The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of Berkshire Bancorp Inc. and subsidiaries for the fiscal years ended December 31, 2008, 2007 and 2006. All references to earnings per share, unless stated otherwise, refer to earnings per basic shares for the 2008 period and diluted shares for the 2007 and 2006 periods. The discussion should be read in conjunction with the consolidated financial statements and related notes (Notes located in Item 8 herein). Reference is also made to Part I, Item 1 "Business" herein.

Segments

Management has determined that the Company through its wholly owned bank subsidiary, the Bank, operates in one business segment, community banking. The Bank's principal business activity consists of gathering deposits from the general public and investing those deposits in residential and commercial mortgage loans and commercial non-mortgage loans, both unsecured and secured by personal property. In addition, the Bank invests those deposits in debt obligations issued by the U.S. Government, its agencies, business corporations and mortgage-backed securities.

General

Trust Preferred Securities. As of May 18 2004, the Company established BCTI. The Company owns all the common capital securities of BCTI. BCTI issued $15.0 million of preferred capital securities to investors in a private transaction and invested the proceeds, combined with the proceeds from the sale of BCTI's common capital securities, in the Company through the purchase of $15.464 million aggregate principal amount of the Floating Rate Junior Subordinated Debentures issued by the Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034 and bear interest at a floating rate, three month LIBOR plus 2.70%, currently 6.53%.

On April 1, 2005, the Company established BCTII. The Company owns all the common capital securities of BCTII. BCTII issued $7.0 million of preferred capital securities to investors in a private transaction and invested the proceeds, combined with the proceeds from the sale of BCTII's common capital securities, in the Company through the purchase of $7.217 million aggregate principal amount of the 2005 Debentures issued by the Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035 and bear interest at a floating rate, three month LIBOR plus 1.95%, currently 4.10%. See Note A of Notes to Consolidated Financial Statements for a further discussion of the Trust Preferred Securities.

Series A Preferred Shares. On October 31, 2008, the Company sold an aggregate of 60,000 Series A Preferred Shares at $1,000 per share, or $60 million in the aggregate, to the Company's Chairman of the Board and majority stockholder, and two non-affiliated investors. Each Series A Preferred Share bears non-cumulative cash dividends at the rate of 8% per annum, payable quarterly, is mandatorily convertible into 123.153 shares of our Common Stock on October 31, 2011, unless previously redeemed, and is redeemable at the option of the Company between April 30, 2009 and November 1, 2010 at a redemption price of $1,100. So long as any share of Series A Preferred Shares remains outstanding, unless the full dividends for the most recent dividend payment date have been paid or declared, no dividends may be paid or declared on the Company's Common Stock. (See Note A of Notes to Consolidated Financial Statements for further discussion of Series A Preferred Shares).

Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America ("US GAAP") and general practices within the financial services industry. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than any of its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans, mortgages, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

With the adoption of Statement of Financial Accounting Standards ("SFAS") No.
142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") on January 1, 2002, the Company discontinued the amortization of goodwill resulting from acquisitions. Goodwill is now subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary. The Company tests for impairment based on the goodwill maintained at the Bank. A fair value is determined for each reporting unit based on at least one of three various market valuation methodologies. If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is necessary. If the fair value of the reporting unit is less, an expense may be required on the Company's books to write down the related goodwill to the proper carrying value. As of December 31, 2008, the goodwill was evaluated for impairment with no recognition of impairment considered necessary.

The Company recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carryforwards and tax credits. Deferred tax assets are subject to management's judgment based upon available evidence that future realization is more likely than not. If management determines that the Company may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.

Discussion of Financial Condition and Results of Operations

Overview

Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31,
2007. Net loss for the fiscal year ended December 31, 2008 was $79.91 million,
or $11.45 per basic share, as compared to net income of $5.35 million, or $.76
per diluted share, for the fiscal year ended December 31, 2007. Net loans
increased by approximately 6%. Investment securities and total assets decreased
by approximately 50% and 16%, respectively.

