               (891,795)       285,819
                                                                                    ------------   ------------
     Other comprehensive loss, net of tax                                           $ (5,586,874)  $   (796,485)
                                                                                    ============   ============


Accumulated other comprehensive loss consists of the following as of December
31:



                                                                                        2008           2007
                                                                                    ------------   ------------
                                                                                             
Net unrealized holding losses on available-for-sale securities, net of taxes        $ (6,967,705)  $ (2,272,627)

Unrecognized pension plan expense - SFAS No. 158, net of taxes                        (1,937,763)    (1,045,967)
                                                                                    ------------   ------------

Accumulated other comprehensive loss                                                $ (8,905,468)  $ (3,318,594)
                                                                                    ============   ============


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

                                       F-4



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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                     Years Ended December 31, 2008 and 2007
                     --------------------------------------



                                                                         2008            2007
                                                                    --------------   ------------
                                                                               
Cash flows from operating activities:
Net income                                                          $    1,105,881   $  3,800,048
Adjustments to reconcile net income to net cash provided by
     operating activities:
   Amortization of securities, net                                         148,904         75,014
   Gain on sales and calls of available-for-sale securities, net          (600,331)      (294,984)
   Write-down of available-for-sale securities                           2,955,365              0
   Provision for loan losses                                             1,279,099              0
   Change in loans held-for-sale                                        (2,194,250)       184,000
   Change in deferred loan costs, net                                      (87,293)      (137,362)
   Change in unearned income on loans                                         (554)        (2,528)
   Net decrease in mortgage servicing rights                               116,984        110,515
   Depreciation and amortization                                           687,177        565,267
   Amortization of core deposit intangible                                 164,215        164,216
   Amortization of fair value adjustment on loans                           47,618         71,357
   Accretion of fair value adjustments on borrowings                      (130,204)      (130,203)
   Increase in interest receivable                                        (135,165)       (64,671)
   Deferred tax (benefit) provision                                       (937,571)        34,785
   Decrease (increase) in prepaid expenses                                 138,106         (4,594)
   Increase in cash surrender value of insurance policies                 (136,632)      (133,026)
   (Increase) decrease in income tax receivable                           (347,144)        89,869
   (Increase) decrease in other assets                                    (182,974)        90,673
   (Decrease) increase in accrued expenses                                 (98,143)       102,293
   (Decrease) increase in interest payable                                (239,662)         6,794
   Increase in other liabilities                                           182,795        216,509
   Issuance of shares for Directors' fees                                   27,720         30,450
                                                                    --------------   ------------

Net cash provided by operating activities                                1,763,941      4,774,422
                                                                    --------------   ------------

Cash flows from investing activities:
   Purchases of Federal Home Loan Bank stock                              (146,900)      (512,400)
   Purchases of available-for-sale securities                         (111,560,110)   (69,642,478)
   Proceeds from sales of available-for-sale securities                 76,524,048     63,597,747
   Proceeds from maturities of available-for-sale securities            29,869,894     12,170,270
   Proceeds from maturities of held-to-maturity securities                   4,327          4,102
   Loan originations and principal collections, net                    (27,367,179)   (11,448,576)
   Purchases of loans                                                   (3,297,434)    (4,313,300)
   Recoveries of loans previously charged off                               45,050        103,564
   Capital expenditures                                                   (903,154)    (1,396,923)
   Cash and cash equivalents acquired from New York Community
     Bank, net of expenses paid of $119,407                                      0        176,653
                                                                    --------------   ------------

Net cash used in investing activities                                  (36,831,458)   (11,261,341)
                                                                    --------------   ------------


                                       F-5



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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                     Years Ended December 31, 2008 and 2007
                     --------------------------------------
                                   (continued)



                                                                         2008            2007
                                                                    --------------   ------------
                                                                               
Cash flows from financing activities:
   Net increase in demand deposits, NOW and savings accounts            17,712,746      8,467,718
   Net increase (decrease) increase in time deposits                     9,471,217     (4,805,216)
   Federal Home Loan Bank advances                                      17,000,000     21,000,000
   Principal payments on Federal Home Loan Bank advances               (36,208,284)   (16,589,044)
   Net change in short-term Federal Home Loan Bank advances             12,241,000      3,637,000
   Net change in securities sold under agreements to repurchase         11,203,289              0
   Dividends paid                                                       (1,870,843)    (1,802,527)
                                                                    --------------   ------------

Net cash provided by financing activities                               29,549,125      9,907,931
                                                                    --------------   ------------

Net (decrease) increase in cash and cash equivalents                    (5,518,392)     3,421,012
Cash and cash equivalents at beginning of year                          15,178,195     11,757,183
                                                                    --------------   ------------
Cash and cash equivalents at end of year                            $    9,659,803   $ 15,178,195
                                                                    ==============   ============

Supplemental disclosures:
   Interest paid                                                    $   11,194,973   $ 12,559,418
   Income taxes paid                                                       863,430        745,352
   Loans transferred to other real estate owned                            204,534              0

New York Community Bank Branch Acquisition:
Cash and cash equivalents acquired                                                   $    296,060
                                                                                     ------------
                                                                                          296,060
                                                                                     ------------
Deposits assumed                                                                          492,486
Accrued interest payable assumed                                                            3,574
                                                                                     ------------
                                                                                          496,060
                                                                                     ------------
Net liabilities assumed                                                                   200,000
Acquisition costs                                                                         119,407
                                                                                     ------------
Goodwill                                                                             $    319,407
                                                                                     ============


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

                                       F-6



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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     Years Ended December 31, 2008 and 2007
                     --------------------------------------

NOTE 1 - NATURE OF OPERATIONS
-----------------------------

Salisbury  Bancorp,  Inc.  (Bancorp)  is  a  Connecticut  corporation  that  was
organized on April 24, 1998 to become a holding  company,  under which Salisbury
Bank and Trust Company (Bank) operates as its wholly-owned  subsidiary.  Bancorp
and the Bank are referred to together as the Company.

The  Bank is a state  chartered  bank  which  was  incorporated  in 1874  and is
headquartered  in  Lakeville,  Connecticut.  The Bank operates its business from
four banking  offices  located in  Connecticut,  two banking  offices located in
Massachusetts,  and one banking  office in Dover Plains,  New York.  The Bank is
engaged  principally  in the business of  attracting  deposits  from the general
public and investing  those deposits in residential  and commercial real estate,
consumer and small  business  loans.  The Bank also offers a full  complement of
trust and investment services.

NOTE 2 - ACCOUNTING POLICIES
----------------------------

The  accounting  and  reporting  policies of the Company  conform to  accounting
principles  generally  accepted in the United States of America and  predominant
practices within the banking  industry.  The consolidated  financial  statements
were prepared using the accrual basis of accounting.  The significant accounting
policies are summarized below to assist the reader in better  understanding  the
consolidated financial statements and other data contained herein.

      USE OF ESTIMATES:

      The  preparation  of financial  statements in conformity  with  accounting
      principles  generally  accepted in the United  States of America  requires
      management  to make  estimates  and  assumptions  that affect the reported
      amounts of assets and liabilities and disclosure of contingent  assets and
      liabilities  at the  date of the  financial  statements  and the  reported
      amounts of revenues  and  expenses  during the  reporting  period.  Actual
      results could differ from the estimates.

      BASIS OF PRESENTATION:

      The consolidated  financial statements include the accounts of the Bancorp
      and its  wholly-owned  subsidiary,  the Bank, and the Bank's  wholly-owned
      subsidiaries,  SBT Realty,  Inc.,  and SBT  Mortgage  Service  Corporation
      (PIC). SBT Realty,  Inc. holds and manages bank owned real estate situated
      in New York state. The PIC operates as a passive investment company, which
      owns and services  residential and commercial  mortgages.  All significant
      intercompany  accounts  and  transactions  have  been  eliminated  in  the
      consolidation.

      CASH AND CASH EQUIVALENTS:

      For purposes of reporting cash flows,  cash and cash  equivalents  include
      cash on hand, cash items, due from banks, interest bearing demand deposits
      with other banks, money market mutual funds and federal funds sold.

      Cash  and due from  banks  as of  December  31,  2008  and  2007  includes
      $650,000,  which is  subject  to  withdrawals  and usage  restrictions  to
      satisfy the reserve requirements of the Federal Reserve Bank.

      SECURITIES:

      Investments in debt  securities are adjusted for  amortization of premiums
      and accretion of discounts to approximate  the interest  method.  Gains or
      losses  on sales of  investment  securities  are  computed  on a  specific
      identification basis.

      The  Company may  classify  debt and equity  securities  into one of three
      categories:  held-to-maturity,   available-for-sale,   or  trading.  These
      security  classifications  may be modified  after  acquisition  only under
      certain specified conditions. In general,  securities may be classified as
      held-to-maturity  only if the Company has the positive  intent and ability
      to hold them to maturity.  Trading  securities are defined as those bought
      and held principally for the purpose of selling them in the near term. All
      other securities must be classified as available-for-sale.

            --    Held-to-maturity  securities  are carried at amortized cost in
                  the consolidated balance sheets.  Unrealized holding gains and
                  losses are not included in earnings or in a separate component
                  of  capital.   They  are   disclosed   in  the  notes  to  the
                  consolidated financial statements.

                                       F-7



            --    Available-for-sale securities are carried at fair value on the
                  consolidated  balance  sheets.  Unrealized  holding  gains and
                  losses are not  included in earnings but are reported as a net
                  amount (less expected tax) in a separate  component of capital
                  until realized.

            --    Trading   securities   are   carried  at  fair  value  on  the
                  consolidated  balance  sheets.  Unrealized  holding  gains and
                  losses for trading securities are included in earnings. During
                  the two years ended  December  31, 2008 and 2007,  the Company
                  did not classify any securities as trading.

      Declines  in the fair  value of  held-to-maturity  and  available-for-sale
      securities below their cost that are deemed to be other than temporary are
      reflected in earnings as realized losses.

      On December  8, 2008,  the  Federal  Home Loan Bank of Boston  announced a
      moratorium on the  repurchase  of excess stock held by its members.  Until
      the  moratorium is lifted,  the Bank is unable to redeem any excess shares
      of Federal Home Loan Bank of Boston stock.  The moratorium  will remain in
      effect indefinitely.

      LOANS:

      Loans  receivable that management has the intent and ability to hold until
      maturity or payoff,  are reported at their outstanding  principal balances
      adjusted  for any  charge-offs,  the  allowance  for loan  losses  and any
      deferred  fees or costs on  originated  loans or  unamortized  premiums or
      discounts on purchased loans.

      Interest on loans is recognized on a simple interest basis.

      Residential  real estate loans are generally  placed on nonaccrual  status
      when reaching 90 days past due or in the process of foreclosure.  Lines of
      credit  secured  by real  estate  90 days  past due or in the  process  of
      foreclosure are placed on nonaccrual  status.  Secured  consumer loans are
      written  down  to  realizable  value  and  unsecured  consumer  loans  are
      charged-off  upon  reaching 120 or 180 days past due depending on the type
      of loan.  Commercial  real estate loans and commercial  business loans and
      leases  which  are 90 days or  more  past  due  are  generally  placed  on
      nonaccrual  status,  unless  secured by  sufficient  cash or other  assets
      immediately convertible to cash. When a loan has been placed on nonaccrual
      status,  previously  accrued and uncollected  interest is reversed against
      interest  on  loans.  A loan  can  be  returned  to  accrual  status  when
      collectibility  of  principal  is  reasonably  assured  and the  loan  has
      performed for a period of time, generally six months.

      Cash  receipts  of  interest  income on  impaired  loans are  credited  to
      principal  to  the  extent   necessary  to  eliminate   doubt  as  to  the
      collectibility  of the net carrying amount of the loan. Some or all of the
      cash  receipts  of  interest  income on impaired  loans is  recognized  as
      interest income if the remaining net carrying amount of the loan is deemed
      to be  fully  collectible.  When  recognition  of  interest  income  on an
      impaired loan on a cash basis is appropriate, the amount of income that is
      recognized  is limited to that  which  would have been  accrued on the net
      carrying  amount of the loan at the  contractual  interest  rate. Any cash
      interest  payments  received  in excess of the  limit and not  applied  to
      reduce the net carrying  amount of the loan are recorded as  recoveries of
      charge-offs until the charge-offs are fully recovered.

