The Berkshire County Region, with twelve offices in Berkshire County. Berkshire County is the Company’s traditional market, where it has a leading market share in many of its product lines. Berkshire County is renowned for its combination of nature, culture, and harmony which make it a leisure and tourism destination and an attractive location for an emerging creative economy.

~~-3-~~

The Pioneer Valley Region with ten offices along the Connecticut River valley north and west of Springfield, Massachusetts. The Company entered this region through the acquisition of Woronoco Bancorp, Inc. in June 2005. This region is the metropolitan hub of Western Massachusetts and part of the Hartford/Springfield economic region centrally located between Boston and New York City.

~~Index~~The New York Region with ten offices serving Albany and the surrounding area in Northeastern New York. This region represents a de novo expansion by the Bank begun in 2005. Albany is the state capital and is part of New York’s Tech Valley which is gaining prominence as a world technology hub including leading edge nanotechnology initiatives representing a blend of private enterprise and public investment.

The Vermont region with seven offices serving Southern Vermont. The Company entered this region through the acquisition of Factory Point Bancorp, Inc. in September 2007. The Southern Vermont region is contiguous to Berkshire County and shares similar characteristics, with a more pronounced focus on recreation activities in Vermont’s Green Mountains.

~~The Vermont region with seven offices serving Southern Vermont. The Company entered this region through the acquisition of Factory Point Bancorp, Inc. in September 2007.~~

These four regions are viewed as having favorable demographics and provide an attractive regional niche for the Bank to distinguish itself from larger super-regional banks and smaller community banks. The Company is pursuing growth through acquisitions, de novo branching, product development, and organic growth. It made acquisitions of insurance and financial planning providers in 2004 and 2005, followed by the acquisition of five insurance agencies in the fourth quarter of 2006. These insurance acquisitions were merged and integrated into the Berkshire Insurance Group, which was made a subsidiary of the Company. Berkshire Insurance Group operates from ten locations in the Berkshire County and Pioneer Valley regions in Massachusetts. The Bank promotes itself as “America’s Most Exciting Bank”. It has set out to change the financial service experience, and its vision is to establish itself as a world-class financial services company through an engaging and exciting environment where customers want to do business and employees want to work. This brand and culture statement is expected to drive customer ~~delight, emotional~~ engagement, loyalty, market share and profitability.

- 3 -

The ~~Bank~~Company offers a ~~full-scale~~wide range of deposit, lending, investment, wealth management, and insurance products ~~through a team of employees with extensive experience~~to retail, commercial, not-for-profit, and municipal customers in its market areas. In addition to traditional retail and commercial banking ~~insurance,~~products, the Company’s product offerings also include retail and ~~investment management. The Company stresses quality control, including using Six Sigma tools to improve operational effectiveness~~commercial electronic banking, commercial cash management, and ~~efficiency. It is enhancing its credit and risk management functions to maintain strong asset quality and careful~~commercial interest rate ~~management. It~~swaps. The Company’s commercial banking products are offered within its regions and to commercial relationships in Massachusetts, Connecticut, and Rhode Island. The Company stresses a culture of teamwork and performance excellence to produce customer satisfaction to support its strategic growth and profitability. The Company utilizes Six Sigma tools to improve operational effectiveness and efficiency.

The Company has recruited executives with experience in regional management and has augmented its management team as it has expanded into a three state diversified regional financial services provider. The Company has invested in its infrastructure in order to position itself for further growth as a regional consolidator with an objective of filling in and expanding its footprint in its New England and New York markets. The Company has absorbed expenses related to its ten branch de novo expansion into the attractive New York market . Its acquisitions of banks, insurance agencies, and wealth management companies have resulted in near term dilution to per share tangible book value in order for the Company to achieve the scale, positioning, and momentum to support future beneficial growth.

The Company views its markets as geographically conservative, and these markets have experienced less exposure to speculative development, real estate inflation, and subprime lending activities compared to many other regions of the country. The Company’s markets are not contiguous with the densely populated Boston and New York City metropolitan areas. The Company believes that it has a closer and more consistent focus on its markets compared to national competitors.

COMPANY WEBSITE AND AVAILABILITY OF SECURITIES AND EXCHANGE COMMISSION FILINGS

The Company’s Internet website is its Investor Relations section atwww.berkshirebank.com. The Company makes available free of charge on or through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with the Securities and Exchange Commission. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K.

ECONOMIC AND FINANCIAL EVENTS

In the second half of 2008, and continuing into 2009, there are economic and financial events in the United States and around the globe which are unprecedented since World War II. The contraction of household wealth, as measured by real estate values and investment values, was the largest decline since the Great Depression. Major financial institutions failed or were forced into mergers with other institutions or ownership by national governments. All of the major U.S. investment banking firms either merged with commercial banks or changed their charters to commercial bank charters, except for Lehman Brothers, which declared bankruptcy. This bankruptcy precipitated a financial panic which threatened the continued operation of the global financial system. Emergency federal rescue measures were undertaken, including large scale investments in financial institutions, guarantees of the liabilities of money market funds and other financial institution liabilities, expanded liquidity facilities made available by the Federal Reserve Bank, increases in the amount of FDIC insurance, mortgage foreclosure mitigation programs, economic stimulus spending, and various other measures. Emergency federal loans were also made to U.S. auto manufacturers in order to avoid major bankruptcies in this industry. Most countries are in recession and the financial system remains fragile early in 2009.

- 4 -

COMPETITION

The Company is subject to strong competition from banks and other financial institutions and financial service providers. Its competition includes national and super-regional banks such as Bank of America, TD Banknorth, and Citizens Bank, which have substantially greater resources and lending limits. Non-bank competitors include credit unions, brokerage firms, insurance providers, financial planners, and the mutual fund industry. New technology is reshaping customer interaction with financial service providers and the increase of Internet-accessible financial institutions increases competition for the Company’s customers. The Company generally competes on the basis of customer service, relationship management, and the fair pricing of loan and deposit products and wealth management and asset management services. The location and convenience of branch offices is also a significant competitive factor, particularly regarding new offices. The Company does not rely on any individual, group, or entity for a material portion of its deposits.

The economic and financial events of 2008 have significantly impacted the competitive environment. The Federal Reserve System reduced short-term interest rates to close to zero and numerous financial companies converted to bank charters and began accepting FDIC insured deposits.

LENDING ACTIVITIES

General.The Bank originates loans in the four basic portfolio categories discussed below. Lending activities are limited by federal and state laws and regulations. Loan interest rates and other key loan terms are affected principally by the Bank’s asset/liability strategy, loan demand, competition, and the supply of money available for lending purposes. These factors, in turn, are affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters. ~~The majority~~Most of the Bank’s loans are made in its market areas and are secured by real estate in its market areas. Lending activities are therefore affected by activity in these real estate markets. The Bank does not engage in subprime lending activities targeted towards borrowers in high risk categories. The Bank monitors and limits the amount of long-term fixed-rate lending volume. Adjustable-rate loan products generally reduce interest rate risk but may produce higher loan losses in the

~~-4-~~

~~Index~~

event of sustained rate increases. The Bank retains most of the loans it originates, although the Bank ~~may sell~~generally sells its longer-term, fixed-rate, one- to four-family residential loans and sometimes buys and sells participations in some commercial ~~loans~~.loans.

Loan Portfolio Analysis.The following table sets forth the year-end composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.


	2008						2007						2006						2005						2004
				Percent						Percent						Percent						Percent						Percent
				of						of						of						of						of
(Dollars in millions)	Amount			Total			Amount			Total			Amount			Total			Amount			Total			Amount			Total

Residential mortgages	$	677.2			34	%	$	657.0			34	%	$	599.2			36	%	$	549.8			39	%	$	235.2			28	%

Commercial mortgages		805.5			40			704.8			36			566.4			33			410.7			29			260.5			32

Commercial business		178.9			9			203.6			11			190.5			11			158.7			11			150.9			18


Total commercial loans		984.4			49			908.4			47			756.9			44			569.4			40			411.4			50

Consumer		345.5			17			378.6			19			342.9			20			301.0			21			181.5			22


Total loans		2,007.1			100	%		1,944.0			100	%		1,699.0			100	%		1,420.2			100	%		828.1			100	%


Allowance for loan losses		(22.9	)					(22.1	)					(19.4	)					(13.0	)					(9.3	)


Net loans	$	1,984.2					$	1,921.9					$	1,679.6					$	1,407.2					$	818.8

- 5 -

2007 2006 2005 2004 2003
Percent Percent Percent Percent Percent
of of of of of
(Dollars in millions) Amount Total Amount Total Amount Total Amount Total Amount Total

Residential mortgages $ 657.0 34 % $ 599.2 36 % $ 549.8 39 % $ 235.2 28 % $ 265.5 34 %
Commercial mortgages 704.8 36 566.4 33 410.7 29 260.5 32 206.4 26
Commercial business 203.6 11 190.5 11 158.7 11 150.9 18 166.3 21
Total commercial loans 908.4 47 756.9 44 569.4 40 411.4 50 372.7 47
Consumer 378.6 19 342.9 20 301.0 21 181.5 22 154.0 19
Total loans 1,944.0 100 % 1,699.0 100 % 1,420.2 100 % 828.1 100 % 792.2 100 %

Allowance for loan losses (22.1 ) (19.4 ) (13.0 ) (9.3 ) (9.0 )
Net loans $ 1,921.9 $ 1,679.6 $ 1,407.2 $ 818.8 $ 783.2

Residential mortgages.

The Bank offers ~~conforming and a limited number of non-conforming,~~ fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 ~~years. The Bank offers both fixed- and adjustable-rate conventional mortgage loans (“ARMs”) with terms of 10 to 30~~ years that are fully amortizing with monthly loan payments. ~~One- to four-family residential mortgage loans~~Residential mortgages are generally underwritten according to Fannie Mae and Freddie Mac guidelines for loans they designate as “A” or “A-~~“. Loans that conform to such guidelines~~” (these are referred to as “conforming loans.” The Bank generally originates both fixed-rate and ARM loans in amounts up to the maximum conforming loan limits as established by Fannie Mae and Freddie Mac, which are currently $417,000 for single-family homes.loans”). Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. The Bank also originates loans above conforming loan amount limits, referred to as “jumbo loans,” which are generally consistent with secondary market guidelines for these loans. The Bank does not ~~actively engage in the business of sub-prime~~offer subprime mortgage lending programs, but may from time to time originate residential mortgage loans with FICO scores below 660, or otherwise not consistent with conforming loan criteria, when merited by other underwriting considerations.

The Bank also originates loans above conforming limits, referred to as “jumbo loans,” which have been underwritten to the substantially same credit standards as conforming loans, which are generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans. The Bank also originates loans other than jumbo loans that are not saleable to Fannie Mae or Freddie Mac, but are deemed to be acceptable risks.

~~The Bank actively~~often sells its newly originated fixed rate mortgages. It monitors its interest rate risk position ~~to determine the desirable level of investment in fixed-rate mortgages, The Bank~~and sometimes may decide to sell ~~all or a portion of such~~existing mortgage loans in the secondary mortgage ~~market~~market. During 2008, the Bank became approved as a direct seller to ~~government-sponsored entities such as~~ Fannie Mae, ~~and Freddie Mac or other purchasers depending on market interest rates and our capital and liquidity position.~~

~~The Bank generally retains~~retaining the servicing ~~rights on large portfolio loan sales to generate fee income and reinforce our commitment to customer service, although the~~rights. The Bank may also sell loans to ~~mortgage banking companies,~~other secondary market investors, either on a ~~servicing-released~~servicing retained or servicing released basis. The Bank sometimes originates loans for sale to the FHA, VA, and state housing agency programs. As of ~~December 31, 2007,~~year-end 2008, residential mortgage loans serviced for others totaled ~~$128.0~~$111 million.

The Bank ~~currently~~ offers ~~several ARM loan products secured by residential properties with rates that are fixed for a period ranging from~~adjustable rate (“ARM”) mortgages which do not contain interest-only or negative amortization features. After an initial term of six months to ten ~~years. After~~years, the ~~initial term, if the loan is not already refinanced, the interest~~ rates on these loans generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury ~~securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board and subject to certain periodic and lifetime limitations on~~securities. ARM loan interest ~~rate changes. ARM loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers~~rates may rise as interest rates

~~-5-~~

~~Index~~

rise, thereby increasing the potential for default. At December 31, ~~2007, our~~2008, the Bank’s ARM portfolio totaled ~~$338.3~~$372 million. ~~The Bank’s adjustable rate loans do not have interest-only or negative amortization features.~~

The Bank requires title insurance on all its one- to four-family mortgage loans, and also requires that borrowers maintain fire and extended coverage or all risk casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements, but in any event in an amount calculated to avoid the effect of any coinsurance clause. For loans with initial loan-to-value ratios in excess of 80%, the Bank generally requires private mortgage insurance.

The Bank originates loans to individuals for the construction and acquisition of personal residences. These loans generally provide fifteen-month construction periods followed by a permanent mortgage loan, and follow the Bank’s normal mortgage underwriting guidelines. Residential construction loans totaled ~~$46.8~~$35 million at year-end ~~2007.~~2008.

Commercial Mortgages.The Bank originates commercial mortgages on properties used for business purposes such as small office buildings, industrial, healthcare, lodging, recreation, or retail facilities. This portfolio also includes commercial 1-4 family and multifamily properties. Loans may generally be made with terms of up to 25 years and with interest rates that adjust periodically (primarily from short-term to five years).

Berkshire Bank generally requires that borrowers have debt service coverage ratios (the ratio of available cash flows before debt service to debt service) of at least 1.25 times. Loans may be made up to 80% of appraised value. Generally, commercial mortgages require personal guarantees by the principals. Credit enhancements in the form of additional collateral or guarantees are normally considered for start-up businesses without a qualifying cash flow history.

Commercial mortgages generally involve larger principal amounts and a greater degree of risk than residential mortgages. They also often provide higher lending spreads. Because repayment is often dependent on the successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. Berkshire Bank seeks to minimize these risks through strict adherence to its underwriting standards and portfolio management processes.

In 2008, the Bank began offering interest rate swaps to certain larger commercial mortgage borrowers. These swaps allow the Bank to originate a mortgage based on short-term LIBOR rates and allow the borrower to swap into a longer term fixed rate. The Bank simultaneously sells an offsetting back-to-back swap to an investment grade national bank so that it does not retain this fixed-rate risk. The Bank also records fee income on these interest rate swaps. In 2008, the Bank also purchased one interest rate swap on a fixed-rate tax-advantaged economic development bond provided to a local borrower, which is being accounted for as a trading security.

The Bank originates ~~land acquisition, development and~~ construction loans to builders and commercial borrowers in ~~our market area.~~and around its markets. These loans totaled ~~$125.3~~$130 million, or ~~6.4%~~6% of the our total loan portfolio at December 31, 2007. Acquisition loans help finance the purchase of land intended for further development, including single-family houses, multi-family housing, and commercial income property. In some cases, the Bank may make an acquisition loan before the borrower has received approval to develop the land as planned. In general, the maximum loan-to-value ratio for a land acquisition loan is 50% of the appraised value of the property, although for certain borrowers deemed to be the lowest risk, higher loan-to-value ratios may be allowed. The Bank also makes development loans to builders in its market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads, sewers and other development costs. Builders generally rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum amount loaned is generally limited to the cost of the improvements plus an interest reserve, if one is required. Advances are made in accordance with a schedule reflecting the cost of the improvements.

~~The Bank also grants construction loans to area builders, often in conjunction with development loans. In the case of residential subdivisions, these~~year-end 2008. Construction loans finance the ~~cost~~acquisition and/or improvement of ~~completing homes on the improved property. Advances on~~commercial and residential properties. The maximum loan to value limits for construction loans ~~are made in accordance with~~generally follow FDIC supervisory limits, up to a ~~schedule reflecting the cost~~maximum of construction. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction.80%. The Bank commits to provide the permanent mortgage financing on most of our construction loans on income-producing property. Advances on construction loans are made in accordance with a schedule reflecting the cost of the improvements. Construction loans include land acquisition loans up to a maximum 65% loan to value on raw land.

- 6 -

~~-6-~~

~~Index~~

~~Land acquisition, development and construction lending exposes the Bank to~~Construction loans may have greater credit risk than permanent ~~mortgage financing. The~~loans. In many cases, the loan’s repayment ~~of land acquisition, development and construction loans depends upon~~is dependent on the ~~sale of the property to third parties or the availability of permanent financing upon~~ completion of ~~all improvements. In the event the Bank makes an acquisition loan on property that is not yet approved for the planned development, there is the~~construction and other real estate improvements, which entails risk that ~~approvals will~~construction permits may be delayed or may not be ~~granted~~received, or ~~will~~that there may be ~~delayed. These events may adversely affect~~delays or cost overruns during construction. Repayment is also often dependent on the borrower and the collateral value of the property. Development and construction loans also expose the Bank to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the improved property, which depends on market conditions and the availability of permanent financing. Developers and contractors may also encounter liquidity risks or other risks related to other projects which are not ~~occur as anticipated.~~being financed.

Commercial Business Loans.The Bank offers secured commercial term loans with repayment terms which are normally limited to the expected useful life of the asset being financed, generally not exceeding seven years. Berkshire Bank also offers revolving loans, lines of credit, letters of credit, time notes and Small Business Administration guaranteed loans. Business lines of credit have adjustable rates of interest and are payable on demand, subject to annual review and renewal.

Commercial lending policies regarding debt-service coverage ability and guarantees are similar to those which govern commercial real estate lending. Commercial business loans are generally secured by a variety of collateral such as accounts receivable, inventory and equipment, and are generally supported by personal guarantees. Loan to value ratios depend on the collateral type and generally do not exceed 95% of the liquidation value of the collateral. Some commercial loans may also be secured by liens on real estate. Berkshire Bank generally does not make unsecured commercial loans.

Commercial loans are of higher risk and are made primarily on the basis of the borrower’s ability to make repayment from the cash flows of its business. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The Bank gives additional consideration to the borrower’s credit history and the guarantor’s capacity to help mitigate these risks. Commercial loans are often a central component of a total commercial banking relationship, and are therefore an important component of the Bank’s lending activities.

Consumer Loans.~~Berkshire~~The Bank’s consumer ~~lending strategy is focused on~~loans consist principally of prime indirect automobile loans and home equity loans. ~~The Bank offers fixed-rate~~In 2008, the Company substantially ended the origination of new indirect automobile loans ~~with terms~~due to its assessment of ~~up to 72 months for new~~credit and ~~recent model used cars and up to 66 months for older model used cars. The Bank generally makes such loans up to 100% of the retail value shown~~pricing conditions in ~~the~~ ~~NADA Used Car Guide. This program is targeted towards prime grade credits. The Bank does not offer subprime lending programs.~~that market. The automobile loans have produced a higher loan charge-off rate than the Bank’s other loan portfolios, which is viewed as normal for this segment. Collections are more sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged prior to repossession. Additionally, collections are more subject to the limitations of federal and state laws. Automobile loans outstanding totaled ~~$190.6~~$135 million at year-end ~~2007.~~

2008.

