|FORM 10-KUnited States Securities and

Exchange CommissionWashington, DC 20549

Annual report pursuant to

section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year

ended December 31, 2001 Commission File Number 001-13405





ALLIANCE

BANCORP OF NEW ENGLAND, INC.





Incorporated in the State

of Delaware IRS Employer Identification Number 06-1495617

Address and Telephone:

     348

Hartford Turnpike, Vernon, Connecticut 06066, (860) 875-2500





Securities registered

pursuant to Section 12(b) of the Act: Common Stock  $.01 par value, which

is registered on the American Stock Exchange.





Alliance Bancorp of New

England (1) has filed all reports required to be filed by Section 13 or 15(d) of

the Securities Exchange Act of 1934 during the preceding 12 months and (2) has

been subject to such filing requirements for the past 90 days.





There were no delinquent

filers subject to disclosure pursuant to Item 405 of Regulation S-K as contained

in the definitive Proxy Statement incorporated by reference in Part III of this

Form 10-K.





The aggregate market value

of the voting stock held by non-affiliates of the registrant, based on the

closing sale price of February 4, 2002, as reported by American Stock Exchange,

was approximately $28,305,000.





The number of shares of

common stock outstanding was 2,339,297 as of February 4, 2002.





DOCUMENTS INCORPORATED BY REFERENCE
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1. Proxy Statement for the 2002

Annual Meeting of Shareholders (Part III).

## FORM 10-K TABLE

OF CONTENTS AND CROSS REFERENCE INDEX

| |            |           | PAGE                                                                  
| | ---------- | --------- | ----------------------------------------------------------------------
| | PART I     | Item 1 -  | Business                                                              
| |            | Item 2 -  | Properties                                                            
| |            | Item 3 -  | Legal Proceedings                                                     
| |            | Item 4 -  | Submission of Matters to a Vote of Security Holders                   
| |            |           |                                                                       
| | PART II    | Item 5 -  | Market for Registrants Common Equity and Related Shareholder Matters
| |            | Item 6 -  | Selected Consolidated Financial Data                                  
| |            | Item 7 -  | Managements Discussion and Analysis of Financial Condition and       
| |            |           | Results of Operations                                                 
| |            | Item 7A-  | Quantitative and Qualitative Disclosures about Market Risk            
| |            | Item 8 -  | Consolidated Financial Statements and Supplementary Data              
| |            | Item 9 -  | Changes in and Disagreements with Accountants on Accounting and       
| |            |           | Financial Disclosure                                                  
| |            |           |                                                                       
| | PART III   | Item 10   | Directors and Executive Officers of the Registrant                    
| |            | Item 11   | Executive Compensation                                                
| |            | Item 12   | Security Ownership of Certain Beneficial Owners and Management        
| |            | Item 13   | Certain Relationships and Related Transactions                        
| | PART IV    | Item 14 - | Exhibits, Financial Statement Schedules and Reports on Form 8-K       
| |            |           |                                                                       
| | SIGNATURES |           |                                                                       

|1
|-

|PART I





Special Note

Regarding Forward-Looking Statements





This report contains

certain forward-looking statements. These forward-looking

statements, which are included in Managements Discussion and Analysis,

describe future plans or strategies and include the Companys expectations

of future financial results. The words believe, expect,

anticipate, estimate, plan,

project and similar expressions identify forward-looking statements.

The Companys ability to predict results or the effect of future plans or

strategies or qualitative or quantitative changes based on market risk exposure

is inherently uncertain. Factors which could affect actual results include but

are not limited to changes in general market interest rates, general economic

conditions, legislative/regulatory/tax changes, fluctuations of interest rates,

changes in the quality or composition of the Companys loan and investment

portfolios, deposit flows, competition, demand for financial services in the

Companys markets, and changes in accounting principles. These factors

should be considered in evaluating the forward-looking statements, and undue

reliance should not be placed on such statements.





ITEM 1.

BUSINESS





General. Alliance Bancorp of New

England, Inc. (Alliance or the Company) is a Delaware corporation

that was organized in 1997 as the holding company for Tolland Bank (the Bank),

which is its principal asset.





The Bank is a Connecticut

chartered savings bank which was founded in 1841 and is headquartered in Vernon,

as is Alliance. In 1986, Tolland Bank converted from mutual to stock form. The

Banks deposits are insured up to applicable limits by the Federal Deposit

Insurance Corporation (FDIC).





The Bank operates nine

offices in and around Tolland County, Connecticut, and provides retail and

commercial banking products and services in Tolland County and surrounding

towns. Retail activities include branch deposit services, and home mortgage and

consumer lending. Commercial activities include merchant deposit services,

business cash management, construction mortgages, permanent mortgages, and

working capital and equipment loans. Through third party relationships, the Bank

also provides investment products, insurance products, and electronic payment

services to retail and commercial customers.





At December 31, 2001,

Alliance had total deposits of $303 million, total loans of $258 million, and

total assets of $385 million. There are no material concentrations of loans or

deposits with one customer or a group of related customers. Real estate related

assets comprise a substantial portion of total assets, including residential

mortgages, commercial mortgages, and home equity loans. Loans to commercial

entities organized to hold real estate are a significant component of commercial

mortgages. Corporate investment securities industry concentrations are limited

by policy to 6% of assets excluding government and agency securities.





Market

Area. The Banks market area is centered in Tolland County,

Connecticut, a suburban and rural area east of Hartford. The Bank operates nine

offices and its wider market area extends throughout much of northeastern and

central Connecticut and western Massachusetts. Much of the market is part of the

Greater Hartford metropolitan area.





Lending Activities.The Bank originates personal and commercial loans in and around

its market area. Retail lending includes the origination of residential first

mortgages and home equity lines of credit, which are generally secured by second

mortgages. Commercial lending focuses primarily on mortgage loans, along with

general commercial and industrial loans and subdivision development and

construction loans. Additionally, the Bank has a portfolio of 100% Government

guaranteed loans which are purchased in the secondary market as an alternative

to investment purchases. Alliance does not purchase syndicated loans or operate

subprime lending programs; asset based loans are related primarily to

construction loans.





Most of the Banks

residential mortgage originations are underwritten to secondary market

standards, and many are sold on a non-recourse, servicing released basis.

Consumer loans primarily consist of home equity lines and loans and are normally

secured by second mortgages. These loans are subject to the same general

underwriting standards as residential mortgage loans, and the Bank retains

ownership and servicing of all home equity lines and loans that it originates.

Consumer loan origniations include Free-Refi first mortgages which

are processed similarly to other consumer loans, but are included with

residential mortgages in the Consolidated Financial Statements.





2
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Commercial mortgages are

primarily first mortgage loans on a variety of commercial properties including

retail, office, light manufacturing, and recreation. Commercial mortgages

normally amortize over 1520 years and typically mature in 10 years.

Commercial mortgages are normally guaranteed by the principals. Other commercial

loans include commercial and industrial loans, and real estate secured term

loans, as well as subdivision development and construction loans. The majority

of commercial mortgages are priced at a spread over the five year Federal Home

Loan Bank borrowing rate. The Banks policy generally requires minimum

annual debt service coverage of 125% and a maximum loan to value of 75%. The

Company originates commercial mortgages throughout Connecticut (except Fairfield

county).





Government guaranteed loans

are purchased in the secondary market and are 100% guaranteed by either the

Small Business Administration (SBA) or the U.S. Department of Agriculture

(USDA). These are business term loans and mortgages, and are primarily loan

certificates registered with and serviced by a national service corporation.





All loan originations are

governed by a Board approved credit policy, which requires that all policy

exceptions be reported to the Board. All loans over $1 million are approved by

the Board. The loan policy sets certain limits on concentrations of credit

related to one borrower. The Banks policy is to assign a risk rating to

all commercial loans. The Bank conducts an ongoing program of commercial loan

reviews and quality control sample inspections of residential and consumer loan

originations.





The allowance for loan

losses is determined based on a methodology described in the Companys

accounting policies (see Note 1 to the consolidated financial statements in Item

8). The allowance is evaluated quarterly by Management and the Board. Adverse

developments in credit performance in the Companys markets can develop

quickly, and the determination of the allowance is based on Managements

assessment of both short and long term risk factors.





Total real estate secured

loans were $211 million at year-end 2001 (93% of total loans other than

purchased government guaranteed loans). Aided by favorable interest rates and a

modest recovery in the Connecticut economy, real estate markets and prices have

improved in most sectors over the last several years. The Bank conducts an

overall review of real estate market trends periodically, and real estate

lending activities are governed by real estate lending and appraisal policies.

New construction has been active in certain residential markets, along with

commercial retail, medical office, and lodging properties.





Investment

Activities.Securities investments are a source of interest and

dividend income, provide for diversification, are a tool for asset/liability

management, and are a source of liquidity. The Companys securities

portfolio is primarily composed of publicly traded U.S. corporate securities and

U.S. government and agency securities. Investment activities are governed by a

Board-approved investment policy, and the Board reviews all investment

activities on a monthly basis. Alliance uses the services of an investment

advisor in managing its portfolio. An Investment Committee of the Board meets

quarterly to review detailed information on the ratings, yields and values of

securities, as well as Managements plans for investment security

transactions. Premiums on investment securities with prepayment risk are limited

to a maximum of 3%. The Company did not own derivative instruments at year-end

2001.





Deposits and Other

Sources of Funds.The Banks major source of funds is

deposits, along with borrowings, principal payments on loans and securities, and

maturities of investments. Deposit growth has been achieved through opening new

offices and through increasing market share in existing offices. Borrowings are

generally used to fund long-term assets and short-term liquidity requirements.

The Bank is a member of the Federal Home Loan Bank of Boston (FHLBB)

and may borrow from the FHLBB subject to certain limitations. The Bank also has

available lines of credit for federal funds purchases and reverse repurchase

agreements, and is also eligible for short-term borrowings from the Federal

Reserve Bank of Boston.





Competition.The Companys market area is highly competitive with a wide

range of financial institutions. Competitors include national, regional and

local institutions. Factors affecting competition include the consolidation of

bank competitors, expansion of nonbank competitors, expansion of secondary

markets for bank products, and the growth of internet banking. Conversions of

mutual banks to stock ownership have also affected local competition. The Bank

competes through pricing, product development, focused marketing, and providing

more convenience through technology and business hours. The Bank strives to

provide the personal service advantage of a community bank and to take advantage

of potential market changes following mergers and consolidations by the large

regional banks.





3
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Technology.The development of internet e-commerce has been prominent

throughout the economy, including the banking industry. Most of the

Companys competitors offer some level of internet and electronic banking

services. While the local demand for these technologies has been modest, the

level of demand is increasing rapidly. The most significant impact has been in

offerings from non-bank competitors. Alliance has a goal to be an active user of

proven new technologies, both in its product offerings and in its internal

operations. A significant effect of technological change has been to enable

community banks to more easily access emerging technologies previously available

principally to larger competitors.





Employees. As of year-end 2001, the

Company had 107 full-time equivalent employees. None of the employees are represented by

a collective bargaining group, and Management considers relations with its employees to

be good.





Regulation and

Supervision.The Company and the Bank are heavily regulated. As a

bank holding company, Alliance is supervised by the Board of Governors of the

Federal Reserve System (FRB) and it is also subject to the

jurisdiction of the Connecticut Department of Banking. As a

Connecticut-chartered savings bank, the Bank is subject to regulation and

supervision the Connecticut Department of Banking and by the FDIC.





The FDIC insures the

Banks deposit accounts to the $100,000 maximum per separately insured

account. The Bank is subject to regulation, examination, and supervision by the

FDIC and to reporting requirements of the FDIC. The FDIC and the FRB have

adopted requirements setting minimum standards for capital adequacy and imposing

minimum leverage capital ratios. The Company and Bank exceeded all applicable

requirements at December 31, 2001. Connecticut statutes and regulations govern,

among other things, investment powers, lending powers, deposit activities,

maintenance of surplus and reserve accounts, the distribution of earnings, the

payments of dividends, issuance of capital stock, branching, acquisitions and

mergers and consolidations. Connecticut banks that do not operate in accordance

with the regulations, policies and directives of the Banking Commissioner may be

subject to sanctions for noncompliance. The Commissioner may, under certain

circumstances, suspend or remove officers or directors who have violated the

law, conducted the Banks business in a manner which is unsafe, unsound or

contrary to the depositors interest, or been negligent in the performance

of their duties.





In 2001, due to growth, the

Bank became subject to additional community reinvestment regulations.

Additionally, in 2001, major new customer privacy and information security

regulations came into effect pursuant to the Gramm Leach Bliley Act.





Financial

Modernization.In 1999, Congress enacted the Financial

Modernization Act, which fundamentally removes barriers between banking,

insurance and securities brokerage which have existed since the Glass Stegall

Act in the 1930s. There is increased consolidation in these industries

among national competitors. At the community bank level, banks have already been

combining the distribution of these products through joint ventures and

acquisitions of insurance agencies.





ITEM 2.

PROPERTIES





The premises of Alliance

are located in Connecticut as follows (see Notes, Premises and Equipment,

Net and Commitments and Contingencies in Item 8 for additional

information about the Companys premises):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Location - Town (Street) | Owned/Leased/Rent                                                                              | Year LeaseExpires
|------------------------ | ---------------------------------------------------------------------------------------------- | -----------------
|                        | Tolland - (215 Merrow Road)                                                                    | Leased           
|                        | Vernon - (348 Hartford Turnpike)                                                               | Owned            
|                        | Vernon - (62 Hyde Avenue)                                                                      | Owned            
|                        | Coventry - (Routes 31 and 44)                                                                  | Owned            
|                        | Ellington - (287 Somers Road)                                                                  | Owned            
|                        | Stafford Springs - (34 West Stafford Road)                                                     | Owned            
|                        | Willington - (Routes 74 and 32)                                                                | Leased           
|                        | Hebron - (31 Main Street)                                                                      | Leased           
|                        | South Windsor - (1665 Ellington Road)                                                          | Owned            
|                        | Approximately 10 acres of
land adjacent to the Companys office in Coventry, Connecticut.     
|                        | Approximately 4 acres of
land adjacent to the Companys former office in Tolland, Connecticut.

|ITEM 3. LEGAL

PROCEEDINGS





The Company is not involved

in any material legal proceedings other than routine litigation incidental to

its business.





ITEM 4. SUBMISSION OF

MATTERS TO A VOTE OF SECURITY HOLDERS





None.







4
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II 
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS







The Companys common

stock is listed on the American Stock Exchange (AMEX) under the symbol

ANE. A total of 637,800 shares of the Companys stock, or 27%

of year-end outstanding shares, were traded on AMEX in 2001. As of February 4,

2002, the Company had 461 holders of record of its common stock. This does not

reflect the number of persons or entities who hold their stock in nominee or

street name. The closing sale price of the stock on February 4, 2002

was $12.10. Dividends declared and paid in 2001 and 2000 totaled $0.30 and

$0.275 per share, respectively. Dividends are subject to the restrictions of

applicable regulations. See Shareholders Equity in Item 8 for

additional information. See also the information contained in Item 6.







The following table

presents quarterly information on the range of high and low prices for the past

two years, together with dividends declared per share.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Quarter Ended      | High | Low    | Dividends Declared Per Share
|------------------ | ---- | ------ | ----------------------------
|December 31, 2001  |      | $12.05 |                             
|September 30, 2001 |      | 14.00  |                             
|June 30, 2001      |      | 12.75  |                             
|March 31, 2001     |      | 9.38   |                             
|December 31, 2000  |      | 9.13   |                             
|September 30, 2000 |      | 9.38   |                             
|June 30, 2000      |      | 8.50   |                             
|March 31, 2000     |      | 9.25   |                             

|ITEM 6.


SELECTED CONSOLIDATED FINANCIAL DATA
|----------------------------------------------

| | December 31                        | 2001 | 2000            | 1999 | 1998             | 1997
| | ---------------------------------- | ---- | --------------- | ---- | ---------------- | ----
| | For the Year (in thousands)        |      |                 |      |                  |     
| | Net interest income                |      | $      12,211   |      | $       11,892   |     
| | Provision for loan losses          |      | 325             |      | 335              |     
| | Service charges and other income   |      | 1,614           |      | 1,412            |     
| | Net (loss) gain on securities      |      | (467            | )    | 36               |     
| | & other assets                     |      |                
| | Non-interest expense               |      | 8,861           |      | 8,551            |     
| | Net income                         |      | 2,975           |      | 3,220            |     
| |                                   
| | Per Share                          |     
| | Net income - basic                 |      | $          1.27 |      | $           1.39 |     
| | Net income - diluted               |      | 1.24            |      | 1.36             |     
| | Dividends declared                 |      | 0.30            |      | 0.275            |     
| | Book value                         |      | 9.44            |      | 7.77             |     
| | Common stock price (close)         |      | 12.00           |      | 9.00             |     
| |                                   
| | At Year End (in millions)          |     
| | Total assets                       |      | $        384.6  |      | $         348.2  |     
| | Total loans                        |      | 257.6           |      | 228.3            |     
| | Other earning assets               |      | 101.0           |      | 95.9             |     
| | Deposits                           |      | 303.4           |      | 280.5            |     
| | Borrowings                         |      | 57.1            |      | 46.7             |     
| | Shareholders equity (a)           |      | 22.1            |      | 18.1             |     
| |                                   
| | Operating Ratios (in percent)      |     
| | Return on average equity           |      | 14.80           | %    | 20.66            | %   
| | Return on average assets           |      | 0.82            |      | 0.97             |     
| | Net interest margin (b)            |      | 3.71            |      | 4.02             |     
| | Equity % total assets (period end) |      | 5.74            |      | 5.20             |     
| | Dividend payout ratio              |      | 23.52           |      | 19.84            |     
| |                                   

| |  | (a) |  | Shareholders equity
includes net accumulated other comprehensive loss, which consists of unrealized losses on

certain investment securities, net of taxes.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) |  | Ratio

expressed as fully taxable equivalent.                                                                                                               

|5
|-

|
|

|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

|INTRODUCTION





Alliance Bancorp of New

England, Inc. (Alliance or the Company) is the holding

company for Tolland Bank (the Bank), as further described in Item 1

of this report. The Consolidated Financial Statements and related notes in Item

8 of this report should be read in conjunction with this discussion. All

references to changes in fiscal year 2001 in this discussion are compared to

fiscal year 2000 unless otherwise specified, and all references to changes at

December 31, 2001 are compared to December 31, 2000 unless otherwise specified.