      ALLOWANCE FOR LOAN LOSSES:

      The  allowance for loan losses is  established  as losses are estimated to
      have  occurred  through a provision  for loan losses  charged to earnings.
      Loan losses are charged against the allowance when management believes the
      uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
      any, are credited to the allowance.

      The  allowance  for  loan  losses  is  evaluated  on a  regular  basis  by
      management  and  is  based  upon  management's   periodic  review  of  the
      collectibility of the loans in light of historical experience,  the nature
      and volume of the loan portfolio,  adverse  situations that may affect the
      borrowers'  ability  to  repay,  the  estimated  value  of any  underlying
      collateral  and  prevailing  economic   conditions.   This  evaluation  is
      inherently  subjective as it requires  estimates  that are  susceptible to
      significant revision as more information becomes available.

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

                                       F-8



      market  price,  or the  fair  value  of the  collateral  if  the  loan  is
      collateral  dependent.  The Bank does not separately  identify  individual
      consumer and  residential  loans for impairment  disclosures,  but instead
      evaluates smaller groups of homogeneous loans collectively for impairment.

      PREMISES AND EQUIPMENT:

      Premises and equipment are stated at cost, less  accumulated  depreciation
      and  amortization.  Cost  and  related  allowances  for  depreciation  and
      amortization  of premises and equipment  retired or otherwise  disposed of
      are removed from the respective accounts with any gain or loss included in
      income  or  expense.   Depreciation   and   amortization   are  calculated
      principally on the straight-line method over the estimated useful lives of
      the assets.  Estimated  lives are 3 to 99 years for  buildings and 2 to 20
      years for furniture and equipment.

      OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:

      Other real estate owned includes  properties  acquired through foreclosure
      and properties classified as in-substance  foreclosures in accordance with
      Statement of Financial  Accounting Standards (SFAS) No. 15, "Accounting by
      Debtors and Creditors for Troubled Debt  Restructuring."  These properties
      are carried at the lower of cost or  estimated  fair value less  estimated
      costs to sell. Any  write-down  from cost to estimated fair value required
      at the time of foreclosure or classification  as in-substance  foreclosure
      is  charged  to the  allowance  for  loan  losses.  Expenses  incurred  in
      connection with  maintaining  these assets and subsequent  write-downs are
      included in other expense.

      In accordance  with SFAS No. 114,  "Accounting by Creditors for Impairment
      of a Loan," the Bank  classifies  loans as  in-substance,  repossessed  or
      foreclosed if the Bank or its subsidiaries receives physical possession of
      the debtor's assets regardless of whether formal  foreclosure  proceedings
      take place.

      ADVERTISING:

      The Bank directly  expenses costs  associated with advertising as they are
      incurred.

      INCOME TAXES:

      The Company  recognizes income taxes under the asset and liability method.
      Under this method, deferred tax assets and liabilities are established for
      the temporary  differences  between the accounting basis and the tax basis
      of the Company's  assets and  liabilities  at tax rates  expected to be in
      effect when the amounts related to such temporary differences are realized
      or settled.

      FAIR VALUES OF FINANCIAL INSTRUMENTS:

      SFAS No. 107,  "Disclosures  About Fair Value of  Financial  Instruments,"
      requires that the Company disclose  estimated fair value for its financial
      instruments.  Fair value  methods and  assumptions  used by the Company in
      estimating its fair value disclosures are as follows:

      Cash and cash  equivalents:  The carrying  amounts reported in the balance
      sheets  for cash and  cash  equivalents  approximate  those  assets'  fair
      values.

      Securities  (including  mortgage-backed   securities):   Fair  values  for
      securities are based on quoted market prices,  where available.  If quoted
      market  prices are not  available,  fair values are based on quoted market
      prices of comparable instruments.

      Loans held-for-sale: Fair values of mortgage loans held-for-sale are based
      on commitments on hand from investors or prevailing market prices.

      Loans receivable:  For variable-rate loans that reprice frequently with no
      significant  change in credit  risk,  fair  values  are based on  carrying
      values.  The fair values for other loans are  estimated  using  discounted
      cash flow analyses, using interest rates currently being offered for loans
      with similar terms to borrowers of similar credit quality.

      Accrued  interest  receivable:  The  carrying  amount of accrued  interest
      receivable approximates its fair value.

      Deposit   liabilities:   The  fair  values   disclosed  for  interest  and
      non-interest checking,  passbook savings and money market accounts are, by
      definition,  equal to the amount  payable on demand at the reporting  date
      (i.e., their carrying amounts). Fair values for fixed-rate certificates of
      deposit  are  estimated  using a  discounted  cash flow  calculation  that
      applies  interest  rates  currently  being  offered on  certificates  to a
      schedule of aggregated expected monthly maturities on time deposits.

                                       F-9



      Securities  sold under  agreements  to  repurchase:  The carrying  amounts
      reported on the  consolidated  balance  sheets for  securities  sold under
      agreements to repurchase approximate their fair values.

      Federal  Home Loan Bank  Advances:  Fair values for Federal Home Loan Bank
      advances are estimated using a discounted cash flow technique that applies
      interest  rates  currently  being  offered on  advances  to a schedule  of
      aggregated expected monthly maturities on Federal Home Loan Bank advances.

      Due to broker: The carrying amount of due to broker  approximates its fair
      value.

      Off-balance sheet instruments:  The fair value of commitments to originate
      loans is  estimated  using the fees  currently  charged  to enter  similar
      agreements,  taking into account the remaining terms of the agreements and
      the present  creditworthiness of the  counterparties.  For fixed-rate loan
      commitments and the unadvanced portion of loans, fair value also considers
      the difference  between current levels of interest rates and the committed
      rates.  The fair  value of  letters  of credit is based on fees  currently
      charged for similar  agreements or on the estimated cost to terminate them
      or  otherwise  settle  the  obligation  with  the  counterparties  at  the
      reporting date.

      STOCK BASED COMPENSATION:

      Bancorp has a stock-based  plan to compensate  non-employee  directors for
      their services. This plan is more fully described in Note 16. Compensation
      cost for these  services is  reflected in net income in an amount equal to
      the fair value on the date of  issuance  of the  shares of Bancorp  common
      stock issued to the directors.

      EARNINGS PER SHARE (EPS):

      Basic EPS excludes  dilution and is computed by dividing income  available
      to common  shareholders  by the  weighted-average  number of common shares
      outstanding  for the period.  Weighted  average common shares  outstanding
      were  1,685,549 in 2008 and  1,684,699  in 2007.  Diluted EPS reflects the
      potential  dilution that could occur if  securities or other  contracts to
      issue  common  stock were  exercised  or  converted  into common  stock or
      resulted in the  issuance of common stock that then shared in the earnings
      of the entity.  Diluted EPS is not presented  because there were no common
      stock equivalents in the years ended December 31, 2008 and 2007.

      RECENT ACCOUNTING PRONOUNCEMENTS:

      In June 2006,  the  Financial  Accounting  Standards  Board (FASB)  issued
      Interpretation  No. 48,  "Accounting  for Uncertainty in Income Taxes - an
      interpretation  of FASB  Statement  109" (FIN  48).  FIN 48  prescribes  a
      recognition   threshold  and  measurement   attribute  for  the  financial
      statement recognition and measurement of a tax position taken, or expected
      to be taken,  in a tax  return and  provides  guidance  on  derecognition,
      classification,  interest and  penalties,  accounting in interim  periods,
      disclosure and transition.  FIN 48 is effective for fiscal years beginning
      after December 15, 2007.  The Company's  adoption of FIN 48 did not have a
      material impact on its financial statements.

      In September 2006, the FASB ratified the consensus reached by the Emerging
      Issues  Task  Force  (EITF) on Issue No.  06-4  "Accounting  for  Deferred
      Compensation   and   Postretirement   Benefit   Aspects   of   Endorsement
      Split-Dollar  Life Insurance  Arrangements,"  (EITF Issue 06-4). EITF 06-4
      requires  companies  with  an  endorsement   split-dollar  life  insurance
      arrangement to recognize a liability for future  postretirement  benefits.
      The effective date is for fiscal years  beginning after December 15, 2007,
      with earlier  application  permitted.  The Company  should  recognize  the
      effects of applying this Issue  through  either (a) a change in accounting
      principle  through a cumulative  effect adjustment to retained earnings or
      (b) a change in accounting principle through retrospective  application to
      all periods.  The Company  adopted  this Issue in 2008,  and the impact is
      described in Note 9 of the consolidated financial statements.

      In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
      (SFAS 157).  SFAS No. 157 defines fair value,  establishes a framework for
      measuring fair value under generally accepted accounting principles (GAAP)
      and expands disclosures about fair value measurements.  The FASB's FSP FAS
      157-2, "Effective Date of FASB Statement No. 157", defers until January 1,
      2009, the application of SFAS 157 to nonfinancial  assets and nonfinancial
      liabilities  not  recognized or disclosed at least annually at fair value.
      This includes  nonfinancial assets and nonfinancial  liabilities initially
      measured at fair value in a business combination or other new basis event,
      but not measured at fair value in subsequent periods.  The Company adopted
      this statement on January 1, 2008.  See Note 12 - Fair Value  Measurements
      for additional information.

      In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial  Assets and  Financial  Liabilities  - Including an amendment of
      FASB  Statement  No.  115"  (SFAS  159).  SFAS 159  permits  entities,  at
      specified   election  dates,  to  choose  to  measure  certain   financial
      instruments  at fair value that are not currently  required to be measured
      at   fair   value.    The   fair   value   option   is   applied   on   an
      instrument-by-instrument  basis, is irrevocable and can only be applied to
      an entire  instrument and not to specified risks,  specific cash flows, or
      portions  of that  instrument.  Unrealized  gains and  losses on items for
      which the fair value option has been elected will be

                                      F-10



      reported in earnings at each  subsequent  reporting  date and upfront fees
      and costs  related  to those  items  will be  recognized  in  earnings  as
      incurred  and not  deferred.  SFAS No. 159 is  effective  in fiscal  years
      beginning after November 15, 2007 and may not be applied  retrospectively.
      The Company adopted SFAS 159 effective January 1, 2008. See Note 12.

      In December 2007, the FASB issued SFAS No. 160, "Noncontrolling  Interests
      in  Consolidated  Financial  Statements and Amendment of ARB No. 51 ("SFAS
      No.  160").  The  new  pronouncement   requires  all  entities  to  report
      noncontrolling  (minority)  interests  in  subsidiaries  as a component of
      shareholders'  equity.  SFAS No. 160 will be  effective  for fiscal  years
      beginning   after  December  15,  2008.   Early  adoption  is  prohibited.
      Management anticipates that this statement will not have a material impact
      on the Company's financial condition and results of operations.

      In December 2007, the FASB issued SFAS No. 141 (Revised  2007),  "Business
      Combinations"  (SFAS 141(R)).  SFAS 141(R) will  significantly  change the
      accounting  for business  combinations.  Under SFAS  141(R),  an acquiring
      entity  will  be  required  to  recognize  all  the  assets  acquired  and
      liabilities  assumed in a transaction at the  acquisition-date  fair value
      with  limited  exceptions.  It also amends the  accounting  treatment  for
      certain  specific items  including  acquisition  costs and non controlling
      minority  interests  and includes a substantial  number of new  disclosure
      requirements.  SFAS 141(R) applies  prospectively to business combinations
      for which the acquisition date is on or after January 1, 2009. The Company
      does not expect the adoption of this  statement to have a material  impact
      on its financial condition and results of operations.