The Bank’s home equity lines of credit are typically secured by first or second mortgages on borrowers’ residences. Home equity lines have an initial revolving period up to ten years, followed by an amortizing term up to fifteen years. These loans are normally indexed to the prime rate. Home equity loans also include amortizing fixed-rate second mortgages with terms up to fifteen years. Lending policies for combined debt service and collateral coverage are similar to those used for residential first mortgages, although underwriting verifications are more streamlined. The maximum combined loan-to-value is 80%. Home equity line credit risks are similar to those of adjustable-rate first mortgages, although these loans may be more sensitive to losses when interest rates are rising due to increased sensitivity to rate ~~changes and increased~~changes. Additionally, there may be possible compression of collateral coverage on second ~~liens.~~lien home equity lines. The Bank also includes all other consumer loans in this portfolio total, including personal secured and unsecured loans and overdraft protection facilities. Home equity and other loans outstanding at year-end ~~2007~~2008 totaled ~~$181.9~~$211 million.

- 7 -

~~-7-~~

~~Index~~

Maturity and Sensitivity of Loan Portfolio.The following table shows contractual final maturities of selected loan categories at year-end ~~2007.~~2008. The contractual maturities do not reflect premiums, discounts, and deferred costs, and do not reflect prepayments.

December 31, 2007


Contractual Maturity	One Year		More Than One		More Than				One Year		More than One		More Than
(In Thousands)	or Less		to Five Years		Five Years		Total
(In thousands)									or Less		to Five Years		Five Years		Total

Construction Mortgage Loans:
Construction mortgage loans:
Residential	$	9,266	$	37,548	$	----	$	46,814	$	22,404	$	12,117	$	—	$	34,521
Commercial		36,854		88,495		----		125,349		61,507		68,197		—		129,704
Commercial Business Loans		92,262		49,368		61,934		203,564
Commercial business loans										87,310		37,538		54,086		178,934

Total	$	138,382	$	175,411	$	61,934	$	375,727	$	171,221	$	117,852	$	54,086	$	343,159

For the ~~$237~~$172 million total of loans above which mature in more than one year, ~~$101~~$54 million of these loans are fixed-rate and ~~$136~~$118 million are ~~variable-rate.~~variable rate.

Loan Administration.Lending activities are governed by a loan policy approved by the ~~Board of Directors.~~Board’s Risk Management Committee. Internal staff perform post-closing loan documentation review, quality control, and ~~ongoing~~monitor commercial loan ~~review.~~administration. The ~~Bank~~lending staff assigns a risk rating to all commercial ~~loans, and loan review staff perform an ongoing program of loan and risk rating reviews.~~loans. Management ~~also~~ employs an independent third party ~~for~~to review the risk ratings of the majority of commercial loan ~~reviews, as discussed in “Allowance for Loan Losses.”~~

balances.

The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by ~~Berkshire Bank’s Board of Directors~~the Board’s Risk Management Committee and management. The ~~Board of Directors~~Risk Management Committee has approved individual and combined lending approval authorities up to specified ~~limits. Above those~~ limits ~~the Board of Directors established Regional Loan Committees~~for loans with ~~commercial approval authority generally up to $5 million.~~certain risk ratings. Management’s Executive Loan Committee is responsible for commercial loan approval above $5 million and residential mortgage approval above $2 million.

The Bank’s lending activities are conducted by its salaried and commissioned loan ~~personnel and through its relationships with automobile dealers.~~personnel. From time to time, the Bank will purchase whole loans or participations in loans. These loans are underwritten according to Berkshire Bank’s underwriting criteria and procedures and are generally serviced by the originating lender under terms of the applicable participation agreement. The Bank from time to time will sell or securitize residential mortgages in the secondary market based on prevailing market interest rate conditions and an analysis of the composition and risk of the loan portfolio, the Bank’s interest rate risk profile and liquidity needs. The Bank sells a limited number of commercial loan participations on a non-recourse basis. The Bank issues loan commitments to its prospective borrowers conditioned on the occurrence of certain events. Loan origination commitments are made in writing on specified terms and conditions and are generally honored for up to sixty days from approval; some commercial commitments are made for longer terms. Total lending commitments, including lines and letters of credit, were ~~$571~~$438 million at year-end ~~2007.~~

2008.

The loan policy sets certain limits on concentrations of credit and requires periodic reporting of concentrations to the ~~Board.~~Risk Management Committee. Loans outstanding to the ten largest relationships ~~totaled $159 million~~were 81% of risk based capital at year-end ~~2007.~~2008. Total year-end commercial construction loans outstanding were ~~74%~~52% of the Bank’s risk based capital at year-end, and total commercial mortgage outstandings (including certain owner-occupied loans) were estimated at ~~265%~~247% of risk based capital. The FDIC has ~~recently~~ established monitoring guidelines of 100% and 300% for these ratios, respectively. Above these guidelines, additional monitoring and risk management controls are required. The commercial construction and development loans primarily involve residential and condominium construction projects. Additionally, the Bank finances construction of lodging, leisure, and retail properties. For the majority of these loans, the Bank provides permanent or semi-permanent financing after the construction period.

Problem Assets.The Bank ~~finances residential and condominium construction and development projects as well.~~

~~Problem Assets.~~ ~~While the Bank generally~~ prefers to work with borrowers to resolve problems rather than proceeding to foreclosure. For commercial loans, this may result in a period of forbearance or restructuring of the loan. For residential mortgage loans, the Bank generally follows FDIC guidelines to attempt a restructuring that will enable an owner-occupant to remain in their home. However, if these processes fail to result in a performing loan, then the Bank generally will initiate foreclosure or other proceedings no later than the 90^th day of a delinquency, as necessary, to minimize any potential loss. Management reports to the Board of Directors ~~monthly~~quarterly delinquent loans and nonperforming assets. Loans are generally removed from accruing status when they reach 90 days delinquent, except for certain loans which

~~-8-~~

~~Index~~

are well secured and in the process of collection. Delinquent automobile loans are maintained on accrual until they reach 120 days delinquent, and then they are generally charged-off. Interest income that would have been recorded for ~~2007~~2008 had nonaccruing loans been current according to their original terms, amounted to ~~$0.8~~$0.9 million. The amount of interest income on those loans that was included in net income in ~~2007~~2008 was $0.1 million.

- 8 -

General

~~-15-~~

~~Index~~

Regulatory Enforcement Authority.Any ~~Massachusetts~~Massachusetts-chartered bank that does not operate in accordance with the ~~Commissioner’s~~ regulations, policies and directives of the Commissioner may be ~~sanctioned.~~subject to sanctions for non-compliance, including seizure of the property and business of the bank and suspension or revocation of its charter. The Commissioner may under certain circumstances suspend or remove ~~directors~~officers or ~~officers of a bank~~directors who have violated the law, conducted athe bank’s business in a manner ~~that~~which is unsafe, unsound or contrary to the ~~depositors’~~depositors interests or been negligent in the performance of their duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or practice, the Commissioner ~~has the authority~~may issue an order to ~~appoint~~cease and desist and impose a ~~receiver or conservator if it is determined that~~fine on the bank ~~is conducting its business~~concerned. Finally, Massachusetts consumer protection and civil rights statutes applicable to Berkshire Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in ~~an unsafe or unauthorized manner, and under~~the case of certain ~~other circumstances.~~violations of those statutes.

Depositors Insurance Fund.All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund, a ~~private deposit insurer, which~~corporation that insures ~~all~~savings bank deposits ~~in member banks~~ in excess of ~~FDIC~~federal deposit insurance ~~limits. Member~~coverage. The Depositors Insurance Fund is authorized to charge savings banks an annual assessment of up to 1/50th of 1.0% of a savings bank’s deposit balances in excess of amounts insured by the FDIC.

Massachusetts has other statutes or regulations that are required to pay fund assessments. In addition, the Mutual Savings Central Fund acts as a source of liquidity to its members in supplying them with low-cost funds, and purchasing qualifying obligations from them.

~~Berkshire Bank must adhere~~similar to the Massachusetts banking laws, which govern activities such as authorized investments, lending activities and dividend payments. In particular, a Massachusetts savings bank may only pay dividends on its capital stock if such payment would not impair the bank’s capital. No dividends may be paid to stockholders of a bank if such dividends would reduce stockholders’ equity of the bank below the amount of the liquidation account required by the Massachusetts conversion regulations. Additionally, the Commissioner may restrict the payment of dividends by a bank if it is determined that such payment would result in safety and soundness concerns.federal provisions discussed below.

Federal Regulations

~~FEDERAL REGULATIONS~~

~~CAPITAL REQUIREMENTS~~

Capital Requirements.Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Berkshire Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total average assets (as defined) of 3%. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock

~~-16-~~

~~Index~~

~~(including~~ (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and ~~a percentage of~~ certain ~~nonfinancial equity investments.~~

other items. Berkshire Bank must also comply with the FDIC risk-based capital guidelines. The FDIC guidelines require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk.

State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net unrealized gain on equity securities and other capital instruments. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital.

As a savings and loan holding company regulated by the OTS, Berkshire Hills is not subject to any separate regulatory capital requirements. Berkshire Bank’s regulatory capital is included in the Stockholders’ Equity note of the Company’s financial statements in Item 8 of this report. ~~For the dates shown,~~At December 31, 2008, Berkshire Bank met each of its capital requirements.

~~INTERSTATE BANKING AND BRANCHING~~

Interstate Banking and Branching.Federal law permits a bank, such as Berkshire Bank, to acquire an institution by merger in a state other than Massachusetts unless the other state has opted out. Federal law also authorizes de novo branching into another state if the host state enacts a law expressly permitting out of state banks to establish such branches within its borders. ~~In 2004,~~ Berkshire Bank ~~purchased a branch~~operates branches in ~~Oriskany Falls, New York. At year-end 2005, Berkshire Bank had received regulatory approval for a new branch in East Greenbush,~~ New York and ~~was in the process of obtaining regulatory approval for new branches in Delmar and Guilderland, New York. Since 2005, Berkshire Bank opened nine branches in upstate New York’s capital region.~~Vermont. At its interstate branches, Berkshire Bank may conduct any activity that is authorized under Massachusetts law that is permissible either for a savings bank chartered in that state (subject to applicable federal restrictions) or a branch in that state of an out-of-state national bank. The New York State Superintendent of Banks and the Vermont Commissioner of Banking and Insurance may exercise certain regulatory authority over the Bank’s New York and Vermont branches.

- 17 -

Lending

Continued and Prolonged Deterioration in the Housing Sector and Related Markets and the Economy May Adversely Affect Our Business and Financial Results.

Residential real estate markets continued to decline throughout 2008. Economic measures declined at an accelerating rate, leading to a 6.2% preliminary estimated annualized decline in the U.S. GDP in the fourth quarter. Unemployment rose as economic conditions deteriorated. We do not expect improvement in the economy or in real estate and financial market conditions in the near future. A worsening of these negative conditions could adversely impact the ability of our borrowers to service their debt, along with the value and liquidity of collateral and other forms of loan support. The quality and value of our investment securities may also be impacted. Emergency government measures may affect our ~~business.~~rights as creditors and owners of securities. Adverse developments could affect our net interest income, charge-offs, loan loss provision, asset and goodwill valuations, and our prospects for growth. Regulatory promulgations could affect our operations and financial condition.

Our Emphasis on Commercial Lending May Expose Us to Increased Lending Risks, Which Could Hurt Our Profits.

~~Lending~~

~~Our emphasis on commercial lending may expose us to increased lending risks, which could hurt our profits.~~

Our commercial loan portfolio, which consists of commercial real estate loans, construction and development loans and commercial business loans, has increased from $757 million at year-end 2006 to $908 million at year-end 2007. A significant portion of this growth has included construction and development loans that may have higher risk, and loans in new markets, where the Company has less historic knowledge of the market. Also, commercialCommercial loans are historically more sensitive to economic ~~downturns and the possible impact of higher interest rates.~~downturns. Such sensitivity includes potentially higher default rates and possible reduction of collateral values. ~~Some of the growth in commercial loans is also attributable to~~Commercial lending involves larger loan sizes and larger relationship exposures, which can have a greater impact on profits in the event of adverse loan performance. Commercial lending ~~also~~ involves more development financing, which is dependent on the future success of new operations. ~~Additionally,~~Residential construction loans depend significantly on the ~~Company has expanded its commercial~~residential real estate and lending ~~team~~markets for the repayment of these loans. Commercial loans also include lending to ~~accomplish this growth, and this has the potential~~nonprofit organizations which in some cases are particularly sensitive to increase risk relating to underwriting and administrative controls as new lenders are integrated into the control environment. These and other factors may result in errors in judging the collectability of commercial loans, which may lead to additional provisions or charge-offs. Construction lending depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs provesnegative economic events.

Our Allowance for Loan Losses May Prove to be ~~inaccurate, the Company may be required~~Insufficient to advance funds beyond the amount originally committed to permit completion of the building project. If the estimate of value proves to be inaccurate, the Company may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment. If the Company is forced to foreclose on collateral before or at completion due to a default, there can be no assurance that it will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Absorb Losses in Our ~~allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.~~

Loan Portfolio.

Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results.

~~In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes~~ The Company has seen a significant increase in the ~~composition~~level of ~~our loan portfolio~~potential problem loans and other loans with higher than normal risk. The Company expects to receive more frequent requests from borrowers to modify residential mortgage and consumer loans. The related accounting measurements related to impairment and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount ofloan loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, the local residential real estate market, the interest rate environment, fiscal and monetary policy of the United States government, energy prices, commercial real estate conditions, the duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters,allowance require significant estimates which are ~~by nature more subjective~~subject to uncertainty and ~~fluid.~~changes relating to new information and changing circumstances. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.

~~-22-~~

~~Index~~

Based on our review of the above-mentioned factors, we recorded a provision for loan losses of $4.3 million for the year ended December 31, 2007 and acquired $4.5 million in allowance for loan losses from the Factory Point Bancorp acquisition to bring our allowance for loan losses at year-end 2007 to $22.1 million, which was 1.14% of total loans. State and federal regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

- 24 -

Operating

A ~~downturn~~Continuing Downturn in the ~~local economy~~Local Economy or ~~a decline in real estate values could hurt our profits.~~Local Real Estate Values Could Hurt Our Profits.

Approximately 79% of our loans were secured by real estate as of year-end 2007. A decline in real estate values could expose us to a greater risk of loss. Because the majority of our borrowers and depositors are individuals and businesses located and doing business in our market areas, ourOur success depends to a significant extent upon economic conditions in our market areas. The demand for our products and services, and our ability to maintain satisfactory pricing margins, may be affected by market conditions. Adverse economic conditions in our market areas could reduce our growth rate, affect the ability of our customers to repay their loans and generally ~~effect~~affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market areas could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

~~Growth~~

Our ~~geographic expansion~~Geographic Expansion and ~~growth, if not successful, could negatively impact earnings.~~

Growth, If Not Successful, Could Negatively Impact Earnings.

We plan to achieve significant growth both organically and through acquisitions. We have recently expanded into new geographic markets and anticipate that we will expand into additional new geographic markets as we ~~transform ourselves into~~expand as a regional bank. The success of this expansion ~~will depend~~depends on our ability to continue to maintain and develop an infrastructure appropriate to support such growth. Also, our success ~~will depend~~depends on the acceptance by customers of us and our services in these new markets and, in the case of expansion through acquisitions, our success depends on many factors, including the long-term retention of key personnel and acquired customer relationships. The profitability of our expansion strategy also ~~will depend~~depends on whether the income we generate in the new markets will offset the increased expenses of operating a larger entity with increased personnel, more branch locations and additional product offerings. We expect that it may take a period of time before certain of our new branches can become profitable, especially in areas in which we do not have an established physical presence. During this period, operating these new branches may negatively impact net income. Additionally, in connection with our expansion, we will need to increase our operational

Competition From Financial Institutions and ~~financial procedures, systems~~Other Financial Service Providers May Adversely Affect Our Growth and ~~controls. If we have difficulty in doing so, it could harm our business, results of operations and financial condition.~~

~~Competition from financial institutions and other financial service providers may adversely affect our growth and profitability.~~

Profitability.

The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. WeDue to the interventions of the federal government, some of the institutions that we compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and internationalare receiving substantial federal financial ~~institutions that operate offices in our primary market areas and elsewhere.~~

~~-23-~~

~~Index~~

We compete with these institutions both in attracting deposits and in making loans. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in our earning less on our loans and paying more on our deposits,support which reduces net interest income. Many of our competitors are larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller resources and smaller lending limits, lack of geographic diversification and inability to spread our marketing costs across a broader market.

~~Our continued pace of growth may require us to raise additional capital in the future, but that capital~~ may not be available ~~when~~to our Company. Many institutions have been allowed to convert to banking charters and to offer insured deposits for the first time. The federal government has guaranteed money market funds which traditionally compete with bank deposits. The federal government has offered significant guarantees of new debt issuances to some of the Company’s competitors to help them fund their operations. Fannie Mae and Freddie Mac are now in federal receivership and may operate directly as a competitor in some lending markets in the future. Emergency measures designed to support some of the Company’s competitors may provide no advantage to the Company or place it at a disadvantage. Emergency changes in deposit insurance, financial market regulation, bank regulation, and policy of the Federal Home Loan Bank system may all affect the competitive environment for the Company and other market participants.

The Terms of Our Capital May Change and Our Access to Capital Markets and Financial Markets May Not Be Available When It Is Needed.

The Company has participated in the U.S. Treasury Capital Purchase Program. The terms of this program are subject to changes by Congress and the burden of the program is ~~needed.~~

affected by inspections and program management. Congress continues to add new terms to this program and the Treasury’s involvement as a partner is evolving. Uncertainty about the direction of this program and adverse changes in this program could affect the Company’s ability to operate and generate earnings, including the impact of dividend payments and the impact of compensation and operating restrictions. The possible nationalization of portions of the U.S. financial system and/or failures or restructurings of major market participants may create unpredictable and adverse changes in the availability of capital and other financial resources. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Regulatory capital requirements and their impact on the Company may change. We may at some point need to raise additional capital to support our operations and continued growth. Our ability to raise capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. ~~Accordingly, if needed, we cannot assure you of our ability to raise additional capital on terms acceptable to us.~~ If we cannot raise additional capital when needed, it could affect our operations and our ability to execute our strategic plan, which includes further expanding our operations through internal growth and ~~acquisitions~~acquisitions.

- 25 -

We are Subject to Security and Operational Risks Relating to Our Use of Technology that Could Damage Our Reputation and Our Business.