2001 SUMMARY





Alliance reported net

income totaling $3.0 million for the year 2001, an 8% decrease from $3.2 million

in the prior year. Earnings per share measured $1.24 in 2001, a 9% decrease from

$1.36 in the prior year, on a diluted basis. Total dividends declared in 2001

were 30.0 cents, a 9% increase from 27.5 cents in 2000. Return on

shareholders equity measured 14.8% in 2001, compared to 20.7% in the prior

year.





Results included a pre-tax special

charge of $515 thousand to write down the carrying value of a debt security. On an

after-tax basis, operating earnings (net income excluding the special charge noted above)

increased by 3% to $3.3 million, representing a 16.5% adjusted return on shareholdersequity

in 2001. The special charge was a writedown recognized on one debt security which the

Bank continues to hold and which is expected to continue to perform in accordance with

its terms. This was a non-cash charge to earnings of an unrealized market loss which had

previously been a direct deduction from shareholdersequity.





Alliance produced deposit growth of

8%, and growth of 10% in regular loans(all loans other than purchased

Government guaranteed loans) in 2001. This growth in the Companys basic business,

together with higher fee income, has been the combination that has steadily produced

gains in operating earnings. This growth has also produced an increasing share of

business in the Companys expanding local market. Alliance produced record operating

earnings in 2001, despite the tighter margins resulting from the steep drop in interest

rates during the year and other effects from the onset of an economic slowdown. This

accomplishment produced the sixth consecutive year of record operating earnings.





At the turn of the year,

Tolland Bank began opening new accounts in its Generations Gold club account,

which offers extensive discounts and member benefits with a roster of local and

national merchants. The Bank initiated improvements in other fee-based services,

including insurance products, commercial internet banking, Visa Check Cards, and

merchant card services. New business volume continued strong through year-end.

Consolidations of the Banks competitors continue to provide marketing

opportunities to solicit new personal and commercial relationships.





The net interest margin decreased to

3.71% in 2001, compared to 4.02% in 2000 due to the 4.75% decline in short-term interest

rates to a forty year low. The net interest margin fell to a low of 3.56% in the third

quarter of the year, before increasing to 3.63% in the fourth quarter. Near the end of

the year, the benefit of time deposit repricings began to offset the adverse effects of

loan repricings, which responded more quickly to the sharp decline in short-term interest

rates during the year.





Service charge and other income was

up 14% in 2001. This reflected a higher volume of fee-based deposit and loan services,

along with the benefit of commercial loan prepayment fees and penalty fees. Non-interest

expense only increased by 4% in 2001 due to controls instituted to help offset tighter

margins. Expense growth was tied to increased volumes, expanded marketing, and conversion

related costs recorded in the first and fourth quarters.





For the year 2001, total

assets increased by 10% due primarily to growth in loans and deposits. Total

regular loans increased by 10% in 2001, with growth in both retail and

commercial loans. Purchased assets (including investment securities and

purchased government guaranteed loans) increased by 30%, reflecting the

reinvestment of short-term investments primarily into government and

mortgage-backed loans and securities. Deposit growth totaling 8% in 2001

included increases in all major categories except time accounts.





The Bank had no foreclosed

assets at December 31, 2001, and nonaccruing loans totaled $2.1 million (0.56%

of total assets), including a $0.8 million commercial loan which is current on

its payments, a $0.7 million SBA guaranteed loan, and $0.5 million in

residential mortgages. The $3.7 million loan loss allowance measured 1.62% of

total regular loans at year-end 2001. For the year 2001, net loan chargeoffs

measured 0.01% of average loans, resulting in the fourth favorable consecutive

year of net chargeoffs below 0.10% of average loans.





Shareholders equity

totaled $22.1 million at December 31, 2001, increasing by 22% during the year.

In addition to growth from retained earnings, shareholders equity also

benefited from the net change in unrealized securities gains and losses, which

provided additional net comprehensive income of $1.6 million for the year 2001.

Book value per share was $9.44 at year-end 2001, compared to $7.77 at the prior

year-end. Shareholders equity measured 5.7% of total assets at year-end

2001, up from 5.2% a year earlier. The Company and Bank were well capitalized

based on their regulatory capital ratios at year-end 2001.







6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RESULTS OF

OPERATIONS  2001 VERSUS 2000





Net Interest

Income  Fully Taxable Equivalent Basis (FTE)
|----------------------------------------------------------------------------------------------------------

|Years ended December 31                   | 2001 | 2000     | 1999
|----------------------------------------- | ---- | -------- | ----
|
|
|Loans                                     |      | $244,378 |     
|Securities                                |      | 86,394   |     
|Short-term investments                    |      | 10,285   |     
|                                         
|Total earning assets                      |      | 341,057  |     
|Other assets                              |      | 20,384   |     
|                                         
|Total assets                              |      | $361,441 |     
|                                         
|Interest bearing deposits                 |      | $258,158 |     
|Borrowings and trust preferred securities |      | 47,491   |     
|                                         
|Interest bearing liabilities              |      | 305,649  |     
|Other liabilities                         |      | 35,698   |     
|Shareholders equity                      |      | 20,094   |     
|                                         
|Total liabilities and shareholders       |     
|equity                                    |      | $361,441 |     
|                                         
|Net Interest Spread                       |      |          |     
|Net Interest Margin                       |      |          |     

|Note:

The average balance of loans includes nonaccruing loans and deferred fees and costs.

Also, the balance and yield on all securities is based on amortized cost and not on fair

value.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31Net Interest Income FTE (in thousands) | 2001 | 2000     | 1999
|------------------------------------------------------------- | ---- | -------- | ----
|Interest income                                               |      | $ 25,466 |     
|Tax-equivalent adjustment                                     |      | 449      |     
|Interest expense                                              |      | (13,255  | )   
|                                                             
|Net interest income (FTE)                                     |      | $ 12,660 |     
|                                                             

|Note: The tax-equivalent

adjustment presents earnings on tax-advantaged securities on a basis equivalent

to yields on fully-taxable securities. A tax rate of 34% was used to compute the

adjustment for each year presented.





The $210 thousand (2%)

increase in net interest income in 2001 was mainly due to growth in earning

assets. This accomplishment offset the negative effect of tighter margins

resulting from declining short-term interest rates, to which earnings were

sensitive in the near term. Short-term interest rates decreased by an

unprecedented 4.75% in 2001. The increase in net interest income consisted of a

$1.66 million volume variance, reduced by a ($1.45) million rate variance. The

Companys sensitivity to changes in interest rates is discussed further in

the Interest Rate Risk section of this Discussion.





The Company produced growth

in both regular loans and deposits, measuring 10% and 8%, respectively. This

followed a similar combination of growth measuring 18% and 12% in the previous

year. This combination of strong loan and deposit growth was favorable for the

Company, allowing it to add higher yielding assets funded with lower cost funds,

and improving market share in the Companys primary market and in central

Connecticut. Additionally, the Company redeployed its short-term investments

into longer-term investment securities to reduce its exposure to falling

interest rates.





Average earning assets

increased by $31 million (10%) in 2001, with increases recorded in most major

categories except average short-term investments, which decreased by $9 million.

Yields decreased on all categories of earning assets, due primarily to lower

short-term rates. Additionally, long-term interest rates trended lower in the

second half of the year, and spreads on corporate bonds and commercial loans

also tightened. Prepayments and refinancings increased, with new fixed rate

assets being booked at lower rates than those they replaced. Purchased assets

(securities and government guaranteed loans) were targeted more toward higher

quality sectors, which have lower spreads. The result of these trends was that

the yield on earning assets declined by 0.53% to 7.60% in 2001, compared to

8.13% in the prior year. This yield declined to 7.08% in the final quarter,

reflecting the ongoing decline in short-term interest rates through year-end.





7
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Average interest bearing

liabilities increased by $25 million (9%) in 2001, with increases in all major

categories including time deposits, which were down slightly at period-end.

Short-term interest rates declined to unusually low levels, with the Federal

Funds rate ending the year at 1.75%. In this environment, customers generally

maintained balances in liquid accounts, without committing to longer-term time

accounts. Conditions in capital markets and in the economy contributed to

increased demand for savings accounts. Due to the low prevailing rates, most

deposit rate spreads tightened, and the Bank was unable to price down deposit

accounts enough to fully reflect the decline in market rates. Partially

offsetting this was the change in depositor preference away from higher cost

time accounts, along with selective interest rate cuts that were made by the

Bank in NOW and savings account interest rates which are not normally interest

sensitive in the short term. The result of these trends was that the cost of

interest bearing liabilities decreased by only 0.21% to 4.34% in 2001 from 4.55%

in 2000. This cost decreased to 3.87% in the fourth quarter, as time account

repricings began to accumulate a larger benefit near the end of the year.





For the year, the 0.53%

decrease in asset yield was not fully offset by the 0.21% decrease in the cost

of funds, thereby producing the 0.31% decrease in the net interest margin to

3.71%. The net interest margin reached a low of 3.56% in the third quarter, and

then increased to 3.63% in the fourth quarter, as the benefit of time account

repricings began to more than offset the impact of lower rates on asset yields.

Fully taxable equivalent net interest income includes a $449 thousand tax

equivalent adjustment, down from $558 thousand in the prior year due to a lower

average volume and rate on equity securities.





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 Management and the Board. The

provision for loan losses in 2001 totaled $325 thousand, compared to $335

thousand in 2000. The loan loss allowance increased to $3.70 million at year-end

2001, compared to $3.40 million at year-end 2000. Please see the later

discussion on the Allowance for Loan Losses and the Summary of Significant

Accounting Policies in the Notes to the Consolidated Financial Statements.





Non-Interest

Income
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31(in thousands) | 2001 | 2000     | % change
|------------------------------------- | ---- | -------- | --------
|Loan related income                   |      | $    454 |         
|Deposit related income                |      | 689      |         
|Increase in cash surrender value      |     
|of life insurance                     |      | 145      |         
|Miscellaneous income                  |      | 326      |         
|                                     
|Total service charges                 |     
|and other income                      |      | 1,614    |         
|Gross gains on securities             |      | 244      |         
|Gross losses on securities            |      | (720     | )       
|                                     
|Net (losses) gains on securities      |      | (476     | )       
|Gross gains on assets                 |      | 11       |         
|Gross losses on assets                |      | (2       | )       
|                                     
|Net gains on assets                   |      | 9        |         
|                                     
|Total non-interest income             |      | $ 1,147  |         
|                                     

|Total service charges and

other income increased by $202 thousand (14%) in 2001. This increase was

primarily due to an $83 thousand increase in commercial loan prepayment fees and

a $100 thousand increase in overdraft fees. Commercial loan prepayment fees

increased due to higher refinancings of commercial loans prompted by lower

market rates prevailing in 2001. Overdraft fees increased due to higher volume

and a higher collection rate. In the competitive local market, Alliance has

focused on promoting account growth and increasing market share and

distinguishes itself from the larger banks which charge higher fees. The

Companys strategy is to introduce new fee-based products and services over

time to increase non-interest income. Several recent initiatives were discussed

in the Summary. The income recognized for the increase in cash surrender value

relates to bank-owned life insurance contracts.




In 2001, securities losses

included $589 thousand in writedowns on two securities deemed to be

other-than-temporarily impaired. These securities are discussed further in the

Securities section of this report. Other security gains and losses were

generally recognized as a result of securities sales to shorten the life of the

portfolio.






8
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Non-Interest

Expense





Total non-interest expense

increased by $310 thousand (4%) in 2001. Due to the unanticipated tightening of

interest margins, Management implemented controls during the year to reduce

expenses below the level planned. Despite these reductions, the Company

generally achieved its goals for balance sheet growth and service charge and fee

income growth in 2001. In 2001, expense growth was tied to increased volumes,

expanded marketing, and conversion related costs. Excluding conversion related

costs, the efficiency ratio declined to a record low level of 60% (the ratio of

expenses to the sum of taxable equivalent net interest income plus service

charges and other income).





Total salary expense

decreased by $129 thousand (3%) and benefits expense increased by $186 thousand

(31%). Gross salaries were flat, while salary deferrals related to loan

production increased by $137 thousand. Benefits expense increased due to cost

and volume increases for employee health insurance and to higher pension service

costs related to staff changes. Full time equivalent staff at year-end 2001

totaled 107 persons, which was unchanged from the prior year-end despite the 10%

increase in total assets for the year.





All other categories of

non-interest expense increased by a combined $253 thousand (6%). Most categories

were generally flat. The increase in expenses was primarily due to costs

totaling about $250 thousand related to conversions of loan servicing and

merchant processing functions. Additionally, higher expenses included credit

reports and appraisal expenses related to higher application volumes, and a $50

thousand increase in marketing and public relations expense. The Company

benefited by a $115 thousand reduction in systems costs under new contracts.





Income Tax

Expense





The effective income tax

rate measured 29% in 2001, consistent with the rate of 28% for the prior year.

The Company operates a passive investment corporation for the purpose of

servicing real estate related loans. Under state statutes, income in passive

investment corporations and dividends to their parents are not subject to

Connecticut Corporate Business tax. Income tax expense was also reduced due to

the benefit from the dividends received deductions on investments in marketable

equity securities. In 2001, the benefit from the dividends received deductions

was lower due to a lower average balance of equity investments, together with

lower average yields on investments.





Comprehensive

Income





In addition to net income

recorded in the Consolidated Income Statements, comprehensive income includes

changes in unrealized gains and losses on securities available for sale, net of

the associated income tax effect. In 2001, Alliance recorded comprehensive

income of $4.61 million, compared to $4.32 million in 2000. The components of

comprehensive income are detailed in the Consolidated Statements of Changes in

Shareholders Equity.





FINANCIAL

CONDITION DECEMBER 31, 2001 VERSUS 2000





Cash and Cash

Equivalents





Most of the short-term investments

at year-end 2000 were reinvested in medium-term investment securities during the

first quarter of 2001, shortly after short-term interest rates began to decline.

Additional liquidity accumulated during the middle of the year from

unanticipated deposit growth, which was reinvested in two-year securities in the

fourth quarter. Short-term investments averaged $10 million in 2001, compared to

$20 million in the prior year. Short-term investments are usually held in either

federal funds, money market mutual funds, or money market preferred stock, which

is eligible for the dividends received deduction. The average yield on

short-term investments fell to 3.61% in 2001 from 5.93% in the prior year,

reflecting the large decline in short-term interest rates during the year.





Securities





Alliance invests in

securities primarily to produce income, in conjunction with the loan portfolio.

Investment securities also play a role in other aspects of asset/liability

management, including liquidity, interest rate sensitivity, and capital

adequacy. Alliance also purchases 100% U.S. Government guaranteed loans as an

alternative to securities, based on market conditions.





9
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|On January 1, 2001, the

Company adopted Statement of Financial Accounting Standards (SFAS)

No. 133, Accounting for Derivative Instruments and Hedging Activities.

Under the provisions of SFAS No. 133, the Company had a one-time opportunity to

reclassify securities out of the held-to-maturity (HTM) category.

Management elected to transfer from HTM to Available For Sale (AFS)

a total of $14 million in securities. These were primarily longer-term debt

securities that Management chose to make available for sale in the event that

conditions became favorable to shorten the duration of the portfolio. This

transfer resulted in a $0.4 million increase in the net accumulated other

comprehensive loss recorded in shareholders equity. At the same time as

this transfer, Management also decided to transfer $7 million of AFS securities

to HTM; the net unrealized gain on these securities was $0.1 million. These were

primarily government agency and mortgage-backed securities with shorter

durations that the Company has the intent and ability to hold to maturity.





Of the $37 million of

securities purchases in 2001, $25 million was invested in government agency

securities and collateralized mortgage obligations with an average expected life

in the 2-5 year range. Due to the comparatively low level of interest rates

prevailing through much of the year, the Company emphasized purchases with

shorter lives. The Company purchased corporate securities totaling $12 million,

with maturities in the 5  10 year range, rated A or higher. The

Companys policy is to classify newly purchased securities as available for

sale unless deemed otherwise. There were no purchases of held to maturity

securities in 2001. The $10 million of securities sold during the year were

corporate securities selected primarily to lower the average life of the

securities portfolio. The total securities portfolio increased by $22 million

(29%) in 2001. The average balance of securities increased by $5 million (7%).