      In February 2008, the FASB issued FSP FAS 140-3, "Accounting for Transfers
      of  Financial  Assets and  Repurchase  Financing  Transactions."  This FSP
      provides  guidance on how the transferor and transferee  should separately
      account  for a  transfer  of a  financial  asset and a related  repurchase
      financing if certain  criteria are met.  This  guidance  will be effective
      January 1, 2009.  The  adoption of this new FSP is not  expected to have a
      material  effect on the  Company's  results  of  operations  or  financial
      position.

      In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
      Instruments and Hedging Activities-an amendment of FASB Statement No. 133"
      (SFAS 161).  SFAS 161 changes the disclosure  requirements  for derivative
      instruments  and  hedging  activities.  Entities  are  required to provide
      enhanced  disclosures  about  (a) how and why an  entity  uses  derivative
      instruments,  (b) how derivative  instruments and related hedged items are
      accounted for under Statement 133 and its related interpretations, and (c)
      how  derivative  instruments  and related  hedged items affect an entity's
      financial position, financial performance, and cash flows. The guidance in
      SFAS 161 is effective for financial statements issued for fiscal years and
      interim periods  beginning after November 15, 2008, with early application
      encouraged.  This statement encourages, but does not require,  comparative
      disclosures for earlier periods at initial adoption.  The Company does not
      expect the  adoption of this  statement  to have a material  impact on its
      financial condition and results of operations.

      In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful
      Life of  Intangible  Assets."  This FSP  provides  guidance  as to factors
      considered  in  developing  renewal  or  extension   assumptions  used  to
      determine the useful life of a recognized intangible asset under SFAS 142,
      "Goodwill  and Other  Intangible  Assets." This guidance will be effective
      January 1, 2009. The adoption is not expected to have a material effect on
      the Company's results of operations or financial position.

      In May 2008,  the FASB issued SFAS No. 162,  "The  Hierarchy  of Generally
      Accepted Accounting Principles." This standard formalizes minor changes in
      prioritizing  accounting  principles  used in the preparation of financial
      statements  that are  presented in  conformity  with GAAP.  This  standard
      became effective November 15, 2008.

                                      F-11



NOTE 3 - INVESTMENTS IN SECURITIES
----------------------------------

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets  according to management's  intent.  The amortized cost of securities and
their approximate fair values are as follows as of December 31:



                                                            Amortized         Gross          Gross
                                                              Cost         Unrealized     Unrealized        Fair
                                                              Basis           Gains         Losses          Value
                                                          -------------   ------------   ------------   -------------
                                                                                            
Available-for-sale securities:
   December 31, 2008:
      Equity securities                                   $         422   $          0   $          0   $         422
      Preferred stock                                            19,635              0              0          19,635
      Debt securities issued by the U.S. Treasury and
        other U. S. government corporations and
        agencies                                             41,460,086        110,037        298,777      41,271,346
      Debt securities issued by states of the United
        States and political subdivisions of the states      63,513,972        134,913      7,953,357      55,695,528
      Money market mutual funds                               1,476,999              0              0       1,476,999
      Mortgage-backed securities                             56,089,978        501,180      3,051,125      53,540,033
                                                          -------------   ------------   ------------   -------------
                                                            162,561,092        746,130     11,303,259     152,003,963
      Money market mutual funds included in cash and
        cash equivalents                                     (1,476,999)                                   (1,476,999)
                                                          -------------   ------------   ------------   -------------
                                                          $ 161,084,093   $    746,130   $ 11,303,259   $ 150,526,964
                                                          =============   ============   ============   =============

   December 31, 2007:
      Equity securities                                   $       3,031   $    157,453   $          0   $     160,484
      Preferred stock                                         2,975,000              0      1,149,730       1,825,270
      Debt securities issued by the U.S. Treasury and
        other U. S. government corporations and
        agencies                                             47,224,654          4,492        370,330      46,858,816
      Debt securities issued by states of the United
        States and political subdivisions of the states      58,707,327         11,409      1,739,673      56,979,063
      Money market mutual funds                               1,340,891              0              0       1,340,891
      Mortgage-backed securities                             41,910,517         99,631        456,627      41,553,521
                                                          -------------   ------------   ------------   -------------
                                                            152,161,420        272,985      3,716,360     148,718,045
      Money market mutual funds included in cash and
        cash equivalents                                     (1,340,891)                                   (1,340,891)
                                                          -------------   ------------   ------------   -------------
                                                          $ 150,820,529   $    272,985   $  3,716,360   $ 147,377,154
                                                          =============   ============   ============   =============

Held-to-maturity securities:
   December 31, 2008:
      Mortgage-backed securities                          $      66,443   $         59   $          0   $      66,502
                                                          =============   ============   ============   =============

   December 31, 2007:
      Mortgage-backed securities                          $      70,798   $        637   $          0   $      71,435
                                                          =============   ============   ============   =============


The scheduled  maturities of debt  securities were as follows as of December 31,
2008:



                                             Available-For-Sale       Held-To-Maturity
                                             ------------------   -----------------------
                                                     Fair          Amortized      Fair
                                                     Value        Cost Basis      Value
                                                -------------     ----------   ----------
                                                                      
Due after five years through ten years          $   1,000,532     $        0   $        0
Due after ten years                                95,966,342              0            0
Mortgage-backed securities                         53,540,033         66,443       66,502
                                                -------------     ----------   ----------
                                                $ 150,506,907     $   66,443   $   66,502
                                                =============     ==========   ==========


                                      F-12



During 2008,  proceeds from sales of  available-for-sale  securities amounted to
$76,524,048.  Gross  realized  gains and gross  realized  losses on those  sales
amounted to $572,014 and $75, respectively.  During 2007, proceeds from sales of
available-for-sale securities amounted to $63,597,747.  Gross realized gains and
gross  realized  losses  on  those  sales  amounted  to  $305,726  and  $10,742,
respectively.  The tax provision applicable to these net realized gains amounted
to $194,459 and $100,295, respectively.

The aggregate amortized cost basis and fair value of securities of issuers which
exceeded 10% of shareholders' equity were as follows as of December 31, 2008.

                                                 Amortized
      Issuer                                     Cost Basis    Fair Value
      ------                                    -----------   -----------
      Wells Fargo Mortgage Backed Securities    $ 9,670,772   $ 9,005,530

Total carrying  amounts of $91,119,746  and  $55,203,368 of debt securities were
pledged to secure Federal Home Loan Bank advances,  public deposits,  securities
sold  under  agreements  to  repurchase,  treasury  tax and loan  and for  other
purposes as required by law as of December 31, 2008 and 2007, respectively.

The aggregate fair value and unrealized losses of securities that have been in a
continuous  unrealized  loss position for less than twelve months and for twelve
months or more, and are temporarily impaired, are as follows as of December 31:



                                                                            December 31, 2008
                                          -------------------------------------------------------------------------------------
                                              Less than 12 Months          12 Months or Longer                 Total
                                          --------------------------   --------------------------   ---------------------------
                                              Fair        Unrealized       Fair        Unrealized       Fair        Unrealized
                                              Value         Losses         Value         Losses         Value         Losses
                                          ------------   -----------   ------------   -----------   ------------   ------------
                                                                                                 
Debt securities issued by the U.S.
   Treasury and other U. S. government
   corporations and agencies              $ 15,701,224   $   298,777   $          0   $         0   $ 15,701,224   $    298,777
Debt securities issued by states
   of the United States and political
   subdivisions of the states               43,327,439     6,032,499      6,381,562     1,920,858     49,709,001      7,953,357
Mortgage-backed securities                  24,195,458     2,513,223      5,570,852       537,902     29,766,310      3,051,125
                                          ------------   -----------   ------------   -----------   ------------   ------------
Total temporarily impaired securities     $ 83,224,121   $ 8,844,499   $ 11,952,414   $ 2,458,760   $ 95,176,535   $ 11,303,259
                                          ============   ===========   ============   ===========   ============   ============


                                                                            December 31, 2007
                                          --------------------------------------------------------------------------------------
                                              Less than 12 Months          12 Months or Longer                  Total
                                          --------------------------   --------------------------   ----------------------------
                                              Fair        Unrealized       Fair        Unrealized        Fair        Unrealized
                                              Value         Losses         Value         Losses          Value         Losses
                                          ------------   -----------   ------------   -----------   -------------  -------------
                                                                                                 
Preferred stock                           $          0   $         0   $  1,825,270   $ 1,149,730   $   1,825,270   $  1,149,730
Debt securities issued by the U.S.
   Treasury and other U. S. government
   corporations and agencies                 8,963,668        20,009     33,518,205       350,321      42,481,873        370,330
Debt securities issued by states of the
   United States and political
   subdivisions of the states               46,754,407     1,684,443      1,314,923        55,230      48,069,330      1,739,673
Mortgage-backed securities                   4,501,563        48,263     20,534,104       408,364      25,035,667        456,627
                                          ------------   -----------   ------------   -----------   -------------  -------------
Total temporarily impaired securities     $ 60,219,638   $ 1,752,715   $ 57,192,502   $ 1,963,645   $ 117,412,140   $  3,716,360
                                          ============   ===========   ============   ===========   =============  =============


Securities  exhibiting  unrealized  losses are  analyzed to  determine  that the
impairments  are not  other-than-temporary  and  the  following  information  is
considered.  U.S. Government  securities are backed by the full faith and credit
of the United States and therefore bear no credit risk. U.S.  Government  agency
securities,  which have a significant impact in financial markets,  have minimal
credit risk. The unrealized losses at December 31, 2008 are mainly  attributable
to  changes in market  interest  rates and  current  market  inefficiencies.  As
Company  management  has  the  ability  and  intent  to  hold  securities  until
anticipated  recovery to cost basis  occurs,  no declines are deemed to be other
than temporary.

                                      F-13



NOTE 4 - LOANS
--------------

Loans consisted of the following as of December 31:

                                                       2008            2007
                                                  -------------   -------------
Commercial, financial and agricultural            $  20,784,842   $  20,629,467
Real estate - construction and land development      33,342,610      28,927,954
Real estate - residential                           177,048,233     158,599,546
Real estate - commercial                             62,796,469      53,822,693
Consumer                                              5,551,172       8,004,931
Other                                                   174,965         376,257
                                                  -------------   -------------
                                                    299,698,291     270,360,848
Deferred costs, net                                     393,228         305,935
Unearned income                                             (61)           (615)
Allowance for loan losses                            (2,724,024)     (2,474,893)
                                                  -------------   -------------
   Net loans                                      $ 297,367,434   $ 268,191,275
                                                  =============   =============

Certain  directors and executive  officers of the Company and companies in which
they have significant  ownership interest were loan customers of the Bank during
2008. Total loans to such persons and their companies  amounted to $1,146,982 as
of December 31, 2008. During 2008,  principal advances of $696,784 were made and
repayments totaled $293,964 on such loans.

Changes in the  allowance  for loan  losses  were as follows for the years ended
December 31:

                                                       2008            2007
                                                  -------------   -------------
Balance at beginning of period                    $   2,474,893   $   2,474,118
Provision for loan losses                             1,279,099               0
Recoveries of loans previously charged off               45,050         103,564
Loans charged off                                    (1,075,018)       (102,789)
                                                  -------------   -------------
Balance at end of period                          $   2,724,024   $   2,474,893
                                                  =============   =============

The  following  table  sets forth  information  regarding  nonaccrual  loans and
accruing loans 90 days or more overdue as of December 31:

                                                       2008            2007
                                                  -------------   -------------

Total nonaccrual loans                            $   5,074,619   $   1,007,890
                                                  =============   =============

Accruing loans which are 90 days or more
   overdue                                        $      99,982   $     816,581
                                                  =============   =============

Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:



                                                           2008                       2007
                                                 ------------------------   ------------------------
                                                 Recorded      Related      Recorded      Related
                                                 Investment    Allowance    Investment    Allowance
                                                 In Impaired   For Credit   In Impaired   For Credit
                                                 Loans         Losses       Loans         Losses
                                                 -----------   ----------   -----------   ----------
                                                                              
Loans for which there is a related allowance
   for credit losses                             $   797,467   $   82,592   $         0   $        0
Loans for which there is no related allowance
   for credit losses                               3,709,479            0             0            0
                                                 -----------   ----------   -----------   ----------
      Totals                                     $ 4,506,946   $   82,592   $         0   $        0
                                                 ===========   ==========   ===========   ==========

Average recorded investment in impaired loans
   during the year ended December 31             $ 3,674,242                $         0
                                                 ===========                ===========

Related amount of interest income recognized
   during the time, in the year ended
   December 31, that the loans were impaired

      Total recognized                           $    16,234                $         0
                                                 ===========                ===========
      Amount recognized using a cash-basis
         method of accounting                    $    16,234                $         0
                                                 ===========                ===========


                                      F-14



In 2008  and  2007,  the Bank  capitalized  mortgage-servicing  rights  totaling
$132,437  and  $59,882  respectively,   and  amortized  $131,806  and  $171,034,
respectively.  The balance of capitalized  mortgage servicing rights included in
other  assets  at  December  31,  2008  and  2007  was  $108,685  and  $225,669,
respectively.

Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:

                                                               2008       2007
                                                            ---------   -------
Balance, beginning of year                                  $     814   $ 1,451
Additions                                                     127,648     2,451
Reductions                                                    (10,033)   (3,088)
                                                            ---------   -------
Balance, end of year                                        $ 118,429   $   814
                                                            =========   =======

The fair value of the mortgage  servicing rights was $134,547 and $562,911 as of
December 31, 2008 and 2007, respectively.

Loans  serviced  for others are not  included in the  accompanying  consolidated
balance  sheets.  The unpaid  principal  balance  of  mortgage  and other  loans
serviced for others was  $54,072,990  and  $48,696,731  at December 31, 2008 and
2007, respectively.

NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------

The following is a summary of premises and equipment as of December 31:

                                                        2008           2007
                                                    ------------   ------------
Land                                                $    775,844   $    775,844
Buildings                                              6,619,537      6,281,851
Furniture and equipment                                3,822,961      3,385,608
                                                    ------------   ------------
                                                      11,218,342     10,443,303
Accumulated depreciation and amortization             (4,094,671)    (3,640,105)
                                                    ------------   ------------
                                                    $  7,123,671   $  6,803,198
                                                    ============   ============

NOTE 6 - DEPOSITS
-----------------

The aggregate  amount of time deposit  accounts in  denominations of $100,000 or
more  as of  December  31,  2008  and  2007  was  $39,334,415  and  $36,440,424,
respectively.

There were no brokered time deposits  outstanding  as of December 31, 2008.  The
aggregate  amount  of  brokered  time  deposits  as of  December  31,  2007  was
$14,681,000. Brokered time deposits are not included in time deposit accounts in
denominations of $100,000 or more above.

For time deposits as of December 31, 2008,  the scheduled  maturities  for years
ended December 31, are as follows:

                      2009                   $  73,026,261
                      2010                      33,851,618
                      2011                       9,159,329
                      2012                       1,882,833
                      2013                       7,599,798
                                             -------------
                                             $ 125,519,839
                                             =============

Certain  directors and executive  officers of the Company and companies in which
they have a significant  ownership  interest were deposit  customers of the Bank
during  2008.  Total  deposits of such persons and their  companies  amounted to
$1,973,772 and $1,847,657 as of December 31, 2008 and 2007, respectively.

NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
-------------------------------------------------------

The securities  sold under  agreements to repurchase as of December 31, 2008 are
securities  sold on a short term basis by the Bank that have been  accounted for
not  as  sales  but  as  borrowings.  The  securities  consisted  of  bonds  and
mortgage-backed  securities  issued  by  Government-sponsored  enterprises.  The
securities are pledged to the purchasers of the securities.  The purchasers have
agreed to sell to the Bank substantially identical securities at the maturity of
the agreements.

                                      F-15



NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
----------------------------------------

Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).

Maturities  of advances  from the FHLB for the five fiscal  years  ending  after
December 31, 2008, and thereafter, are summarized as follows:

                2009                         $ 23,495,766
                2010                            3,551,427
                2011                           12,196,777
                2012                            6,635,584
                2013                           11,569,201
                Thereafter                     30,410,661
                Fair value adjustment              54,251
                                             ------------
                                             $ 87,913,667
                                             ============

As of December 31, 2008, the following advances from the FHLB were redeemable at
par at the option of the FHLB:

      MATURITY DATE      OPTIONAL REDEMPTION DATE                      AMOUNT
      -------------      ------------------------                   ------------
        4/27/2009           1/26/2009                               $    500,000
        4/27/2009           1/26/2009                                    500,000
         2/8/2010              2/6/2009 and quarterly thereafter         600,000
       12/15/2010           3/16/2009 and quarterly thereafter           800,000
       12/20/2010           3/20/2009 and quarterly thereafter           500,000
        2/28/2011           2/26/2009 and quarterly thereafter        10,000,000
         3/1/2011              3/2/2009 and quarterly thereafter         500,000
         3/2/2012              3/2/2009 and quarterly thereafter       5,000,000
       12/16/2013           3/16/2009 and quarterly thereafter        10,000,000
       12/12/2016           3/12/2009 and quarterly thereafter        15,000,000
        7/31/2017              2/2/2009 and quarterly thereafter       6,000,000
         7/2/2018              6/30/2011                               7,000,000

Amortizing  advances are repaid in equal monthly payments and are amortized from
the date of the advance to the maturity date on a direct reduction basis.

Borrowings from the FHLB are secured by a blanket lien on qualified  collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties,  certain  unencumbered  investment  securities  and other  qualified
assets.

At December 31, 2008, the interest rates on FHLB advances ranged from .0625
percent to 6.30 percent. At December 31, 2008, the weighted average interest
rate on FHLB advances was 3.35 percent.

NOTE 9 - EMPLOYEE BENEFITS
--------------------------

The  Bank  has  an  insured  noncontributory  defined  benefit  retirement  plan
available  to employees  eligible as to age and length of service.  Benefits are
based  on a  covered  employee's  final  average  compensation,  primary  social
security benefit and credited service. The Bank makes annual contributions which
meet the Employee Retirement Income Security Act minimum funding requirements.

In 2006, the plan was amended, effective September 1, 2006, to provide that
employees hired or rehired on or after September 1, 2006 are not eligible to
participate in the plan.

                                      F-16



The following tables set forth information about the plan as of December 31, and
the years then ended, using a measurement date of December 31:

                                                        2008           2007
                                                    ------------   ------------
Change in projected benefit obligation:
   Benefit obligation at beginning of year          $  6,359,101   $  6,027,929
   Actuarial gain                                       (266,905)      (229,821)
   Service cost                                          403,808        437,740
   Interest cost                                         366,950        342,022
   Benefits paid                                        (187,408)      (218,769)
                                                    ------------   ------------
         Benefit obligation at end of year             6,675,546      6,359,101
                                                    ------------   ------------

Change in plan assets:
   Plan assets at estimated fair value at
      beginning of year                                5,800,945      5,016,664
   Actual return on plan assets                       (1,236,871)       503,050
   Contributions by employer                             500,000        500,000
   Benefits paid                                        (187,408)      (218,769)
                                                    ------------   ------------
         Fair value of plan assets at end of year      4,876,666      5,800,945
                                                    ------------   ------------

      Funded status and recognized liability
         included in other liabilities on the
            balance sheet                           $ (1,798,880)  $   (558,156)
                                                    ============   ============

Amounts recognized in accumulated other  comprehensive  loss, before tax effect,
consist of:

                                                            December 31,
                                                    ---------------------------
                                                        2008           2007
                                                    ------------   ------------

Net loss                                            $  2,935,986   $  1,583,889
Prior service cost                                            18            910
                                                    ------------   ------------
                                                    $  2,936,004   $  1,584,799
                                                    ============   ============

The accumulated benefit obligation for the plan was $4,958,716 and $4,602,777 at
December 31, 2008 and 2007, respectively.

The  discount  rate  used in  determining  the  actuarial  present  value of the
projected benefit obligation was 6.0% for 2008 and 2007. The rate of increase in
future  compensation levels was based on the following graded table for 2008 and
2007:

                AGE                          RATE
                ---                          -----
                25                           4.75%
                35                           4.25%
                45                           3.75%
                55                           3.25%
                65                           3.00%

Components of net periodic cost are as follows for the years ended December 31:

                                                        2008           2007
                                                    ------------   ------------
Service cost                                        $    403,808   $    437,740
Interest cost on benefit obligation                      366,950        342,022
Expected return on plan assets                          (426,992)      (368,942)
Amortization of prior service cost                           892            893
Recognized net loss                                       44,861         68,236
                                                    ------------   ------------
         Net periodic benefit cost                       389,519        479,949
                                                    ------------   ------------

Other changes in plan assets and benefit
   obligations recognized in other
   comprehensive loss:
Net actuarial loss (gain)                              1,396,958       (363,929)
Amortization of net loss                                 (44,861)       (68,236)
Prior service cost                                          (892)          (893)
                                                    ------------   ------------
Total recognized in other comprehensive loss           1,351,205       (433,058)
                                                    ------------   ------------
Total recognized in net periodic cost and other
   comprehensive loss                               $  1,740,724   $     46,891
                                                    ============   ============

                                      F-17



The  estimated  net loss and prior  service  cost that  will be  amortized  from
accumulated  other  comprehensive  loss into net periodic  benefit cost over the
year ended December 31, 2009 are $123,150 and $18, respectively.

The discount rate used to determine the net periodic  benefit cost was 6.00% for
2008 and 2007;  and the  expected  return on plan  assets was 7.50% for 2008 and
2007.

The graded table above was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2008 and 2007.

Pension  expense is  calculated  based upon a number of  actuarial  assumptions,
including an expected  long-term  rate of return on pension plan assets of 7.50%
for 2008. In developing the expected long-term rate of return assumption,  asset
class  return  expectations  were  evaluated  as  well  as  long-term  inflation
assumptions,   and  historical   returns  based  on  the  current  target  asset
allocations of 55% equity and 40% fixed income and 5% cash equivalents. The Bank
regularly reviews the asset allocations and periodically  rebalances investments
when considered appropriate. While all future forecasting contains some level of
estimation  error,  the  Bank  believes  that  7.50%  falls  within  a range  of
reasonable  long-term rate of return  expectations for pension plan assets.  The
Bank will continue to evaluate the  actuarial  assumptions,  including  expected
rate of return, at least annually, and will adjust as necessary.

Plan Assets:

The pension plan investments are co-managed by the Trust and Investment Services
division of the Bank and Bradley,  Foster and Sargent,  Inc. The  investments in
the plan are reviewed and approved by the Trust Committee.  The asset allocation
of the plan is a balanced  allocation.  Debt securities are timed to mature when
employees  are due to  retire.  Debt  securities  are  laddered  for  coupon and
maturity.  Equities are put in the plan to achieve a balanced  allocation and to
provide   growth  of  the   principal   portion  of  the  plan  and  to  provide
diversification.  The Trust  Committee  reviews the  policies  of the plan.  The
prudent investor rule and applicable ERISA  regulations  apply to the management
of the funds and investment selections.

The Bank's pension plan asset allocations by asset category are as follows:



                                                    December 31, 2008       December 31, 2007
                                                  ---------------------   ---------------------
               Asset Category                      Fair Value   Percent    Fair Value   Percent
-----------------------------------------------   -----------   -------   -----------   -------
                                                                            
Equity securities                                 $ 2,899,682      59.5%  $ 3,407,281      58.7%
U.S. Government treasury and agency securities        517,327      10.6     1,252,945      21.6
Corporate bonds                                       560,643      11.5       122,687       2.1
Mutual funds                                          266,438       5.5       296,365       5.1
Money market mutual funds                             566,812      11.6       617,567      10.7
Certificates of deposit                                65,764       1.3       104,100       1.8
                                                  -----------   -------   -----------   -------
   Total                                          $ 4,876,666     100.0%  $ 5,800,945     100.0%
                                                  ===========   =======   ===========   =======


There were no  securities  of the Bancorp and related  parties  included in plan
assets as of December 31, 2008 and 2007.