Security breaches in our internet banking activities could ~~be materially impaired.~~

~~Interest Rates~~

~~Fluctuations in interest rates could reduce~~expose us to possible liability and damage our ~~profitability and affect the value~~reputation. Any compromise of our ~~assets.~~

~~Like other financial institutions, we are subject~~security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on industry standard internet security systems to ~~interest rate risk. Our primary source~~provide the security and authentication necessary to effect secure transmission of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivitiesdata. These precautions may not protect our systems from compromises or breaches of our ~~assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes~~security measures that could result in ~~market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., prime) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary~~damage to our ~~position,~~reputation and our ~~earnings may be negatively affected. In addition, loan volume~~business. We utilize third part core banking software and ~~quality and deposit volume and mix can be affected by market interest rates. Changes~~for some systems we outsource our data processing to a third party. If our third party providers encounter difficulties or if we have difficulty in ~~levels of market interest rates~~communicating with such third parties, it could ~~materially and adversely affect our net interest spread, asset quality, origination volume and overall profitability.~~

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

~~Changes in the level of interest rates also may negatively~~significantly affect our ability to ~~originate real estate loans,~~adequately process and account for customer transactions, which could significantly affect our business operations. Due to the ~~value~~recession, there may be a rising risk of ~~our assets~~fraud or illegal acts. Disaster and disaster recovery risks could affect our ability to ~~realize gains~~operate and our reputation.

Conditions in Insurance Markets Could Adversely Affect Our Earnings.

Revenue levels from our insurance segment could be negatively impacted by the ~~sale~~fluctuating premiums in the insurance market caused by capacity constraints and losses due to natural disasters. Premium levels and commission structures may be affected by changes in the financial condition of insurers due to the financial and economic downturn. Other factors that affect our insurance revenue are profitability and growth of our ~~assets, all~~clients, continued development of ~~which ultimately affect~~new products and services, as well as our ~~earnings.~~access to markets and the impact of state insurance regulations.

Liquidity

Our ~~investment portfolio includes securities that are sensitive~~Wholesale Funding Sources May Prove Insufficient to ~~interest rates~~Replace Deposits at Maturity and ~~variations in interest rates may adversely impact our profitability.~~

Support Our securities portfolio includes mortgage-backed securities, which are insured or guaranteed by U.S. government agencies or government-sponsored enterprises.. These securities are sensitive to interest rate fluctuations. The unrealized gains or losses in our available-for-sale portfolio are reported as a separate component of stockholders’ equity until realized upon sale. As a result, future interest rate fluctuations may impact stockholders’ equity, causing material fluctuations from quarter to quarter. Failure to hold our securities until maturity or until market conditions are favorable for a sale could adversely affect our financial condition, profitabilityOperations and ~~prospects.~~

~~-24-~~
~~Index~~

~~Liquidity~~
~~Our wholesale funding sources may prove insufficient to replace deposits at maturity and support our future growth.~~

Future Growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we ~~are likely to~~may become more dependent on these sources, which include Federal Home Loan Bank advances, proceeds from the sale of loans, and liquidity resources at the holding company. ~~At December 31, 2007, we had approximately $299 million of FHLB advances outstanding.~~ Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable ~~interest rates.~~costs. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Lack of Consumer Confidence in Financial Institutions May Decrease Our Level of Deposits.

Our ~~ability~~level of deposits may be affected by lack of consumer confidence in financial institutions, which have caused fewer depositors to ~~service our debt,~~be willing to maintain deposits that are not insured by the Federal Deposit Insurance Corporation. That may cause depositors to withdraw deposits and place them in other institutions or to invest uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Treasury. These consumer preferences may cause us to be forced to pay ~~dividends~~higher interest rates to retain deposits and ~~otherwise pay our obligations~~may constrain liquidity as ~~they come due is substantially dependent~~we seek to meet funding needs caused by reduced deposit levels.

Our Ability to Service Our Debt, Pay Dividends and Otherwise Pay Our Obligations as They Come Due Is Substantially Dependent on ~~capital distributions~~Capital Distributions from Berkshire Bank, and ~~these distributions are subject~~These Distributions Are Subject to ~~regulatory limits~~Regulatory Limits and ~~other restrictions.~~Other Restrictions.

AWhile the Company maintained a high level of cash balances at year-end 2008, those balances may decrease due to changes in the Company’s capital structure, possible acquisitions, and possible further investments in the Bank. Over the long term, a substantial source of our income from which we service our debt, pay our obligations and from which we can pay dividends is the receipt of dividends from Berkshire Bank. The availability of dividends from Berkshire Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Berkshire Bank, and other factors, that the applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. If Berkshire Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from Berkshire Bank would adversely affect our business, financial condition, results of operations and prospects.

- 26 -

Regulatory

Recent Legislative and Regulatory Initiatives May Not Stabilize the Banking System.

The potential exists for additional federal or state laws and ~~regulations.~~

~~Berkshire Hills Bancorp is subject~~regulations regarding lending, funding practices, and liquidity standards, and bank regulatory agencies are expected to ~~extensive regulation, supervision~~be more active in responding to concerns and ~~examination by~~trends identified in examinations, including the ~~Office~~expected issuance of ~~Thrift Supervision, its chartering authority,~~many formal enforcement orders. Actions taken to date, as well as potential actions, may not have the beneficial effects that are intended, particularly with respect to the extreme levels of volatility and ~~Berkshire Bank is subject to extensive supervision~~limited credit availability currently being experienced. In addition, new laws, regulations, and ~~examination by the Massachusetts Division of Banks, its chartering authority, and the~~other regulatory changes will increase our Federal Deposit Insurance Corporation ~~as insurer~~insurance premiums and may also increase our costs of ~~Berkshire Bank’s deposits. Such~~regulatory compliance and of doing business, and otherwise affect our operations. New laws, regulations, and ~~supervision govern~~other regulatory changes, along with negative developments in the ~~activities~~financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.

Future Legislative or Regulatory Actions Responding to Perceived Financial and Market Problems Could Impair Our Rights Against Borrowers.

There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.

Our Expenses Will Increase As A Result Of Increases in FDIC Insurance Premiums.

The Federal Deposit Insurance Corporation (“FDIC”) imposes an assessment against financial institutions for deposit insurance. This assessment is based on the risk category of the institution and ~~its holding company may engage, and are intended primarily~~currently ranges from 5 to 43 basis points of the institution’s deposits. On December 22, 2008, the FDIC published a final rule raising the current deposit insurance assessment rates uniformly for all institutions by seven basis points (to a range from 12 to 50 basis points) for the ~~protection~~first quarter of 2009. The FDIC also expects to issue a final rule early in 2009, to be effective April 1, 2009, to change the way that the FDIC calculates federal deposit insurance assessment rates beginning in the second quarter of 2009. For more information on FDIC assessments, see “Regulation and Supervision—Insurance of Deposit Accounts”.

Changes In Federal Statutes May Adversely Affect the Terms of our Capital Purchase Program Letter Agreement with the U.S. Treasury.

The Treasury may amend any provision of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of allowance for loan losses.Agreement to comply with changes to federal statutes. Any change in such ~~regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action may~~Agreement could have a material impact on us and our operations. ~~Berkshire Hills Bancorp primarily depends on Berkshire Bank for dividends as a source~~Future federal statutory changes may adversely affect the terms of ~~funds to service its indebtedness and to pay dividends to stockholders. Such dividends may be restricted or prohibited by regulatory authorities.~~

~~We are subject to security and operational risks relating to our use of technology that could damage our reputation~~the Capital Purchase Program and our ~~business.~~

~~Security breaches in our internet banking activities could expose us to possible liability and damage our reputation.~~financial condition. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on industry standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautionsretroactive restrictions which may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business. Additionally, we outsource our data processing to a third party. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantlyadversely affect our ability to ~~adequately process and account for customer transactions, which would significantly affect~~comply with the terms of the Agreement or effectively manage our business ~~operations.~~or our ability to repay the preferred stock. Current terms of the agreement require approval by bank regulators before the stock may be repaid.

- 28 -

~~-25-~~

~~Index~~

Provisions of our certificate of incorporation, bylaws and Delaware law, as well as state and federal banking regulations, could delay or prevent a takeover of us by a third party.

Provisions in our certificate of incorporation and bylaws, the corporate law of the State of Delaware, and state and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock. These provisions include: limitations on voting rights of beneficial owners of more than 10% of our common stock, supermajority voting requirements for certain business combinations; the election of directors to staggered terms of three years; and advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings. In addition, we are subject to Delaware laws, including one that prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our Board.

Goodwill

~~Goodwill~~

Our ~~acquisitions have resulted~~Acquisitions Have Resulted in ~~significant goodwill, which~~Significant Goodwill, Which if it ~~becomes impaired would~~Becomes Impaired Would be ~~required~~Required to be ~~written down, which would negatively impact earnings.~~

Written Down, Which Would Negatively Impact Earnings.

We acquired Factory Point Bancorp, Inc. in 2007 and Woronoco Bancorp in 2005 and have purchased insurance and financial planning businesses in the last two years, including the five insurance agencies we acquired on October 31, 2006. We will pursue additional opportunities for acquisitions in the future, including acquisitions in adjacent states. The success of acquisitions depends on many factors, including the long term retention of key personnel and acquired customer relationships. ~~We recorded~~The initial recording and subsequent impairment testing of goodwill and other intangible assets requires subjective judgments about the estimates of the fair value of assets acquired. Factors that may significantly affect the estimates include specific industry or market sector conditions, changes in revenue growth trends, customer behavior, competitive forces, cost structures and changes in discount rates. It is possible that future impairment testing could result in an impairment of the value of goodwill or intangible assets, or both. If we determine impairment exists at a given point in time, our earnings and the book value of the related intangible asset(s) will be reduced by the amount of the impairment. Notwithstanding the foregoing, the results of impairment testing on goodwill and core deposit intangible assets have no impact on our tangible book value or regulatory capital levels. These are non-GAAP financial measures. They are not a substitute for GAAP measures and should only be considered in conjunction with the ~~Factory Point Bancorp acquisition, Woronoco Bancorp acquisition, and~~Company’s GAAP financial information.

Trading

The Trading History of Our Common stock is Characterized by Low Trading Volume. The Value of Your Investment May be Subject to Sudden Decreases Due to the ~~acquisition~~Volatility of ~~five insurance agencies and such assets may be recorded in future acquisitions. If these assets were to become impaired, we would be required to write them down.~~

~~Trading~~

~~The trading history~~the Price of our ~~common stock is characterized by low trading volume. The value of your investment may be subject to sudden decreases due to the volatility of the price of our common stock.~~

Common Stock.

Our common stock trades on The NASDAQ Global Select Market. The average daily trading volume of our common stock during 2008 was approximately ~~62,450~~54,000 shares. ~~We cannot predict the extent to which investor~~The level of interest ~~in us will lead to a more active~~and trading ~~market~~ in our ~~common~~ stock ~~or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness~~ depends ~~upon the presence in the marketplace of willing buyers and sellers of~~on many factors beyond our ~~common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no~~ control.

The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

· ~~actual or anticipated fluctuations in our operating results;~~

· ~~changes in interest rates;~~

· ~~changes in the legal or regulatory environment in which we operate;~~

	·•		actual or anticipated fluctuations in our operating results;

	•		changes in interest rates;

	•		changes in the legal or regulatory environment in which we operate;

	•		press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;


	·•		changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;

~~-26-~~

~~Index~~


	·•		future sales of our common stock;

	•		changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and

	•		other developments affecting our competitors or us.

- 29 -

PART II

~~-27-~~

~~Index~~

PAR~~T II~~

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

Market Information

The common shares of Berkshire Hills trade on the NASDAQ Global Select Market under the symbol “BHLB”. The following table sets forth the quarterly high and low closing sales price information and dividends declared per share of common stock in ~~2007~~2008 and ~~2006.~~2007.


					Dividends
	High		Low		Declared
2008
First quarter	$	26.29	$	19.50	$	0.15
Second quarter		27.10		22.25		0.16
Third quarter		32.00		20.67		0.16
Fourth quarter		31.01		22.48		0.16

2007
First quarter	$	34.71	$	32.59	$	0.14
Second quarter		33.75		31.51		0.14
Third quarter		32.52		26.10		0.15
Fourth quarter		31.31		24.27		0.15

Dividends
2007 High Low Declared
First quarter $ 34.71 $ 32.59 $ 0.14
Second quarter 33.75 31.51 0.14
Third quarter 32.52 26.10 0.15
Fourth quarter 31.31 24.27 0.15
2006
First quarter $ 36.08 $ 32.37 $ 0.14
Second quarter 36.39 32.77 0.14
Third quarter 38.44 33.46 0.14
Fourth quarter 39.67 33.08 0.14

Holders

The Company had approximately ~~2,239~~2,217 holders of record of common stock at March ~~10, 2008.~~6, 2009.

Dividends

The ~~principal sources of~~Company intends to pay regular cash dividends to common stockholders; however, there can be no assurance as to future dividends because they are dependent on the Company’s ~~cash reserves are dividends received~~future earnings, capital requirements, and financial condition. Dividends from the Bank ~~and Berkshire Insurance Group, together with proceeds from stock option exercises. In addition,~~have been a source of cash used by the Company to pay its dividends, and these dividends from the Bank are dependent on the Bank’s future earnings, capital requirements, and financial condition. Prior to December 19, 2011, unless we have redeemed all the preferred stock issued to the U.S. Treasury on December 19, 2008 under the CPP, or unless the U.S. Treasury has ~~issued subordinated debt~~transferred all the preferred stock to its wholly owned subsidiary grantor trust. The banking regulators may prohibit banks and holding companies from paying dividends that would constitute an unsafe or unsound banking practice, or which would reducea third party, the ~~amount~~consent of ~~its capital below that necessary to comply with minimum applicable regulatory capital requirements. Under applicable regulations, prior regulatory approval is~~the U.S. Treasury will be required for us to declare or pay any ~~capital~~dividend or make any distribution ~~by the Bank to the Company if the total capital~~on common stock other than (i) regular quarterly cash dividends of not more than $0.16 per share, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (ii) dividends payable solely in shares of common stock and (iii) dividends or distributions ~~for the calendar year exceed net income for that year plus the amount~~ of ~~retained net income for the preceding two years. The Company~~rights or junior stock in connection with a stockholders’ rights plan. Further information about dividend restrictions is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the current and/or immediately preceding fiscal year. See alsoprovided in the Stockholders’ Equity note 13 in the financial statements in Item 8 of this Form 10-K.

Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities

No unregistered securities were sold by the Company within the last three years. Registered securities were exchanged as part of the consideration for the acquisitions of Factory Point Bancorp and Woronoco Bancorp. Registered securities were issued in 2008 in the Company’s offerings of common stock and preferred stock. The Company issued 1.725 million common shares in a public stock offering. Net proceeds of $38.5 million were primarily deposited by the Company into the Bank, which used the funds to pay off short-term borrowings and to purchase investment securities. The Company also issued 40 thousand shares of preferred stock in the U.S. Department of the Treasury Capital Purchase Program. The offering proceeds were $40 million, of which $30 million was provided to the Bank as additional contributed capital and the remaining balance was deposited into the Bank. The Bank used the funds to purchase investment securities and to purchase short-term investments pending anticipated reinvestment in the expansion of credit through lending activities in 2009. The preferred stock offering included the grant of a warrant to purchase 226 thousand shares of common stock; there was no additional cash consideration received for this grant.

- 31 -

~~-28-~~

~~Index~~

Purchases of Equity Securities by the Issuer and Affiliated Purchases

~~The following table provides information with respect to any purchase~~There were no purchases of equity securities during the fourth quarter of 2008 made by or on behalf of the Company or any “affiliated purchaser”, as defined by Section 240.10b-18(a)(3) of the Securities and Exchange Act of 1934, of shares of the Company’s common stock.

Total number of shares Maximum number of
Total number Average purchased as part of shares that may yet
of shares price paid publicly announced be purchased under
Period purchased per share plans or programs the plans or programs
October 1-31, 2007 40,529 $ 27.96 40,529 227,393
November 1-30, 2007 167,500 26.52 167,500 59,893
December 1-31, 2007 61,900 25.69 61,900 297,993
Total 269,929 $ 26.55 269,929 297,993

On February 23, 2006, the Company authorized the purchase of up to 300,000 shares, from time to time, subject to market conditions. The last of the shares under the February 23, 2006 plan were purchased on December 18, 2007. On December 14, 2007, the Company authorized the purchase of up to 300,000 ~~additional~~ shares, from time to time, subject to market conditions. The repurchase plan will continue until it is completed or terminated by the Board of Directors. The Company has no ~~plans that it has elected~~intentions to terminate this plan or to cease any potential future purchases. However, prior to ~~expiration~~December 19, 2011, unless we have redeemed all the preferred stock issued to the U.S. Treasury on December 19, 2008, or unless the U.S. Treasury has transferred all the preferred stock to a third party, the consent of the U.S. Treasury will be required for us to repurchase any of our shares of common stock. As of year-end 2008, there were 98 thousand maximum shares that may yet be purchased under ~~which it does not intend to make further purchases.~~this publicly announced plan.

~~-29-~~

~~Index~~

Performance Graph

The performance graph compares the Company’s cumulative stockholder return on its common stock over the last five years to the cumulative return of the NASDAQ Composite Index, and the SNL All Bank and Thrift Index. Total stockholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. The Company’s cumulative stockholder return over a five-year period is based on an initial investment of $100 on December 31, ~~2002.~~2003.