The average FTE yield on the portfolio measured 7.65%, compared to 8.22% in the

prior year. The average life of the debt securities portfolio measured 14.1

years at year-end 2001.





At year-end 2001, the

amortized cost of the securities portfolio consisted of $34 million of AA

government, agency, and mortgage-backed securities; $53 million of corporate

debt (including trust preferred) securities; and $15 million of equity

securities. The AA securities had an average life of 2.2 years. The equity

securities were mostly publicly traded shares with investment quality rankings,

including utility common stocks and financial institution preferred stocks. The

corporate debt securities portfolio were publicly traded bonds issued primarily

by financial services companies. Most of these securities were rated investment

grade by one or more rating agencies. At year-end 2001, the average credit

rating of this portfolio measured A-, compared to BBB+ at the prior year-end.

The Companys policy for corporate securities limits exposure to any one

industry to 6% of assets, and to any one corporate issuer to $1.5 million. The

Company works with an investment advisor in managing the investment portfolio,

and an Investment Committee of the Board meets quarterly to review the portfolio

and investment strategies.





The net unrealized loss on

the securities portfolio measured 4% of amortized cost at year-end 2001, which

was improved from 6% a year earlier due to the decline in interest rates and to

improved yield spreads in most corporate securities markets. The securities

portfolio is purchased for yield and most securities are held for long term

income. Management anticipates that the securities portfolio will continue to

contribute satisfactorily to the Companys earnings and risk management

objectives. Debt security values are determined by Management based on estimates

provided by the Companys securities accounting vendor, which is a large

correspondent bank. Proceeds realized in actual transactions may differ from the

market value estimates.





At year-end 2001, the

Company owned seven securities which had ratings/rankings below investment

grade. At year-end, the amortized cost of these securities totaled $5.6 million,

with a fair value of $3.6 million, and a net unrealized loss of $2.0 million

(resulting in a $1.3 million reduction in shareholders equity). During

2001, the two securities with the largest percentage unrealized loss were deemed

to be impaired on an other-than-temporary basis. Writedowns of $589 thousand,

$414 thousand after taxes, were recorded on these two securities, which had book

values of $515 thousand and $45 thousand at year-end (net of the writedowns).

The remaining five securities had unrealized losses in the range of 21%39%

of their cost, all of which were declared by Management to be temporary declines

in value. The majority of these unrealized losses are viewed as related to

changes in interest rates and other market conditions for similar securities.

These securities are all debt securities which are expected to continue to

perform in accordance with their terms. Management has no current plans to sell

any of these seven securities, and the prices of these securities are expected

to improve over time.







Lending Activities
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31 (dollars in millions) | 2001 | 2000    | 1999 | 1998  | 1997
|--------------------------------- | ---- | ------- | ---- | ----- | ----
|Residential mortgages             |      | $  63.0 |      | 24.4  | %   
|Commercial mortgages              |      | 87.5    |      | 34.0  |     
|Other commercial loans            |      | 37.7    |      | 14.6  |     
|Consumer loans                    |      | 39.8    |      | 15.5  |     
|                                 
|Total regular loans               |      | 228.0   |      | 88.5  |     
|Government guaranteed loans       |      | 29.6    |      | 11.5  |     
|                                 
|Total loans                       |      | $257.6  |      | 100.0 |     
|                                 

|10
|--

|Commercial loans originated

in 2001 representing new funds totaled $40 million, compared to $47 million in

the prior year. Total commercial mortgages and other commercial loans

outstanding increased by $13 million (11%) at year-end 2001, compared to the

prior year-end. Total commercial loans outstanding in the ten largest customer

relationships were $29 million, or 23% of total commercial mortgages and other

commercial loans at year-end 2001. Among these loans, $15 million were permanent

commercial mortgages on properties related to the owners business, $6

million were permanent mortgages on investment properties, $5 million were other

real estate secured loans, and $3 million were non-real estate secured term

loans.





Personal real estate loan

demand rebounded in 2001, supported by improving real estate prices, lower

interest rates, and the Banks competitive product offerings. Residential

mortgage originations rebounded in 2001 to $29 million, compared to $17 million

in the prior year. In 2001, the Company originated $13 million of residential

mortgages for sale in the secondary market, retaining the remaining $16 million

for portfolio. Residential mortgages outstanding at year-end 2001 increased by

$5 million (8%) compared to the prior year-end. Consumer loans and lines closed

in 2001 totaled $24 million, compared to $11 million in the prior year. Most

consumer loans produced in 2001 were either second mortgage lines and loans, or

Free-Refi first mortgages which are underwritten and processed for

portfolio by the consumer loan department. Free-Refi mortgages totaled $6

million in 2001 and are included with residential mortgages in the Consolidated

Balance Sheets. Consumer loans outstanding at year-end 2001 increased by $4

million (12%) compared to the previous year-end.





The average balance of

total loans increased by $35 million (17%) in 2001. This reflects the higher

volume of regular loans, which increased on average by $26 million (14%).

Additionally, purchases of government guaranteed loans produced a $9 million

(50%) increase in the average balance of those loans. The average yield on loans

declined to 7.75% in 2001 from 8.30% in the prior year due to falling interest

rates.





Nonperforming

Assets
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31(in millions)   | 2001 | 2000 | 1999 | 1998 | 1997
|-------------------------- | ---- | ---- | ---- | ---- | ----
|Nonaccruing loans          |      | $2.1 |      | $1.1 |     
|Foreclosed assets          |      |     |      |     |     
|                          
|Total nonperforming assets |      | $2.1 |      | $1.1 |     
|                          
|Nonperforming assets as a  |      | 0.6  | %    | 0.3  | %   
|percentage of total assets |     

|Total nonperforming assets

remained at a generally low level at year-end 2001, totaling $2.1 million, or

0.56% of total assets. There were no foreclosed properties at that date.

Nonaccruing loans included a $768 thousand commercial mortgage that was current

in its payments, a $656 thousand SBA guaranteed commercial loan with an

improving payment record, $551 thousand in residential mortgages, and $174

thousand in other nonaccruing loans. Loans delinquent 30-89 days totaled $4.4

million at year-end 2001, measuring 1.94% of total regular loans, compared to

1.72% at the prior year-end. At year end 2001, commercial classified loans with

a potential to become nonperforming based on identified credit weaknesses

totaled $7.0 million, including impaired loans totaling $4.2 million.



Allowance for
Loan Losses
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31(in thousands) | 2001 | 2000    | 1999 | 1998    | 1997
|------------------------------------- | ---- | ------- | ---- | ------- | ----
|Beginning balance                     |      | $ 3,400 |      | $ 3,200 |     
|Charge-offs:                          |     
|Residential mortgage                  |      | (17     | )    | (85     | )   
|Consumer                              |      | (20     | )    | (22     | )   
|Commercial                            |      | (111    | )    | (107    | )   
|                                     
|Total Charge-offs                     |      | (148    | )    | (214    | )   
|                                     
|Recoveries:                           |     
|Residential mortgage                  |      | 62      |      | 22      |     
|Consumer                              |      | 57      |      | 29      |     
|Commercial                            |      | 4       |      | 28      |     
|                                     
|Total Recoveries                      |      | 123     |      | 79      |     
|                                     
|Net Charge-offs                       |      | (25     | )    | (135    | )   
|Provision for losses                  |      | 325     |      | 335     |     
|                                     
|Ending balance                        |      | $ 3,700 |      | $ 3,400 |     
|                                     

|11
|--

|Net charge-offs (recoveries) as a
percentage of average loans by type:
|----------------------------------------------------------------------

|Years ended December 31      | 2001 | 2000  | 1999 | 1998  | 1997
|---------------------------- | ---- | ----- | ---- | ----- | ----
|Residential mortgage         |      | (0.07 | )%   | 0.11  | %   
|Consumer                     |      | (0.10 | )    | (0.02 | )   
|Commercial                   |      | 0.09  |      | 0.08  |     
|Total                        |      | 0.01  |      | 0.06  |     
|Allowance as a percentage of |     
|outstanding loans by type at |     
|year end:                    |     
|Residential mortgage         |      | 0.90  | %    | 0.90  | %   
|Consumer                     |      | 0.91  |      | 0.91  |     
|Commercial                   |      | 1.70  |      | 1.80  |     
|Subtotal (regular loans)     |      | 1.62  |      | 1.65  |     
|Government                   |     
|guaranteed loans             |      |      |      |      |     
|Total loans                  |      | 1.44  |      | 1.49  |     
|                            

|The total allowance for

loan losses increased to $3.7 million at year-end 2001, compared to $3.4 million

a year earlier. For the last four years, net loan charge-offs and nonperforming

loans have been at comparatively low levels. While the allowance has increased

each year, the ratio of the allowance to regular loans has declined due to the

improving composition of the portfolio.





The methodology for the

determination of the allowance for loan losses is described in Note 1 to the

Consolidated Financial Statements. The methodology for analysis of loan pools

was revised in 2000 based on new regulatory guidelines.





The allowance absorbs net

loan chargeoffs, which totaled $25 thousand in 2001, compared to $135 thousand

in 2000. The allowance is augmented by the provision for loan losses, which

totaled $325 thousand in 2001, compared to $335 thousand in 2000. There were no

significant changes in the ratio of the allowance to the various loan pools in

2001. Changes in the components in the previous year were due to changes in the

methodology. The ratio of the allowance to nonperforming loans decreased to 172%

at year-end 2001, compared to 301% at year-end 2000. Most nonperforming loans at

year-end 2001 were either current in their payments, SBA guaranteed, or

residential mortgages.





The impaired loan allowance

is included with the total commercial loan allowance in the accompanying tables.

Total impaired loans were $4.2 million at year-end 2001, compared to $1.2

million at the prior year-end. The valuation allowance on impaired loans was

$129 thousand and $112 thousand at year-end 2001 and 2000, respectively. The

$3.0 million increase in impaired loans consisted of a $2.3 million accruing

delinquent commercial mortgage with a 70% loan to value ratio and a $0.7 million

loan which remains current. Commercial loans newly delinquent for 90 days are

evaluated for impairment. The trend of delinquencies and collateral coverage of

those loans can affect the future level of the impaired loan allowance.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31 (dollars in thousands)         | 2001 | 2000    | 1999 | 1998  | 1997
|------------------------------------------ | ---- | ------- | ---- | ----- | ----
|Allowance for loan losses by type of loan: |      |         |      |       |     
|Residential mortgage                       |      | $   567 |      | 15.3  | %   
|Consumer                                   |      | 363     |      | 9.8   |     
|Commercial                                 |      | 2,186   |      | 59.1  |     
|Unallocated                                |      | 584     |      | 15.8  |     
|                                          
|Total                                      |      | $3,700  |      | 100.0 |     
|                                          

|Cash Surrender

Value of Life Insurance





The Company invests in

bank-owned life insurance on directors and certain officers as part of its

benefits program. These policies are issued on the general account of the

insurance companies. At the end of 2001, the Company entered into purchase

agreements for an additional $3.0 million of insurance. Of this amount, $1.5

million was included in Other Assets, pending completion of insurance

documentation.







12
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Deposits and

Borrowings
|------------------------

|December 31(dollars in millions) | 2001 | 2000    | % change
|-------------------------------- | ---- | ------- | --------
|Demand deposits                  |      | $  33.7 |         
|NOW deposits                     |      | 36.4    |         
|Money market deposits            |      | 41.2    |         
|Savings deposits                 |      | 60.2    |         
|Time deposits  $100 thousand    |      | 105.3   |         
|Time deposits  $100 thousand    |      | 26.6    |         
|                                
|Total deposits                   |      | $303.4  |         
|                                
|Personal                         |      | $245.0  |         
|Non personal                     |      | 58.4    |         
|                                
|Total deposits                   |      | $303.4  |         
|                                

|The 8% increase in total

deposits in 2001 was spread among most categories of accounts and included

growth in both the personal and non-personal components. The 26% increase in

non-personal accounts (commercial and municipal) benefited from the fact that

bank account rates were higher than money market fund rates during the second

half of the year. About 47% of the deposit growth in 2001 represented deposits

in the three new branches opened in the last two years. Deposits in the more

established offices grew by an average of 5%. Time accounts declined in 2001

because some maturing time accounts with original maturities over a year did not

renew in time instruments due to lower rates. Total average deposit balances

increased by $24 million (9%) in 2001, including 10% growth in average

transactions accounts balances.





The Company does not

generally solicit higher rate jumbo deposits, and does not solicit wholesale

deposits outside of its market area. In addition to its on-balance sheet

offerings, Alliance also offers a commercial sweep money market fund product. At

year-end 2001, sweep balances totaled $18 million, a 50% increase from a year

earlier. Sweep balances often measure up to 30% of the total commercial funds

deposited in the Company.





During 2001, the Company

borrowed an additional $3 million in 3-5 year funds from the Federal Home Loan

Bank of Boston to fund commercial mortgage growth. Additionally, the Company had

$9 million in short-term borrowings outstanding at year-end 2001 due to the high

volume of loans and investments closed in December, as well as $3 million to

fund purchase agreements for additional bank-owned life insurance. At year-end

2001, the Company had $32.5 million in callable FHLBB advances, of which $17.5

million was callable in 2002. No callable borrowings were expected to be called

based on market conditions existing at December 31, 2001, although this is

subject to change depending on movements in market interest rates.





Interest Rate

Risk





The Companys most

significant form of market risk is interest rate risk. Interest rate risk is the

sensitivity of net interest income and of capital to fluctuations in interest

rates. The actual behavior of the Companys assets and liabilities, and the

extent of movement of interest rates, are uncertainties that affect income and

capital.





Alliance manages its assets

and liabilities to maximize net interest income, while also giving consideration

to interest rate risk, liquidity, capital adequacy, customer demand, and other

market factors. Alliance has an Asset/Liability Committee (ALCO) which meets

weekly. ALCO sets interest rates and product prices, monitors the balance sheet,

and establishes goals and strategies. On a monthly basis, the Board of Directors

reviews key Asset/Liability ratios and ALCO minutes, and on a quarterly basis

the Board reviews interest rate sensitivity reports, related assumptions, and

ALCO strategies. The Board also approves ALCO policies.





To measure and manage its

interest rate risk, Alliance uses a quarterly dynamic simulation model. This

model evaluates changes which might result from a 200 basis point rate shock.

Income is modeled on a monthly basis over 24 months. The model utilizes

discounted cash flows to measure the economic value of assets and liabilities,

in order to test equity at risk. An assessment of income at risk and equity at

risk are the two primary tools that Alliance uses to manage interest rate

sensitivity.





The simulation model

depends on numerous assumptions regarding the shape of the yield curve; the

pricing characteristics of loans, securities, deposits and borrowings;

prepayments and calls on loans, securities, and borrowings; and changes in

balance sheet mix. Assumptions are made for each major category of interest

bearing assets and liabilities regarding their expected average lives, their

repricing frequencies and characteristics (including the optionality of

prepayment speeds and call provisions), and reinvestment expectations. In

assessing its modeling assumptions, Alliance draws on secondary market

information, although this is subject to change depending on movements in market

interest rates, peer group comparisons, and a review of actual product

behaviors. A review is performed at least annually to compare actual experience

to expectations based on the model. The model is also an integral component of

the Companys budgeting and planning processes. Modeling assumptions

involve significant estimations and uncertainties, and actual results may differ

from estimated results. Factors which could cause such differences include

economic conditions, banking industry profitability and competitive factors,

changing consumer preferences, and changes in capital markets behavior.





13
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|At year-end 2000, the

Companys interest sensitivity model indicated that net interest income

would decline in the event of a 200 basis point interest rate decrease. During

2001, short-term interest rates declined by 475 basis points; ten year treasury

rates declined only by about 10 basis points. The net interest income rate

variance in 2001 measured (11%) of net interest income. Net interest income did

not decline in accordance with the model due to the rapid reinvestment of

short-term investments at the beginning of the year; the steepening of the yield

curve producing higher long-term rates; and reductions in the rate paid on

savings and NOW accounts.





In 2001, simultaneous

growth of loans and non-time deposits provided the basis for 10% growth in

earning assets. The Company also utilized Federal Home Loan Bank borrowings to

provide medium-term funds due to the drop in demand for medium-term time

accounts. The change in the callability of existing FHLB borrowings caused this

$17 million to be modeled as medium-term, rather than short-term. This $17

million reduction in short term liabilities offset the similar $17 million

reduction in short-term assets resulting from the redeployment of short-term

investments into longer-term assets.