Based on current data and assumptions, the following benefits are expected to be
paid for each of the following five years and, in the aggregate,  the five years
thereafter:

                2009                             $ 1,109,000
                2010                                 212,000
                2011                                 117,000
                2012                                 304,000
                2013                                 356,000
                2014 - 2018                        2,809,000

The Bank expects to make a contribution of $485,000 in 2009.

The Bank offers a 401(k) Plan to eligible  employees.  Under the Plan,  eligible
participants   may   contribute  a  percentage  of  their  pay  subject  to  IRS
limitations. The Bank may make discretionary contributions to the Plan.

Effective  September  1, 2006,  the  401(k)  Plan was  amended  to provide  that
employees  hired  or  rehired  after  September  1,  2006  are not  eligible  to
participate  in the  plan.  The Bank has  established  a second  401(k)  Plan to
provide  a  discretionary  match  to  employees  hired  or  rehired  on or after
September 1, 2006 who satisfy certain eligibility requirements.

The Bank's contribution expense for the 401(k) Plans in the years ended December
31, 2008 and 2007 amounted to $105,000 and $99,983, respectively.  Discretionary
contributions vest in full after five years.

                                      F-18



The Bank entered into a  Supplemental  Retirement  Plan Agreement with its Chief
Executive Officer that provides for supplemental post retirement  payments for a
ten year  period as  described  in the  agreement.  The  related  liability  was
$163,281  and $90,641 at December 31, 2008 and 2007,  respectively.  The related
expense  amounted to $72,640 and $12,643 for the years ended  December  31, 2008
and 2007, respectively.

As of December 31, 2008, fifteen of the Bank's officers have a change in control
agreement  (agreement)  with the Bank.  The  agreements  provide that if, within
twelve (12) months  after a  "change-in-control"  has  occurred,  the  officer's
employment  terminates or is reassigned  under defined  circumstances,  then the
Bank and/or its  successor  shall pay the officer a lump sum amount equal to the
officer's most recent aggregate base salary paid in the twelve (12) month period
immediately  preceding  his or her  termination  or  reassignment,  less amounts
previously  paid from the date of "change in control."  See Note 22,  Subsequent
Events.

In 2008, the Company  adopted EITF Issue 06-4 and recognized a liability for the
Company's  future   postretirement   benefit   obligations   under   endorsement
split-dollar life insurance arrangements.  The Company recognized this change in
accounting  principle as a cumulative  effect adjustment to retained earnings of
$283,065. The total liability for the arrangements included in other liabilities
was $325,470 at December 31, 2008.  Expense under this  arrangement  was $42,405
for 2008.

NOTE 10 - INCOME TAX (BENEFIT) EXPENSE
--------------------------------------

The  components  of income tax  (benefit)  expense  are as follows for the years
ended December 31:

                                                           2008         2007
                                                        -----------   ---------
Current:
   Federal                                              $   398,088   $ 774,753
   State                                                    118,198      60,468
                                                        -----------   ---------
                                                            516,286     835,221
                                                        -----------   ---------
Deferred:
   Federal                                               (1,016,671)     24,785
   State                                                          0           0
   Change in valuation allowance                             79,100      10,000
                                                        -----------   ---------
                                                           (937,571)     34,785
                                                        -----------   ---------
      Total income tax (benefit) expense                $  (421,285)  $ 870,006
                                                        ===========   =========

The reasons for the  differences  between the statutory  federal income tax rate
and the  effective  tax rates are  summarized  as  follows  for the years  ended
December 31:

                                                              2008        2007
                                                             ------      ------
                                                              % of        % of
                                                             Income      Income
                                                             ------      ------
Federal income tax at statutory rate                           34.0%       34.0%
Increase (decrease) in tax resulting from:
   Tax-exempt income and dividends received deduction        (135.4)      (19.1)
   Other items                                                 16.9         2.6
State tax, net of federal tax benefit                          11.4         0.9
Change in valuation allowance                                  11.6         0.2
                                                             ------      ------
      Effective tax rates                                     (61.5)%      18.6%
                                                             ======      ======

                                      F-19



The Company had gross deferred tax assets and gross deferred tax  liabilities as
follows as of December 31:

                                                         2008          2007
                                                     ------------   -----------
Deferred tax assets:
   Allowance for loan losses                         $    703,472   $   618,527
   Interest on non-performing loans                       135,288        22,710
   Accrued deferred compensation                           55,284        30,584
   Post-retirement benefits                                21,420        22,440
   Other real estate owned property write-down             22,100        22,100
   Capital loss carry forward                             349,266       398,191
   Unrecognized pension expense - FASB No. 158            998,241       538,832
   Write-down of securities                             1,004,827             0
   Net unrealized holding loss on
      available-for-sale securities                     3,589,424     1,170,748
                                                     ------------   -----------
      Gross deferred tax assets                         6,879,322     2,824,132
      Valuation allowance                                (349,266)     (270,166)
                                                     ------------   -----------
                                                        6,530,056     2,553,966
                                                     ------------   -----------
Deferred tax liabilities:
   Deferred loan costs, net                              (133,698)     (104,018)
   Goodwill and core deposit intangible asset            (682,255)     (662,257)
   Accelerated depreciation                            (1,039,137)     (957,538)
   Mark-to-market purchase accounting adjustments         (54,571)      (23,204)
   Mortgage servicing rights                              (36,953)      (76,728)
   Prepaid pension                                       (386,623)     (349,059)
                                                     ------------   -----------
      Gross deferred tax liabilities                   (2,333,237)   (2,172,804)
                                                     ------------   -----------
Net deferred tax asset                               $  4,196,819   $   381,162
                                                     ============   ===========

As of  December  31,  2008,  the Company  had no  operating  loss and tax credit
carryovers for tax purposes.

In assessing the ability to realize  deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent upon the reversal of deferred tax liabilities and generation of future
taxable income during the periods in which those  temporary  differences  become
deductible.   Management  considers  the  scheduled  reversal  of  deferred  tax
liabilities,  projected  future  taxable  income and tax planning  strategies in
making this assessment.  Based upon such information,  management believes it is
more likely than not the Company  will  realize the benefits of the deferred tax
assets, net of the valuation allowance provided, as of December 31, 2008.

The Company adopted FASB  interpretation  No. 48, "Accounting for Uncertainty in
Income Taxes - an  interpretation of FASB Statement 109" (FIN 48) as of December
31, 2008. It is the Company's  policy to provide for uncertain tax positions and
the related interest and penalties based upon management's assessment of whether
a tax benefit is more likely than not to be sustained  upon  examination  by tax
authorities.  There  was no  effect  on the  Company's  balance  sheet or income
statement from adoption of FIN 48.

NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------------

Commitments

The Bank has  entered  into an  agreement  with a third party in which the third
party  is to  provide  the Bank  with  account  processing  services  and  other
miscellaneous  services.  Under  the  agreement,  the Bank is  obligated  to pay
monthly processing fees through August 5, 2010. In the event the Bank chooses to
cancel  the  agreement  prior  to  the  end  of the  contract  term  a lump  sum
termination fee will have to be paid. The fee shall be calculated as the average
monthly  billing,  exclusive of pass through  costs for the past twelve  months,
multiplied  by the number of months and any portion of a month  remaining in the
contract term.

Contingent Liabilities

The Bank  individually and in its capacity as a former Co-trustee of a Revocable
Trust (Trust),  has been named as a defendant in litigation currently pending in
Connecticut Complex Litigation Docket in Stamford, CT (Action).

The Action  involves a dispute  over title to certain real  property  located in
Westport,  Connecticut that was conveyed by the grantor to the Trust on or about
August  8,  2007.  Subsequent  to this  conveyance,  the Bank  granted a loan of
$3,386,609 to the Trust, which was secured by an open-end commercial mortgage in
favor of the Bank on the Westport  property.  The underlying loan is outstanding
as of December 31, 2008.

The gravamen of the  plaintiff's  claim in the Action is that he had an interest
in the Westport real property transferred to the

                                      F-20



Trust of which he was  wrongfully  divested  on  account  of the  actions of the
defendants.  In the Action,  the plaintiff  seeks to quiet title to the property
and to recover  money  damages  from the  defendants  for the  alleged  wrongful
divestiture of his claimed interest in the property.

In  addition  to the  mortgage  on the  property,  the Bank,  at the time of the
financing referenced above,  acquired a lender's title insurance policy from the
Chicago  Title and Insurance  Company,  which is providing a defense to the Bank
under a reservation  of rights.  The Bank denies any  wrongdoing and is actively
defending  the  case.  The Bank has filed a motion to  dismiss  and/or  stay the
lawsuit pending  resolution of a parallel action pending in New York Surrogate's
Court to which the Bank is not a party.  No discovery has been taken to date. At
this time,  the Company is unable to reasonably  evaluate the likely  outcome of
the Action, or to reasonably estimate the amount of any potential loss, if any.

NOTE 12 - FAIR VALUE MEASUREMENTS
---------------------------------

Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards  No.  157 (SFAS  157),  Fair  Value  Measurements,  which  provides  a
framework  for  measuring  fair  value  under  generally   accepted   accounting
principles.  The Company  also  adopted  SFAS No. 159, The Fair Value Option for
Financial  Assets and  Financial  Liabilities,  including  an  amendment of FASB
Statement No. 115. SFAS No. 159 allows an entity the irrevocable option to elect
fair value for the  initial and  subsequent  measurement  for certain  financial
assets and  liabilities  on a  contract-by-contract  basis.  The Company did not
elect  fair  value  treatment  for any  financial  assets  or  liabilities  upon
adoption.

In  accordance  with SFAS 157,  the  Company  groups  its  financial  assets and
financial  liabilities  measured  at fair  value in three  levels,  based on the
markets in which the assets and  liabilities  are traded and the  reliability of
the assumptions used to determine fair value.

Level 1 -  Valuations  for  assets  and  liabilities  traded in active  exchange
markets,  such as the New  York  Stock  Exchange.  Level  1 also  includes  U.S.
Treasury,  other U.S. Government and agency mortgage-backed  securities that are
traded by dealers or brokers in active  markets.  Valuations  are obtained  from
readily available pricing sources for market  transactions  involving  identical
assets or liabilities.

Level 2 - Valuations for assets and liabilities  traded in less active dealer or
broker  markets.  Valuations are obtained from third party pricing  services for
identical or comparable assets or liabilities.

Level 3 -  Valuations  for assets and  liabilities  that are derived  from other
methodologies,  including option pricing models, discounted cash flow models and
similar techniques,  are not based on market exchange,  dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections
in determining the fair value assigned to such assets and liabilities.

A financial  instrument's  level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement.

A description of the valuation  methodologies  used for instruments  measured at
fair value, as well as the general  classification of such instruments  pursuant
to the valuation  hierarchy,  is set forth below. These valuation  methodologies
were applied to all of the Company's financial assets and financial  liabilities
carried at fair value for December 31, 2008.

The Company's cash instruments are generally  classified within level 1 or level
2 of the fair value  hierarchy  because  they are  valued  using  quoted  market
prices,  broker  or dealer  quotations,  or  alternative  pricing  sources  with
reasonable levels of price transparency.

The Company's  investments  in debt  securities and  mortgage-backed  securities
available-for-sale  are  generally  classified  within level 2 of the fair value
hierarchy.  For these  securities,  the Company obtains fair value  measurements
from  independent  pricing  services.   The  fair  value  measurements  consider
observable data that may include dealer quotes,  market spreads, cash flows, the
U.S. treasury yield curve,  trading levels,  market consensus prepayment speeds,
credit information and the instrument's terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to
transfer  restrictions,  valuations are adjusted to reflect  illiquidity  and/or
non-transferability,  and such  adjustments  are  generally  based on  available
market evidence. In the absence of such evidence,  management's best estimate is
used.  Subsequent  to  inception,  management  only  changes  level 3 inputs and
assumptions  when  corroborated  by  evidence  such as  transactions  in similar
instruments,  completed or pending  third-party  transactions  in the underlying
investment   or   comparable   entities,   subsequent   rounds   of   financing,
recapitalization and other transactions across the capital structure,  offerings
in the equity or debt markets, and changes in financial ratios or cash flows.