	*Period Ending*
*Index*	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
Berkshire Hills Bancorp, Inc.		100.00		104.01		95.24		96.68		76.63		93.20
NASDAQ Composite		100.00		108.59		110.08		120.56		132.39		78.72
SNL Bank and Thrift		100.00		111.98		113.74		132.90		101.34		58.28

- 32 -


	At or For the Years Ended December 31,
	2008			2007				2006			2005			2004

Selected Operating Ratios and Other Data:
*Performance Ratios:*
Return on average assets		0.87	%		0.60	%			0.53	%		0.47	%		0.89	%
Return on average equity		6.47			4.69				4.40			4.19			9.06
Interest rate spread		3.06			2.79				2.81			3.00			3.10
Net interest margin		3.44			3.26				3.24			3.33			3.37
Non-interest income/total net revenue		29.44			27.82				16.67			22.43			16.13
Non-interest expense/average assets		2.81			2.90				2.31			2.81			2.25
Dividend payout ratio		30.58			40.28				42.92			45.06			22.02

*Capital Ratios:*
Tier 1 capital to average assets — bank		9.34			7.97				7.69			7.79			8.08
Total capital to risk-weighted assets — bank		12.28			10.40				10.27			11.12			12.69
Stockholders’ equity/total assets		15.32			13.00				12.01			12.09			10.06

*Asset Quality Ratios:*
Nonperforming loans/total loans		0.61			0.54				0.45			0.08			0.14
Nonperforming assets/total assets		0.48			0.45				0.35			0.06			0.09
Net loans charged-off/average total loans		0.19			0.34				0.07			0.08			0.15
Allowance for loan losses/total loans		1.14			1.14		��		1.14			0.92			1.13
Allowance for loan losses/nonperforming loans		1.88	x		2.10	x			2.55	x		10.96	x		8.11	x

*Share Data:*
Book value per share	$	30.33		$	31.15			$	29.63		$	28.81		$	22.43
Market price at year end	$	30.86		$	26.00			$	33.46		$	33.50		$	37.15

At or For the Years Ended December 31,
(Dollars in thousands, except per share data) 2007 2006 2005 2004 2003

Selected Financial Data:
Total assets $ 2,513,432 $ 2,149,642 $ 2,035,553 $ 1,310,115 $ 1,218,548
Securities 258,497 234,174 420,320 414,363 359,294
Loans, net 1,921,900 1,679,617 1,407,229 818,842 783,258
Goodwill and intangibles 182,452 121,341 99,616 7,254 10,233
Deposits 1,822,563 1,521,938 1,371,218 845,789 830,244
Borrowings and subordinated debentures 349,938 360,469 412,917 327,926 251,465
Total stockholders’ equity 326,837 258,161 246,066 131,736 123,175

Selected Operating Data:
Total interest and dividend income $ 131,944 $ 118,051 $ 87,732 $ 61,081 $ 56,308
Total interest expense 68,019 57,811 36,115 20,724 18,742
Net interest income 63,925 60,240 51,617 40,357 37,566
Provision for loan losses 4,300 7,860 1,313 1,565 1,460
Service charges and fee income 26,654 13,539 9,373 5,493 5,023
All other non-interest income (loss) (2,011 ) (1,491 ) 5,550 2,271 1,425
Total non-interest expense 65,494 48,868 48,998 28,977 28,243
Provision for income taxes - continuing operations 5,239 4,668 8,003 5,639 5,161
Net income (loss) from discontinued operations - 371 - (431 ) (185 )
Net income $ 13,535 $ 11,263 $ 8,226 $ 11,509 $ 8,965

Dividends per share $ 0.58 $ 0.56 $ 0.52 $ 0.48 $ 0.48
Basic earnings per share:
Continuing operations $ 1.47 $ 1.28 $ 1.16 $ 2.26 $ 1.74
Discontinued operations - 0.04 - (0.08 ) (0.04 )
Total $ 1.47 $ 1.32 $ 1.16 $ 2.18 $ 1.70

Diluted earnings per share:
Continuing operations $ 1.44 $ 1.25 $ 1.10 $ 2.08 $ 1.60
Discontinued operations - 0.04 - (0.07 ) (0.03 )
Total $ 1.44 $ 1.29 $ 1.10 $ 2.01 $ 1.57

Average shares outstanding:
Basic 9,223 8,538 7,122 5,284 5,266
Diluted 9,370 8,730 7,503 5,731 5,703
Note: All performance ratios are based on average balance sheet amounts where applicable.

~~-31-~~

~~Index~~

At or For the Years Ended December 31,
2007 2006 2005 2004 2003

Selected Operating Ratios and Other Data:
Performance Ratios:
Return on average assets 0.60 % 0.53 % 0.47 % 0.89 % 0.80 %
Return on average equity 4.69 4.40 4.19 9.06 7.28
Interest rate spread 2.79 2.81 3.00 3.10 3.29
Net interest margin 3.26 3.24 3.33 3.37 3.61
Non-interest income/total net revenue 27.82 16.67 22.43 16.13 14.65
Non-interest expense/average assets 2.90 2.31 2.81 2.25 2.53
Dividend payout ratio 40.28 42.92 45.06 22.02 28.24

Bank Capital Ratios:
Tier 1 capital to average assets 7.97 7.69 7.79 8.08 7.87
Total capital to risk-weighted assets 10.40 10.27 11.12 12.69 12.55
Stockholders’ equity/total assets 13.00 12.01 12.09 10.06 10.11

Asset Quality Ratios:
Nonperforming loans/total loans 0.54 0.45 0.08 0.14 0.40
Nonperforming assets/total assets 0.45 0.35 0.06 0.09 0.26
Net loans charged-off/average total loans 0.34 0.07 0.08 0.15 0.35
Allowance for loan losses/total loans 1.14 1.14 0.92 1.13 1.13
Allowance for loan losses/nonperforming loans 2.10 x 2.55 x 10.96 x 8.11 x 2.80 x

Share Data:
Book value per share $ 31.15 $ 29.63 $ 28.81 $ 22.43 $ 20.87
Market price at year end $ 26.00 $ 33.46 $ 33.50 $ 37.15 $ 36.20

ITEM 7. ~~MANAGEM~~E~~NT’S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This discussion is intended to assist in understanding the financial condition and results of operations of the Company. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements. Please see those policies in conjunction with this discussion.

Critical accounting policies are those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management believes that our most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Loan Losses. Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The allowance for loan losses provides for probable estimable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although we believe that we use appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. For example, a downturn in the local economy could cause an increase in non-performing loans. Additionally, a decline in real estate values could ~~cause some~~reduce the collateral protection of our ~~loans to become inadequately collateralized.~~real estate loans. In either case, this may require us to increase our provisions for loan losses, which would negatively impact earnings. The allowance for loan losses discussion in Item 1 provides additional information about the allowance.

- 34 -

~~-32-~~

~~Index~~

Income Taxes.Management considers accounting for income taxes as a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation and evaluation of the timing and recognition of resulting tax liabilities and assets. Management uses the asset liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the ~~Company's~~Company’s assets and liabilities. Management must assess the realizability of the deferred tax assets, and to the extent that management believes that recovery is not likely, a valuation allowance is established. Adjustments to increase or decrease the valuation allowance are generally charged or credited, respectively, to income tax expense.

Goodwill and Identifiable Intangible Assets.In conjunction with the acquisitions of Factory Point Bancorp, Inc. in 2007 and Woronoco Bancorp in 2005, goodwill was recorded as an intangible asset equal to the excess of the purchase price over the estimated fair value of the net assets acquired. Other intangible assets were recorded for the fair value of core deposits and non-compete agreements. Goodwill and intangible assets related to insurance contracts were recorded for the purchase of insurance agencies in 2006. The valuation techniques used by management to determine the carrying value of assets acquired in the acquisition and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates which were used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives could have a material adverse impact on future results of operations.

Determination of Other-Than-Temporary Impairment of Securities.Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

~~SUMMARY~~Fair Valuation of Financial Instruments.The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

SUMMARY

Net income rose to a record $22.2 million in 2008. Earnings per common share rose to a record $2.06. Financial highlights in 2008 included:

21% increase in total net revenue

3.44% net interest margin, the highest since 2003

8% increase in total commercial loans; 7% increase in total residential mortgage and home equity loans

- 35 -

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

Summary.Net income increased by 20% to $13.5 million in 2007, compared to $11.3 million in the prior year. Net income per diluted share increased by 12% to $1.44 in 2007 from $1.29 in 2006. Earnings growth was driven primarily by a $3.7 million increase in net interest income, a $3.6 million decrease in provision for loan losses and a $12.6 million increase in non-interest income offset by a $16.6 million increase in non-interest expense. The increases in non-interest income and non-interest expense were due primarily to the acquisition of the five insurance agencies in the fourth quarter of 2006 and Factory Point in the third quarter of 2007. ~~All earnings per share references are to diluted shares, and also reflect the additional shares issued in the Factory Point acquisition.~~

Financial highlights in 2007 included:

$10.0 million increase in insurance commissions and fees (from first full year of operations from acquired insurance agencies)

~~$10.0 million increase in insurance commissions and fees (from first full year of operations from acquired insurance agencies)~~

33% increase in deposit service fees

~~33% increase in deposit service fees~~

34% increase in wealth management fees

~~34% increase in wealth management fees~~

14% increase in loans (primarily from the Factory Point acquisition)

~~14% increase in loans (primarily from the Factory Point acquisition)~~

32% non-maturity deposit growth (23% from the Factory Point acquisition and 9% from organic growth)

~~32% non-maturity deposit growth (23% from the Factory Point acquisition and 9% from organic growth)~~

Other highlights in 2007 included:

Acquired Factory Point Bancorp, contributing to a 17% increase in total assets

~~Acquired Factory Point Bancorp, contributing to a 17% increase in total assets~~

Opened four new branches in New York increasing our presence to ten branches in the New York Capital region

~~Opened four new branches in New York increasing our presence to ten branches in the New York Capital region~~

Introduced a new brand identity to improve our overall competitive positioning

~~Introduced a new brand identity to improve our overall competitive positioning~~

First full year of operations for the expanded Berkshire Insurance Group — contributed $2.5 million in net income

~~First full year of operations for the expanded Berkshire Insurance Group – contributed $2.5 million in net income~~

Net interest margin of 3.38% for ~~the fourth quarter of 2007 – highest level in fourteen quarters~~

~~Solid asset quality with nonperforming assets at 0.45% of total assets at December 31, 2007~~

~~-33-~~

~~Index~~

Results in 2007 included a third quarter after-tax loss of $2.4 million ($0.25 per share) due to a $3.8 million loss from a balance sheet restructuring, $1.7 million in expenses from the Factory Point acquisition ($1.1 million after-tax or $0.11 per share), $1.3 million in other restructuring expenses ($0.8 million after-tax or $0.08 per share), and a $2.5 million provision for loan losses ($1.5 million after-tax or $0.16 per share) related to a $2.5 million charge-off for one commercial loan that was impacted by borrower fraud. Collectively, these charges lowered 2007 net income by $5.6 million or $0.61 per share. Results in 2006 included a third quarter loss of $2.1 million ($0.25 per share) due to a $5.3 million securities loss related to a securities portfolio restructuring and deleveraging. Third quarter results in 2006 also included a $6.2 million loan loss provision due to an adjustment of the loan loss allowance.

~~COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2007 AND 2006~~

~~Balance Sheet Summary.~~ Total assets were $2.51 billion at year-end 2007, increasing by $364 million (17%). Most categories of assets and liabilities increased due to the acquisition of Factory Point and organic growth. In conjunction with the acquisition, the Company restructured its balance sheet in the third quarter by selling $32 million in securities and $50 million in residential mortgage loans. Total loans increased by $245 million, including acquired Factory Point loans. Organic loan growth in 2007 totaled $58 million (3%) primarily due to growth of $40 million (7%) in commercial mortgages.

Total deposits increased by $301 million in 2007, including acquired Factory Point deposits. Organic deposit growth in 2007 totaled $25 million (2%) due to growth of $49 million (6%) in core non-maturity deposit balances. The Company allowed expensive time deposits to decrease as loan growth declined, and the Company promoted non-time accounts to take advantage of more favorable cost and cross sale characteristics. Total borrowings decreased by $11 million in 2007, with the increase relating to the Factory Point acquisition being more than offset by the third quarter balance sheet deleveraging. Stockholders’ equity increased in 2007 primarily due to $63 million recorded in conjunction with the Factory Point acquisition, including the issuance of 1.91 million common shares. Goodwill increased by $57 million, primarily due to the Factory Point acquisition. Total book value per share increased to $31.15. The ratio of total equity to assets increased to 13.0% reflecting the benefit of the new shares issued and the balance sheet deleveraging. Net income of $14 million in 2007 was primarily used for dividends of $5 million and treasury stock buybacks of $8 million. In the fourth quarter, the Company repurchased 270,000 shares at an average price of $26.55 per share.

~~Investment Securities.~~ Total investment securities increased $24.3 million at year-end 2007 compared to year-end 2006. The Factory Point acquisition increased investment securities by $68 million. This increase was offset primarily by the sale of securities in connection with the deleveraging program, which totaled $32 million and the sale of $25 million of securities from Factory Point sold shortly after the merger date. The sale of $25 million of Factory Point securities was comprised mainly of municipal securities and other debt securities. These securities were marked to market as of the acquisition date, and they were sold for an amount that approximated this value. The Company reinvested approximately $34 million of the proceeds in agency mortgage-backed securities and municipal bonds with average lives of 2-3 years. The remaining securities from Factory Point were comprised mainly of conventional government agency and mortgage-backed securities, and municipal bonds. The loss from the securities sold in connection with the deleveraging program was $0.6 million. These securities had an estimated average life of approximately 4 years and a book yield of 4.75%. As a result of the actions noted above, the Company’s investment portfolio estimated average life was reduced by approximately three quarters of a year.

At year-end 2007, the total investment securities portfolio of $258 million included $112 million of municipal bonds and obligations, $107 million of mortgage backed securities, Federal Home Loan Bank stock of $21 million, and $18 million of other securities which consisted primarily of trust preferred securities. The fully taxable equivalent yield on investment securities remained unchanged at 5.6% in the fourth quarter of 2007 ~~compared to the same period~~— highest level in ~~2006. This reflected the benefit of deleveraging in the third quarter of 2007.~~

~~Loans~~. Total loans increased by $245 million (14%) in 2007. The Factory Point acquisition accounted for $237 million of the increase. Excluding the impact of the $50 million residential mortgage loan sale, organic loan growth totaled $58 million (3%) due primarily to growth in commercial mortgages of $40 million, residential construction loans of $10 million and home equity loan growth of $6 million. The Company slowed the pace of loan growth in 2007 in order to maintain adherence to strong credit standards and pricing objectives in order to strengthen its net interest margin.

fourteen quarters

~~-34-~~

~~Index~~

Residential mortgages increased $58 million in 2007 including $69 million from the Factory Point acquisition. As mentioned previously, the Company sold $50 million in residential mortgages in the third quarter of 2007 as part of a deleverage program to improve the Company’s interest rate risk profile. The Company has no subprime lending programs and does not offer Alt-A or other non-conforming loan documentation programs. The growth in residential construction lending of $10 million was driven primarily by the Company’s expansion in the Albany, NY market. The Company will focus on selling long-term fixed rate residential mortgages and maintaining adjustable rate products in its portfolio in 2008.

Commercial loans and mortgages increased $151 million (20%) in 2007 including $136 million from the Factory Point acquisition. Excluding the increase from the Factory Point acquisition, commercial mortgages increased $40 million organically, primarily in the Berkshire and Pioneer Valley markets. Commercial loans decreased by $25 million, primarily from the outplacement of a large credit in 2007. The Company forecasts solid growth in the commercial loan and mortgage portfolio for 2008, given the opportunity to book larger commercial real estate and commercial loans in Vermont as a result of the Factory Point acquisition, penetration in the expanding Albany market and our dominant position in the Berkshire and Pioneer Valley region.

Consumer loans increased $36 million (10%) in 2007 including $32 million from the Factory Point acquisition. Indirect automobile lending growth remained relatively flat and home equity lines of credit experienced moderate growth from pricing promotions. Loans with repricings over five years totaled $518 million at year-end 2007, which was an increase of $17 million over the $501 million total at year-end 2006. The average yield on loans remained unchanged at 6.7% in the fourth quarter of 2007 compared to the same period in 2006.

~~Asset Quality.~~ ~~The Company’s~~Solid asset quality ~~measures remained solid~~with nonperforming assets at ~~year-end 2007, despite softening economic conditions taking hold in the second half of 2007. Nonperforming loans increased to $10.5 million at year-end 2007 (0.54%~~0.45% of total ~~loans) compared to $7.6 million~~assets at year-end 2006 (0.45% of total loans). Nonaccruing commercial business loans decreased from $7.2 million at year-end 2006 to $4.2 million at year-end 2007, primarily due to charge-offs of $4.0 million related to one commercial loan stemming from borrower fraud. Offsetting this decrease in nonaccruing commercial business loans was a $4.9 million increase in nonaccruing commercial mortgages. The increase in nonaccruing commercial mortgages resulted mainly from the classification of one large commercial mortgage totaling $2.6 million in the third quarter of 2007 and several smaller credits placed on nonaccrual during the year.

In addition to the nonperforming loans discussed above, the Company has identified approximately $23.1 million in potential problem loans at year-end 2007 as compared to $16.2 million at year-end 2006. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. Potential problem loans are typically loans that are performing but are classified by the Company’s loan rating system as “substandard.” At December 31, 2007 and 2006, potential problem loans primarily consisted of commercial business loans and commercial mortgages. At year-end 2007, there were six potential problem loans that exceeded $1.0 million, totaling $14.2 million in aggregate compared to six potential problem loans exceeding $1.0 million, totaling $10.0 million at year-end 2006. Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

As a result of the softening economic conditions in 2007, the Company did experience a modest increase in nonaccruing residential mortgages and consumer loans (mostly home equity loans). Nonaccruing residential mortgages totaled $0.7 million and nonaccruing consumer loans totaled $0.4 million at year-end 2007. Other real estate owned totaled $0.9 million at year-end 2007 and was comprised of two residential mortgage properties.

~~-35-~~

~~Index~~

~~Loan Loss Allowance~~. The determination of the allowance for loan losses is a critical accounting estimate. The Company’s methodologies for determining and allocating the allowance for loan losses focus on ongoing reviews of larger individual loans, historical net charge-offs, delinquencies in the loan portfolio, the level of impaired and non-performing assets, values of underlying loan collateral, the overall risk characteristics of the portfolios, changes in composition or size of the portfolio, geographic location, prevailing economic conditions and other relevant factors. The various factors used in the methodologies are reviewed on a periodic basis.

The Company considers the allowance for loan losses of $22.1 million appropriate to cover losses inherent in the loan portfolio as of December 31, 2007. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions, the Company’s ongoing credit review process or regulatory requirements, will not require significant changes in the allowance for loan losses. Among other factors, a protracted economic slowdown and/or a decline in commercial or residential real estate values in the Company’s markets may have an adverse impact on the current adequacy of the allowance for loan losses by increasing credit risk and the risk of potential loss. The ratio of the loan loss allowance to total loans was 1.14% at year-end 2007 and year-end 2006.

The total allowance for loan losses is generally available to absorb losses from any segment of the portfolio. The allocation of the Company’s allowance for loan losses disclosed in a table on page 12 of this document is subject to change based on the changes in criteria used to evaluate the allowance and is not necessarily indicative of the trend of future losses in any particular portfolio.

In 2006, the Company refined its allowance for loan losses allocation methodology. In addition, management determined in the third quarter of 2006, loan losses would increase above negligible levels of recent years due to signs of an economic slowdown and increasing risk factors in the commercial and real estate loan portfolios. These changes resulted in a third quarter 2006 provision for loan losses of $5.5 million to increase general pool reserve levels due to a higher percentage of inherent losses in the loan portfolio.

~~Other Assets.~~ The net book value of premises increased $9.7 million due primarily to the Factory Point acquisition and the de-novo branching program in the Company’s New York market. Goodwill and other intangible assets increased $61.1 million mainly from the acquisition of Factory Point. All other assets increased primarily due to equity investments in community and historic development entities which provide transferable tax credits utilized by the Company and an increase in current income tax receivable and net deferred tax assets.