The following table

displays the Companys interest rate sensitivity compared to its policy

guidelines at year-end 2001 and 2000. The Company was within its policy

guidelines at year-end 2001. The year-end 2000 equity at risk was approved as an

exception based on anticipated improvements as a result of the reinvestment of

short-term investments into investment securities and loans in progress at

year-end. Income moves in the direction of rate changes due to the

Companys prime based commercial and personal loans. Income sensitivity

increased in an upward environment due to the change in the call expectation on

FHLB borrowings along with increased repricings of loans within a year. The

economic value of equity also moves in the direction of rate changes. Equity

decreases both due to the income effect above and due to accelerated loan

prepayments which would be reinvested at lower rates. At year-end 2000, equity

decreased in an upward environment due to the callable FHLB borrowings. At

year-end 2001, rates had fallen so far that these borrowings were not expected

to be called even after an upward 200 basis point shock. The removal of this

optionality removed the negative repricing effect of these borrowings, allowing

the value of variable rate assets to produce a positive gain in an upward

environment. Additionally, the increase in non-maturity deposits and the sale of

longer-dated securities benefited equity at risk in 2001. Of note, the policy

guideline for equity at risk was changed from 2.5% of assets to 15% of the

economic value of equity in 2001 in order to improve the measure but not to

change the underlying risk tolerance. The Company was within its policy

guidelines, measured quarterly, for the past two years except for the above

noted exception at year-end 2000.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | December 31       | Percentage changeto base value
| | ----------------- | ------------------------------
|
| | Income at risk    |                               
| | +200 basis points |                               
| | -200 basis points |                               
| | Policy guideline  |                               
| | Equity at risk    |                               
| | +200 basis points |                               
| | -200 basis points |                               
| | Policy guideline  |                               
| |                  

|The Company also monitors

its interest rate sensitive assets and liabilities by specific timeframes and

cumulatively, based on the assumptions used in the dynamic model. This

information is used to assess the overall repricing sensitivity of the

portfolio, which is primarily measured by the interest rate gap for each

timeframe. The Companys policy limits the one year interest rate gap as a

percentage of earning assets, establishing an acceptable range for this ratio of

(15%)  10%. The Companys one year gap measured 3% of earning assets

at year-end 2001, compared to 1% a year earlier.





Interest rates have

decreased to the lowest levels in several decades. The Company has primarily

focused on the risk of an upward trend in interest rates. Accordingly, the

Company generally prefers a positive one year interest rate gap, which will

allow it to increase earnings in an upward rate environment. The Company

believes that an asset sensitive one year gap provides more alternatives for

interest rate risk management than a liability sensitive gap, due primarily to

market considerations which affect deposit liability management. The Company

also monitors its gap under twelve months which is normally asset sensitive due

to the volume of prime based assets in the commercial and consumer loan

portfolio. Sudden downward shocks such as those in 2001 have an immediate

negative earnings impact initially until time account repricings can accumulate

to offset prime rate changes.






14
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A significant assumption in

the simulation model is the behavior of non-maturity deposits, which are mostly

viewed as non sensitive to interest rate fluctuations through the medium term.

The large influx of these deposits following the 4.75% reduction in short term

rates creates some uncertainty about the likely duration of these deposits if

interest rates rebound. Additionally, the $17 million of callable borrowings

could move back from medium term to under one year if rates rebound more than

2.0%. The Company has endeavored to minimize its further exposure to short-term

rate increases, emphasizing lower risk medium term loans and investments which

would not excessively impact equity at risk in the event that interest rates

increase. The Company closely monitors its longer maturity assets and will

evaluate opportunities to shorten the longest maturity debt securities depending

on market conditions.





Liquidity and

Cash Flows





The Companys primary

source of funds is dividends received from the Bank, and its primary uses of

funds are dividends paid to shareholders and semi-annual interest payments on

its trust preferred securities. In recent years, dividends from the Bank have

been paid from current period earnings of the Bank, although additional amounts

could be paid subject to regulatory restrictions as further described in the

note to the Consolidated Financial Statements in Item 8 of this report. In the

past, Alliance has also issued trust preferred securities as a source of funds

for additional equity investments in the Bank to fund asset growth.





The Banks primary

liquidity needs are to fund loan originations and the use of credit commitments,

along with deposit withdrawals and maturing borrowings. The Bank manages its

day-to-day liquidity by maintaining short-term investments and/or utilizing

short-term borrowings. In addition to its FHLBB relationship, the Bank maintains

credit facilities for short-term borrowings and repurchase agreements.

Additionally, the Bank is eligible to obtain short-term advances from the

Federal Reserve Bank of Boston. Over the year, loan originations and asset

purchases are funded by amortization of loans and investments, as well as by

deposit growth and FHLBB borrowings. In 2001, the primary uses of funds were the

origination of loans, drawdowns on loan commitments, and purchases of investment

securities. The primary sources of funds were growth in the various categories

of deposits and the liquidation of short-term investments. In the event of

additional funding needs, the Bank could choose to utilize its various credit

sources, or obtain funds from the investment portfolio either by selling

securities available for sale or obtaining loans collateralized by investment

securities. Additionally, the portfolio of government guaranteed loan

certificates represents a readily marketable pool of assets.






During 2001, short-term

investments averaged $10 million. This generally provided the Bank with ample

liquidity for day-to-day operations, and there was accordingly minimal use of

short-term borrowings, which averaged $0.4 million. The Bank expects to operate

with a lower level of short-term investments and to have more reliance on

short-term borrowings to manage daily liquidity in 2002. The Bank did not

encounter any unusual liquidity needs during 2001. The Banking Commissioner

closed Connecticuts banks on September 11 following the terrorist attacks,

and customer behavior was restrained, with no significant change in deposit

patterns.





Capital

Resources





Total shareholders

equity increased by $4 million (22%) in 2001, following a similar $4 million

increase in 2000. In 2001, net income of $3.0 million was supplemented by $1.6

million of other comprehensive income due to changes in unrealized gains and

losses on securities.





Capital ratios for the

Company and the Bank exceeded all applicable regulatory requirements for all

periods presented. At December 31, 2001, the Company and the Bank were Well

Capitalized. Alliance had $7.0 million outstanding in trust preferred securities

at year-end 2001. These securities provide regulatory capital using an

instrument with the lower costs associated with debt financing, as compared to

equity financing. The ratio of equity to assets increased to 5.74% at year-end

2001, compared to 5.20% at year end 2000. The Board assesses capital levels

quarterly in accordance with the Capital and Dividends policy.





Book value per share

increased to $9.44 at the end of 2001, compared to $7.77 at the end of 2000, and

measured $10.67 excluding the ($1.23) per share in accumulated other net

comprehensive loss at year-end 2001. Alliance declared total dividends of 30

cents per share in 2001, a 9% increase compared to the previous year. The

dividend payout ratio increased to 24% in 2001, compared to 20% in the prior

year. Compared to after tax operating earnings in 2001, the dividend payout

ratio measured 21%. The dividend yield was 2.5% based on the closing stock price

of $12 at year-end 2001.






15
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|COMPARISON OF

2000 VERSUS 1999





Alliance reported record

net income for the year 2000 totaling $3.22 million, a 10% increase over net

income of $2.92 million in the year 1999. Earnings per share increased to $1.36

compared to $1.23 a year earlier, on a diluted basis. Total dividends declared

in 2000 were 27.5 cents, a 20% increase from 23 cents in 1999.





The year 2000 marked the

fifth consecutive year of record earnings, and it was the Companys best

year ever for growth in its basic business. Both regular loans and deposits grew

by around $30 million, and growth in regular loans measured 18%. Net interest

income increased by 15% in 2000. These accomplishments were due to two basic

factors. First, deposit growth reflected the contribution by offices that were

opened in new markets, including Hebron, South Windsor, and our office on the

Tolland-Vernon line. These offices added new core deposits as a base for growing

the loan portfolio. Second, the Bank increased its commercial accounts. The Bank

achieved a 28% increase in total commercial loans in 2000, together with a 16%

increase in our commercial and municipal deposits.





At year-end 2000, problem

assets were a modest 0.32% of total assets, and for the first time in a decade

the Bank had no foreclosed properties at year-end. During 2000, the Bank

introduced TBK Online, an internet banking service for both consumer

and commercial customers. Customer usage was well ahead of projections at

year-end.





Interest income growth

produced an improvement in the efficiency ratio to 62% in 2000, compared to 63%

in 1999 (the ratio of non-interest expenses to the sum of taxable equivalent net

interest income plus service charges and other income). Managements goal

is to reduce this ratio (indicating improved efficiency) over time.





The net interest margin

increased to 4.02% in 2000 compared to 3.88% in 1999, primarily reflecting the

growth in higher margin loans. Alliance recorded a decrease in non-interest

income of $234 thousand (14%) for the year in 2000. Service charges and other

income declined due primarily to unusually high loan prepayment fees in 1999.

Total non-interest expense increased by $786 thousand (10%) in 2000. This

increase was primarily due to higher compensation and benefits, including the

effects of expansion and new offices, as well as higher commissions and bonuses.





Overall loan loss

experience continued to be favorable in the year 2000. The provision for loan

losses increased by $98 thousand (41%) in 2000, while net loan charge-offs

increased by $38 thousand (39%). Net loan charge-offs measured .06% of average

loans in 2000, compared to .05% in the prior year. The loan loss allowance

measured 1.65% of regular loans at year-end 2000, compared to 1.82% a year

earlier.




Growth in market share

produced strong balance sheet growth in 2000. Total assets increased by $41

million (13%) to $348.2 million in the year 2000. Total loans increased by $37

million (19%), with increases recorded in all categories, including the

aforementioned 28% increase in total commercial loans. Most new commercial loans

were originated by Alliance primarily to customers in the central Connecticut

area. Total deposits increased by $29 million (12%), including a 20% increase in

total transactions account balances. Borrowings from the Federal Home Loan Bank

of Boston increased by $3 millon (7%). Alliance placed a second $3.5 million

trust preferred debenture during 2000. Short-term investments totaling $20

million were held at year-end 2000 in anticipation of purchases of securities

and government guaranteed loans, along with additional planned loan bookings.





Capital resources improved

in 2000 due to earnings retention, improved securities prices, and the placement

of a second trust preferred debenture. Shareholders equity totaled $18

million at December 31, 2000, an increase of 26% over year-end 1999. This

included the benefit of a $1.1 million decrease in the net other comprehensive

loss due to improved securities prices. Book value per share measured $7.77 at

year-end 2000, and return on shareholders equity measured 20.6% for both

the most recent quarter and for the year 2000. Excluding accumulated other

comprehensive loss, return on shareholders equity measured 15.1% and 15.9%

for the years 2000 and 1999, respectively. The ratio of shareholders

equity to assets measured 5.2% as of year-end 2000, compared to 4.7% at the

prior year-end, and the Companys capital remained in excess of all

regulatory requirements at year-end 2001. The $3.5 million trust preferred

debenture provided additional regulatory capital at an after tax rate of 7.18%

which compared favorably with other sources of regulatory capital and without

diluting common equity.





16
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Market risk is the

sensitivity of income and equity to changes in interest rates and other market

driven rates or prices. Information regarding disclosures about interest rate

risk appears under Item 7, Managements Discussion and Analysis of

Financial Condition and Results of Operations in the section on Interest

Rate Risk.





Other market driven prices

that affect the Companys market risk are primarily prices in the markets

for corporate debt and equity securities. Changes in market risk perceptions and

risk tolerance can contribute to changes in securities prices affecting the

Companys capital and liquidity, and indirectly affecting earnings if

market changes constrict portfolio management alternatives available to the

Company or contribute to circumstances affecting the potential impairment of a

security. The Company monitors the prices of its investment securities at least

once a month. The Company manages this risk primarily by setting portfolio

limits, including limits by issuer, by industry, by security type, and for the

overall size of the corporate debt and equity security portfolios.





ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Managements

Report on the Financial Statements





The Management of Alliance Bancorp

of New England, Inc. is responsible for the consolidated financial statements

and other information in this annual report. The basis of preparation and

presentation, and significant estimates, are described in the first note to the

financial statements.





The consolidated financial

statement disclosures include the fair values of financial instruments, which

include many assets and liabilities. They are not a representation of the fair

values or liquidation values of total assets and liabilities, or the value of

present and future business activities of the Company.





The accounting systems

which record, summarize, and report data are supported by internal controls that

are augmented by written policies, internal audits and staff training programs.

The accounting and control systems are designed to provide reasonable assurance

of the reliability of the Companys records, on which Management relies for

the preparation of the consolidated financial statements, together with other

information in this annual report. Documented methodologies are utilized in

arriving at significant estimates.





The Audit Committee of the

Board of Directors is governed by a written charter which was provided to

shareholders as an attachment to the proxy statement for the 2001 annual

meeting. The Committees report on its actions relating to the audited

consolidated financial statements is included in the proxy statement for the

2002 annual meeting.





KPMG LLP, a firm of

Certified Public Accountants, has been appointed by the Board of Directors to

conduct an independent audit and to express an opinion as to the fairness of the

presentation of the consolidated financial statements of Alliance Bancorp of New

England, Inc., in accordance with accounting principles generally accepted in

the United States of America.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Joseph H.

RossiChief Executive OfficerJanuary 29, 2002 | David H. GonciChief Financial Officer | Richard B. Troutman

Controller, Tolland Bank
|------------------------------------------------------- | ------------------------------------- | ---------------------------------------------

|17
|--

|Independent

Auditors Report





To the Shareholders and Board of

Directors of Alliance Bancorp of New England, Inc.:





We have audited the

accompanying consolidated balance sheets of Alliance Bancorp of New England,

Inc. and subsidiaries as of December 31, 2001 and 2000, and the related

consolidated income statements, statements of changes in shareholders

equity, and statements of cash flows for each of the years in the three-year

period ended December 31, 2001. These consolidated financial statements are the

responsibility of the Companys Management. Our responsibility is to

express an opinion on these consolidated financial statements based on our

audits.





We conducted our audits in

accordance with auditing standards generally accepted in the United States of

America. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the consolidated financial statements. An audit

also includes assessing the accounting principles used and significant estimates

made by Management, as well as evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for our

opinion.





In our opinion, the

consolidated financial statements referred to above present fairly, in all

material respects, the financial position of Alliance Bancorp of New England,

Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their

operations and their cash flows for each of the years in the three-year period

ended December 31, 2001, in conformity with accounting principles generally

accepted in the United States of America.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | /s/ KPMG

LLPHartford, ConnecticutJanuary 29, 2002
| |  | --------------------------------------------------

|18
|--

|Consolidated Balance

Sheets
|----------------------------

|(In thousands, except share data)                       | December 31,2001 | December 31,2000
|------------------------------------------------------- | ---------------- | ----------------
|Assets                                                  |                  |                 
|Cash and due from banks                                 |                  | $   12,723      
|Short-term investments                                  |                  | 2,591           
|                                                       
|Total cash and cash equivalents                         |                  | 15,314          
|                                                        |                  |                 
|Securities available for sale (at fair value)           |                  | 85,973          
|                                                        |                  |                 
|Securities held to maturity                             |                 
|(fair value of $11,987 in 2001 and $22,188 in 2000)     |                  | 12,397          
|                                                        |                  |                 
|Residential mortgage loans                              |                  | 63,037          
|Commercial mortgage loans                               |                  | 87,485          
|Other commercial loans                                  |                  | 37,658          
|Consumer loans                                          |                  | 39,849          
|Government guaranteed loans                             |                  | 29,595          
|                                                       
|Total loans                                             |                  | 257,624         
|Less: Allowance for loan losses                         |                  | (3,700          
|                                                       
|Net loans                                               |                  | 253,924         
|                                                        |                  |                 
|Premises and equipment, net                             |                  | 5,458           
|Accrued interest income receivable                      |                  | 2,812           
|Cash surrender value of life insurance                  |                  | 4,391           
|Other assets                                            |                  | 4,296           
|                                                       
|Total assets                                            |                  | $ 384,565       
|                                                       
|Liabilities and Shareholders Equity                    |                 
|Demand deposits                                         |                  | $   33,647      
|NOW deposits                                            |                  | 36,400          
|Money market deposits                                   |                  | 41,223          
|Savings deposits                                        |                  | 60,182          
|Time deposits                                           |                  | 131,906         
|                                                       
|Total deposits                                          |                  | 303,358         
|                                                        |                  |                 
|Borrowings                                              |                  | 57,069          
|Other liabilities                                       |                  | 2,049           
|                                                       
|Total liabilities                                       |                  | 362,476         
|                                                        |                  |                 
|Commitments and contingencies                           |                 
|Preferred stock, ($0.01 par value; 100,000 shares       |                 
|authorized, none issued)                                |                  |                
|Common stock, ($0.01 par value; authorized 4,000,000    |                 
|shares; issued 2,539,896 in 2001 and 2,531,699 in 2000; |                 
|outstanding 2,339,297 in 2001 and 2,331,100 in 2000)    |                  | 25              
|Additional paid-in capital                              |                  | 11,577          
|Retained earnings                                       |                  | 16,473          
|Accumulated other comprehensive loss, net               |                  | (2,877          
|Treasury stock (200,599 shares)                         |                  | (3,109          
|                                                       
|Total shareholders equity                              |                  | 22,089          
|                                                       
|Total liabilities and shareholders equity              |                  | $ 384,565       
|                                                       