                                      F-21



The Company's  impaired  loans are reported at the fair value of the  underlying
collateral  if  repayment  is expected  solely from the  collateral.  Collateral
values are  estimated  using  level 2 inputs  based upon  appraisals  of similar
properties obtained from a third party.

The  following  summarizes  assets  measured at fair value for the period ending
December 31, 2008.

Assets measured at Fair Value on a recurring basis:



                                             Fair Value Measurements at Reporting Date Using:
                                 ------------------------------------------------------------------------
                                                      Quoted Prices in       Significant      Significant
                                                     Active Markets for   Other Observable   Unobservable
                                                      Identical Assets         Inputs           Inputs
                                 December 31, 2008        Level 1              Level 2          Level 3
                                 -----------------   ------------------   ----------------   ------------
                                                                                 
Securities available-for-sale        $ 150,526,964             $ 19,635      $ 148,747,605   $  1,759,724
Impaired loans                             714,875                    0            714,875              0
                                     -------------             --------      -------------   ------------
      Totals                         $ 151,241,839             $ 19,635      $ 149,462,480   $  1,759,724
                                     =============             ========      =============   ============




                                                               Fair Value Measurements
                                                        Using Significant Unobservable Inputs
                                                                       Level 3
                                                        -------------------------------------
                                                        Available-for-Sale
                                                            Securities               Total
                                                        ------------------        -----------
                                                                            
Beginning balance January 1, 2008                          $  1,700,281           $ 1,700,281
   Total gains or losses (realized/unrealized)
      Included in earnings
      Included in other comprehensive loss                     (674,335)             (674,335)
   Amortization of securities, net                               (6,287)               (6,287)
   Transfers in and/or out of Level 3                           740,065               740,065
                                                           ------------           -----------
   Ending balance, December 31, 2008                       $  1,759,724           $ 1,759,724
                                                           ============           ===========

The amount of total gains or losses for the
   period included in earnings attributable to
   the change in unrealized gains or losses relating
   to assets still held at the reporting date              $          0           $         0
                                                           ============           ===========


The estimated fair values of the Bank's financial instruments,  all of which are
held or issued for purposes  other than  trading,  are as follows as of December
31:



                                                    2008                            2007
                                       -----------------------------   -----------------------------
                                          Carrying         Fair           Carrying         Fair
                                           Amount          Value           Amount          Value
                                       -------------   -------------   -------------   -------------
                                                                           
Financial assets:
   Cash and cash equivalents           $   9,659,803   $   9,659,803   $  15,178,195   $  15,178,195
   Available-for-sale securities         150,526,964     150,526,964     147,377,154     147,377,154
   Held-to-maturity securities                66,443          66,502          70,798          71,435
   Federal Home Loan Bank stock            5,323,000       5,323,000       5,176,100       5,176,100
   Loans held-for-sale                     2,314,250       2,330,092         120,000         121,403
   Loans, net                            297,367,434     287,062,745     268,191,275     264,217,484
   Accrued interest receivable             2,704,385       2,704,385       2,538,607       2,538,607

Financial liabilities:
   Deposits                            $ 344,925,232   $ 346,035,072   $ 317,741,269   $ 318,498,739
   Securities sold under agreements
      to repurchase                       11,203,289      11,203,289               0               0
   FHLB advances                          87,913,667      90,205,661      95,011,155      95,183,700
   Due to broker                           7,631,919       7,631,919               0               0


The  carrying  amounts of  financial  instruments  shown in the above  table are
included  in the  consolidated  balance  sheets  under the  indicated  captions.
Accounting policies related to financial instruments are described in Note 2.

NOTE 13 - FINANCIAL INSTRUMENTS
-------------------------------

The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing

                                      F-22



needs of its  customers.  These  financial  instruments  include  commitments to
originate  loans,  standby letters of credit and unadvanced  funds on loans. The
instruments  involve,  to varying degrees,  elements of credit risk in excess of
the amount  recognized  in the balance  sheets.  The  contract  amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for loan  commitments  and standby letters of
credit is represented by the contractual amounts of those instruments.  The Bank
uses the same credit policies in making commitments and conditional  obligations
as it does for on-balance sheet instruments.

Commitments  to originate  loans are  agreements to lend to a customer  provided
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future  cash   requirements.   The  Bank  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed necessary by the Bank upon extension of credit,  is based on management's
credit  evaluation  of the  borrower.  Collateral  held varies,  but may include
secured interests in mortgages, accounts receivable,  inventory, property, plant
and equipment and income producing properties.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee  the  performance  by a customer  to a third  party.  The credit  risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers. As of December 31, 2008 and 2007, the
maximum  potential  amount of the Bank's  obligation  was  $2,800  and  $12,800,
respectively,   for  financial  and  standby  letters  of  credit.   The  Bank's
outstanding  letters of credit generally have a term of less than one year. If a
letter  of  credit  is  drawn  upon,  the Bank may  seek  recourse  through  the
customer's  underlying line of credit.  If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.

The amounts of financial  instrument  liabilities with off-balance  sheet credit
risk are as follows as of December 31:

                                                         2008          2007
                                                    ------------   ------------
Commitments to originate loans                      $  5,450,832   $  9,002,416
Standby letters of credit                                  2,800         12,800
Unadvanced portions of loans:
   Home equity                                        25,496,268     26,511,813
   Commercial lines of credit                         10,423,342     10,482,619
   Construction                                        4,740,207      6,178,958
   Consumer                                            1,745,694      7,129,237
                                                    ------------   ------------
                                                    $ 47,859,143   $ 59,317,843
                                                    ============   ============

There is no material  difference  between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.

NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
---------------------------------------------------------

Most of the Bank's business  activity is with customers  located in northwestern
Connecticut  and  nearby  New  York  and  Massachusetts   towns.  There  are  no
concentrations   of   credit   to   borrowers   that   have   similar   economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and nearby New
York and Massachusetts towns.

NOTE 15 - REGULATORY MATTERS
----------------------------

Bancorp and its subsidiary,  the Bank, are subject to various regulatory capital
requirements  administered by federal banking agencies.  Failure to meet minimum
capital  requirements  can initiate  certain  mandatory and possibly  additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the Company's  and the Bank's  financial  statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action,  the Company and the Bank must meet  specific  capital  guidelines  that
involve  quantitative   measures  of  their  assets,   liabilities  and  certain
off-balance-sheet  items as calculated  under regulatory  accounting  practices.
Their  capital  amounts  and  classification  are also  subject  to  qualitative
judgments by the regulators about components, risk weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier 1  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2008  and  2007,  that  the  Company  and the Bank  meet  all  capital  adequacy
requirements to which they are subject.

As of December 31, 2008, the most recent  notification  from the Federal Deposit
Insurance  Corporation  categorized  the  Bank as  well  capitalized  under  the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized the Bank must maintain minimum total  risk-based,  Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. The

                                      F-23



Company's and the Bank's actual capital amounts and ratios are also presented in
the table.

There are no  conditions  or events  since  that  notification  that  management
believes have changed the Bank's categorization.



                                                                                       To Be Well
                                                                                       Capitalized Under
                                                                   For Capital         Prompt Corrective
                                                    Actual         Adequacy Purposes   Action Provisions
                                               -----------------   -----------------   ------------------
                                                Amount     Ratio    Amount     Ratio    Amount     Ratio
                                               --------   ------   --------    -----   --------   -------
                                                            (Dollar amounts in thousands)
                                                                                
As of December 31, 2008:
   Total Capital (to Risk Weighted Assets)
      Consolidated                             $ 39,610    11.59%  $ 27,336    >=8.0%       N/A
      Salisbury Bank and Trust Company           38,593    11.34     27,233    >=8.0    $34,042   >=10.0%

   Tier 1 Capital (to Risk Weighted Assets)
      Consolidated                               36,851    10.78     13,668    >=4.0        N/A
      Salisbury Bank and Trust Company           35,835    10.53     13,617    >=4.0     20,425   >=6.0

   Tier 1 Capital (to Average Assets)
      Consolidated                               36,851     7.74     19,049    >=4.0        N/A
      Salisbury Bank and Trust Company           35,835     7.52     19,049    >=4.0     23,811   >=5.0

As of December 31, 2007:
   Total Capital (to Risk Weighted Assets)
      Consolidated                             $ 39,545    15.00%  $ 21,087    >=8.0%       N/A
      Salisbury Bank and Trust Company           38,683    14.69     21,069    >=8.0    $26,336   >=10.0%

   Tier 1 Capital (to Risk Weighted Assets)
      Consolidated                               37,070    14.06     10,544    >=4.0        N/A
      Salisbury Bank and Trust Company           36,174    13.74     10,534    >=4.0     15,801   >=6.0

   Tier 1 Capital (to Average Assets)
      Consolidated                               37,070     8.24     17,988    >=4.0        N/A
      Salisbury Bank and Trust Company           36,174     8.06     17,945    >=4.0     22,431   >=5.0


The declaration of cash dividends is dependent on a number of factors, including
regulatory  limitations,  and the  Company's  operating  results  and  financial
condition.  The stockholders of Bancorp will be entitled to dividends only when,
and if,  declared  by the  Bancorp's  Board of  Directors  out of funds  legally
available  therefore.  The  declaration  of future  dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.

Under  Connecticut law, the Bank may pay dividends only out of net profits.  The
Connecticut  Banking  Commissioner's  approval is required for dividend payments
which  exceed the current  year's net profits and  retained net profits from the
preceding two years. As of December 31, 2008, the Bank may declare  dividends to
Bancorp in an amount not to exceed $3,475,791.

NOTE 16 - DIRECTORS STOCK RETAINER PLAN
---------------------------------------

At the 2001 annual  meeting  the  shareholders  of Bancorp  voted to approve the
Directors  Stock  Retainer Plan of Salisbury  Bancorp,  Inc.  (Plan).  This Plan
provides  non-employee  directors of the Company with shares of restricted stock
of Bancorp as a component of their  compensation for services as directors.  The
maximum  number of shares of stock  that may be issued  pursuant  to the Plan is
15,000. The first grant date under this Plan preceded the 2002 annual meeting of
stockholders.  Each director whose term of office begins with or continues after
the date the Plan was  approved by the  stockholders  is issued an annual  stock
retainer  consisting  of 120 shares of fully vested  restricted  common stock of
Bancorp. In 2008 and 2007, 840 shares were issued under the Plan and the related
compensation expense amounted to $27,720 and $30,450, respectively.

NOTE 17 - ACQUISITION
---------------------

On August 1, 2007, the Bank opened a full service branch office in Dover Plains,
New York. The opening of the branch  reflects  consummation  on July 31, 2007 of
the purchase of a branch office in Mt. Vernon,  New York by the Bank pursuant to
the Purchase and Assumption  Agreement  dated October 3, 2006 by and between the
Bank and New York Community Bank. Such branch was relocated to Dover Plains, New
York and opened for business August 1, 2007.

                                      F-24



The assets acquired and liabilities assumed have been recorded by the Company at
their fair values at the consummation  date.  Goodwill recorded totaled $319,407
and will be  analyzed  for  impairment  on at least an annual  basis.  Financial
statement amounts for the transaction are included in the Company's consolidated
financial statements beginning on the acquisition date. A summary is included in
the supplemental disclosure in the cash flow statement.

NOTE 18 - GOODWILL AND INTANGIBLE ASSETS
----------------------------------------

The  Company's  assets as of  December  31,  2008 and 2007  include  goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001 and $7,151,421
of additional  goodwill from the 2004 merger with Canaan National Bancorp,  Inc.
In 2007, the Company recorded $319,407 of additional  goodwill from the purchase
of a branch of a bank in Mt. Vernon, NY. See Note 17.

The Company evaluated its goodwill and intangible assets as of December 31, 2008
and 2007 and found no impairment.