~~Deposits and Borrowings.~~ Total deposits increased by $300.6 million (20%) in 2007. The Factory Point acquisition resulted in $274 million of this increase. Organic non-maturity deposit growth was $72 million and time deposits decreased $45 million. Deposit growth was centered in higher yielding money market accounts and demand deposits. Time deposits continued to decrease in 2007, as the Company has shifted its focus, generating growth in demand deposits, NOW accounts and money market accounts. The Bank’s strategy is to promote lower cost transaction accounts, along with money market accounts which can be tied to other relationship banking. With this strategy, the Bank has also enhanced its commercial payment services and municipal account solicitation in order to broaden its footprint and improve cross sales with loan and insurance products. In 2007, the Bank unveiled its “I’m so excited” branding initiative and implemented new goals and incentives for increasing the pool of customers and products. The de novo branch program in New York generated $29 million in deposit growth, with total New York deposits increasing to $131 million at year-end 2007.

Total borrowings decreased by $11 million during 2007 due to the reduction of FHLBB borrowings with $82 million in funds provided from the deleveraging at the end of the third quarter offset by the assumption of $34 million in borrowings from Factory Point and a $20 million increase in borrowings at the holding company to fund the cash portion of the Factory Point acquisition and stock repurchases. During 2007, the Bank borrowed $65 million in FHLBB term advances over one year. The average maturity of these term borrowings was 4.8 years and they were used to fund growth of intermediate term loans. Most of these advances were bullet advances without optional calls. Total year-end borrowings with maturities over three years increased to $80 million from $68 million. FHLBB Borrowings maturing under a year increased slightly to $124 million at year-end 2007 from $122 million at the prior year-end. Borrowings in 2007 also included $35 million in short term note payables at the holding company which were used to provide funding for the Factory Point acquisition and stock repurchases mentioned previously. The cost of borrowings increased to 4.7%

~~-36-~~

~~Index~~

~~in the fourth quarter of 2007 from 4.4% in the same quarter of 2006. This cost rose primarily due to extending term borrowings and the cost of holding company short-term note payables.~~

~~Equity.~~ Stockholders’ equity increased in 2007 primarily due to $63 million recorded in conjunction with the Factory Point acquisition, including the issuance of 1.91 million common shares. Total book value per share increased to $31.15. The ratio of total equity to assets increased to 13.0% reflecting the benefit of the new shares issued and the balance sheet deleveraging. Net income of $14 million in 2007 was primarily used for dividends of $5 million and treasury stock buybacks of $8 million. There were 272,600 shares of treasury stock repurchased at a total cost of $7.8 million ($26.52 per share on average), and there were 138,548 shares issued for option exercises and stock grants.

The Bank met all regulatory capital requirements and continued to satisfy the conditions necessary to be classified as “Well Capitalized” in accordance with federal regulatory standards. The Bank’s risk based capital was 10.4% at year-end 2007 compared to 10.3% at year-end 2006 Because the Bank’s dividends exceeded retained earnings from recent operations in accordance with certain regulatory measurements in 2006, the Bank’s dividends to the Company required specific regulatory approval. Such dividends in the immediate future would also require specific regulatory approval. The Bank received regulatory approval to pay $10 million in dividends to the Company in 2007. For 2008, ~~the Bank can declare aggregate additional dividends of $9 million without obtaining regulatory approval.~~

~~COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006~~

Net Income.Net income increased by 20% to $13.5 million in 2007, compared to $11.3 million in the prior year. Net income in 2007 included a third quarter after-tax charge of $2.4 million ($0.25 per share) due to a $3.8 million charge from a balance sheet restructuring, $1.7 million in expenses from the Factory Point acquisition ($1.1 million after-tax), $1.3 million in other restructuring expenses ($0.8 million after-tax), and a $2.5 million provision for loan losses ($1.5 million after-tax) related to a $2.5 million charge-off for one commercial loan that was impacted by borrower fraud. Collectively, these charges lowered 2007 net income by $5.6 million.Net income in 2007 also included total costs of $4.2 million for the New York de novo branch program and the costs of the Company’s branding program, which the Company views as an investment in franchise expansion and brand awareness. The above charges ~~are~~were not viewed as related to usual operations. The return on average assets for the year 2007 was 0.60% and the return on average equity was 4.69% for the year. Results in 2006 included a third quarter loss of $2.1 million ($0.25 per share) due to a $5.3 million securities loss related to a securities portfolio restructuring and deleveraging. Third quarter results in 2006 also included a $6.2 million loan loss provision due to an adjustment of the loan loss allowance.

- 42 -

Total Revenue.Total revenue consists of net interest income and non-interest income. Total revenue increased by $16.3 million (23%) in 2007. This increase was due primarily to a full year of insurance commissions and fees from Berkshire Insurance Group, acquisitions, de novo expansion, and organic growth.

Net Interest Income.Net interest income increased by $3.7 million (6%) to $63.9 million in 2007 compared to 2006. The increase in net interest income resulted primarily from an increase in average earning assets of 6% due to higher loan balances (primarily from the Factory Point acquisition and organic loan growth). The net interest margin improved by 2 basis points (“bp”) to 3.26% for 2007 compared to 3.24% in 2006. The Company improved its net interest margin during the second half of 2007 despite the difficult market conditions. As previously mentioned, the Company restructured the balance sheet in the third quarter of 2007 by selling $32 million in investment securities and $50 million in residential mortgages and paid down $82 million in borrowings. In addition, the Company acquired Factory Point which had a net interest margin in excess of 4% and implemented new pricing strategies. These actions led to the improvement in the net interest margin increasing to 3.38% in the fourth quarter of 2007 from 3.15% for the second quarter of 2007.

The yield on earning assets increased 36 bp to 6.61% in 2007 compared to 2006. This increase was due primarily to the deleveraging transactions in 2006 and 2007 as well as an increase in yield on loan originations and purchases of new securities during an increasing rate environment that was prevalent for 2006 and most of 2007. The average rate paid for interest bearing liabilities increased 38 bp to 3.82% in 2007 compared to 2006. The increase in the rate paid on interest bearing liabilities can be attributed to a higher average federal funds rate in 2007 compared to 2006. The increase in average balances on interest earning assets and interest bearing liabilities was impacted by the Factory Point acquisition and offset somewhat by the third quarter balance sheet restructuring.

Provision for Loan Losses.The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The level of the allowance was included in the discussion of

~~-37-~~
~~Index~~

~~financial condition.~~ The loan loss provision totaled $4.3 million for the year 2007, compared to $7.9 million in 2006. The provision for loan losses for 2007 reflected a $2.5 million charge-off related to a commercial credit with borrower fraud. The total charge-offs in 2007 related to this commercial credit with borrower fraud totaled $4.0 million. Total net loan charge-offs were $6.0 million in 2007. Excluding the $4.0 million charge-off mentioned above, all other net charge-offs totaled $2.0 million (0.11% of average loans), compared to net charge-offs of $1.1 million (0.07% of average loans) in 2006. The decrease in the provision for loan losses in 2007 from 2006 was due primarily to the previously mentioned $5.5 million charge in 2006 for increases in general pool reserve levels due to management’s evaluation of a higher percentage of inherent losses in the loan portfolio at that time.

Non-Interest Income.Non-interest income increased $12.6 million in 2007 to $24.6 million from $12.0 million in 2006. The increase was driven primarily by a $10.0 million increase in insurance commissions and fees from a full year of activity of Berkshire Insurance Group as well as increases in deposit service fees and wealth management. Deposit service fees increased $1.9 million (33%) in 2007 from growth in core deposit accounts, pricing increases and the Factory Point acquisition. Wealth management fees increased $1.1 million (34%) in 2007 from organic growth and the Factory Point acquisition. ~~The Company will continue to focus on diversifying and expanding its sources of non-interest income.~~ Non-interest income included $3.8 million in losses for the previously mentioned deleveraging in the third quarter of 2007 and $3.1 million in losses from a balance sheet restructuring in the third quarter of 2006.

Non-Interest Expense.Non-interest expense increased by $16.6 million (34%) in 2007 compared to 2006. For 2007, additional expense from the acquired insurance agencies totaled $6.5 million, merger, integration and restructuring expenses increased $1.4 million, marketing expenses increased $1.1 million from the branding campaign and acquisitions, amortization of intangible assets increased $1.0 million from acquisitions, and expenses related to the de novo branch program increased by $1.5 million to $3.4 million in 2007, compared to $1.9 million in 2006. Berkshire views the de novo branch costs as an investment in franchise expansion in the attractive Albany and Tech Valley, New York area.million. The remaining $5.1 million increase (10%) in total non-interest expense was in all other non-interest expense related to higher overhead for the Company’s transition into a regional bank, together with initiatives to develop sales and products which resulted in increases in personnel, data processing and professional fees.

Income Tax Expense.The effective tax rate for 2007 was 27.9%. The effective tax rate in 2006 was 30.3%. The decrease in the effective tax rate resulted mainly from increases in tax credits and tax-exempt income in 2007.

Results of Segment Operations. The Company acquired five affiliated insurance agencies in the fourth quarter of 2006. The Company had not previously established operating segments for the purposes of financial statement disclosure. Due to the change in the composition of the Company’s business as a result of the insurance agency acquisitions, the Company has designated two operating segments for financial statement disclosure: banking and insurance. Additional information about the Company’s accounting for segment operations is contained in Note 17 to the financial statements contained in Item 8 of this 10-K.

One of the Company's strategies is to emphasize non-depository products and increase fee income to diversify revenues, enhance customer benefit, and reduce reliance on net interest income. The Company's acquisition of insurance agencies in the fourth quarter of 2006 was a significant step in implementing this strategy. Net income of the insurance segment for 2007 increased by $2.2 million due to the impact of the ~~acquired~~ insurance ~~agencies and earnings due to the impact of annual contingency revenues which are received~~agency acquisitions in ~~the first half of the year.~~2006. Net income for the banking segment for 2007 increased $1.1 million due to increases in net interest income (primarily due to growth in earning assets and the Factory Point acquisition) and non-interest income (increases in deposit service and wealth management fees) as well as a decrease in the provision for loan losses offset by an increase in non-interest expense (driven by the de novo branches, marketing costs and the Factory Point merger costs).

- 43 -

ITEM 8. FINANCIAL ~~STAT~~E~~MENTS~~STATEMENTS AND SUPPLEMENTARY DATA

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, ~~2007,~~2008, utilizing the framework established inInternal Control—Integrated Frameworkissued by the Committee 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, ~~2007~~2008 is effective.

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

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.

The effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2007~~2008 has been audited by Wolf & Company, P.C., an independent registered public accounting firm, as stated in their report, which follows. This report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2007.~~2008.


/s/ Michael P. Daly Michael P. Daly		/s/ Kevin P. Riley Kevin P. Riley
President and Chief Executive Officer		Executive Vice President and Chief Financial Officer
March 13, 2009		March 13, 2009

- 50 -

~~-46-~~

~~Index~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Berkshire Hills Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Berkshire Hills Bancorp, Inc. and subsidiaries as of December 31, ~~2007~~2008 and ~~2006,~~2007, and the related consolidated statements of income, changes in ~~stockholders'~~stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, ~~2007.~~2008. We also have audited Berkshire Hills Bancorp, Inc.’s internal control over financial reporting as of December 31, ~~2007,~~2008, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Berkshire Hills Bancorp, Inc.'s’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s ~~Annual~~ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the ~~Company's~~Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A ~~company's~~company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A ~~company's~~company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the ~~company's~~company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Berkshire Hills Bancorp, Inc. and subsidiaries as of December 31, ~~2007~~2008 and ~~2006,~~2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2007,~~2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Berkshire Hills Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2007,~~2008, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Wolf & Company, P.C.

Boston, Massachusetts

March ~~12, 2008~~16, 2009

- 51 -

~~-47-~~

~~Index~~

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
(In thousands, except share data)	2008			2007
Assets
Cash and due from banks	$	26,582		$	33,259
Short-term investments		18,216			7,883

Total cash and cash equivalents		44,798			41,142
Trading security		18,144			—
Securities available for sale, at fair value		274,380			195,921
Securities held to maturity (fair values of $26,729 and $39,689)		25,872			39,456
Restricted equity securities		23,120			23,120

Residential mortgages		677,254			657,045
Commercial mortgages		805,456			704,764
Commercial business loans		178,934			203,564
Consumer loans		345,508			378,643

Total loans		2,007,152			1,944,016
Less: Allowance for loan losses		(22,908	)		(22,116	)

Net loans		1,984,244			1,921,900

Premises and equipment, net		37,448			38,806
Goodwill		161,178			161,632
Other intangible assets		17,652			20,820
Cash surrender value of life insurance		35,668			35,316
Other assets		44,225			35,319

Total assets	$	2,666,729		$	2,513,432


Liabilities
Demand deposits	$	233,040		$	231,994
NOW deposits		190,828			213,150
Money market deposits		448,238			439,341
Savings deposits		211,156			210,186
Time deposits		746,318			727,892

Total deposits		1,829,580			1,822,563
Short-term debt		23,200			92,800
Long term Federal Home Loan Bank advances		318,957			221,674
Other long-term debt		17,000			20,000
Junior subordinated debentures		15,464			15,464
Other liabilities		54,103			14,094

Total liabilities		2,258,304			2,186,595
Commitments and contingencies (See note 15)

Stockholders’ equity
Preferred stock ($.01 par value; 1,000,000 shares authorized; 40,000 shares with $1,000 liquidation value in 2008 and no shares issued in 2007)		36,822			—
Common stock ($.01 par value; 26,000,000 shares authorized; 14,238,825 shares issued in 2008 and 12,513,825 in 2007)		142			125
Additional paid-in capital		307,620			266,134
Unearned compensation		(1,905	)		(2,009	)
Retained earnings		127,773			113,387
Accumulated other comprehensive (loss) income		(11,574	)		1,217
Treasury stock (1,985,381 shares in 2008 and 2,021,120 shares in 2007)		(50,453	)		(52,017	)

Total stockholders’ equity		408,425			326,837

Total liabilities and stockholders’ equity	$	2,666,729		$	2,513,432

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

- 52 -

December 31,
(In thousands, except share data) 2007 2006
Assets
Total cash and cash equivalents $ 41,142 $ 30,985

Securities available for sale, at fair value 219,041 194,206
Securities held to maturity (fair values of $39,689 and $39,686) 39,456 39,968

Residential mortgages 657,045 599,273
Commercial mortgages 704,764 566,339
Commercial business loans 203,564 190,493
Consumer loans 378,643 342,882
Total loans 1,944,016 1,698,987
Less: Allowance for loan losses (22,116 ) (19,370 )
Net loans 1,921,900 1,679,617

Premises and equipment, net 38,806 29,130
Goodwill 161,632 104,531
Other intangible assets 20,820 16,810
Cash surrender value of life insurance 35,316 30,338
Other assets 35,319 24,057
Total assets $ 2,513,432 $ 2,149,642

Liabilities and stockholders’ equity
Liabilities
Demand deposits $ 231,994 $ 178,109
NOW deposits 213,150 153,087
Money market deposits 439,341 297,155
Savings deposits 210,186 202,213
Total non-maturity deposits 1,094,671 830,564
Brokered time deposits 21,497 41,742
Other time deposits 706,395 649,632
Total time deposits 727,892 691,374
Total deposits 1,822,563 1,521,938
Borrowings 334,474 345,005
Junior subordinated debentures 15,464 15,464
Other liabilities 14,094 9,074
Total liabilities 2,186,595 1,891,481

Commitments and contingencies (Note 12)

Stockholders’ equity ��
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued) - -
Common stock ($.01 par value; 26,000,000 shares authorized;
12,513,825 shares issued in 2007 and 10,600,472 in 2006) 125 106
Additional paid-in capital 266,134 200,975
Unearned compensation (2,009 ) (1,896 )
Retained earnings 113,387 105,731
Accumulated other comprehensive income 1,217 92
Treasury stock, at cost (2,021,120 shares in 2007 and 1,887,068 shares in 2006) (52,017 ) (46,847 )
Total stockholders' equity 326,837 258,161
Total liabilities and stockholders' equity $ 2,513,432 $ 2,149,642

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

~~-48-~~

~~Index~~

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,
(In thousands, except per share data)	2008			2007			2006
Interest and dividend income
Loans	$	120,567		$	120,059		$	100,836
Securities		12,460			11,743			16,957
Other		184			142			258

Total interest and dividend income		133,211			131,944			118,051
Interest expense
Deposits		41,733			50,597			41,044
Borrowings and junior subordinated debentures		15,738			17,422			16,767

Total interest expense		57,471			68,019			57,811

Net interest income		75,740			63,925			60,240
Non-interest income
Deposit service fees		9,782			7,747			5,803
Wealth management fees		5,704			4,407			3,287
Insurance commissions and fees		13,619			13,728			3,757
Loan and swap fees		1,229			772			692

Total fee income		30,334			26,654			13,539
Loss on sales of securities, net		(22	)		(591	)		(3,130	)
Loss on sale of loans and prepayment of borrowings		—			(3,130	)		—
Other		1,283			1,710			1,639

Total non-interest income		31,595			24,643			12,048

Total net revenue		107,335			88,568			72,288
Provision for loan losses		4,580			4,300			7,860
Non-interest expense
Salaries and employee benefits		38,282			34,018			24,708
Occupancy and equipment		11,238			9,945			7,699
Marketing, data processing, and professional services		8,761			8,598			6,648
Merger, integration and restructuring		683			2,956			1,510
Amortization of intangible assets		3,830			3,058			2,035
Other		8,905			6,919			6,268

Total non-interest expense		71,699			65,494			48,868

Income from continuing operations before income taxes		31,056			18,774			15,560
Income tax expense		8,812			5,239			4,668

Net income from continuing operations		22,244			13,535			10,892
Income from discontinued operations before income taxes		—			—			606
Income tax expense		—			—			235

Net income from discontinued operations		—			—			371

Net income	$	22,244		$	13,535		$	11,263


Basic earnings per share
Continuing operations	$	2.08		$	1.47		$	1.28
Discontinued operations		—			—			0.04

Total	$	2.08		$	1.47		$	1.32


Diluted earnings per share
Continuing operations	$	2.06		$	1.44		$	1.25
Discontinued operations		—			—			0.04

Total	$	2.06		$	1.44		$	1.29


Weighted average shares outstanding
Basic		10,700			9,223			8,538
Diluted		10,791			9,370			8,730