                                                             As and for the fiscal Year Ended December 31,
                                                                                                          %
                                                           2008                    2007               Inc/(Dec)
                                                         (In millions, except per share data and percentages)
Total Assets                                         $          943.7        $        1,120.5                  (16 )%
Loans, net                                                      457.5                   430.6                    6 %
Investment Securities                                           299.1                   599.4                  (50 )%
Total Liabilities                                               877.8                   996.3                  (12 )%
Deposits                                                        726.1                   853.2                  (15 )%
Borrowings                                                      127.5                   131.1                   (3 )%
Stockholders' Equity                                             66.0                   124.3                  (47 )%

Total Income                                                     60.3                    60.2                    0 %
Interest Income                                                  59.6                    58.5                    2 %
Total Expense                                                   141.1                    52.1                  171 %
Interest Expense                                                 30.5                    37.8                  (19 )%
Net Interest Income                                              29.1                    20.7                   41 %
Net Income (Loss)                                               (79.9 )                   5.4               (1,580 )%
Diluted Income (Loss) Per Share                                (11.45 )                   .76               (1,591 )%
Bank Branches                                                      12                      12                    -

Fiscal Year Ended December 31, 2007 Compared to Fiscal Year Ended December 31, 2006. Net income was $5.35 million, or $.76 per diluted share, for the fiscal year ended December 31, 2007, compared to $4.88 million, or $.70 per diluted share, for the fiscal year ended December 31, 2006. Net loans and total assets increased by approximately 17% and 18%, respectively, and investment securities increased by approximately 16%. Stockholders' equity increased by approximately 7% to $124.26 million in fiscal 2007 from $115.78 million in fiscal 2006.

                                          Fiscal Year Ended December 31,
                                                                                  %
                                  2007                       2006             Inc/(Dec)
                               (In millions, except per share data and percentages)
Total Assets               $           1,120.5         $          948.7               18 %
Loans, net                               430.6                    367.2               17 %
Investment Securities                    599.4                    515.2               16 %
Total Liabilities                        996.3                    832.9               20 %
Deposits                                 853.2                    681.5               25 %
Borrowings                               131.1                    138.1               (5 )%
Stockholders' Equity                     124.3                    115.8                7 %

Total Income                              60.2                     51.9               16 %
Interest Income                           58.5                     48.2               21 %
Total Expense                             52.1                     42.8               22 %
Interest Expense                          37.8                     29.2               29 %
Net Interest Income                       20.7                     19.0                9 %
Net Income                                 5.4                      4.9               10 %
Diluted Income Per Share                   .76                      .70                9 %
Bank Branches                               12                       11                -

Net Interest Income

Net interest income, represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors including: (i) the amount of interest-earning assets that the Company can maintain based upon its funding sources; (ii) the relative amounts of interest-earning assets versus interest-bearing liabilities; and (iii) the difference between the yields earned on those assets and the rates paid on those liabilities. Non-performing loans adversely affect net interest income because they must still be funded by interest-bearing liabilities, but they do not provide interest income. Furthermore, when we designate an asset as non- performing, all interest which has been accrued but not actually received is deducted from current period income, further reducing net interest income.

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

                                           Twelve Months Ended                            Twelve Months Ended                            Twelve Months Ended
                                            December 31, 2008                              December 31, 2007                              December 31, 2006
                                                 Interest                                       Interest                                      Interest
                                  Average          and           Average         Average          and           Average        Average          and           Average
                                  Balance       Dividends      Yield/Rate        Balance       Dividends      Yield/Rate       Balance       Dividends      Yield/Rate
INTEREST-EARNING ASSETS:
Loans (1)                       $   461,678     $   32,754            7.09 %   $   389,520     $   29,804            7.65 %   $  327,210     $   23,844            7.29 %
Investment securities               464,927         25,456            5.48         558,742         27,178            4.86        550,443         24,027            4.37
Other (2)(5)                         54,157          1,380            2.55          31,678          1,553            4.90          8,509            350            4.11
Total interest-earning assets       980,762         59,590            6.08         979,940         58,535            5.97        886,162         48,221            5.44
Noninterest-earning assets           55,244                                         46,070                                        46,882
Total Assets                    $ 1,036,006                                    $ 1,026,010                                    $  933,044

INTEREST-BEARING LIABILITIES:
Interest bearing deposits           287,772          7,645            2.66         291,049         10,338            3.55        206,745          5,283            2.56
Time deposits                       456,803         17,323            3.79         449,754         21,745            4.83        410,729         17,276            4.21
Other borrowings                    127,343          5,555            4.36         103,112          5,710            5.54        144,722          6,627            4.58
Total interest-bearing
 liabilities                        871,918         30,523            3.50         843,915         37,793            4.48        762,196         29,186            3.83

Demand deposits                      54,452                                         50,647                                        47,890
Noninterest-bearing
liabilities                           9,077                                         12,285                                         9,731
Stockholders' equity (5)            100,559                                        119,163                                       113,227

Total liabilities and
stockholders' equity            $ 1,036,006                                    $ 1,026,010                                    $  933,044