A summary of acquired amortizing intangible assets is as follows:



                                                                     As of December 31, 2008
                                                           ------------------------------------------
                                                              Gross                           Net
                                                             Carrying     Accumulated      Carrying
                                                              Amount      Amortization      Amount
                                                           -----------    ------------    -----------
                                                                                 
Core deposit intangible-People's Bank branch purchase      $   888,606    $    498,418    $   390,188

Core deposit intangible-Canaan National merger               1,191,279         416,399        774,880
                                                           -----------    ------------    -----------

      Total                                                $ 2,079,885    $    914,817    $ 1,165,068
                                                           ===========    ============    ===========




                                                                     As of December 31, 2007
                                                           ------------------------------------------
                                                              Gross                           Net
                                                             Carrying     Accumulated      Carrying
                                                              Amount      Amortization      Amount
                                                           -----------    ------------    -----------
                                                                                 
Core deposit intangible-People's Bank branch purchase      $   888,606    $    430,064    $   458,542

Core deposit intangible-Canaan National merger               1,191,279         320,538        870,741
                                                           -----------    ------------    -----------

      Total                                                $ 2,079,885    $    750,602    $ 1,329,283
                                                           ===========    ============    ===========


Amortization  expense was $164,215  and  $164,216,  respectively,  for the years
ending  December  31,  2008 and  2007.  Amortization  is being  calculated  on a
straight-line basis.

Estimated  amortization  expense for each of the five years  succeeding 2008 and
thereafter is as follows:

            2009                                     $   164,216
            2010                                         164,216
            2011                                         164,216
            2012                                         164,216
            2013                                         164,216
            Thereafter                                   343,988
                                                     -----------
                                                     $ 1,165,068
                                                     ===========

NOTE 19 - RECLASSIFICATION
--------------------------

Certain  amounts in the prior year have been  reclassified to be consistent with
the current year's statement presentation.

                                      F-25



NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------

The following  condensed  financial  statements are for Salisbury Bancorp,  Inc.
(Parent  Company Only) and should be read in conjunction  with the  Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.

                             SALISBURY BANCORP, INC.
                             -----------------------
                              (Parent Company Only)
                                 BALANCE SHEETS
                                 --------------
                           December 31, 2008 and 2007
                           --------------------------



                                                                2008           2007
                                                            ------------   ------------
                                                                     
ASSETS
------
Money market mutual funds                                   $  1,476,999   $  1,340,891
Cash in Salisbury Bank and Trust Company                             709          6,316
                                                            ------------   ------------
         Cash and cash equivalents                             1,477,708      1,347,207
Investment in subsidiary                                      37,923,873     44,668,437
Other assets                                                       9,792          2,910
                                                            ------------   ------------
         Total assets                                       $ 39,411,373   $ 46,018,554
                                                            ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Dividends payable                                           $    472,041   $    454,956
                                                            ------------   ------------
         Total liabilities                                       472,041        454,956
Total shareholders' equity                                    38,939,332     45,563,598
                                                            ------------   ------------
         Total liabilities and shareholders' equity         $ 39,411,373   $ 46,018,554
                                                            ============   ============


                             SALISBURY BANCORP, INC.
                             -----------------------
                              (Parent Company Only)
                              STATEMENTS OF INCOME
                              --------------------
                     Years Ended December 31, 2008 and 2007
                     --------------------------------------



                                                                2008           2007
                                                            ------------   ------------
                                                                     
Dividend income from subsidiary                             $  2,000,000   $  1,920,000
Taxable interest on securities                                    16,452         48,487
                                                            ------------   ------------
                                                               2,016,452      1,968,487
                                                            ------------   ------------

Professional fees                                                 10,756         33,950
Supplies and printing                                              4,900            380
Other expense                                                     30,082         22,716
                                                            ------------   ------------
                                                                  45,738         57,046
                                                            ------------   ------------
Income before income tax benefit and equity in
   net (loss) income of subsidiary                             1,970,714      1,911,441
Income tax benefit                                                (9,792)        (2,909)
                                                            ------------   ------------
Income before equity in net (loss) income of subsidiary        1,980,506      1,914,350
Equity in net (loss) income of subsidiary                       (874,625)     1,885,698
                                                            ------------   ------------
         Net income                                         $  1,105,881   $  3,800,048
                                                            ============   ============


                                      F-26



                             SALISBURY BANCORP, INC.
                             -----------------------
                              (Parent Company Only)
                            STATEMENTS OF CASH FLOWS
                            ------------------------
                     Years Ended December 31, 2008 and 2007
                     --------------------------------------



                                                                   2008           2007
                                                               -----------    -----------
                                                                        
Cash flows from operating activities:
   Net income                                                  $ 1,105,881    $ 3,800,048
   Adjustments to reconcile net income to net cash provided
      by operating activities:
   Equity in net loss (income) of subsidiary                       874,625     (1,885,698)
   (Increase) decrease in taxes receivable                          (6,882)         2,559
   Issuance of shares for Directors' fees                           27,720         30,450
                                                               -----------    -----------

   Net cash provided by operating activities                     2,001,344      1,947,359
                                                               -----------    -----------
Cash flows from financing activities:
   Dividends paid                                               (1,870,843)    (1,802,527)
                                                               -----------    -----------

   Net cash used in financing activities                        (1,870,843)    (1,802,527)
                                                               -----------    -----------

Net increase in cash and cash equivalents                          130,501        144,832
Cash and cash equivalents at beginning of year                   1,347,207      1,202,375
                                                               -----------    -----------
Cash and cash equivalents at end of year                       $ 1,477,708    $ 1,347,207
                                                               ===========    ===========


NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------

Summarized quarterly financial data for 2008 and 2007 follows:



                                         (In thousands, except earnings per share)
                                                     2008 Quarters Ended
                                         ------------------------------------------
                                         March 31    June 30    Sept. 30    Dec. 31
                                         --------    -------    --------    -------
                                                                
Interest and dividend income             $  6,668    $ 6,591    $  6,712    $ 6,586
Interest expense                            3,008      2,710       2,587      2,520
                                         --------    -------    --------    -------
   Net interest and dividend income         3,660      3,881       4,125      4,066
Provision for loan losses                      60        110         520        589
Other income (charge)                       1,433      1,153      (1,345)     1,000
Other expense                               3,651      3,696       3,835      4,827
                                         --------    -------    --------    -------
   Income (loss) before income taxes        1,382      1,228      (1,575)      (350)
Income tax expense (benefit)                  301        245         337     (1,304)
                                         --------    -------    --------    -------
   Net income (loss)                     $  1,081    $   983    $ (1,912)   $   954
                                         ========    =======    ========    =======

Earnings (loss) per common share         $    .64    $   .58    $  (1.13)   $   .57
                                         ========    =======    ========    =======




                                         (In thousands, except earnings per share)
                                                     2007 Quarters Ended
                                         ------------------------------------------
                                         March 31    June 30    Sept. 30    Dec. 31
                                         --------    -------    --------    -------
                                                                
Interest and dividend income             $  6,437    $ 6,360    $  6,602    $ 6,753
Interest expense                            3,071      2,997       3,167      3,197
                                         --------    -------    --------    -------
   Net interest and dividend income         3,366      3,363       3,435      3,556
Provision for loan losses                       0          0           0          0
Other income                                1,124      1,115       1,060      1,165
Other expense                               3,319      3,305       3,401      3,489
                                         --------    -------    --------    -------
   Income before income taxes               1,171      1,173       1,094      1,232
Income tax expense                            237        224         177        232
                                         --------    -------    --------    -------
   Net income                            $    934    $   949    $    917    $ 1,000
                                         ========    =======    ========    =======

Earnings per common share                $    .55    $   .56    $    .54    $   .59
                                         ========    =======    ========    =======


                                      F-27



NOTE 22 - SUBSEQUENT EVENT
--------------------------

On November 13, 2008, the Company applied for participation in the Treasury TARP
CPP  under  the  EESA  and the  rules  and  regulations  promulgated  thereunder
(collectively, the Act). On January 7, 2009, the Treasury preliminarily approved
the Company's  application in the amount of $8,816,000.  At the time of Treasury
preliminary approval,  the Company's Certificate of Incorporation did not permit
the  issuance of  preferred  stock.  A Special  Meeting of  Shareholders  of the
Company  was held on March  10,  2009,  and  Shareholders  voted to  approve  an
amendment to the Company's  Certificate of Incorporation to authorize a class of
25,000 shares of preferred stock, par value $0.01 per share.

The Company  closed the TARP CPP  transaction on March 13, 2009 in the amount of
$8,816,000.  The Company issued to the Treasury 8,816 shares of Preferred  Stock
together  with a warrant to purchase  57,671  shares of Company  common stock at
$22.93  per  share,  which  warrant,  if  exercised  in full,  would  dilute the
percentage  ownership of the holders of Company  common  stock by  approximately
3.3%. If the Company redeems all of the shares of Preferred  Stock, it has first
refusal  rights to buy back the warrant or the shares  received upon exercise of
the warrant at their fair market value if they are then held by the Treasury. As
a condition of the closing, the Company amended the change in control agreements
described in Note 9. The amendment prohibits any payments relating to the change
in control  agreements to the specified  officers during the period in which any
obligation arising under the TARP CPP remains outstanding.

The  Preferred  Stock  qualifies as Tier 1 capital for  regulatory  purposes and
ranks senior to the  Company's  common stock in the payment of dividends or upon
liquidation.  The  Preferred  Stock  purchased by the Treasury pays a cumulative
dividend  rate of 5% per annum for the first  five years it is  outstanding  and
thereafter at a rate of 9% per annum.  The Preferred Stock is non-voting,  other
than voting rights on matters that could  adversely  affect the Preferred  Stock
and in the event the Company is in arrears on six quarterly dividend payments on
the Preferred  Stock, in which case, the holder of the Preferred Stock may elect
two directors to the Company's  Board of Directors until all dividends have been
paid in full for four consecutive  quarterly dividends.  The Preferred Stock may
be  redeemed  by the  Company at 100% of its issue  price plus any  accrued  and
unpaid  dividends.  The Treasury's  consent will be required for any increase in
Company  common stock  dividends per share or any  repurchase of Company  common
stock until the earlier of the third  anniversary  of the date of the investment
or the transfer by the Treasury of all of the shares of Preferred Stock.

                                      F-28



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

During the two (2) most recent fiscal  years,  the Company and the Bank have had
no changes in or disagreements  with  independent  accountants on accounting and
financial disclosure matters.

ITEM 9A(T). CONTROLS AND PROCEDURES

The Company's Chief  Executive  Officer and Chief  Financial  Officer  concluded
that,  based upon an  evaluation  as of December 31,  2008,  as required by Rule
13a-15(b) of the Exchange Act, the Company's disclosure controls and procedures,
as defined in Rule  13a-15(e) of the Exchange  Act, are effective to ensure that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within  the time  periods  specified  in the SEC  rules  and  forms.  Disclosure
controls and procedures  include,  without  limitation,  controls and procedures
designed to ensure that information  required to be disclosed is accumulated and
communicated  to  management,  including its Chief  Executive  Officer and Chief
Financial Officer,  as appropriate to allow timely decisions  regarding required
disclosure.  During the fourth  quarter ended  December 31, 2008,  there were no
changes in the Company's  internal  control over  financial  reporting that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

On October 1, 2007,  the Bank, by mutual  agreement,  entered  Change of Control
Agreements  (Agreements)  with  the  following  officers  of the  Bank:  John F.
Perotti,  Richard J. Cantele,  Jr., John F. Foley,  Todd M. Clinton,  Diane E.R.
Johnstone, Joseph C. Law, Lana J. Morrison, Sharon A. Pilz, Geoffrey A. Talcott,
Melanie K. Neely, Gerard J. Baldwin,  Darrell S. Long, Elizabeth A. Summerville,
Diane Farrell and Roberta Reed (Executives).