|See accompanying notes to

consolidated financial statements





19
|--------------------------------------------------------------------

|Consolidated Income

Statements
|-------------------------------

|Years ended December 31(in thousands, except share data) | 2001 | 2000            | 1999
|-------------------------------------------------------- | ---- | --------------- | ----
|                                                         |      |                 |     
|Interest and Dividend Income                             |      |                 |     
|Loans                                                    |      | $      18,931   |     
|Debt securities                                          |      | 5,207           |     
|Dividends on equity securities                           |      | 957             |     
|Short-term investments                                   |      | 371             |     
|                                                        
|Total interest and dividend income                       |      | 25,466          |     
|                                                        
|                                                         |      |                 |     
|Interest Expense                                         |     
|Deposits                                                 |      | 10,308          |     
|Borrowings                                               |      | 2,947           |     
|                                                        
|Total interest expense                                   |      | 13,255          |     
|                                                        
|                                                         |      |                 |     
|Net Interest Income                                      |      | 12,211          |     
|                                                         |      |                 |     
|Provision for Loan Losses                                |      | 325             |     
|                                                        
|Net interest income after provision for loan losses      |      | 11,886          |     
|                                                         |      |                 |     
|Non-Interest Income                                      |     
|Service charges and other income                         |      | 1,614           |     
|Net (loss) gain on securities                            |      | (476            | )   
|Net gain on assets                                       |      | 9               |     
|                                                        
|Total non-interest income                                |      | 1,147           |     
|                                                         |      |                 |     
|Non-Interest Expense                                     |     
|Compensation and benefits                                |      | 4,695           |     
|Occupancy                                                |      | 717             |     
|Data processing and equipment                            |      | 1,223           |     
|Office and insurance                                     |      | 545             |     
|Purchased services                                       |      | 979             |     
|Other                                                    |      | 702             |     
|                                                        
|Total non-interest expense                               |      | 8,861           |     
|                                                        
|Income before income taxes                               |      | 4,172           |     
|Income tax expense                                       |      | 1,197           |     
|                                                        
|Net Income                                               |      | $        2,975  |     
|                                                        
|                                                         |      |                 |     
|Per Share Data                                           |     
|Basic earnings per share                                 |      | $          1.27 |     
|                                                        
|Diluted earnings per share                               |      | $          1.24 |     
|                                                        
|Average basic shares outstanding                         |      | 2,333,556       |     
|Average additional dilutive shares                       |      | 72,681          |     
|                                                        
|Average diluted shares                                   |      | 2,406,237       |     
|                                                        

|See accompanying notes to

consolidated financial statements







20
|----------------------------------------------------------------------

|Consolidated

Statements of Changes in Shareholders Equity
|-----------------------------------------------------------

|(in thousands, except share data)     | Commonstock | Additionalpaid-Incapital | Retainedearnings | Accumulatedothercom-prehensiveincome(loss) | Treasurystock | Total   
|------------------------------------- | ----------- | ------------------------ | ---------------- | ------------------------------------------ | ------------- | --------
|Balance, December 31, 1998            |             | $      25                |                  | $ 11,306                                   |               | $  9,223
|                                     
|Comprehensive loss                    |            
|Net income                            |             |                          |                  |                                            |               | 2,922   
|Unrealized losses on securities,      |            
|net of reclassification adjustment    |             |                          |                  |                                            |               |         
|                                      |             |                          |                  |                                            |               |         
|Comprehensive loss                    |             |                          |                  |                                            |               |         
|Dividends declared ($0.23 per share)  |             |                          |                  |                                            |               | (527    
|Shares issued (exercise of options)   |             |                          |                  | 123                                        |               |         
|                                     
|Balance, December 31, 1999            |             | $      25                |                  | $ 11,429                                   |               | $11,618 
|                                     
|Comprehensive income                  |            
|Net income                            |             |                          |                  |                                            |               | 3,220   
|Unrealized gains on securities,       |            
|net of reclassification adjustment    |             |                          |                  |                                            |               |         
|                                      |             |                          |                  |                                            |               |         
|Comprehensive income                  |             |                          |                  |                                            |               |         
|Dividends declared ($0.275 per share) |             |                          |                  |                                            |               | (640    
|Shares issued (exercise of options)   |             |                          |                  | 87                                         |               |         
|                                     
|Balance, December 31, 2000            |             | $      25                |                  | $ 11,516                                   |               | $14,198 
|                                     
|Comprehensive income                  |            
|Net income                            |             |                          |                  |                                            |               | 2,975   
|Unrealized gains on securities,       |            
|net of reclassification adjustment    |             |                          |                  |                                            |               |         
|                                      |             |                          |                  |                                            |               |         
|Comprehensive income                  |             |                          |                  |                                            |               |         
|Dividends declared ($0.30 per share)  |             |                          |                  |                                            |               | (700    
|Shares issued (exercise of options)   |             |                          |                  | 61                                         |               |         
|                                     
|Balance, December 31, 2001            |             | $      25                |                  | $ 11,577                                   |               | $16,473 
|                                     

|Disclosure of reclassification amount
|-------------------------------------

|Years ended December 31 (in thousands)           | 2001 | 2000   | 1999
|------------------------------------------------ | ---- | ------ | ----
|Unrealized holding gains (losses) arising during
|the year, net of income tax expense (benefit)   
|of $669, $605 and ($3,113), respectively         |      | $1,299 |     
|Less reclassification adjustment for             |     
|losses (gains) included in net income,           |     
|net of income tax (benefit) expense              |     
|of ($137), $13 and $25, respectively             |      | 339    |     
|                                                
|Net unrealized gains (losses) on securities      |      | $1,638 |     
|                                                

|See accompanying notes to

consolidated financial statements





21
|--------------------------------------------------------------------

|Consolidated

Statements of Cash Flows
|--------------------------------------

|Years ended December 31 (in thousands)             | 2001 | 2000       | 1999
|-------------------------------------------------- | ---- | ---------- | ----
|Operating Activities:                              |      |            |     
|Net income                                         |      | $   2,975  |     
|Adjustments to reconcile net income to             |     
|net cash provided by operating activities:         |     
|Provision for loan losses                          |      | 325        |     
|Depreciation and amortization                      |      | 508        |     
|Net loss (gain) on securities and other assets     |      | 467        |     
|Loans originated for sale                          |      | (13,406    | )   
|Proceeds from loans sold                           |      | 11,349     |     
|(Decrease) increase in other liabilities           |      | (798       | )   
|Decrease (increase) in accrued                     |     
|interest income receivable                         |      | 377        |     
|(Increase) decrease in other assets                |      | (344       | )   
|                                                  
|Net cash provided by operating activities          |      | 1,453      |     
|                                                   |     
|Investing Activities:                              |     
|Securities available for sale:                     |     
|Proceeds from repayments and maturities            |      | 587        |     
|Proceeds from sales                                |      | 9,755      |     
|Proceeds from calls                                |      | 1,000      |     
|Purchases                                          |      | (37,445    | )   
|Securities held to maturity:                       |     
|Proceeds from amortization and maturities          |      | 4,013      |     
|Proceeds from calls                                |      | 2,005      |     
|Net increase in loans (other than held for sale)   |      | (27,498    | )   
|Proceeds from sales of foreclosed assets           |      | 230        |     
|Purchases of premises and equipment                |      | (240       | )   
|Proceeds from sales of premises and equipment      |      | 195        |     
|Purchases of life insurance                        |      | (1,500     | )   
|                                                  
|Net cash used by investing activities              |      | (48,898    | )   
|                                                   |     
|Financing Activities:                              |     
|Net increase in interest-bearing deposits          |      | 19,488     |     
|Net increase in demand deposits                    |      | 3,354      |     
|Proceeds from FHLBB advances                       |      | 20,709     |     
|Principal repayments of FHLBB advances             |      | (11,240    | )   
|Net increase in other borrowings                   |      | 900        |     
|Stock options exercised                            |      | 61         |     
|Cash dividends paid                                |      | (700       | )   
|                                                  
|Net cash provided by financing activities          |      | 32,572     |     
|                                                  
|Net change in cash and cash equivalents            |      | (14,873    | )   
|Cash and cash equivalents at beginning of the year |      | 30,187     |     
|                                                  
|Cash and cash equivalents at end of the year       |      | $ 15,314   |     
|                                                  
|                                                   |     
|Supplemental Information on Cash Payments          |     
|Interest                                           |      | $ 13,295   |     
|Income taxes                                       |      | 1,550      |     
|                                                  
|                                                   |     
|Supplemental Information on Non-cash Transactions  |     
|Net loans transferred to foreclosed assets         |      | $      206 |     
|Securities transferred to held to maturity         |      | 7,045      |     
|Securities transferred to available for sale       |      | 11,882     |     
|                                                  

|See accompanying notes to

consolidated financial statements







22
|----------------------------------------------------------------------

|Notes to Consolidated

Financial Statements





1. Summary of

Significant Accounting Policies





Principles of

Business and Consolidation. Alliance Bancorp of New England, Inc.

(Alliance or the Company) is a one bank holding company,

chartered in Delaware. Alliance owns 100% of the stock of Tolland Bank (the

Bank), a Connecticut chartered savings bank. Alliance also wholly

owns Alliance Capital Trust I (Trust I) and Alliance Capital Trust II (Trust

II). These Trusts have issued trust preferred securities which are included in

borrowings in the consolidated balance sheets.





Tolland Bank provides

consumer and commercial banking services from its nine offices located in and

around Tolland County, Connecticut. The Bank also provides non-deposit financial

products in association with third parties. The Banks deposits are insured

up to applicable limits by the Federal Deposit Insurance Corporation

(FDIC). In 2001, the Bank established a new, wholly owned passive

investment company, Tolland Investment Corporation (TIC), chartered

in Connecticut to own and service real estate secured loans. Also as part of

this reorganization, the pre-existing passive investment company was merged into

the Bank in 2001. The Bank also wholly owns a Connecticut chartered corporation

named Asset Recovery Systems, Inc. (ARS) which is a foreclosed asset

liquidation subsidiary.





The consolidated financial

statements include Alliance, the Bank, Trust I, Trust II, TIC, and ARS. All

significant intercompany accounts and transactions have been eliminated in

consolidation. The Company and its subsidiaries have no significant transactions

with entities in which they hold an investment interest, except for Bankers Bank

Northeast (a mutually owned correspondent bank) and the Federal Home Loan Bank

of Boston.





Basis of Preparation

and Presentation.The consolidated financial statements have been

prepared and presented in conformity with accounting principles generally

accepted in the United States of America. Unless otherwise noted, all dollar

amounts presented in the financial statements and note tables are rounded to the

nearest thousand dollars, except share data. Certain prior period amounts have

been reclassified to conform with current financial statement presentation. The

Company uses the accrual method of accounting for all material items of income

and expense.





Significant

Estimates.The Company is required to make certain estimates and

assumptions in preparing its consolidated financial statements. The most

significant estimates are those necessary in determining impaired loans and the

allowance for loan losses; other-than-temporary declines in the fair value of

securities; fair values in evaluating impairment of loans and debt securities

and in determining accumulated other comprehensive income (loss); and the

deferred tax asset valuation allowance. Factors affecting these estimates

include national and local economic conditions, the level and trend of interest

rates, real estate trends and values, securities market trends and values, and

financial ratings methodologies.





Securities.Debt securities, for which the Company has the positive intent

and ability to hold to maturity, are classified as held to maturity securities

and reported at amortized cost. Trading securities, if any, are securities

bought principally for the purpose of selling them in the near term. Unrealized

gains and losses on trading securities are included in earnings. Securities not

classified as either held to maturity securities or trading securities are

classified as available for sale securities and reported at fair value, with

unrealized net gains or losses excluded from earnings and reported in a separate

component of shareholders equity (accumulated other comprehensive income

or loss), net of applicable income taxes. Realized gains or losses on the sale

of securities are generally computed on a specific identified cost basis and

reported in Net (Loss) Gain on Securities in the Consolidated Income Statements.

Premiums and discounts are recognized as an adjustment of yield by the interest

method.





Any decline in the fair

value of a security below its cost that is considered to be other-than-temporary

is reflected as a realized loss in the Consolidated Income Statements.

Securities with unrealized losses are periodically reviewed by Management to

assess the loss. A written evaluation is performed by Management for debt

securities with unrealized losses which are not rated as investment grade by the

rating agencies that draws a conclusion as to whether there has been

other-than-temporary impairment.





23
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Loans.Total

loans (other than those held for sale) are reported at the principal amount

outstanding, net of charge-offs, and adjusted for the net amount of deferred

fees and costs, premiums and discounts. Net loans are total loans less the

allowance for loan losses. Residential mortgage loans held for sale, included in

residential mortgages on the consolidated balance sheets, are reported at the

lower of amortized cost or market value (based on secondary market prices).

Gains or losses are determined using the specific identification method. The

Company recognizes as separate assets rights to service mortgage loans for

others.





Premiums and discounts are

recognized as an adjustment of yield by the interest method based on the

contractual terms of the loan. Commitment fees are considered to be an

adjustment to the loan yield. Loan origination fees and certain direct costs of

loan origination are also deferred and accounted for as an adjustment to yield

based on the contractual amortization of the loan. The unamortized balance of

deferred fees and costs, premiums, and discounts, is credited or charged to

income at the time a loan repays.





Interest income receivable

is included in the Consolidated Balance Sheets. Most of the Companys loans

require interest payments monthly in arrears. The Company generally places loans

on nonaccrual when a payment becomes more than three months past due. The

Company may also place a loan on nonaccrual sooner if a concern develops as to

the ultimate collection of principal or interest. The Company may continue to

accrue interest on certain commercial loans which are well secured and in the

process of collection. Generally, when a commercial loan is placed on nonaccrual

status, any interest receivable over ninety days is charged-off against income.

Interest receivable on all other loans is charged-off against income entirely

when the loan is placed on nonaccrual status. Payments received on nonaccruing

loans are normally applied first against unpaid interest.





Allowance for Loan

Losses and Provision for Loan Losses.The allowance for loan

losses is maintained at a level estimated by the Company to be adequate to

absorb estimated credit losses associated with the loan portfolio. The provision

for loan losses is a charge to current period income necessary to maintain the

loan loss allowance at the level estimated to be adequate by the Company.





The Companys Credit

Committee is responsible for assessing the adequacy of the loan loss allowance.

The Committee provides its quarterly assessment to the Board of Directors for

approval of the amount of the loan loss allowance.





The Company consistently

follows a detailed methodology for determining the loan loss allowance. This

methodology is based on the loan categories shown on the Consolidated Balance

Sheets. Allowances for loan impairment are maintained in accordance with

Statement of Financial Accounting Standards (SFAS) No. 114,

Accounting by Creditors for Impairment of a Loan. Additionally, amounts

are allocated to individual pools of loans based on the size of each pool, the

expected average life of each pool, the inherent annual loss rate based on an

assessment of historic losses for that pool, and Managements assessment of

current environmental conditions that could affect individual loan categories.

Finally, an unallocated component is assigned to the overall allowance based on

Managements assessment of the overall risks and trends of the portfolio,

uncertainties in the loan loss estimation process and other relevant factors.





A loan is considered

impaired when it is probable that the Company will not be able to collect all

amounts due according to the contractual terms of the loan agreement. Management

excludes large groups of smaller balance homogeneous loans, including

residential mortgages and consumer loans, which are evaluated collectively for

impairment. The amount of impairment represents the difference between the

present value of the expected cash flows related to the loan, using the original

contractual interest rate, and its recorded amount, or, as a practical expedient

for collateral dependent loans, the difference between the appraised value of

the collateral and the recorded amount of the loan. When foreclosure is

probable, impairment is measured based on the fair value of the collateral. The

Companys method of recognition of interest income on impaired loans is

consistent with the method of recognition of interest on all loans.





Current estimates of loan

losses may vary from future estimates and from ultimate loan loss experience.

While the allowance is based on an analysis of individual loans and loan pools,

the entire allowance is available to absorb losses on any loan or loan category.

The Companys estimates of the collectibility of principal and interest are

based in many cases on estimates of future borrower cash flows and market

conditions and expectations. In addition, federal and state regulatory agencies,

as an integral part of their examination process, periodically review the

Companys allowance for loan losses. Based on information available to them

at the time of their examination, and on regulatory guidelines then in effect,

such agencies may require the Company to recognize additions to the allowance

for loan losses.





Loan Charge-offs.Loans are charged-off in whole or in part when it has been

determined that there has been a loss of principal. For real estate secured

loans, this determination is normally made in conjunction with a current

appraisal analysis. Charge-offs (recoveries) are charged (credited) to the

allowance for loan losses. Initial write-downs on recently acquired foreclosed

assets are also charged-off against the allowance for loan losses.





24
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Foreclosed Assets.Foreclosed assets are transferred from loans at the lower of cost

or fair value less selling costs, with any necessary write down from carrying

value recognized as a charge-off against the allowance for loan losses.





The Company periodically

obtains and analyzes appraisals of foreclosed real estate. If the fair value

less selling costs is less than the carrying value of these assets, these assets

are written down to that value by crediting the amount to a valuation allowance.

Gains and losses on the ultimate disposition of foreclosed assets, and

provisions to increase the valuation allowance, are reported in Net Gain (Loss)

on Assets in the Consolidated Income Statements. The carrying value of

foreclosed real estate is subject, in general, to the same uncertainties

discussed above regarding the Allowance for Loan Losses. Net receipts and

disbursements related to the operations of foreclosed real estate are included

in Other Non-Interest Expense in the Consolidated Income Statements.





Premises and

Equipment.Premises and equipment are reported at cost less

accumulated depreciation. Depreciation is charged to expense on a straight-line

basis over the estimated useful lives of the related assets. Estimated lives are

15 to 40 years for buildings and improvements and 3 to 20 years for furniture,

fixtures, software and equipment. Expenditures for maintenance and repairs are

charged to expense as incurred.