Net interest income                             $   29,067                                     $   20,742                                    $   19,035

Interest-rate spread (3)                                              2.58 %                                         1.49 %                                        1.61 %

Net interest margin (4)                                               2.96 %                                         2.12 %                                        2.15 %

Ratio of average
interest-earning assets to
average interest bearing
liabilities                            1.12                                           1.16                                          1.16

Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following tables set forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (changes in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume) (in thousands):

                                Twelve Months Ended December 31, 2008
                                                Versus
                                Twelve Months Ended December 31, 2007
                                      Increase (Decrease) Due To
                                Rate              Volume           Total

Interest-earning assets:
Loans                       $     (2,181 )     $      5,131       $  2,950
Investment securities              3,464             (5,186 )       (1,722 )
Other                               (744 )              571           (173 )
Total                                539                516          1,055

Interest-bearing
liabilities:
Deposit accounts:
Interest bearing deposits         (2,590 )             (103 )       (2,693 )
Time deposits                     (4,677 )              255         (4,422 )
Other borrowings                  (1,217 )            1,062           (155 )
Total                             (8,484 )            1,214         (7,270 )

Net interest income         $      9,023       $       (698 )     $  8,325



                                Twelve Months Ended December 31, 2007
                                                Versus
                                Twelve Months Ended December 31, 2006
                                      Increase (Decrease) Due To
                                Rate              Volume           Total

Interest-earning assets:
Loans                       $      1,228       $      4,732       $  5,960
Investment securities              2,777                374          3,151
Other                                 79              1,124          1,203
Total                              4,084              6,230         10,314

Interest-bearing
 liabilities:
Deposit accounts:
Interest bearing deposits          2,461              2,594          5,055
Time deposits                      2,717              1,752          4,469
Other borrowings                   1,220             (2,137 )         (917 )
Total                              6,398              2,209          8,607

Net interest income         $     (2,314 )     $      4,021       $  1,707

Provision for Loan Losses.

The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, management makes significant estimates and therefore has identified the allowance as a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The allowance for loan losses has been determined in accordance with U.S. GAAP, principally SFAS No. 5, "Accounting for Contingencies" and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan, an amendment to FASB Statements No. 5 and 15," as amended. Under the above accounting principles, we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. Management believes that the allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components:
specific and general allocations. Specific allocations are made for loans determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, as a practical expedient for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The Bank considers its investment in one-to-four family real estate loans and consumer loans to be smaller balance homogeneous loans and therefore excluded from separate identification for evaluation of impairment. These homogeneous loan groups are evaluated for impairment on a collective basis under SFAS No. 114.

The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. Management also analyzes historical loss experience, delinquency trends, general economic conditions, geographic concentrations, and industry and peer comparisons. This analysis establishes factors that are applied to the loan segments to determine the amount of the general allocations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses management has established which could have a material negative effect on the Company's financial results.

On a quarterly basis, the Bank's management committee reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. This process includes all loans, concentrating on non-accrual and classified loans. Each non-accrual or classified loan is evaluated for potential loss exposure. Any shortfall results in a recommendation of a specific allowance if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value available. This appraised value is then reduced to reflect estimated liquidation expenses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans. Based on the composition of our loan portfolio, management believes the primary risks are increases in interest rates, a decline in the economy, generally, and a decline in real estate market values in the New York metropolitan area. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. Management believes the allowance for loan losses reflects the inherent credit risk in our portfolio, the level of our non-performing loans and our charge-off experience. Based upon our analysis, we added $4.90 million to the allowance for loan losses during the fiscal year ended December 31, 2008.

Although management believes that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Although management uses what it believes is the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation, New York State Banking Department, and other regulatory bodies, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on its judgments about information available to them at the time of their examination.

Results of Operations Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007.

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

Net Income (Loss). Net loss for the fiscal year ended December 31, 2008 was $79.91 million, or $11.45 per share, as compared to net income of $5.35 million, or $.76 per share, for the fiscal year ended December 31, 2007. The net loss in fiscal 2008 was primarily due to the other than temporary impairment charges on securities of $94.35 million or $13.37 per share. The other than temporary impairment charge was due to our investment, directly and indirectly through auction rate securities, in preferred shares of Fannie Mae and Freddie Mac. These government sponsored agencies were taken over by the federal government in September 2008 resulting in, among other things, the suspension of dividend payments.

The Company's net income is largely dependent on interest rate levels, the demand for the Company's loan and deposit products and the strategies employed . . .