The  Agreements  provide  that if following a "Change in Control" (as defined in
the  Agreements)  of the Company or the Bank,  an Executive is  terminated or is
reassigned under certain circumstances defined in the Agreements within a period
of twelve (12) months  following such Change in Control,  such Executive will be
entitled to a lump sum  payment  equal to his or her annual  compensation  based
upon the most recent  aggregate  base salary paid to the Executive in the twelve
(12) month period immediately  preceding his or her termination or reassignment.
In  addition,  for twelve  (12) months  following  a Change in Control,  certain
specified insurance benefits shall continue in effect on terms and conditions at
least as  favorable  to the  Executive as  maintained  immediately  prior to the
Change in  Control.  In no event  shall such  payments be made in an amount that
would  cause  them to be  deemed  non-deductible  to the Bank by  reason  of the
operation  of Section  280G of the  Internal  Revenue  Code.  The purpose of the
Agreements is to provide certain potential  benefits to the Executives solely in
the event of a Change in Control and do not provide a contract  for  employment.
The Agreements will expire on September 30, 2010,  provided that if a "Change in
Control"  occurs prior to September  30, 2010,  the  Agreements  shall remain in
effect for twelve (12) months after the date on which any such Change in Control
is consummated.

As an institution  participating in the TARP CPP, the Company and its executives
modified the Company's change in control  agreements to preclude the possibility
that a golden  parachute  payment  could be made by the Company that may violate
the new limits on  executive  compensation,  which  were  enacted as part of the
ARRA,  which  amended the EESA.  The Company is pleased that each officer of the
Company,  who is a party to a change  in  control  agreement  with the  Company,
voluntarily agreed to such changes in order to enable the Company to participate
in the TARP CPP. A form of these  Agreements was filed on March 28, 2009 on Form
8-K. See also Notes 9 and 22 of the Notes to Consolidated Financial Statements.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information  regarding  Directors  and  Executive  Officers  of  the  Registrant
required by this Item  pursuant to Item 401 of  Regulation  S-K is omitted  from
this report on Form 10-K and is  contained  in the  Company's  Definitive  Proxy
Statement for the Annual Meeting of  Shareholders  to be held on May 27, 2009 to
be filed  within 120 days after the end of the fiscal year  covered by this Form
10-K, under the Sections  "Election of Directors" and "Executive  Officers," and
the information included therein is incorporated by reference.

Information  required  by this  Item  pursuant  to Item  405 of  Regulation  S-K
regarding  compliance  with Section  16(a) of the Exchange  Act, as amended,  is
omitted from this report on Form 10-K and is contained in the Bank's  Definitive
Proxy  Statement for the Annual  Meeting of  Shareholders  to be held on May 27,
2009 to be filed  within 120 days after the end of the  fiscal  year  covered by
this Form 10-K under the Section "Section 16(a) Beneficial  Ownership  Reporting
Compliance," and the information included therein is incorporated by reference.

Information  required by this Item pursuant to Item  407(c)(3) of Regulation S-K
regarding material changes, if any, to

                                       26



procedures by which shareholders may recommend nominees to the Board, is omitted
from this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of  Shareholders  to be held on May 27, 2009 to
be filed  within 120 days after the end of the fiscal year  covered by this Form
10-K, under the Section "Deadline for Receipt of Shareholder Proposals," and the
information included therein is incorporated by reference.

Information  required by this Item pursuant to Item 407(d)(4) and Item 407(d)(5)
of Regulation S-K regarding the audit  committee and audit  committee  financial
expert(s),  respectively,  is  omitted  from  this  report  on Form  10-K and is
contained in the Company's  Definitive Proxy Statement for the Annual Meeting of
Shareholders  to be held on May 27,  2009 to be filed  within 120 days after the
end of the fiscal year covered by this Form 10-K , under the Section  "Corporate
Governance," and the information included therein is incorporated by reference.

Code of Ethics
--------------

The Company has adopted a Code of Ethics  that  applies to the  Company's  Chief
Executive Officer and Chief Financial  Officer. A copy of such Code of Ethics is
available  upon  request to any person,  without  charge,  by writing to John F.
Foley, Chief Financial Officer and Secretary, Salisbury Bancorp, Inc., 5 Bissell
Street, P. O. Box 1868, Lakeville, CT 06039.

ITEM 11. EXECUTIVE COMPENSATION

Information  required  by this  Item  pursuant  to Item  402 of  Regulation  S-K
regarding  Directors and  Executive  Compensation,  including  the  Compensation
Discussion & Analysis, is omitted from this report on Form 10-K and is contained
in  the  Company's   Definitive  Proxy  Statement  for  the  Annual  Meeting  of
Shareholders  to be held on May 27,  2009 to be filed  within 120 days after the
end of the fiscal  year  covered by this Form 10-K,  under the  Sections  "Board
Compensation" and "Executive Compensation," and the information included therein
is incorporated by reference.

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

Information  required  by this  Item  pursuant  to Item  403 of  Regulation  S-K
regarding  Security  Ownership of Certain  Beneficial  Owners and  Management is
omitted  from  this  report  on Form  10-K  and is  contained  in the  Company's
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 27,  2009 to be filed  within  120 days  after  the end of the  fiscal  year
covered by this Form  10-K,  under the  Section  "Security  Ownership,"  and the
information included therein is incorporated by reference.

Information  required by this Item  pursuant to Item  201(d) of  Regulation  S-K
regarding securities  authorized for issuance under equity compensation plans is
omitted  from  this  report  on Form  10-K  and is  contained  in the  Company's
Definitive  Proxy Statement for the Annual Meeting of Shareholders to be held on
May 27,  2009 to be filed  within  120 days  after  the end of the  fiscal  year
covered  by  this  Form  10-K,  under  the  Section  "Equity  Compensation  Plan
Information," and the information included therein is incorporated by reference.

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

Information  required  by this  Item  pursuant  to Item  404 of  Regulation  S-K
regarding Certain  Relationships  and Related  Transactions is omitted from this
report on Form 10-K and is contained in the Company's Definitive Proxy Statement
for the Annual  Meeting of  Shareholders  to be held on May 27, 2009 to be filed
within  120 days  after the end of the  fiscal  year  covered by this Form 10-K,
under the Section  "Certain  Relationships  and Related  Transactions,"  and the
information included therein is incorporated by reference.

Information  required by this Item  pursuant to Item  407(a) of  Regulation  S-K
regarding the independence of directors is omitted from this report on Form 10-K
and is contained in the  Company's  Definitive  Proxy  Statement  for the Annual
Meeting of  Shareholders  to be held on May 27, 2009 to be filed within 120 days
after the end of the fiscal  year  covered by this Form 10-K,  under the Section
"Corporate  Governance," and the information included therein is incorporated by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information  required  by this  Item  regarding  Principal  Accounting  Fees and
Services  is  omitted  from this  report on Form  10-K and is  contained  in the
Company's  Definitive  Proxy Statement for the Annual Meeting of Shareholders to
be held on May 27, 2009 to be filed  within 120 days after the end of the fiscal
year  covered  by  this  Form  10-K,  under  the  Section   "Independent  Public
Accountants," and the information included therein is incorporated by reference.

Information required by this Item regarding  pre-approval policies for audit and
non-audit  services is omitted from this report on Form 10-K and is contained in
the Company's  Definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on May 27,  2009 to be filed  within  120 days  after  the end of the
fiscal  year  covered  by this Form 10-K,  under the  Section  "Audit  Committee
Pre-Approval  of  Audit  and  Permissible   Non-Audit  Services  of  Independent
Auditors," and the information included

                                       27



therein is incorporated by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)   The following documents are filed as part of this report on Form l0-K.

      1.    Financial Statements:

                  The  financial  statements  filed as part of this  report  are
                  listed in the index appearing at Item 8.

      2.    Financial Statement Schedules:

                  Such schedules are omitted  because they are  inapplicable  or
                  the  information  is  included in the  consolidated  financial
                  statements or notes thereto.

      3.    Exhibits Required by Item 601 of Regulation S-K:



              Exhibit No.    Description
              -----------    -----------
                          
                 3.1         Certificate of Incorporation of Salisbury Bancorp, Inc. (1)
                 3.1.1       Amendment to Certificate of Incorporation of Salisbury Bancorp, Inc. (2)
                 3.1.2       Amendment to Certificate of Incorporation of Salisbury Bancorp, Inc. (3)
                 3.2         Bylaws of Salisbury Bancorp, Inc., as amended and restated as of March 13, 2009 (4)
                 4.1         Warrant to purchase Common Stock dated March 13, 2009 (5)
                 10          Amended and Restated Supplemental  Retirement Plan Agreement with John F. Perotti dated
                             January 25, 2008 (6)
                 10.2        Form of Change in Control Agreement with Executive Officers dated March 10, 2009 (7)
                 10.3        Form of First  Amendment to Change in Control  Agreement with Executive  Officers dated
                             March 13, 2009 (8)
                 10.3        Director Stock Retainer Plan (9)
                 11          Computation of Earnings per Share
                 21          Subsidiaries of the Company
                 31.1        Rule 13a-15(e) Certification
                 31.2        Rule 13a-15(e) Certification
                 32          Section 1350 Certifications


----------
(1)   Exhibit  was  filed  on  April  23,  1998  as  Exhibit  3.1  to  Company's
      Registration  Statement on Form S-4 (No.  333-50857)  and is  incorporated
      herein by reference.

(2)   Exhibit was filed on March 11, 2009 as Exhibit  3.1 to  Company's  Current
      Report on Form 8-K and is incorporated herein by reference.

(3)   Exhibit was filed on March 19, 2009 as Exhibit  3.1 to  Company's  Current
      Report Form 8-K and is incorporated herein by reference.

(4)   Exhibit was filed on March 19, 2009 as Exhibit  3.2 to  Company's  Current
      Report on Form 8-K and is incorporated herein by reference.

(5)   Exhibit was filed on March 19, 2009 as Exhibit  4.1 to  Company's  Current
      Report on Form 8-K and is incorporated herein by reference.

(6)   Exhibit  was filed on January 30,  2009 as Exhibit  10.1 to the  Company's
      Current Report on Form 8-K and is incorporated herein by reference.

(7)   Exhibit was filed on March 19, 2009 as Exhibit 10.1 to  Company's  Current
      Report on Form 8-K and is incorporated herein by reference.

(8)   Exhibit was filed on March 19, 2009 as Exhibit  3.2 to  Company's  Current
      Report on Form 8-K and is incorporated herein by reference.

(9)   Exhibit was filed on May 8, 2002 as Exhibit 10.3 to the  Company's  Annual
      Report on Form 10-KSB for the fiscal year ended  December  31, 2002 and is
      incorporated herein by reference.

                                       28



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, in Lakeville, Connecticut
on March 27, 2009.

                                          SALISBURY BANCORP, INC.

                                          By:   /s/ John F. Perotti
                                             ----------------------
                                                John F. Perotti
                                                Chairman and
                                                Chief Executive Officer

                                          By:   /s/ John F. Foley
                                             ---------------------
                                                John F. Foley
                                                Chief Financial Officer,
                                                Treasurer and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

Signature                          Title                               Date
---------                          -----                               ----

/s/ John F. Perotti                Chairman,                      March 27, 2009
--------------------------------   Chief Executive Officer
 (John F. Perotti)                 and Director

/s/ Louis E. Allyn, II             Director                       March 27, 2009
--------------------------------
(Louis E. Allyn, II)

/s/ John R. H. Blum                Director                       March 27, 2009
--------------------------------
(John R. H. Blum)

/s/ Louise F. Brown                Director                       March 27, 2009
--------------------------------
(Louise F. Brown)

/s/ Richard J. Cantele, Jr.        Director                       March 27, 2009
--------------------------------
(Richard J. Cantele, Jr.)

/s/ Robert S. Drucker              Director                       March 27, 2009
--------------------------------
(Robert S. Drucker)

/s/ Nancy F. Humphreys             Director                       March 27, 2009
--------------------------------
(Nancy F. Humphreys)

/s/ Holly J. Nelson                Director                       March 27, 2009
--------------------------------
(Holly J. Nelson)

/s/ Michael A. Varet               Director                       March 27, 2009
--------------------------------
(Michael A. Varet)

                                       29