Cash Surrender Value

of Life Insurance.The cash surrender value of bank-owned life

insurance relates to policies on employees and directors of Tolland Bank for

which the Bank is the beneficiary. Increases in cash surrender value are

included in Non-Interest Income in the Consolidated Income Statements. These

policies are issued for the general account of the insurance companies.





Deferred Income

Taxes.Deferred tax assets and liabilities are recognized for the

future tax consequences attributable to temporary differences between the

financial statement carrying amounts of existing assets and liabilities and

their respective tax bases, and tax operating loss carry-forwards. Deferred tax

assets and liabilities are measured using enacted tax rates expected to apply to

future taxable income. The effect on deferred tax assets and liabilities of a

change in tax rates is recognized in income in the period that includes the

enactment date. The valuation allowance for deferred tax assets is subject to

ongoing adjustment based on changes in circumstances that affect

Managements judgment about the likelihood that the associated tax benefits

will be realized. Adjustments to increase or decrease to the valuation allowance

are charged or credited, respectively, to income tax expense.





Stock Options.The Company measures the compensation cost for its stock option

plans using the intrinsic value method prescribed by Accounting Principles Board

(APB) Opinion No. 25, Accounting for Stock Issued to

Employees, and related interpretations. No compensation cost is recognized

because, at the grant date, the exercise price of the options is equal to the

fair market value of the Companys common stock. In the notes to its

consolidated financial statements, the Company makes pro forma disclosures of

net income and earnings per share as if the fair value method of accounting in

SFAS No. 123, Accounting for Stock-Based Compensation, had been applied.

Under this method, compensation cost of stock options is measured at the grant

date based on the fair market value of the award and is recognized over the

service period.





Deferred Stock

Plans. The Directors Deferred Compensation Plan allows

directors to defer director fees and to receive payment in shares of the

Companys common stock based on current share prices at the time the fees

are recorded as expense. When directors receive payment of shares under this

plan, the shares are purchased in the market by the Company and transferred to

the directors. The Companys deferred compensation liability is measured

based on the current market price of the common stock with quarterly

mark-to-market adjustments charged or credited to Other Expense.





In 2001, the Company

established the Stock Option Income Deferral Plan to permit option holders to

elect a stock-for-stock exercise to defer to this plan shares with a value equal

to the taxable income that would have otherwise resulted from the option

exercise.





Earnings Per Share.Earnings per share have been computed in accordance with SFAS No.

128, Earnings Per Share. Basic earnings per share have been calculated by

dividing net income by weighted average shares outstanding. Diluted earnings per

share have been calculated by dividing net income by weighted average shares

outstanding after giving effect to the potential dilution that could occur if

the common stock equivalents were converted into common stock using the treasury

stock method. Common stock equivalents are derived from outstanding stock

options and shares in the Stock Option Income Deferral Plan.





25
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Cash Flow Reporting.The Company uses the indirect method to report cash flows from

operating activities. Under this method, net income is reconciled to net cash

flow from operating activities. Net reporting of cash transactions affecting

balance sheet items has been used where permitted. The Company considers due

from banks and short-term investments to be cash equivalents.





Comprehensive Income.Comprehensive income includes net income and any changes in

equity from non-owner sources that are not included in the income statement,

including changes in unrealized gains and losses on securities, net of

applicable income taxes.





Business

Segments. An operating segment is a component of a business for

which separate financial information is available that is evaluated regularly by

the chief operating decision-maker in deciding how to allocate resources and

evaluate performance. The Companys operations are limited to financial

services provided within the framework of a community bank, and decisions are

based generally on specific market areas and or product offerings. Accordingly,

based on the financial information now regularly evaluated by the Companys

chief operating decision-maker, the Company operates in a single business

segment and detailed segment information is not provided.





Recent Accounting Developments. In

July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.

142, Goodwill and Other Intangible Assets. This statement addresses financial accounting

and reporting for acquired goodwill and other intangible assets and supersedes APB

Opinion No. 17, Intangible Assets. SFAS No. 142 requires that goodwill no longer be

amortized to earnings, but instead be reviewed at least annually for impairment.

Impairment losses would be charged to earnings when they occur. Amortization of goodwill

ceases upon adoption of SFAS No. 142, which for calendar year-end entities such as

Alliance will be on January 1, 2002. SFAS No. 142 requires that intangible assets other

than goodwill (such as core deposit intangibles) continue to be amortized to expense over

their estimated useful lives. Alliance had intangible assets of $57,000 at December 31,

2001 and, accordingly, adoption of SFAS No. 142 is not expected to have a significant

effect on the consolidated financial statements.





In August 2001, the FASB

issued SFAS No. 143, Accounting for Asset Retirement Obligations.This

statement addresses financial accounting and reporting for obligations

associated with the retirement of tangible long-lived assets and the associated

asset retirement costs. This statement requires that the fair value of a

liability for an asset retirement obligation be recognized in the period in

which it is incurred if a reasonable estimate of fair value can be made. The

associated asset retirement costs are capitalized as part of the carrying amount

of the long-lived asset. SFAS No. 143 is effective for financial statements

issued for fiscal years beginning after June 15, 2002. Earlier adoption is

permitted. The Company does not expect that the adoption of this statement will

have a material impact on its consolidated financial statements.





In August 2001, the FASB

issued SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived

Assets,which is effective for financial statements issued for fiscal years

beginning after December 15, 2001 and interim periods within those fiscal years.

The provisions of this statement are to be applied prospectively. The Company

does not expect that the adoption of this statement will have a material impact

on its consolidated financial statements.





2. Cash and

Cash Equivalents
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Short-term investments at December 31(in thousands) | 2001 | 2000   
|--------------------------------------------------- | ---- | -------
|Federal funds sold                                  |      | $     
|Money market preferred stock                        |      | 2,500  
|Other short-term investments                        |      | 91     
|                                                   
|Total short-term investments                        |      | $2,591 
|                                                   

|The Company is required to

maintain certain average vault cash and cash reserve balances with the Federal

Reserve Bank of Boston. Cash and due from banks included amounts so required of

$3,196,000 and $959,000 at December 31, 2001 and 2000, respectively.





26
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. Securities





Information concerning the

securities portfolios is summarized below as of December 31, 2001; January 1,

2001 after certain reclassifications made in conjunction with the adoption of a

new accounting standard; and December 31, 2000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31, 2001 (in thousands) | AmortizedCost | UnrealizedGains | UnrealizedLosses | FairValue
|-------------------------------- | ------------- | --------------- | ---------------- | ---------
|Securities available for sale    |               |                 |                  |          
|U.S. Government and agency debt  |               | $10,149         |                  | $  55    
|U.S. Agency mortgage-backed debt |               | 17,876          |                  | 78       
|Trust preferred                  |               | 24,526          |                  | 390      
|Other corporate debt             |               | 22,047          |                  | 212      
|Marketable equity                |               | 12,387          |                  | 160      
|Non-marketable equity            |               | 2,580           |                  |         
|                                
|Total available for sale         |               | $89,565         |                  | $895     
|                                
|Securities held to maturity      |              
|U.S. Government and agency debt  |               | $  2,063        |                  | $  46    
|U.S. Agency mortgage-backed debt |               | 2,747           |                  | 53       
|Other mortgage-backed debt       |               | 1,518           |                  | 32       
|Other corporate debt             |               | 6,069           |                  | 56       
|                                
|Total held to maturity           |               | $12,397         |                  | $187     
|                                
|                                 |              
|January 1, 2001 (in thousands)   |              
|                                
|Securities available for sale    |              
|U.S. Government and agency debt  |               | $  2,000        |                  | $       
|U.S. Agency mortgage-backed debt |               | 1,505           |                  |         
|Trust preferred                  |               | 27,608          |                  | 235      
|Other corporate debt             |               | 16,010          |                  | 34       
|Marketable equity                |               | 14,659          |                  | 186      
|Non-marketable equity            |               | 2,281           |                  |         
|                                
|Total available for sale         |               | $64,063         |                  | $455     
|                                
|Securities held to maturity      |              
|U.S. Government and agency debt  |               | $  4,060        |                  | $  16    
|U.S. Agency mortgage-backed debt |               | 5,800           |                  | 2        
|Other mortgage-backed debt       |               | 2,354           |                  | 4        
|Other corporate debt             |               | 6,043           |                  |         
|                                
|Total held to maturity           |               | $18,257         |                  | $  22    
|                                
|                                 |              
|December 31, 2000 (in thousands) |              
|                                
|Securities available for sale    |              
|U.S. Government and agency debt  |               | $  5,000        |                  | $  73    
|U.S. Agency mortgage-backed debt |               | 3,457           |                  | 5        
|Other mortgage-backed debt       |               | 2,093           |                  | 10       
|Trust preferred                  |               | 24,122          |                  | 235      
|Other corporate debt             |               | 6,042           |                  | 27       
|Marketable equity                |               | 14,659          |                  | 186      
|Non-marketable equity            |               | 2,281           |                  |         
|                                
|Total available for sale         |               | $57,654         |                  | $536     
|                                
|Securities held to maturity      |              
|U.S. Government and agency debt  |               | $     986       |                  | $  16    
|U.S. Agency mortgage-backed debt |               | 3,850           |                  | 2        
|Other mortgage-backed debt       |               | 251             |                  | 4        
|Trust preferred                  |               | 3,098           |                  | 114      
|Other corporate debt             |               | 14,828          |                  | 223      
|                                
|Total held to maturity           |               | $23,013         |                  | $359     
|                                

|27
|--

|The amortized cost,

estimated fair value and average yield of debt securities are shown below by

remaining period to contractual maturity. Actual maturities may differ from

contractual maturities because certain issuers have the right to call or prepay

obligations with or without call or prepayment penalties. The average yield is

calculated based on amortized cost.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31, 2001(dollars in thousands) | AmortizedCost | FairValue | AverageYield
|--------------------------------------- | ------------- | --------- | ------------
|Debt securities available for sale      |               |           |             
|Due in 1 year or less                   |               | $  5,032  |             
|Due after 1 to 5 years                  |               | 4,594     |             
|Due after 5 to 10 years                 |               | 12,135    |             
|Due after 10 years                      |               | 52,837    |             
|                                       
|Total available for sale                |               | $74,598   |             
|                                       
|Debt securities held to maturity        |              
|Due in 1 year or less                   |               | $        |             
|Due after 1 to 5 years                  |               | 325       |             
|Due after 5 to 10 years                 |               | 2,384     |             
|Due after 10 years                      |               | 9,688     |             
|                                       
|Total held to maturity                  |               | $12,397   |             
|                                       

|At December 31, 2001, the

Company had $30,823,000 of securities available for sale with call provisions

and $2,063,000 of securities held to maturity with call provisions.





Non-marketable equity

securities principally consist of the required investment in Federal Home Loan

Bank of Boston stock.





At December 31, 2001,

securities having an amortized cost of $448,000 were pledged to secure treasury,

tax and loan and other deposits.





On January 1, 2001, the

Company adopted SFAS No. 133 and as permitted by this accounting standard,

reclassified certain debt securities from held to maturity to available for

sale. Securities with a total amortized cost of $11,882,000, net of a transfer

adjustment of $1,571,000 and with a total fair value of $11,585,000, were

transferred to available for sale from held to maturity. The net unrealized loss

on these securities was $1,868,000. At the same time, securities with an

amortized cost totaling $7,045,000 and a fair value totaling $7,127,000 were

transferred to held to maturity from available for sale. The net unrealized gain

on these securities was $82,000. The overall impact of these transfers was an

increase of $196,000 in the accumulated other comprehensive loss.





During 2000, one corporate

debt security with an amortized cost of $1,030,000 was transferred to available

for sale from held to maturity due to evidence of significant deterioration in

the issuers credit worthiness through the downgrading by a credit agency

and other relevant factors. The transfer resulted in an additional unrealized

loss of $314,000 (net of income taxes of $162,000) which was recorded as an

increase in the accumulated other comprehensive loss. During 1999, securities

totaling $20,963,000 which were originally purchased as available for sale, were

subsequently transferred to held to maturity. There were no transfers of held to

maturity securities to available for sale in 1999.





A summary of realized gains

and losses on sales of securities follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31(in thousands) | 2001 | 2000  | 1999
|------------------------------------- | ---- | ----- | ----
|Debt securities sold                  |      |       |     
|Gross gains                           |      | $ 165 |     
|Gross losses                          |      | (130  | )   
|                                     
|Net gains (losses)                    |      | 35    |     
|Equity securities sold                |     
|Gross gains                           |      | 79    |     
|Gross losses                          |      | (1    | )   
|                                     
|Net gains                             |      | 78    |     
|                                     
|Net gains                             |      | $ 113 |     
|                                     

|In 2001, a debt security

with an amortized cost of $1,030,000 was written down by $515,000 and an equity

security with a cost of $119,000 was written down by $74,000. These write downs

reflect other-than-temporary declines in the value of these securities, and are

included in the net loss on securities in the 2001 consolidated income

statement.




28
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. Total Loans

and Allowance for Loan Losses
|---------------------------------------------

|December 31 (in thousands)            | 2001 | 2000       
|------------------------------------- | ---- | -----------
|Residential mortgage loans            |      | $  63,037  
|Commercial mortgage loans             |      | 87,485     
|Other commercial loans:               |     
|Construction                          |      | 8,810      
|Other commercial                      |     
|Real estate secured                   |      | 14,561     
|Non real estate secured               |      | 14,287     
|                                     
|Total other commercial loans          |      | 37,658     
|Consumer loans:                       |     
|Installment                           |      | 15,958     
|Home equity line loans                |      | 22,506     
|Other consumer loans                  |      | 1,385      
|                                     
|Total consumer loans                  |      | 39,849     
|                                     
|Total regular loans                   |      | 228,029    
|Purchased government guaranteed loans |      | 29,595     
|                                     
|Total loans                           |      | $257,624   
|                                     
|Premiums on loans purchased,          |     
|deferred loan fees and costs, net     |      | $       570
|                                     

|Following is information

about the Companys nonaccruing loans and impaired loans.
|-----------------------------------------------------------------------------------

|December 31 (in thousands)              | 2001 | 2000   
|--------------------------------------- | ---- | -------
|Total nonaccruing loans                 |      | $2,149 
|Accruing loans past due 90 days or more |      |       
|                                       
|Impaired loans:                         |     
|Valuation allowance required            |      | $   969
|No valuation allowance required         |      | 3,238  
|                                       
|Total impaired loans                    |      | $4,207 
|                                       
|Total valuation allowance on            |      | $   129
|impaired loans                          |     
|Commitments to lend additional funds    |     
|to borrowers with impaired loans        |      |       
|                                       

|Years ended December 31(in thousands)           | 2001 | 2000     | 1999
|----------------------------------------------- | ---- | -------- | ----
|Additional interest that would have been earned |      | $     84 |     
|on year-end nonaccruing loans if they had been  |     
|accruing based on original terms                |     
|Total interest income recognized on impaired    |     
|loans while such loans were considered impaired |      | 140      |     
|Average recorded investment in impaired loans   |      | 1,616    |     
|                                               

|The valuation allowance on impaired

loans is included in the overall allowance for loan losses. Changes in the allowance for

loan losses were as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31(in thousands) | 2001 | 2000    | 1999
|------------------------------------- | ---- | ------- | ----
|Balance at beginning of year          |      | $ 3,400 |     
|Charge-offs                           |      | (148    | )   
|Recoveries                            |      | 123     |     
|Provision for loan losses             |      | 325     |     
|                                     
|Balance at end of year                |      | $ 3,700 |     
|                                     

|The majority of the

Companys loans are secured by real estate located within Tolland County in

central Connecticut. Real estate loan activities are governed by the

Companys loan policies, and loan to value ratios are based on an analysis

of the collateral backing each loan.






29
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|At December 31, 2001 and

2000, residential mortgage loans held for sale totaled $3,057,000 and

$1,001,000, respectively. An adjustment to reduce these loans to market value

was not required at either date. Loans serviced for others totaled $5,346,000

and $6,584,000 at December 31, 2001 and 2000, respectively.





In the ordinary course of

business, the Company makes loans to its directors and officers and their

related interests for substantially the same terms prevailing at the time of

origination for comparable transactions with others. As of December 31, 2001 and

2000, loans to related parties totaled $434,000 and $465,000, respectively.

During 2001, advances on related party loans totaled $34,000 and payments on

related party loans totaled $65,000.