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

- 53 -

Years Ended December 31,
(In thousands, except per share data) 2007 2006 2005
Interest and dividend income
Loans $ 120,059 $ 100,836 $ 70,103
Securities 11,743 16,957 17,517
Short-term investments 142 258 112
Total interest and dividend income 131,944 118,051 87,732
Interest expense
Deposits 50,597 41,044 21,048
Borrowings and junior subordinated debentures 17,422 16,767 15,067
Total interest expense 68,019 57,811 36,115
Net interest income 63,925 60,240 51,617
Non-interest income
Deposit service fees 7,747 5,803 4,539
Wealth management fees 4,407 3,287 2,742
Insurance commissions and fees 13,728 3,757 1,343
Loan service fees 772 692 749
(Loss) gain on sales of securities, net (591 ) (3,130 ) 4,283
Loss on sale of loans (1,950 ) - -
Loss on prepayment of borrowings (1,180 ) - -
Other 1,710 �� 1,639 1,267
Total non-interest income 24,643 12,048 14,923
Total revenue 88,568 72,288 66,540
Provision for loan losses 4,300 7,860 1,313
Non-interest expense
Salaries and employee benefits 34,018 24,708 20,281
Termination of employee stock ownership plan - - 8,836
Occupancy and equipment 9,945 7,699 5,798
Marketing, data processing, and professional services 8,598 6,648 4,881
Merger, integration and restructuring 2,956 1,510 2,142
Amortization of intangible assets 3,058 2,035 1,140
Other 6,919 6,268 5,920
Total non-interest expense 65,494 48,868 48,998
Income from continuing operations before income taxes 18,774 15,560 16,229
Income tax expense 5,239 4,668 8,003
Net income from continuing operations 13,535 10,892 8,226
Income from discontinued operations before income taxes - 606 -
Income tax expense - 235 -
Net income from discontinued operations - 371 -
Net income $ 13,535 $ 11,263 $ 8,226

Basic earnings per share
Continuing operations $ 1.47 $ 1.28 $ 1.16
Discontinued operations - 0.04 -
Total $ 1.47 $ 1.32 $ 1.16

Diluted earnings per share
Continuing operations $ 1.44 $ 1.25 $ 1.10
Discontinued operations - 0.04 -
Total $ 1.44 $ 1.29 $ 1.10

Weighted average shares outstanding
Basic 9,223 8,538 7,122
Diluted 9,370 8,730 7,503

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

~~-49-~~

~~Index~~

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2008, 2007 ~~2006~~ and ~~2005~~2006


																	Accumulated
								Additional			Unearned						other comp-
	Common stock					Preferred		paid-in			compen-			Retained			rehensive			Treasury
(In thousands)	Shares			Amount		stock		capital			sation			earnings			income (loss)			stock			Total
Balance at December 31, 2005		8,540		$	106	$	—	$	198,667		$	(1,435	)	$	99,429		$	(2,239	)	$	(48,462	)	$	246,066


Comprehensive income:
Net income		—			—		—		—			—			11,263			—			—			11,263
Other net comprehensive income		—			—		—		—			—			—			2,331			—			2,331

Total comprehensive income																								13,594
Cash dividends declared ($0.56 per share)		—			—		—		—			—			(4,834	)		—			—			(4,834	)
Treasury stock purchased/transferred		(76	)		—		—		—			—			—			—			(2,876	)		(2,876	)
Exercise of stock options		197			—		—		—			—			(127	)		—			3,556			3,429
Reissuance of treasury stock — other		53			—		—		853			—			—			—			935			1,788
Stock-based compensation		—			—		—		195			—			—			—			—			195
Tax benefit from stock compensation		—			—		—		1,260			—			—			—			—			1,260
Change in unearned compensation		—			—		—		—			(461	)		—			—			—			(461	)

Balance at December 31, 2006		8,713			106		—		200,975			(1,896	)		105,731			92			(46,847	)		258,161


Comprehensive income:
Net income		—			—		—		—			—			13,535			—			—			13,535
Other net comprehensive income		—			—		—		—			—			—			1,125			—			1,125

Total comprehensive income																								14,660
Acquisition of Factory Point Bancorp, Inc.		1,913			19		—		63,331			—			—			—			—			63,350
Cash dividends declared ($0.58 per share)		—			—		—		—			—			(5,398	)		—			—			(5,398	)
Treasury stock purchased		(290	)		—		—		—			—			—			—			(7,822	)		(7,822	)
Forfeited shares		(41	)		—		—		(36	)		—			—			—			(1,112	)		(1,148	)
Exercise of stock options		132			—		—		—			—			(481	)		—			2,598			2,117
Reissuance of treasury stock — other		66			—		—		1,001			—			—			—			1,166			2,167
Stock-based compensation		—			—		—		187			—			—			—			—			187
Tax benefit from stock compensation		—			—		—		676			—			—			—			—			676
Change in unearned compensation		—			—		—		—			(113	)		—			—			—			(113	)

Balance at December 31, 2007		10,493			125		—		266,134			(2,009	)		113,387			1,217			(52,017	)		326,837


Comprehensive income:
Net income		—			—		—		—			—			22,244			—			—			22,244
Other net comprehensive loss		—			—		—		—			—			—			(12,791	)		—			(12,791	)

Total comprehensive income																								9,453
Issuance of preferred stock		—			—		36,802		—			—			—			—			—			36,802
Fair value of warrant issued with preferred stock		—			—		—		3,198			—			—			—			—			3,198
Issuance of common stock		1,725			17		—		38,504			—			—			—			—			38,521
Cash dividends declared ($0.63 per share)		—			—		—		—			—			(6,837	)		—			—			(6,837	)
Treasury stock purchased		(200	)		—		—		—			—			—			—			(4,880	)		(4,880	)
Forfeited shares		(3	)		—		—		(5	)		70			—			—			(65	)		—
Exercise of stock options		185			—		—		—			—			(1,206	)		—			4,714			3,508
Reissuance of treasury stock — other		53			—		20		(193	)		—			185			—			1,795			1,807
Stock-based compensation		—			—		—		55			—			—			—			—			55
Tax loss from stock compensation		—			—		—		(73	)		—			—			—			—			(73	)
Change in unearned compensation		—			—		—		—			34			—			—			—			34

Balance at December 31, 2008		12,253			$142		$36,822		$307,620			$(1,905	)		$127,773			$(11,574	)		$(50,453	)		$408,425

Accumulated
Additional Unearned other comp-
Common stock paid-in compen- Retained rehensive Treasury
(In thousands) Shares Amount capital sation earnings income (loss) stock Total

Balance at December 31, 2004 5,874 $ 77 $ 77,588 $ (7,414 ) $ 94,996 $ 4,214 $ (37,725 ) $ 131,736

Comprehensive income:
Net income - - - - 8,226 - - 8,226
Other net comprehensive loss - - - - - (6,453 ) - (6,453 )
Total comprehensive income 1,773
Acquisition of Woronoco Bancorp 2,927 29 111,810 - - - - 111,839
Termination of Employee Stock
Ownership Plan - - 8,459 5,105 - - - 13,564
Cash dividends declared ($0.52 per share) - - - - (3,707 ) - - (3,707 )
Treasury stock purchased/transferred (382 ) - - - - - (12,837 ) (12,837 )
Exercise of stock options 103 - - - (86 ) - 1,777 1,691
Reissuance of treasury stock - other 18 - 315 - - - 323 638
Tax benefit from stock compensation - - 279 - - - - 279
Change in unearned compensation - - 216 874 - - - 1,090
Balance at December 31, 2005 8,540 106 198,667 (1,435 ) 99,429 (2,239 ) (48,462 ) 246,066

Comprehensive income:
Net income - - - - 11,263 - - 11,263
Other net comprehensive income - - - - - 2,331 - 2,331
Total comprehensive income 13,594
Cash dividends declared ($0.56 per share) - - - - (4,834 ) - - (4,834 )
Treasury stock purchased/transferred (76 ) - - - - - (2,876 ) (2,876 )
Exercise of stock options 197 - - - (127 ) - 3,556 3,429
Reissuance of treasury stock - other 53 - 853 - - - 935 1,788
Stock-based compensation - - 195 - - - - 195
Tax benefit from stock compensation - - 1,260 - - - - 1,260
Change in unearned compensation - - - (461 ) - - - (461 )
Balance at December 31, 2006 8,713 106 200,975 (1,896 ) 105,731 92 (46,847 ) 258,161

Comprehensive income:
Net income - - - - 13,535 - - 13,535
Other net comprehensive income - - - - - 1,125 - 1,125
Total comprehensive income 14,660
Acquisition of Factory Point Bancorp, Inc. 1,913 19 63,331 - - - - 63,350
Cash dividends declared ($0.58 per share) - - - - (5,398 ) - - (5,398 )
Treasury stock purchased (290 ) - - - - - (7,822 ) (7,822 )
Forfeited shares (41 ) - (36 ) - - - (1,112 ) (1,148 )
Exercise of stock options 132 - - - (481 ) - 2,598 2,117
Reissuance of treasury stock - other 66 - 1,001 - - - 1,166 2,167
Stock-based compensation - - 187 - - - - 187
Tax benefit from stock compensation - - 676 - - - - 676
Change in unearned compensation - - - (113 ) - - - (113 )
Balance at December 31, 2007 10,493 $ 125 $ 266,134 $ (2,009 ) $ 113,387 $ 1,217 $ (52,017 ) $ 326,837

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

- 54 -

~~-50-~~

~~Index~~

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2008, 2007 ~~2006~~ and ~~2005~~2006


(In thousands)	2008			2007			2006
Cash flows from operating activities:
Continuing operations:
Net income	$	22,244		$	13,535		$	10,892
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Provision for loan losses		4,580			4,300			7,860
Net amortization of securities		173			250			943
Net loan amortization and deferrals		2,949			3,767			2,981
Premises depreciation and amortization expense		3,835			3,404			2,831
Stock-based compensation expense		1,635			1,604			1,338
Excess tax loss (benefit) from stock-based payment arrangements		73			(676	)		(1,260	)
Amortization of other intangibles		3,830			3,058			2,035
Increase in cash surrender value of bank owned life insurance		(352	)		(1,078	)		(1,034	)
Loss on sales of securities, net		22			591			3,130
Loss on sale of loans		—			1,950			—
Loss on prepayment of borrowings		—			1,180			—
Deferred income tax provision (benefit), net		905			986			(1,762	)
Net change in other		(704	)		(9,440	)		(3,540	)

Net cash provided by continuing operating activities		39,190			23,431			24,414


Discontinued operations:
Pre-tax income		—			—			606

Net cash provided by discontinued operations		—			—			606


Total net cash provided by operating activities:		39,190			23,431			25,020


Cash flows from investing activities:
Trading account security purchased		(15,000	)		—			—
Securities available for sale:
Sales		10,058			59,141			190,009
Proceeds from maturities, calls, and prepayments		25,307			31,152			46,138
Purchases		(98,918	)		(45,810	)		(40,155	)
Securities held to maturity:
Proceeds from maturities, calls, and prepayments		30,065			14,850			16,319
Purchases		(16,481	)		(14,344	)		(26,379	)

(continued)

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

- 55 -

~~-54-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-56-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-60-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-61-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-62-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-64-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-65-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-67-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-68-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-69-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-70-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Short-term debt includes FHLBB advances with an original maturity of less than one year and outstanding borrowings on lines of credit. Total short-term debt was $23.2 million and $92.8 million at year-end 2008 and 2007, respectively. The weighted-average interest rates on total short-term debt at year-end 2008 and 2007 were 0.37% and 3.50%, respectively.

~~-71-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-73-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-74-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~-75-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

In the fourth quarter of 2008, the Company issued 1.725 million common shares in a public offering and received net cash proceeds of $38.5 million. On December 19, 2008, the Company entered into an agreement with the U.S. Treasury related to its purchase of $40 million of preferred stock. Under this agreement, the Company may not repurchase common shares or increase its dividend for three years from the date of the agreement subject to certain conditions described in the preferred stock note above.

~~-76-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

18. STOCK-BASED COMPENSATION PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN

In April 2008 the stockholders of the Company has no recorded liability for these arrangements. EITF 06-4, effective for fiscal years beginning after December 15, 2007 sets forth requirements for the recognition of a liability. See Note 1 – Recent Accounting Pronouncements.

~~15.~~

~~STOCK-BASED COMPENSATION PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN~~

~~The Company has two stock-based compensation plans:~~voted to terminate the 2001 Stock-Based Incentive Plan ~~and~~while simultaneously increasing by 200 thousand the number of shares of common stock that the Company may issue under the 2003 Equity Compensation Plan. These ~~plans, which are stockholder-approved, permit~~amendments represented a net increase of 118 thousand shares available to grant stock and option awards.

The 2003 Equity Compensation Plan permits the ~~grant~~granting of a combination of stock awards and incentive and non-qualified stock options to employees and directors. ~~The plans~~A total of 500 thousand common stock shares were authorized ~~1.374 million shares~~under the plan, as amended. As of year-end 2008, the Company had the ability to grant approximately 261 thousand additional stock and option awards under this plan.

On September 21, 2007, the Company assumed the outstanding unexercised options issued by Factory Point Bancorp as part of the merger agreement between the Company and Factory Point. Each Factory Point option was converted to a vested option for one of the Company’s ~~common~~shares with an exercise price equal to the market price of Factory Point’s stock ~~for~~at the date of grant and a maximum original term of ten years based on the original grant date subject to the exchange ratio set forth in the merger agreement. In 2007, the total stock-based compensation cost capitalized as part of the goodwill of the Factory Point acquisition was $2.1 million.

A summary of activity in the Company’s stock compensation plans is shown below:


	Non-vested Stock
	Awards Outstanding					Stock Options Outstanding
				Weighted-					Weighted-
				Average					Average
	Number of			Grant Date		Number of			Exercise
(Shares in thousands)	Shares			Fair Value		Shares			Price
Balance, December 31, 2007		105		$	31.88		644		$	21.90
Granted		68			22.80		—			—
Stock options exercised		—			—		(185	)		18.96
Stock awards vested		(47	)		30.03		—			—
Forfeited		(3	)		27.67		(6	)		33.46

Balance, December 31, 2008		123		$	27.40		453		$	23.00

Exercisable options, December 31, 2008							437		$	22.61

Stock awards ~~as stock or options. Authorized shares included 767,000 shares reserved for options, 307,000 shares reserved~~

The total compensation cost for stock awards recognized as expense was $1.6 million, $1.6 million, and ~~300,000 shares available for either options or~~$1.3 million, in the years 2008, 2007 and 2006, respectively. The total recognized tax benefit associated with this compensation cost was $0.6 million, $0.6 million, and $0.5 million, respectively.

The fair value of stock ~~awards.~~awards is based on the closing stock price on the grant date. The ~~Company believes that such~~weighted average fair value of stock awards ~~better align~~granted was $22.80, $33.06 and $33.96 in 2008, 2007 and 2006. Stock awards vest over periods up to five years and are valued at the ~~interests~~closing price of ~~plan participants with those~~the stock on the grant date.

The total fair value of ~~its stockholders.~~stock awards vested during 2008, 2007 and 2006 was $1.4 million, $1.4 million and $2.1 million, respectively. The unrecognized stock-based compensation expense related to unvested stock awards was $1.9 million as of year-end 2008. This amount is expected to be recognized over a weighted average period of 1 year.

- 83 -

Option Awards

~~-77-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant, and vest over periods up to five years. The options grant the holder the right to acquire a share of the Company’s common stock for each option held, and have a contractual life of ten years. The Company assumed the outstanding unexercised options issued by Factory Point Bancorp, Inc., which was acquired on September 21, 2007. Each Factory Point option was converted to a vested option for one of the Company’s shares with an exercise price equal to the market price of Factory Point’s stock at the date of grant and a maximum original term of ten years based on the original grant date subject to the exchange ratio set forth in the merger agreement. The Company generally issues shares from treasury stock as options are exercised. ~~Stock awards vest over periods up to five years and are valued at the closing price of the stock on the grant date.~~

The total compensation cost for stock-based payment arrangements recognized as expense was $1.6 million, $1.3 million, and $1.4 million in the years 2007, 2006, and 2005, respectively. For all of these years, the total recognized tax benefit related to this compensation cost was $0.6 million, $0.5 million and $0.6 million in the years 2007, 2006, and 2005, respectively. In 2007, the total stock-based compensation cost capitalized as part of the goodwill of the Factory Point acquisition was $2.1 million.

~~The fair value of stock awards is based on the closing stock price on the grant date. The weighted average fair value of stock awards granted was $33.06, $33.96, and $35.10 in 2007, 2006, and 2005.~~ The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing ~~model with the following weighted-average assumptions and grant date fair values (no options were granted in 2005).~~model. The expected dividend yield and expected term are based on management estimates. The expected volatility is based on historical volatility. The risk-free interest rates for the expected term are based on the U.S. Treasury yield curve in effect at the time of the grant.

2007 2006
Expected dividends 1.85 % 1.85 %
Expected term 6 years 6 years
Expected volatility 19 % 19 %
Risk-free interest rate 4.68 % 4.86 %
Weighted average grant date fair value $ 7.67 $ 8.05

~~A summary of activity~~ The following weighted-average assumptions were used in the ~~Company’s stock compensation plans is shown below:~~determination of the weighted average grant date fair value for option awards granted in 2007 and 2006. The Company did not grant option awards in 2008. Option awards granted in 2007 and 2006 totaled approximately 20 thousand and 3 thousand, respectively.


(In thousands)	2007			2006

Expected dividends		1.85	%		1.85	%
Expected term	6 years			6 years
Expected volatility		19	%		19	%
Risk-free interest rate		4.68	%		4.86	%
Weighed average grant date fair value	$	7.67		$	8.05

Non-vested Stock
Awards Outstanding

Stock Options
Outstanding

Weighted- Weighted-
Average Average
Number of Grant Date Number of Exercise
(Shares in thousands) Shares Fair Value Shares Price
Balance, December 31, 2006 93 $ 30.98 586 $ 20.62
Granted 66 33.06 20 33.46
Acquired - - 172 20.43
Stock options exercised - - (132 ) 16.04
Stock awards vested (43 ) 31.03 - -
Forfeited (11 ) 34.56 (2 ) 22.30
Balance, December 31, 2007 105 $ 31.88 644 $ 21.90
Exercisable options, December 31, 2007 606 $ 21.46

~~-78-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The total intrinsic value of options exercised was $1.1 million, $1.9 million, ~~$3.4 million,~~ and ~~$1.8~~$3.4 million for the years 2008, 2007, and 2006, ~~and 2005,~~ respectively. ~~The total fair value of stock awards vested during these respective years was $1.4 million, $2.1 million, and $2.0 million.~~ As of ~~year end 2007,~~year-end 2008, unrecognized stock-based compensation expense related to unvested options amounted to ~~$135~~$50 thousand. This amount is expected to be recognized over a weighted average period of ~~1.0~~less than 1 year. The weighted average ~~year-end 2007~~ intrinsic value of stock options outstanding at year-end 2008 was ~~$3.8~~$4.1 million, and the similar value of exercisable options was ~~$3.7~~$4.1 million. The ~~unrecognized stock-based compensation~~ expense ~~related~~pertaining to ~~unvested stock awards~~options vesting in the years 2008, 2007, and 2006 was ~~$2.0 million. This amount is expected~~$55 thousand, $187 thousand, and $195 thousand, respectively.

19. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of SFAS No. 157 for non-financial assets and non-financial liabilities until January 1, 2009. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS No. 157 defines fair value as the price that would be received to ~~be recognized over~~sell an asset or paid to transfer a ~~weighted average period~~liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of ~~1.7 years.~~

a principal market, the most advantageous market for the asset or liability. The ~~following pro forma information presents net income and earnings per share for 2005 as if~~price in the principal (or most advantageous) market used to measure the fair value ~~method of SFAS 123R had been used to measure compensation cost for stock-based compensation plan expense.~~

(In thousands, except per share data) 2005
Net income as reported $ 8,226
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 822

Less: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects (1,255 )
Pro forma net income $ 7,793

Income per share:
Basic - as reported $ 1.16
Basic - pro forma 1.09

Diluted - as reported 1.10
Diluted - pro forma 1.04

~~Employee Stock Ownership Plan~~

The Bank had established an Employee Stock Ownership Plan (“ESOP”) for the benefit of certain employees. This plan was terminated by the Bank as of June 30, 2005. A total of 444 thousand shares were held in trust and distributed to plan participants in 2007. These shares were treated as allocated as of July 1, 2005 for purposes of calculating earnings per share.

~~Berkshire Hills Funding Corporation, a subsidiary~~ of the ~~Company, had provided~~asset or liability shall not be adjusted for transaction costs. An orderly transaction is a ~~loan~~transaction that assumes exposure to the ~~Berkshire Bank Employee Stock Ownership Plan Trust which was originally used~~market for a period prior to ~~purchase~~ the ~~Company’s outstanding stock~~measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the ~~open market.~~principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

- 84 -

SFAS No. 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The ~~loan bore interest equal~~market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to ~~9.5%, provided for quarterly payments~~convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of ~~interest and principal, and was secured by~~an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the ~~unallocated shares~~assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the ~~plan through June 30, 2005. The Bank made contributions~~circumstances. In that regard, SFAS No. 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the ~~ESOP sufficient~~lowest priority to support the debt service of the loan and made a $900 thousand prepayment of the loan in June 2005. Following the prepayment, the Board of Directors terminated the plan. As provided in the plan, the outstanding loan was repaid through the sale of 147 thousand shares by the plan to the Company. Those shares were recorded as treasury shares at the June 30, 2005 share closing price of $33.32.

Total expense applicable to the termination of the plan was recorded in the amount of $8.7 million in 2005. The effect on capital of this expense was offset by credits to unearned compensation and additional paid in capital in stockholders’ equity. The Bank recorded an additional $168 thousand in expense related to the termination of the ESOP supplemental executive retirement plan. Additionally, total compensation expense applicable to the operation of the ESOP prior to its termination amounted to $340 thousand for 2005.

~~-79-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

In connection with the acquisition of Woronoco, Berkshire Bank assumed the obligations of the Woronoco Savings Bank Employee Stock Ownership Plan. The Woronoco Savings Bank Employee Stock Ownership Plan was terminated by Woronoco Savings Bank as of the effective date of the merger and all outstanding loan obligations under the plan were repaid. Participant shares in the plan totaled 305 thousand shares at year-end 2005 and these shares were distributed to participants in 2006.

~~16.~~

~~FAIR VALUE OF FINANCIAL INSTRUMENTS~~

unobservable inputs. The fair value ~~of a financial instrument~~hierarchy is as follows:

Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the ~~current amount that would be exchanged between willing parties,~~reporting entity has the ability to access at the measurement date.

Level 2 Inputs — Inputs other than quoted prices included in ~~a forced liquidation.~~ Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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 effective January 1, 2008.

Fair value is ~~best determined~~ based upon quoted market ~~prices. However, in many instances, there are no quoted market~~ prices, ~~for the Company’s various financial instruments.~~where available. In most cases, ~~where~~such quoted market prices are not available, and fair value is based on inputs other than quoted prices that are market based or are derived from or corroborated by market data by correlation or other means. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Recurring fair value measurements of financial instruments

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of year-end 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.


	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value

Trading account security	$	—	$	—	$	18,144	$	18,144
Securities available for sale		381		272,553		1,446		274,380
Derivative assets		—		3,740		—		3,740
Derivative liabilities		—		24,068		—		24,068

Trading Security at Fair Value.The Company holds one security designated as a trading security. It is a tax advantaged economic development bond issued by the Company to a local nonprofit organization which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain of the inputs to the fair value calculation are unobservable and there is little to no market activity in the security. The security meets FAS No.157’s definition of a level 3 security and has been classified as such.

- 85 -

Cash and cash equivalents.Carrying value is assumed to represent fair value for cash and due from banks and short-term investments, which have original maturities of 90 days or less.

Securities held to maturity.Fair values of held to maturity securities are based on quoted market prices of identical or similar securities or dealer quotes when available. In other cases, fair values are based on estimates using present value or other valuation techniques. ~~Those techniques are significantly affected by the assumptions used, including the discount rate and estimates~~

Cash surrender value of ~~future cash flows. Accordingly, the~~life insurance policies.Carrying value is assumed to represent fair value.

Loans, net.The carrying value ~~estimates may not be realized in an immediate settlement~~ of the ~~instrument. Certain financial instruments~~loans in the loan portfolio is based on the cash flows of the loans discounted over their respective loan origination rates. The origination rates are adjusted for substandard and ~~all nonfinancial instruments are excluded from its disclosure requirements.~~special mention loans to factor the impact of declines in the loan’s credit standing. The ~~aggregate fair value amounts presented may not necessarily represent the underlying~~ fair value of the ~~Company.~~loans is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.

~~The following methods and assumptions were used by the Company in estimating fair~~Accrued interest receivable.Carrying value ~~disclosures for financial instruments:~~

~~Cash and cash equivalents: The carrying amounts of these instruments approximate fair values.~~

~~Securities: Fair values for securities are based on quoted market prices, where available. Non-marketable equity securities are~~is assumed to ~~have~~represent fair ~~values equal to carrying values.~~ value.

Deposits.The fair value of ~~municipal securities without quoted~~demand, non-interest bearing checking, savings and certain money market ~~prices~~deposits is ~~based on discounted cash flow analyses using year-end market rates for similar instruments.~~

~~Loans~~: For variable-rate loans that reprice frequently, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, using interest rates offered at year-end for loans with similar terms. These values are stated net of the allowance for loan losses, which is the estimated adjustment of fair value due to credit quality.

~~Non-maturity deposits: The fair values for non-maturity deposits are, by definition, equal to~~determined as the amount payable on demand at the reporting ~~date which is their carrying amounts.~~

~~Time deposits:~~ ~~Fair values for~~date. The fair value of time deposits ~~are~~is estimated by discounting the estimated future cash flows using ~~a discounted cash flow calculation that applies interest~~market rates offered ~~at year-end~~ for deposits of similar remaining ~~maturities.~~maturities as of year-end.

~~Borrowings~~: Borrowed funds.The fair ~~values~~value of ~~borrowings are~~borrowed funds is estimated ~~using discounted~~by discounting the future cash ~~flow analyses~~flows using ~~year-end~~ market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.

Junior subordinated ~~debentures:~~debentures.Junior subordinated debentures reprice every ninety days and the carrying amount approximates fair value.

Off-balance-sheet financial ~~instruments~~: instruments.Fair values for off-balance-sheet lending commitments are immaterial. In its credit commitments, the Company does not normally provide interest rate locks exceeding sixty days, and most credit commitments are for adjustable rate loans.

~~-80-~~

~~Index~~

~~BERKSHIRE HILLS BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~The year-end carrying amounts and estimated fair values of the Company’s financial instruments are as follows:~~

2007 2006
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value

Financial assets:
Cash and cash equivalents $ 41,142 $ 41,142 $ 30,985 $ 30,985
Securities available for sale 219,041 219,041 194,206 194,206
Securities held to maturity 39,456 39,689 39,968 39,686
Loans, net 1,921,900 1,964,983 1,679,617 1,683,030

Financial liabilities:
Non-maturity deposits 1,094,671 1,094,671 830,564 830,564
Time deposits 727,892 733,034 691,374 692,298
Borrowings 334,474 336,231 345,005 338,669
Junior subordinated debentures 15,464 15,464 15,464 15,464

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. These estimates are subjective in nature and require considerable judgment to interpret market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange, nor are they intended to represent the fair value of the Company as a whole. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of the respective balance sheet dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

In addition, other assets, such as property and equipment, and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures. Also, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of non-maturity deposit accounts, the trained work force, customer goodwill and similar items.

~~17.~~

~~OPERATING SEGMENTS~~

20. OPERATING SEGMENTS

The Company has two reportable operating segments, Banking and Insurance, which are delineated by the consolidated subsidiaries of Berkshire Hills Bancorp. Banking includes the activities of Berkshire Bank and its subsidiaries, which provide retail and commercial banking, along with wealth management and ~~consumer banking~~investment services. Insurance includes the activities of Berkshire Insurance Group, which provides ~~commercial~~retail and ~~consumer~~commercial insurance services. The only other consolidated financial activity of the Company is the Parent, which consists of the transactions of Berkshire Hills Bancorp. Management fees for corporate services provided by the Bank to Berkshire Insurance Group and the Parent are eliminated.

The accounting policies of each reportable segment are the same as those of the Company. The Insurance segment and the Parent reimburse the Bank for administrative services provided to them. Income tax expense for the individual segments is calculated based on the activity of the segments, and the Parent records the tax expense or benefit necessary to reconcile to the consolidated total. The Parent does not allocate capital costs. Average assets include securities available-for-sale based on amortized cost.

- 88 -


Delaware		04-3510455

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

24 North Street, Pittsfield, Massachusetts		01201

(Address of principal executive offices)		(Zip Code)


Title of each class		Name of Exchange on which registered

Common stock, par value $0.01 per share		NASDAQ Stock Market LLC

~~Large Accelerated Filer~~ ¨	~~Accelerated Filer~~ ý
~~Non-Accelerated Filer~~ ¨	~~Smaller Reporting Company~~ ¨
~~(Do not check if a smaller reporting company)~~
Large Accelerated Filero		Accelerated Filerþ	Non-Accelerated Filero	Smaller Reporting Companyo


	2007				2006				2005				2008				2007				2006
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value		Cost		Value		Cost		Value		Cost		Value		Cost		Value
Available for sale securities
U.S. Government agencies	$	-	$	-	$	-	$	-	$	69	$	63
Municipal bonds and obligations		74,223		75,186		63,788		64,503		63,701		63,673	$	76,843	$	75,414	$	74,223	$	75,186	$	63,788	$	64,503
Mortgage-backed securities		103,387		104,518		85,102		84,334		264,705		258,504		174,896		176,978		103,387		104,518		85,102		84,334
Other bonds and obligations		15,601		15,265		20,392		20,439		24,356		24,703		24,341		20,889		15,601		15,265		20,392		20,439
Equity securities		23,913		24,073		24,687		24,930		41,667		43,933		1,177		1,099		793		952		878		1,121


Total available for sale securities	$	217,124	$	219,042	$	193,969	$	194,206	$	394,498	$	390,876	$	277,257	$	274,380	$	194,004	$	195,921	$	170,160	$	170,397


Held to maturity securities
Municipal bonds and obligations	$	36,981	$	37,233	$	35,572	$	35,286	$	23,851	$	23,851	$	25,066	$	25,926	$	36,981	$	37,233	$	35,572	$	35,286
Mortgage-backed securities		2,475		2,456		4,396		4,400		6,057		5,912		806		803		2,475		2,456		4,396		4,400


Total held to maturity securities	$	39,456	$	39,689	$	39,968	$	39,686	$	29,908	$	29,763	$	25,872	$	26,729	$	39,456	$	39,689	$	39,968	$	39,686


Trading account security													$	15,000	$	18,144	$	—	$	—	$	—	$	—

Restricted equity securities													$	23,120	$	23,120	$	23,120	$	23,120	$	23,809	$	23,809


						More than One Year					More than Five Years
	One Year or Less					to Five Years					to Ten Years					More than Ten Years					Total
			Weighted					Weighted					Weighted					Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
(Dollars in millions)	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield

Municipal bonds and obligations	$	10.0		2.83	%	$	5.1		3.62	%	$	26.6		2.82	%	$	60.2		4.39	%	$	101.9		3.79	%
Mortgage-backed securities		0.5		3.30			8.9		3.31			25.9		5.25			140.4		4.69			175.7		4.70
Other bonds and obligations		—		—			11.8		6.24			3.0		5.18			9.5		5.25			24.3		5.72

Total	$	10.5		2.86	%	$	25.8		4.71	%	$	55.5		4.08	%	$	210.1		4.63	%	$	301.9		4.47	%

ý
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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


INDPART IEX			3

~~PART I~~ITEM 1. BUSINESS			3
~~ITEM 1.~~	~~BUSINESS~~	22
ITEM 1A.	RISK FACTORS	27		23

ITEM 1B.	UNRESOLVED STAFF COMMENTS	27		30

ITEM 2. PROPERTIES	~~PROPERTIES~~	27	30

ITEM 3.	LEGAL PROCEEDINGS	27		30

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	27
~~PART II~~		28	30

PART II			31

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	28		31

ITEM 6.	SELECTED FINANCIAL DATA	31		33

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32		34

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45		47

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	46		50

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	86		93

ITEM 9A.	CONTROLS AND PROCEDURES	86
~~ITEM 9B.~~	~~OTHER INFORMATION~~	87
~~PART III~~		87	93

ITEM ~~10.~~9B. OTHER INFORMATION	~~DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE~~	87	93

~~ITEM 11.~~PART III	~~EXECUTIVE COMPENSATION~~	88	93

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT			93

ITEM 11. EXECUTIVE COMPENSATION			95

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS	88		95

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ~~AND DIRECTOR INDEPENDENCE~~	89		96

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	89
~~PART IV~~		90	96

PART IV			97

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	90
~~SIGNATURES~~		92	97

SIGNATURES			99

Exhibit 10.7
Exhibit 23.0
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


(Dollars in thousands)	2008			2007			2006			2005			2004

Nonaccruing loans:
Residential mortgages	$	1,646		$	726		$	15		$	261		$	327
Commercial mortgages		7,738			5,177			308			271			147
Commercial business		1,921			4,164			7,203			553			523
Consumer		866			441			66			101			155

Total nonperforming loans		12,171			10,508			7,592			1,186			1,152
Real estate owned		498			866			—			—			—

Total nonperforming assets	$	12,669		$	11,374		$	7,592		$	1,186		$	1,152


Troubled debt restructurings (accruing)	$	7,456		$	4,613		$	5,268		$	1,234		$	510
Accruing loans 90+ days past due		923			823			281			110			65

Total nonperforming loans/total loans		0.61	%		0.54	%		0.45	%		0.08	%		0.14	%
Total nonperforming assets/total assets		0.48	%		0.45	%		0.35	%		0.06	%		0.09	%

(Dollars in thousands)	2007			2006			2005			2004			2003

Nonaccruing loans:
Residential mortgages	$	726		$	15		$	261		$	327		$	348
Commercial mortgages		5,177			308			271			147			496
Commercial business		4,164			7,203			553			523			1,887
Consumer		441			66			101			155			468
Total nonperforming loans		10,508			7,592			1,186			1,152			3,199
Real estate owned		866			-			-			-			-
Total nonperforming assets	$	11,374		$	7,592		$	1,186		$	1,152		$	3,199

Troubled debt restructurings	$	4,613		$	5,268		$	1,234		$	510		$	214
Accruing loans 90+ days past due		823			281			110			65			306

Total nonperforming loans/total loans		0.54	%		0.45	%		0.08	%		0.14	%		0.40	%
Total nonperforming assets/total assets		0.45	%		0.35	%		0.06	%		0.09	%		0.26	%



			Weighted
Maturity Period			Average
(Dollars in thousands)	Amount		Rate
Three months or less	$	56,422		3.18	%
Over 3 months through 6 months		35,338		3.14
Over 6 months through 12 months		102,815		3.48
Over 12 months		157,088		4.18

Total	$	351,663		3.71	%

						Total number of shares		Maximum number of
	Total number			Average		purchased as part of		shares that may yet
		of shares		price paid		publicly announced		be purchased under
Period		purchased		per share		plans or programs		the plans or programs
October 1-31, 2007			40,529	$	27.96		40,529		227,393
November 1-30, 2007			167,500		26.52		167,500		59,893
December 1-31, 2007			61,900		25.69		61,900		297,993
Total			269,929	$	26.55		269,929		297,993

	Period Ending
Index	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
Berkshire Hills Bancorp Inc.	$	100.00	$	156.34	$	162.61	$	148.90	$	151.15	$	119.80
NASDAQ Composite		100.00		150.01		162.89		165.13		180.85		198.60
SNL Bank and Thrift Index		100.00		135.57		151.82		154.20		180.17		137.40

	At or For the Years Ended December 31,
(Dollars in thousands, except per share data)	2007			2006			2005		2004			2003

Selected Financial Data:
Total assets	$	2,513,432		$	2,149,642		$	2,035,553	$	1,310,115		$	1,218,548
Securities		258,497			234,174			420,320		414,363			359,294
Loans, net		1,921,900			1,679,617			1,407,229		818,842			783,258
Goodwill and intangibles		182,452			121,341			99,616		7,254			10,233
Deposits		1,822,563			1,521,938			1,371,218		845,789			830,244
Borrowings and subordinated debentures		349,938			360,469			412,917		327,926			251,465
Total stockholders’ equity		326,837			258,161			246,066		131,736			123,175

Selected Operating Data:
Total interest and dividend income	$	131,944		$	118,051		$	87,732	$	61,081		$	56,308
Total interest expense		68,019			57,811			36,115		20,724			18,742
Net interest income		63,925			60,240			51,617		40,357			37,566
Provision for loan losses		4,300			7,860			1,313		1,565			1,460
Service charges and fee income		26,654			13,539			9,373		5,493			5,023
All other non-interest income (loss)		(2,011	)		(1,491	)		5,550		2,271			1,425
Total non-interest expense		65,494			48,868			48,998		28,977			28,243
Provision for income taxes - continuing operations		5,239			4,668			8,003		5,639			5,161
Net income (loss) from discontinued operations		-			371			-		(431	)		(185	)
Net income	$	13,535		$	11,263		$	8,226	$	11,509		$	8,965

Dividends per share	$	0.58		$	0.56		$	0.52	$	0.48		$	0.48
Basic earnings per share:
Continuing operations	$	1.47		$	1.28		$	1.16	$	2.26		$	1.74
Discontinued operations		-			0.04			-		(0.08	)		(0.04	)
Total	$	1.47		$	1.32		$	1.16	$	2.18		$	1.70

Diluted earnings per share:
Continuing operations	$	1.44		$	1.25		$	1.10	$	2.08		$	1.60
Discontinued operations		-			0.04			-		(0.07	)		(0.03	)
Total	$	1.44		$	1.29		$	1.10	$	2.01		$	1.57

Average shares outstanding:
Basic		9,223			8,538			7,122		5,284			5,266
Diluted		9,370			8,730			7,503		5,731			5,703


(1)
~~(1)~~ The average balances of loans includes nonaccrual loans, loans held for sale, and deferred fees and costs.