5. Premises and Equipment, Net
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31 (in thousands)         | 2001 | 2000   
|---------------------------------- | ---- | -------
|Land                               |      | $ 1,290
|Buildings                          |      | 5,321  
|Furniture, fixtures, and equipment |      | 2,969  
|                                  
|Total premises and equipment       |      | 9,580  
|Less: accumulated depreciation     |     
|and amortization                   |      | (4,122 
|                                  
|Premises and equipment, net        |      | $ 5,458
|                                  

|6. Other Assets
|---------------

|December 31 (in thousands)                | 2001 | 2000  
|----------------------------------------- | ---- | ------
|Deferred tax asset, net                   |      | $1,705
|Life insurance purchase deposit           |      | 1,500 
|Receivable for security sold, not settled |      |      
|All other assets                          |      | 1,091 
|                                         
|Total other assets                        |      | $4,296
|                                         

|7. Deposits
|-----------

|December 31                 | 2001 | 2000     
|--------------------------- | ---- | ---------
|
|Demand deposits             |      | $  33,647
|NOW deposits                |      | 36,400   
|Money market deposits       |      | 41,223   
|Savings deposits            |      | 60,182   
|                           
|Total non-time deposits     |      | 171,452  
|Time deposits, by remaining |     
|period to maturity:         |     
|Within 1 year               |      | 79,470   
|After 1, but within 2 years |      | 23,102   
|After 2, but within 3 years |      | 12,333   
|After 3, but within 4 years |      | 9,904    
|After 4, but within 5 years |      | 7,097    
|                           
|Total time deposits         |      | 131,906  
|                           
|Total deposits              |      | $303,358 
|                           

|30
|--

|Amounts and average rates

of time deposits of $100,000 or more, by remaining period to maturity, were as

follows:
|-------------------------------------------------------------------------------------------------------------------

|December 31                   | 2001 | 2000    
|----------------------------- | ---- | --------
|
|Within 3 months               |      | $  7,180
|After 3, but within 6 months  |      | 4,057   
|After 6, but within 12 months |      | 4,878   
|After 12 months               |      | 10,451  
|                             
|Total time deposits of        |     
|$100,000 or more              |      | $26,566 
|                             

|Interest expense and

interest paid on deposits are summarized as follows:
|--------------------------------------------------------------------------

|Years ended December 31(in thousands) | 2001 | 2000      | 1999
|------------------------------------- | ---- | --------- | ----
|Interest expense:                     |      |           |     
|NOW deposits                          |      | $     498 |     
|Money market deposits                 |      | 1,431     |     
|Savings deposits                      |      | 1,206     |     
|Time deposits                         |      | 7,173     |     
|                                     
|Total deposit interest expense        |      | $10,308   |     
|                                     
|Interest paid:                        |     
|Time deposits of $100,000             |     
|or more                               |      | $  1,280  |     
|Total deposit interest paid           |      | 10,323    |     
|                                     

|8. Borrowings





Borrowings in the following

table are reported based on the remaining period to contractual maturity. None

of the borrowings amortize. Actual maturities may differ from contractual

maturities because lenders have the right to call certain borrowings with or

without call penalties.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31(dollars in thousands) | 2001 | 2000    
|--------------------------------- | ---- | --------
|
|FHLBB advances:                   |      |         
|Within 1 year                     |      | $  6,469
|After 1, but within 2 years       |      |        
|After 2, but within 3 years       |      | 1,500   
|After 3, but within 4 years       |      | 6,000   
|After 4, but within 5 years       |      | 1,500   
|After 5 years                     |      | 32,500  
|                                 
|Total FHLBB advances              |      | 47,969  
|Federal funds purchased           |      | 2,100   
|Other borrowing                   |      |        
|Company-obligated                 |     
|mandatorily redeemable            |     
|trust securities                  |      | 7,000   
|                                 
|Total borrowings                  |      | $57,069 
|                                 

|The Company has a line of

credit equal to 2% of total assets with the Federal Home Loan Bank of Boston

(FHLBB). The Company may borrow additional funds from the FHLBB

subject to certain limitations. To secure advances from the FHLBB, the Company

has pledged certain qualifying assets, as defined by the FHLBB. To obtain

additional loan advances, the Company may be required to invest in additional

amounts of FHLBB stock. Investment in FHLBB stock as of December 31, 2001 and

2000, was $2,399,000 and $2,100,000, respectively.





31
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|FHLBB advances maturing

after five years at December 31, 2001 were callable at the option of the lender

as follows: $10,000,000 at 4.66% callable as of December 31, 2001, $7,500,000 at

5.70% in 2002, $5,000,000 at 4.89% in 2003, $5,000,000 at 6.04% in 2004, and

$5,000,000 at 5.39% in 2008. Borrowings are callable on a quarterly basis

continually after the first call date.





At December 31, 2001, the

Company had a $20,000,000 facility for repurchase agreements, and two lines of

credit for unsecured federal funds borrowings for $5,000,000 and $3,000,000. The

Company paid $2,972,000, $2,541,000 and $1,832,000 in interest on borrowings

during the years ended December 31, 2001, 2000 and 1999, respectively.





The Company has two

statutory business trusts, of which the Company owns all of the common

securities. These trusts issued trust securities totaling $7,000,000 and

invested the proceeds thereof in an equivalent amount of junior subordinated

debentures issued by the Company. The subordinated debt securities are unsecured

obligations of the Company and are subordinate and junior in right of payment to

all present and future senior indebtedness of the Company. The Company has

entered into a guarantee, which provides a full and unconditional guarantee of

amounts on the capital securities. The capital securities qualify as Tier 1

capital for the Company under regulatory definitions.





The trust securities bear

interest at 9.40% and 10.88% and have maturities in 2029 and 2030, with early

redemption at the Companys option after 2009 and 2010, or in the event of

certain regulatory or tax changes. Additionally, payments on these securities

may be suspended by the Company for up to five years under certain

circumstances.





9.

Shareholders Equity





Treasury Stock





Treasury stock consists of

200,599 common shares at a cost of $15.50 per share.




Accumulated

Other Comprehensive Loss, net
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31 (dollars in thousands)          | 2001 | 2000   
|------------------------------------------- | ---- | -------
|Net loss on securities currently classified |      | $(3,592
|as available for sale                       |     
|Net unamortized loss on securities          |     
|transferred from available for sale         |     
|to held to maturity                         |      | (358   
|Income tax effect                           |      | 1,073  
|                                           
|Total accumulated other                     |     
|comprehensive loss                          |      | $(2,877
|                                           

|Dividends





The Companys

principal asset is its investment in the Bank. As such, the Companys

ability to pay dividends to its shareholders is largely dependent on the ability

of the Bank to pay dividends to the Company. The declaration of cash dividends

is dependent on a number of factors, including regulatory limitations, financial

conditions, and the Banks operating results. The shareholders of the

Company will be entitled to dividends only when, and if, declared by the

Companys Board of Directors out of funds legally available therefrom. The

declaration of future dividends will be subject to favorable operating results,

financial conditions, debt service requirements on trust preferred securities,

tax considerations and other factors. FDIC regulations require banks to maintain

certain capital ratios, as noted below, which may otherwise restrict the ability

of the Bank to pay dividends to the Company. The Banks ability to pay

dividends is also governed by State of Connecticut banking regulations.





Regulatory

Capital Requirements





The Bank is subject to

various regulatory capital requirements administered by the federal banking

agencies. Failure to meet minimum capital requirements can initiate certain

mandatory and possibly additional discretionary actions by regulators that, if

undertaken, could have a direct material effect on the Companys

consolidated financial statements. Under capital adequacy guidelines and the

regulatory framework for prompt corrective action, the Bank must meet specific

capital guidelines that involve quantitative measures of the Banks assets,

liabilities and certain off-balance-sheet items as calculated under regulatory

accounting practices. The Banks capital amounts and classification are

also subject to qualitative judgments by the regulators about components, risk

weightings, and other factors.







32
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Quantitative measures

established by regulation to ensure capital adequacy require the Bank to

maintain minimum amounts and ratios (set forth in the table below) of Total

Capital and Tier 1 Capital to risk-weighted assets, and of Leverage (Tier 1)

Capital to average assets. Management believes that, as of December 31, 2001 and

2000, the Bank met all capital adequacy requirements to which it was subject.





As of December 31, 2001,

the most recent notification from the FDIC categorized the Bank as well

capitalized under the regulatory framework for prompt corrective action. To be

categorized as well capitalized, the Bank must maintain minimum Total

risk-based, Tier 1 risk-based and Leverage ratios measuring 10.0%, 6.0% and

5.0%, respectively. There have been no conditions or events since that

notification that Management believes have changed the Banks capital

category.





The following table

presents capital and capital ratio information for the Bank:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31(dollars in thousands)     | 2001 | 2000   
|------------------------------------- | ---- | -------
|Actual:                               |      |        
|Total risk-based capital              |      | $34,551
|Tier 1 risk-based capital             |      | 30,851 
|Leverage                              |      | 30,851 
|Minimum regulatory capital standards: |     
|Total risk-based capital              |      | $23,828
|Tier 1 risk-based capital             |      | 11,866 
|Leverage                              |      | 15,049 
|                                     

|The Company is subject to

similar consolidated regulatory capital requirements of the Federal Reserve

Board. The Company satisfied these requirements at December 31, 2001 and 2000,

with capital ratios substantially the same as those of the Bank.





Stock Options





At December 31, 2001, the

Company had two stock option plans, which are described below. As permitted by

SFAS No. 123, the Company applies APB Opinion No. 25 and related Interpretations

in accounting for its plans. Accordingly, no compensation cost has been

recognized for its fixed stock options. Had compensation cost for the

Companys stock options been determined consistent with the fair value

method in SFAS No. 123, the Companys net income and earnings per share

would have been reduced to the pro forma amounts indicated below. The after tax

fair value of each option grant is estimated using the Black-Scholes

option-pricing model in accordance with the weighted-average assumptions

indicated below:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Year ended December 31(in thousands, except share data) | 2001 | 2000        | 1999
|------------------------------------------------------- | ---- | ----------- | ----
|Net income                                              |      |             |     
|As reported                                             |      | $     2,975 |     
|Pro forma                                               |      | 2,939       |     
|Basic earnings per share                                |     
|As reported                                             |      | 1.27        |     
|Pro forma                                               |      | 1.26        |     
|Diluted earnings per share                              |     
|As reported                                             |      | 1.24        |     
|Pro forma                                               |      | 1.22        |     
|                                                       

|Assumptions used for grants made inthe year ended December 31 | 2001 | 2000  | 1999
|------------------------------------------------------------- | ---- | ----- | ----
|Expected dividend yield                                       |      | 3.05  | %   
|Expected volatility                                           |      | 37.07 | %   
|Risk free interest rate                                       |      | 5.04  | %   
|Expected life (years)                                         |      | 10.00 |     
|                                                             

|The Company maintains a

Stock Option Incentive Plan for the benefit of officers and other employees of

the Company. Under the terms of this plan, 299,993 shares may be issued or

transferred pursuant to the exercise of options to purchase shares of common

stock and stock appreciation rights (SARs) and awards of restricted

stock. The exercise price of the option is equal to the market price of the

common stock on the date of grant. Options granted to officers and other

full-time salaried employees may be accompanied by SARs and awards of restricted

stock. No SARs or awards of restricted stock have been granted as of December

31, 2001. Total shares reserved for future option grants were 126,303 at

December 31, 2001.





33
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Company also maintains

a Stock Option Plan for Non-Employee Directors. Under the terms of this plan,

161,000 shares may be issued or transferred pursuant to the exercise of options

to purchase shares of common stock. Total shares reserved for future grants were

112,000 at December 31, 2001. Total options outstanding include grants made

under prior stock option plans.





A summary of the status of

the Companys stock option plans and changes therein is presented below.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31            | 2001 | 2000    | 1999
|---------------------------------- | ---- | ------- | ----
|
|Outstanding at beginning of year   |      | 285,915 |     
|Granted                            |      | 16,400  |     
|Exercised                          |      | (18,746 | )   
|Forfeited                          |      | (19,050 | )   
|                                  
|Outstanding at end of year         |      | 264,519 |     
|                                  
|Options exercisable at end of year |      | 259,519 |     
|                                  
|Weighted-average net fair value of |     
|options granted during the year    |      |         |     
|                                  
|Shares reserved for future grants  |      | 238,303 |     

|The following table summarizes
information about stock options outstanding at December 31, 2001:
|------------------------------------------------------------------------------------------------

|          | Options Outstanding | Options Exercisable
|--------- | ------------------- | -------------------
|
|$1 to $6  |                     | 61,826             
|$6 to $9  |                     | 104,893            
|$9 to $12 |                     | 97,800             
|         
|Total     |                     | 264,519            
|         

|Deferred Stock

Plans





The Company maintains a Directors

Deferred Compensation Plan which allows participants to defer receipt of fees

earned as a director of the Company. Upon the death, retirement or resignation

of a director, payment is made in the form of Company common stock. Total other

liabilities included $151,000 at December 31, 2001 and $91,000 at December 31,

2000 for the Companys obligation under this plan. The amount at December

31, 2001 relates to 12,186 common shares.





The Company established a

Stock Option Income Deferral Plan in 2001, whereby option holders may elect a

stock-for-stock exercise to defer to the plan shares equal in value to the

taxable income that would have otherwise resulted from the option exercise. In

2001, 10,549 options were exercised pursuant to this plan.





10. Employee

Benefit Plans





The Company sponsors a

noncontributory defined benefit pension plan covering all employees who meet

certain eligibility requirements. Benefits are based on length of service and

qualifying compensation. The Companys policy is to fund the plan in

accordance with the requirements of applicable regulations. Plan assets are

invested in stock, bond, and money market investments. The plan valuation date

is October 1. The pension plans funded status and amounts recognized in

the Companys financial statements are as follows:







34
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Years ended December 31 (in thousands)         | 2001 | 2000    
|---------------------------------------------- | ---- | --------
|Change in benefit obligation                   |      |         
|Benefit obligation at beginning of year        |      | $ 2,497 
|Service cost                                   |      | 118     
|Interest cost                                  |      | 178     
|Actuarial loss                                 |      | 120     
|Benefits paid                                  |      | (113    
|                                              
|Benefit obligation at end of year              |      | $ 2,800 
|                                              
|                                               |     
|Change in plan assets                          |     
|Fair value of plan assets at beginning of year |      | $ 2,983 
|Loss on plan assets                            |      | (214    
|Benefits paid                                  |      | (113    
|                                              
|Fair value of plan assets at end of year       |      | $ 2,656 
|                                              
|                                               |     
|Funded status at end of year                   |     
|Funded status                                  |      | $  (144 
|Unrecognized net transition obligation         |      | (20     
|Unrecognized net actuarial loss (gain)         |      | 432     
|Unrecognized prior service cost                |      | (19     
|                                              
|Prepaid benefit cost                           |     
|(included in other assets)                     |      | $    249
|                                              
|                                               |     
|Weighted average assumptions as of October 1   |     
|Discount rate                                  |      | 7.00    
|Expected return on plan assets                 |      | 8.50    
|Rate of compensation increase                  |      | 5.00    
|                                              

|Components of net periodic

pension (benefit) expense are as follows:
|---------------------------------------------------------------------

|Years ended December 31(in thousands) | 2001 | 2000  | 1999
|------------------------------------- | ---- | ----- | ----
|Service cost                          |      | $ 118 |     
|Interest cost                         |      | 178   |     
|Expected return on plan assets, net   |      | (271  | )   
|Net amortization and deferral         |      | (35   | )   
|                                     
|Net periodic pension                  |     
|(benefit) expense                     |      | $(10  | )   
|                                     

|The Company also sponsors a

defined contribution 401(k) savings plan, which includes a discretionary

matching contribution by the Company equal to 35% of the employees

contribution up to 6% of earnings for each of the years 2001, 2000 and 1999.

Savings plan expense totaled $59,000, $58,000 and $49,000 for the years 2001,

2000 and 1999, respectively. Additionally, the Company offers retirees

participation in its medical insurance benefit program. The cost of offering

this participation is not material to the financial condition or results of

operations of the Company.





The Company has

supplemental retirement plans for an active key employee and a retired key

employee. The accrued liability for these plans (included in other liabilities)

was $183,000 and $130,000 at December 31, 2001 and 2000, respectively. Plan

expense was $60,000, $40,000 and $4,000 for the years 2001, 2000 and 1999. These

plans were designed to offset the effect of tax law provisions which reduce

pension benefits for highly paid employees. The Company purchased a bank-owned

life insurance policy on the life of the active key employee. The death benefits

will assist in the funding of the supplemental retirement plan liability. The

Company will recover the cost of premium payments from the cash value of this

policy.





In December 2001, the

Company made payments of $3,000,000 to fund additional purchases of bank-owned

life insurance. This amount includes a deposit of $1,500,000 for a purchase

completed in early 2002. The death benefits are payable to the Company and a

benefit will be paid to the participants representing a portion of the death

benefits proceeds. The Company will recover the cost of premium payments from

the cash value of these policies.





35
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. Income Tax

Expense





Components of income tax

expense are as follows:
|------------------------------------------------------------------------------

|Years ended December 31(in thousands)               | 2001 | 2000    | 1999
|--------------------------------------------------- | ---- | ------- | ----
|Current:                                            |      |         |     
|Federal                                             |      | $ 1,204 |     
|State                                               |      |        |     
|                                                   
|Total current                                       |      | 1,204   |     
|Deferred (including change in valuation allowance): |     
|Federal                                             |      | (7      | )   
|State                                               |      |        |     
|                                                   
|Total deferred                                      |      | (7      | )   
|                                                   
|Total income tax expense                            |      | $ 1,197 |     
|                                                   

|The actual income tax

expense differs from the expected income tax expense, computed by

applying the statutory U.S. Federal corporate tax rate of 34% to income before

income taxes, as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Years ended December 31(in thousands)                 | 2001 | 2000    | 1999
|----------------------------------------------------- | ---- | ------- | ----
|Expected income tax expense at statutory rate         |      | $ 1,418 |     
|(Decrease) increase in income tax resulting from:     |     
|Dividends received deduction                          |      | (219    | )   
|Change in valuation allowance for deferred tax assets |      | 25      |     
|Other, net                                            |      | (27     | )   
|                                                     
|Total income tax expense                              |      | $ 1,197 |     
|                                                     

|The Company made income tax

payments of $1,550,000, $1,372,000 and $780,000 during the years ended December

31, 2001, 2000 and 1999, respectively.