(2)		The average balance of investment securities is based on amortized cost.


	2008 Compared with 2007									2007 Compared with 2006
	Increase (Decrease) Due to									Increase (Decrease) Due to
(In thousands)	Rate			Volume			Net			Rate			Volume			Net

Interest income:
Loans	$	(11,686	)	$	12,194		$	508		$	2,944		$	16,280		$	19,224
Investment securities		(1,362	)		1,979			617			2,548			(7,714	)		(5,166	)
Short-term investments		(92	)		134			42			(103	)		(11	)		(114	)

Total interest income		(13,140	)		14,307			1,167			5,389			8,555			13,944


Interest expense:
NOW accounts		(1,318	)		506			(812	)		616			235			851
Money market accounts		(5,874	)		3,654			(2,220	)		601			1,953			2,554
Savings accounts		(783	)		146			(637	)		442			(77	)		365
Certificates of deposit		(5,728	)		533			(5,195	)		2,996			2,812			5,808

Total deposits		(13,703	)		4,839			(8,864	)		4,655			4,923			9,578
Borrowings		(1,587	)		(97	)		(1,684	)		1,926			(1,273	)		653

Total interest expense		(15,290	)		4,742			(10,548	)		6,581			3,650			10,231

Change in net interest income	$	2,150		$	9,565		$	11,715		$	(1,192	)	$	4,905		$	3,713

	2007 Compared with 2006									2006 Compared with 2005
	Increase (Decrease) Due to									Increase (Decrease) Due to
(In thousands)	Rate			Volume			Net			Rate			Volume			Net

Interest income:
Loans	$	2,944		$	16,280		$	19,224		$	7,355		$	23,378		$	30,733
Investment securities		2,548			(7,714	)		(5,166	)		1,970			(2,062	)		(92	)
Short-term investments		(103	)		(11	)		(114	)		40			106			146
Total interest income		5,389			8,555			13,944			9,365			21,422			30,787

Interest expense:
NOW accounts		616			235			851			924			70			994
Money market accounts		601			1,953			2,554			3,272			1,970			5,242
Savings accounts		442			(77	)		365			(29	)		42			13
Certificates of deposit		2,996			2,812			5,808			5,813			7,934			13,747
Total deposits		4,655			4,923			9,578			9,980			10,016			19,996
Borrowings		1,926			(1,273	)		653			2,319			(619	)		1,700
Total interest expense		6,581			3,650			10,231			12,299			9,397			21,696
Change in net interest income	$	(1,192	)	$	4,905		$	3,713		$	(2,934	)	$	12,025		$	9,091


			Less than One		One to Three		Three to Five		After Five
(In thousands)	Total		Year		Years		Years		Years

FHLBB borrowings (1)	$	342,332	$	77,686	$	95,610	$	78,000	$	91,036
Junior subordinated debentures		15,464		—		—		—		15,464
Operating lease obligations (2)		42,180		2,558		4,925		4,667		30,030
Note payable		17,000		625		16,375		—		—
Purchase obligations (3)		4,777		2,945		968		864		—

Total Contractual Obligations	$	421,753	$	83,814	$	117,878	$	83,531	$	136,530


(1)		Consists of borrowings from the Federal Home Loan Bank. The maturities extend through ~~2022~~2027 and the rates vary by borrowing.

(2)		Consists of leases, ~~of four Bank offices~~bank branches and ATMs through ~~2030.~~2031.

(3)		Consists of obligations with multiple vendors to purchase a broad range of ~~services and contractual estimates of capital~~
~~renovations to Bank buildings.~~services.


Change in
Interest Rates-Basis
Points (Rate Ramp)	1 – 12 Months						13 – 24 Months
(Dollars in thousands)	$ Change			% Change			$ Change			% Change

At December 31, 2008
+ 300	$	2,207			3.07	%	$	7,065			10.24	%
+ 200		1,587			2.21			5,283			7.66
+ 100		869			1.21			2,778			4.03
- 100		(1,977	)		(2.75	)		(5,779	)		(8.38	)

At December 31, 2007
+ 200	$	(1,373	)		(1.88	)%	$	(1,704	)		(2.31	)%
+ 100		(732	)		(1.00	)		(649	)		(0.88	)
- 100		428			0.59			(119	)		(0.16	)
- 200		101			0.14			(1,971	)		(2.67	)

Change in
Interest Rates-Basis	Net Interest		1 - 12 Months						13 - 24 Months
Points (Rate Ramp)	Amount		$ Change			% Change			$ Change			% Change
(Dollars in thousands)

At December 31, 2007
+ 200	$	56,317	$	(1,373	)		(1.88	) %	$	(1,704	)		(2.31	) %
+ 100		58,430		(732	)		(1.00	)		(649	)		(0.88	)
- 100		60,944		428			0.59			(119	)		(0.16	)
- 200		59,078		101			0.14			(1,971	)		(2.67	)

At December 31, 2006
+ 200	$	60,226	$	(1,402	)		(2.26	) %	$	(3,380	)		(5.31	) %
+ 100		60,982		(415	)		(0.67	)		(1,255	)		(1.97	)
- 100		62,765		238			0.38			453			0.71
- 200		60,057		(3	)		(0.01	)		(1,188	)		(1.87	)

	December 31,
(In thousands, except share data)	2007			2006
Assets
Total cash and cash equivalents	$	41,142		$	30,985

Securities available for sale, at fair value		219,041			194,206
Securities held to maturity (fair values of $39,689 and $39,686)		39,456			39,968

Residential mortgages		657,045			599,273
Commercial mortgages		704,764			566,339
Commercial business loans		203,564			190,493
Consumer loans		378,643			342,882
Total loans		1,944,016			1,698,987
Less: Allowance for loan losses		(22,116	)		(19,370	)
Net loans		1,921,900			1,679,617

Premises and equipment, net		38,806			29,130
Goodwill		161,632			104,531
Other intangible assets		20,820			16,810
Cash surrender value of life insurance		35,316			30,338
Other assets		35,319			24,057
Total assets	$	2,513,432		$	2,149,642

Liabilities and stockholders’ equity
Liabilities
Demand deposits	$	231,994		$	178,109
NOW deposits		213,150			153,087
Money market deposits		439,341			297,155
Savings deposits		210,186			202,213
Total non-maturity deposits		1,094,671			830,564
Brokered time deposits		21,497			41,742
Other time deposits		706,395			649,632
Total time deposits		727,892			691,374
Total deposits		1,822,563			1,521,938
Borrowings		334,474			345,005
Junior subordinated debentures		15,464			15,464
Other liabilities		14,094			9,074
Total liabilities		2,186,595			1,891,481

Commitments and contingencies (Note 12)

Stockholders’ equity			��
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)		-			-
Common stock ($.01 par value; 26,000,000 shares authorized;
12,513,825 shares issued in 2007 and 10,600,472 in 2006)		125			106
Additional paid-in capital		266,134			200,975
Unearned compensation		(2,009	)		(1,896	)
Retained earnings		113,387			105,731
Accumulated other comprehensive income		1,217			92
Treasury stock, at cost (2,021,120 shares in 2007 and 1,887,068 shares in 2006)		(52,017	)		(46,847	)
Total stockholders' equity		326,837			258,161
Total liabilities and stockholders' equity	$	2,513,432		$	2,149,642

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

	Years Ended December 31,
(In thousands, except per share data)	2007			2006			2005
Interest and dividend income
Loans	$	120,059		$	100,836		$	70,103
Securities		11,743			16,957			17,517
Short-term investments		142			258			112
Total interest and dividend income		131,944			118,051			87,732
Interest expense
Deposits		50,597			41,044			21,048
Borrowings and junior subordinated debentures		17,422			16,767			15,067
Total interest expense		68,019			57,811			36,115
Net interest income		63,925			60,240			51,617
Non-interest income
Deposit service fees		7,747			5,803			4,539
Wealth management fees		4,407			3,287			2,742
Insurance commissions and fees		13,728			3,757			1,343
Loan service fees		772			692			749
(Loss) gain on sales of securities, net		(591	)		(3,130	)		4,283
Loss on sale of loans		(1,950	)		-			-
Loss on prepayment of borrowings		(1,180	)		-			-
Other		1,710		��	1,639			1,267
Total non-interest income		24,643			12,048			14,923
Total revenue		88,568			72,288			66,540
Provision for loan losses		4,300			7,860			1,313
Non-interest expense
Salaries and employee benefits		34,018			24,708			20,281
Termination of employee stock ownership plan		-			-			8,836
Occupancy and equipment		9,945			7,699			5,798
Marketing, data processing, and professional services		8,598			6,648			4,881
Merger, integration and restructuring		2,956			1,510			2,142
Amortization of intangible assets		3,058			2,035			1,140
Other		6,919			6,268			5,920
Total non-interest expense		65,494			48,868			48,998
Income from continuing operations before income taxes		18,774			15,560			16,229
Income tax expense		5,239			4,668			8,003
Net income from continuing operations		13,535			10,892			8,226
Income from discontinued operations before income taxes		-			606			-
Income tax expense		-			235			-
Net income from discontinued operations		-			371			-
Net income	$	13,535		$	11,263		$	8,226

Basic earnings per share
Continuing operations	$	1.47		$	1.28		$	1.16
Discontinued operations		-			0.04			-
Total	$	1.47		$	1.32		$	1.16

Diluted earnings per share
Continuing operations	$	1.44		$	1.25		$	1.10
Discontinued operations		-			0.04			-
Total	$	1.44		$	1.29		$	1.10

Weighted average shares outstanding
Basic		9,223			8,538			7,122
Diluted		9,370			8,730			7,503

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

(In Thousands)	September 21, 2007
Assets
Cash and cash equivalents	$	14,076
Investments		68,403
Loans, net		231,846
Premises and equipment, net		7,509
Cash surrender value of life insurance policies		3,900
Goodwill		53,385
Intangible assets		7,092
Other assets		4,521
Total assets acquired	$	390,732

Liabilities
Deposits	$	269,027
Borrowings		34,202
Other liabilities		2,363
Total liabilities assumed	$	305,592

Net assets acquired	$	85,140

Cash paid to Factory Point stockholders	$	16,015
Common stock issued to Factory Point
stockholders and stock options assumed		63,350
Total consideration		79,365
Professional fees and other acquisition costs		5,775
Net assets acquired	$	85,140

	For the years ended December 31,
(In thousands, except per share data)	2007		2006
Interest income	$	147,382	$	138,852
Interest expense		74,881		66,518
Net interest income		72,501		72,334
Provision for loan losses		4,840		8,250
Net interest income after provision for loan losses		67,661		64,084
Non-interest income		27,192		15,758
Non-interest expense		74,921		57,358
Income before income taxes		19,932		22,484
Income tax expense		5,561		6,556
Net income	$	14,371	$	15,928

Basic earnings per share	$	1.35	$	1.52
Diluted earnings per share	$	1.33	$	1.49


			Gross		Gross
	Amortized		Unrealized		Unrealized
(In thousands)	Cost		Gains		Losses			Fair Value

December 31, 2008

Securities available for sale
Debt securities:
Municipal bonds and obligations	$	76,843	$	401	$	(1,830	)	$	75,414
Mortgaged-backed securities		174,896		2,275		(193	)		176,978
Other bonds and obligations		24,341		170		(3,622	)		20,889

Total debt securities		276,080		2,846		(5,645	)		273,281
Equity securities:
Marketable equity securities		1,177		32		(110	)		1,099

Total securities available for sale		277,257		2,878		(5,755	)		274,380


Securities held to maturity
Municipal bonds and obligations		25,066		860		—			25,926
Mortgaged-backed securities		806		1		(4	)		803

Total securities held to maturity		25,872		861		(4	)		26,729


Total	$	303,129	$	3,739	$	(5,759	)	$	301,109


December 31, 2007

Securities available for sale
Debt securities:
Municipal bonds and obligations	$	74,223	$	1,028	$	(65	)	$	75,186
Mortgaged-backed securities		103,387		1,152		(21	)		104,518
Other bonds and obligations		15,601		38		(374	)		15,265

Total debt securities		193,211		2,218		(460	)		194,969
Equity securities:
Marketable equity securities		793		197		(38	)		952

Total securities available for sale		194,004		2,415		(498	)		195,921


Securities held to maturity
Municipal bonds and obligations		36,981		377		(125	)		37,233
Mortgaged-backed securities		2,475		—		(19	)		2,456

Total securities held to maturity		39,456		377		(144	)		39,689


Total	$	233,460	$	2,792	$	(642	)	$	235,610

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2007
Securities available for sale
Debt securities:
Municipal bonds and obligations	$	74,223	$	1,028	$	(65	)	$	75,186
Mortgaged-backed securities		103,387		1,152		(21	)		104,518
Other bonds and obligations		15,601		38		(374	)		15,265
Total debt securities		193,211		2,218		(460	)		194,969
Equity securities:
Federal Home Loan Bank stock		21,077		-		-			21,077
Other equity securities		2,836		197		(38	)		2,995
Total equity securities		23,913		197		(38	)		24,072
Total securities available for sale		217,124		2,415		(498	)		219,041

Securities held to maturity
Municipal bonds and obligations		36,981		377		(125	)		37,233
Mortgaged-backed securities		2,475		-		(19	)		2,456
Total securities held to maturity		39,456		377		(144	)		39,689

Total securities	$	256,580	$	2,792	$	(642	)	$	258,730


December 31, 2006
Securities available for sale
Debt securities:
Municipal bonds and obligations	$	63,788	$	799	$	(84	)	$	64,503
Mortgaged-backed securities		85,102		112		(880	)		84,334
Other bonds and obligations		20,392		169		(122	)		20,439
Total debt securities		169,282		1,080		(1,086	)		169,276
Equity securities:
Federal Home Loan Bank stock		21,766		-		-			21,766
Other equity securities		2,921		253		(10	)		3,164
Total equity securities		24,687		253		(10	)		24,930
Total securities available for sale		193,969		1,333		(1,096	)		194,206

Securities held to maturity
Municipal bonds and obligations		35,572		-		(286	)		35,286
Mortgaged-backed securities		4,396		49		(45	)		4,400
Total securities held to maturity		39,968		49		(331	)		39,686

Total securities	$	233,937	$	1,382	$	(1,427	)	$	233,892


	Available for sale				Held to maturity				Available for sale				Held to maturity
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value		Cost		Value		Cost		Value

Within 1 year	$	4,571	$	4,579	$	6,879	$	6,879	$	2,365	$	2,380	$	7,662	$	7,662
Over 1 year to 5 years		7,351		7,423		1,163		1,172		15,635		15,824		1,376		1,380
Over 5 years to 10 years		19,343		19,441		2,470		2,470		27,413		27,311		2,150		2,212
Over 10 years		58,559		59,008		26,469		26,712		55,771		50,788		13,878		14,672

Total bonds and obligations		89,824		90,451		36,981		37,233		101,184		96,303		25,066		25,926

Marketable equity securities										1,177		1,099		—		—
Mortgage-backed securities		103,387		104,518		2,475		2,456		174,896		176,978		806		803

Total debt securities	$	193,211	$	194,969	$	39,456	$	39,689

Total									$	277,257	$	274,380	$	25,872	$	26,729

	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
(In thousands)	Losses		Value		Losses		Value
December 31, 2007

Securities available for sale:
Mortgaged-backed securities	$	-	$	149	$	21	$	6,713
Other bonds and obligations		259		7,281		180		8,213
Total available for sale		259		7,430		201		14,926
Securities held to maturity:
Mortgaged-backed securities		2		1,382		17		1,032
Municipal and other bonds and obligations		125		8,243		-		-

Total	$	386	$	17,055	$	218	$	15,958


December 31, 2006

Securities available for sale:
Mortgaged-backed securities	$	71	$	30,944	$	809	$	34,453
Other bonds and obligations		14		1,598		202		17,289
Total available for sale		85		32,542		1,011		51,742
Securities held to maturity:
Mortgaged-backed securities		-		35		45		1,330
Municipal and other bonds and obligations		-		-		286		35,286

Total	$	85	$	32,577	$	1,342	$	88,358


Unamortized net loan origination costs	$	8,329	$	9,574
Unamortized net premium on purchased loans		129		199

Total unamortized net costs and premiums	$	8,458	$	9,773

Unamortized net loan origination costs	$	9,574	$	8,537
Unamortized net premium on purchased loans		199		166
Total unamortized net costs and premiums	$	9,773	$	8,703


	Gross					Net
	Intangible		Accumulated			Intangible
(In thousands)	Assets		Amortization			Assets
December 31, 2008
Non-maturity deposits	$	16,978	$	(5,718	)	$	11,260
Insurance contracts		7,463		(1,708	)		5,755
Non-compete agreements		2,318		(2,318	)		—
All other intangible assets		1,037		(400	)		637

Total	$	27,796	$	(10,144	)	$	17,652


December 31, 2007
Non-maturity deposits	$	16,978	$	(3,140	)	$	13,838
Insurance contracts		7,463		(961	)		6,502
Non-compete agreements		2,318		(1,996	)		322
All other intangible assets		375		(217	)		158

Total	$	27,134	$	(6,314	)	$	20,820

(In thousands)	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets

December 31, 2007
Non-maturity deposits	$	16,978	$	(3,140	)	$	13,838
Insurance contracts		7,463		(961	)		6,502
Non-compete agreements		2,318		(1,996	)		322
All other intangible assets		375		(217	)		158
Total	$	27,134	$	(6,314	)	$	20,820

December 31, 2006
Non-maturity deposits	$	9,886	$	(1,673	)	$	8,213
Insurance contracts	$	7,463	$	(194	)		7,269
Non-compete agreements		2,318		(1,224	)		1,094
All other intangible assets		375		(141	)		234
Total	$	20,042	$	(3,232	)	$	16,810


			Weighted								Estimated
	Notional		Average		Weighted Average Rate						Fair Value
	Amount		Maturity		Received			Paid			Gain (Loss)
	(In thousands)		(In years)								(In thousands)
Cash flow hedges
Interest rate swaps on FHLBB borrowings	$	135,000		5.7		2.57	%		4.24	%	$	(15,657	)
Interest rate swaps on junior subordinated debentures		15,000		5.4		4.00			5.54			(1,171	)

Total cash flow hedges		150,000										(16,828	)

Economic hedges
Interest rate swap on industrial revenue bond		15,000		20.9		2.27			5.09			(3,299	)
Interest rate swaps on loans with commercial loan customers		38,948		6.2		4.14			6.42			(3,941	)
Reverse interest rate swaps on loans with commercial loan customers		38,948		6.2		6.42			4.14			3,740

Total economic hedges		92,896										(3,500	)

Total	$	242,896									$	(20,328	)