The tax effects of

temporary differences and net operating loss carryforwards that give rise to

significant portions of the deferred tax assets and deferred tax liabilities are

presented on the following page:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31(in thousands)                      | 2001 | 2000   
|---------------------------------------------- | ---- | -------
|Deferred tax asset:                            |      |        
|Allowance for loan losses                      |      | $ 1,123
|State tax net operating loss carryforward      |      | 985    
|Depreciation of premises and equipment         |      | 29     
|Unrealized losses on securities                |      | 1,538  
|Other, net                                     |      | 390    
|                                              
|Total gross deferred tax asset                 |      | 4,065  
|Less: valuation allowance                      |      | (1,601 
|                                              
|Deferred tax asset, net of valuation allowance |      | 2,464  
|Deferred tax liability:                        |     
|Loan origination fees                          |      | (457   
|Other                                          |      | (302   
|                                              
|Total gross deferred tax liability             |      | (759   
|                                              
|Net deferred tax asset                         |      | $ 1,705
|                                              

|In order to fully realize

the net deferred tax asset, the Company must either generate future taxable

income or incur tax losses that can be carried back to prior years. Based on the

Companys historical and anticipated taxable income, Management believes

that the Company will realize the net deferred tax asset.







36
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A deferred tax asset

valuation allowance of $1,136,000 has been established for the state portion of

temporary differences (not including unrealized losses on securities) and state

tax net operating loss carryforwards that may not be realized due to the

expectation that there will be no state taxable income for the foreseeable

future because of the passive investment company. As of December 31, 2001, there

is also a full valuation allowance of $465,000 for the federal and state tax

effect of unrealized capital losses on equity securities and the state tax

effect of temporary differences on unrealized securities losses.





State tax net operating

loss carryforwards for 2001, 2000 and 1999 are approximately $8,135,000,

$7,610,000 and $4,145,000 and expire in 2021, 2020 and 2004, respectively.





12.

Commitments and Contingencies





Future minimum rental

payments required under operating leases that have remaining noncancellable

lease terms in excess of one year as of December 31, 2001 are as follows: 2002

 $77,000; 2003  $67,000; 2004  $47,000; 2005  $42,000;

2006  $26,000; and $38,000 thereafter. Total rental expense under

operating leases was $118,000, $125,000 and $131,000 for the years ended

December 31, 2001, 2000 and 1999, respectively.





There are various legal

proceedings against the Company arising out of its business. Although the

outcome of these cases is uncertain, in the opinion of Management, based on

discussions with legal counsel, these matters are not expected to result in a

material adverse effect on the financial position or future operating results of

the Company.





13. Financial

Instruments With Off-Balance Sheet Risk





The Company is party to

financial instruments with off-balance sheet risk in the normal course of

business to meet the needs of its customers. The instruments involve, to varying

degrees, credit risk, interest rate risk, and liquidity risk in excess of the

amount recognized in the Consolidated Balance Sheets. Amounts related to credit

instruments are as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31 (in thousands)                          | 2001 | 2000   
|--------------------------------------------------- | ---- | -------
|Commitments to extend credit:                       |      |        
|Commitments to originate new loans                  |      | $13,194
|Unadvanced construction lines of credit             |      | 11,836 
|Unadvanced home equity credit lines                 |      | 22,986 
|Unadvanced commercial lines of credit               |      | 7,592  
|Unadvanced reserve credit lines                     |      | 431    
|Standby letters of credit                           |      | 1,329  
|Commitments to purchase Government guaranteed loans |      | 1,314  
|                                                   

|Commitments to extend

credit are agreements to lend to a customer as long as there is no violation of

any condition established in the agreement. The total commitment amounts do not

necessarily represent future cash requirements or credit risk. Standby letters

of credit are generally unconditional and irrevocable, and are generally not

expected to be drawn upon. In general, the Company uses the same credit policies

in providing these financial instruments as it does in making funded loans.





At December 31, 2000, the

Bank had outstanding an interest rate swap agreement with a $10,000,000 notional

amount, entered into as a hedge of potential increases in interest payments on

variable rate money market deposit accounts. The swap agreement matured June 7,

2001, and had an insignificant effect on the consolidated financial statements

for 2001, 2000 and 1999.





14. Fair

Values of Financial Instruments





Fair value estimates are

made at a specific point in time, based on relevant market information and

information about the financial instrument. 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. Because no

market exists for a portion of the Companys financial instruments, fair

value estimates were based on judgments regarding future expected loss

experience, current economic conditions, risk characteristics of various

financial instruments, and other factors. These estimates are subjective in

nature and involve uncertainties and matters of significant judgment and,

therefore, cannot be determined with precision. Changes in assumptions could

affect the estimates significantly. Fair value estimates were based on existing

on and off-balance sheet financial instruments without attempting to estimate

the value of anticipated future business and the value of assets and liabilities

that are not considered financial instruments. In addition, the tax

ramifications relating to the realization of the unrealized gains and losses

have not been considered but may have a significant effect on fair value

estimates.





37
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The carrying amounts

reported in the balance sheets for cash and short-term investments approximate

those assets fair values. Fair values of securities were based on quoted

market prices where available. For securities without quoted market prices and

for loans, the fair values were estimated by discounting anticipated future cash

flows using current interest rates on instruments with similar terms and credit

characteristics. The carrying amount of accrued interest receivable approximates

fair value.





The fair values of deposits

with no stated maturity, were, by definition, equal to their carrying amounts.

The fair values of time deposits were based on the discounted value of

contractual cash flows, estimated using discount rates equal to the interest

rates offered at the valuation date for deposits of similar remaining

maturities. The carrying amounts of short-term borrowings approximated their

fair values. Rates currently available for debt with similar terms and remaining

maturities were used to estimate the fair value of long-term borrowings. The

carrying amount of accrued interest payable approximates fair value. The fair

value of off-balance sheet instruments is based on fees currently charged for

such instruments.





The following are the

carrying amounts and estimated fair values of the Companys financial

assets and liabilities, none of which were held for trading purposes.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31                                      | 2001 | 2000     
|------------------------------------------------ | ---- | ---------
|
|Financial assets:                                |      |          
|Cash and cash equivalents                        |      | $  15,314
|Securities available for sale                    |      | 85,973   
|Securities held to maturity                      |      | 12,397   
|Net loans                                        |      | 253,924  
|Accrued interest receivable                      |      | 2,812    
|Financial liabilities:                           |     
|Deposits with no stated maturity                 |      | 171,452  
|Time deposits                                    |      | 131,906  
|Borrowings, including trust preferred securities |      | 57,069   
|Accrued interest payable                         |      | 374      
|Off balance sheet financial instruments          |      |         
|                                                

|15. Condensed Financial

Statements of Alliance Bancorp of New England, Inc. (Parent Company)







Balance Sheets
|-------------------------------------------------------------------------------------------------------------------

|December 31(in thousands)                  | 2001 | 2000     
|------------------------------------------ | ---- | ---------
|Assets                                     |      |          
|Cash and cash equivalents                  |      | $     197
|Equity investment in subsidiaries          |      | 29,043   
|Due from subsidiaries                      |      | 101      
|Other assets                               |      | 177      
|                                          
|Total assets                               |      | $29,518  
|                                          
|                                           |      |          
|Liabilities and Shareholders Equity       |     
|Liabilities:                               |     
|Interest payable                           |      | $     127
|Accrued expenses                           |      | 159      
|Subordinated notes payable to              |     
|non-bank subsidiaries                      |      | 7,105    
|Other liabilities                          |      | 38       
|                                          
|Total liabilities                          |      | 7,429    
|Total shareholders equity                 |      | 22,089   
|                                          
|Total liabilities and shareholders equity |      | $29,518  
|                                          

|38
|--

|Income Statements
|-----------------

|Years ended December 31(in thousands)              | 2001 | 2000    | 1999
|-------------------------------------------------- | ---- | ------- | ----
|Dividends from subsidiary                          |      | $ 1,331 |     
|Interest income from                               |     
|short term investment                              |     
|Interest expense on subordinated notes             |      | (706    | )   
|                                                  
|Net interest income                                |      | 625     |     
|Non-interest expenses                              |      | (252    | )   
|                                                  
|Income (loss) before income tax benefit and        |      | 373     |     
|equity in net income of subsidiaries               |     
|Income tax benefit                                 |      | 345     |     
|                                                  
|Income before equity in net income of subsidiaries |      | 718     |     
|Equity in undistributed net income of subsidiaries |      | 2,257   |     
|                                                  
|Net income                                         |      | $ 2,975 |     
|                                                  

|Statements of Cash Flows
|------------------------

|Years ended December 31(in thousands)              | 2001 | 2000     | 1999
|-------------------------------------------------- | ---- | -------- | ----
|Operating Activities:                              |      |          |     
|Net income                                         |      | $ 2,975  |     
|Adjustments to reconcile net income to             |     
|net cash provided by operating activities:         |     
|Equity in undistributed net income of subsidiaries |      | (2,257   | )   
|Decrease in due from                               |     
|subsidiaries                                       |      | 73       |     
|Increase in other assets                           |      | (43      | )   
|Increase in other liabilities                      |      | 76       |     
|                                                  
|Net cash provided by operating activities          |      | 824      |     
|                                                  
|Investing Activities:                              |     
|Equity investment in subsidiaries                  |      |         |     
|                                                  
|Financing Activities:                              |     
|Notes issued to non-bank subsidiaries              |      |         |     
|Stock options exercised                            |      | 61       |     
|Dividends paid to stockholders                     |      | (700     | )   
|                                                  
|Net cash (used) provided by financing activities   |      | (639     | )   
|                                                  
|Net change in cash and                             |     
|cash equivalents                                   |      | 185      |     
|Cash and cash equivalents at beginning of the year |      | 12       |     
|                                                  
|Cash and cash equivalents at end of the year       |      | $    197 |     
|                                                  

|39
|--

|Consolidated

Supplementary Financial Data (unaudited)





Selected

Quarterly Financial Data
|----------------------------------------------------------------------------------------------

|                           | 2001 | 2000   
|-------------------------- | ---- | -------
|
|Net interest income        |      | $3,138 
|Provision for loan losses  |      | 116    
|Non-interest income        |      | 65     
|Non-interest expense       |      | 2,386  
|                          
|Income before income taxes |      | 701    
|Income tax expense         |      | 194    
|                          
|Net income                 |      | $   507
|                          
|Per Share Data:            |     
|Basic earnings per share   |      | $  0.22
|Diluted earnings per share |      | 0.21   
|Cash dividends declared    |      | 0.075  
|Common stock price:        |     
|High                       |      | 12.05  
|Low                        |      | 10.35  
|Close                      |      | 12.00  

|Net interest income

declined in the second and third quarters of 2001 before the accumulated effect

of falling short-term interest rates on interest income was offset by volume

growth and time deposit repricing. Non-interest income was affected by loan

prepayment fees and collectors fees, together with securities gains and losses,

including a $515,000 decrease due to a write down on a debt security deemed to

be impaired on an other-than-temporary basis in the fourth quarter of 2001.

Non-interest expense increased in the first and fourth quarters due to

conversion-related expenses. Quarterly net income was flat in the first three

quarters, declining in the fourth quarter principally due to the security write

down. Quarterly data may not sum to annual data due to rounding.





Volume and Rate Analysis FTE

Basis
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | 2001 versus 2000 Change due to | 2000 versus 1999 Change due to
|----------------------------- | ------------------------------ | ------------------------------
|
|Interest income:              |                                |                               
|Loans                         |                                | $ 2,755                       
|Securities available for sale |                                | 1,250                         
|Securities held to maturity   |                                | (806                          
|Other earning assets          |                                | (432                          
|                             
|Total Change                  |                                | 2,767                         
|                             
|Interest expense:             |                               
|Deposits                      |                                | 892                           
|Borrowings                    |                                | 211                           
|                             
|Total Change                  |                                | 1,103                         
|                             
|Net Change                    |                                | $ 1,664                       
|                             

|Note: Changes attributable jointly

to volume, rate and mix have been allocated proportionately.





40
|--------------------------------------------------------------------------------------------------------

|Contractual Maturities of

Construction and Commercial Loans
|------------------------------------------------------------

|December 31, 2001 (in thousands) | 1 Yearor Less | 1-5Years | Over 5Years | Total    
|-------------------------------- | ------------- | -------- | ----------- | ---------
|Construction loans:              |               |          |             |          
|Residential                      |               | $       |             | $       
|Commercial                       |               | 3,900    |             | 4,910    
|Commercial loans                 |               | 5,966    |             | 13,770   
|                                
|Total                            |               | $9,866   |             | $18,680  
|                                
|Interest rate sensitivity:       |              
|Predetermined rates              |               | $2,307   |             | $11,018  
|Variable rates                   |               | 7,559    |             | 7,662    
|                                
|Total                            |               | $9,866   |             | $18,680  
|                                

|Securities Cost and Fair Value
|------------------------------

|                                 | 2001 | 2000     | 1999
|-------------------------------- | ---- | -------- | ----
|
|Available for sale               |      |          |     
|U.S. Government and agency debt  |      | $10,149  |     
|U.S. Agency mortgage-backed debt |      | 17,876   |     
|Other mortgage-backed debt       |      |         |     
|Trust preferred                  |      | 24,526   |     
|Other corporate debt             |      | 22,047   |     
|Marketable equity                |      | 12,387   |     
|Non-marketable equity            |      | 2,580    |     
|                                
|Total available for sale         |      | $89,565  |     
|                                
|Held to maturity                 |     
|U.S. Government and agency debt  |      | $  2,063 |     
|U.S. Agency mortgage-backed debt |      | 2,747    |     
|Other mortgage-backed debt       |      | 1,518    |     
|Trust preferred                  |      |         |     
|Other corporate debt             |      | 6,069    |     
|                                
|Total held to maturity           |      | $12,397  |     
|                                

|
|

|ITEM 9. |  | CHANGES

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | -------------------------------------------------------------------------------------

|None.







41
|---------------

|PART III





ITEM 10.  DIRECTORS AND

EXECUTIVE OFFICERS OF THE REGISTRANT





The information contained under the

heading Proposal 1Election of Directors in the Proxy Statement, with

respect to directors and executive officers of the Company and contained on pages 3

through 5, is incorporated herein by reference in response to this item.





ITEM 11.  EXECUTIVE

COMPENSATION





The information contained under the

heading Executive Compensation in the Proxy Statement pages 9 and 10, with

respect to executive compensation, is incorporated herein by reference in response to

this item.





ITEM 12.  SECURITY

OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The information contained under the

heading Principal Beneficial Owners Common Stock in the Proxy Statement pages

2 and 3, with respect to security ownership of certain beneficial owners and Management,

is incorporated herein by reference in response to this item.





ITEM 13.  CERTAIN

RELATIONSHIPS AND RELATED TRANSACTIONS





The information contained under the

heading Certain Transactions in the Proxy Statement page 11, with respect to

certain relationships and related transactions, is incorporated herein by reference in

response to this item.







PART IV





ITEM 14.  EXHIBITS,

FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) |  | All

schedules have been omitted as the required information is either included herein or in

the Proxy Statement, or is not applicable.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Reports

on Form 8-K for Fourth Quarter
|--- |  | ---------------------------------------
|    |  | None.                                  

|(c) |  | Exhibit

Index
|--- |  | --------------

| |  | 3(i) |  | Certificate
of Incorporation of Registrant (Exhibit 99.1 to the Registration Statement on Form 8-A
filed September 23, 1997).
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------

| |  | 3(ii) |  | Bylaws
of Registrant (Exhibit 99.2 to the Registration Statement on Form 8-A filed September 23,
1997).
| |  | ----- |  | -------------------------------------------------------------------------------------------------------

| |  | 10(i) |  | Change
in Control Agreement between Tolland Bank and Joseph H. Rossi, dated January 5, 1996
(Exhibit 10(i) to the Report on Form 10-K filed March 27, 1998).
| |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10(ii) |  | 1997
Stock Incentive Plan for Directors, Officers and Key employees (Exhibit 4.3 to the
Registration Statement on Form S-8 filed November 6, 1997).
| |  | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10(iii) |  | Supplemental
Executive Retirement Plan and Agreement between Tolland Bank and Joseph H. Rossi, dated
December 14, 1999. (Exhibit 10(iii) to the report filed with the SEC on Form 10-K on
March 30, 2000).
| |  | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10(iv) |  | DirectorsDeferred
Compensation Plan (Exhibit 10(iv) to the Report on Form 10-K filed on March 27, 1998).
| |  | ------ |  | ---------------------------------------------------------------------------------------------------------

| |  | 10(v) |  | 1999
Stock Option Plan for Non-Employee Directors (Exhibit 4.3 to the Registration Statement
on Form S-8 filed October 28, 1999).
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  | 10(vi) |  | Cash
Bonus Plan (Exhibit 10(vi) to the Report on Form 10-K filed on March 27, 1998).
| |  | ------ |  | ------------------------------------------------------------------------------------

| |  | 10(vii) |  | Stock
Option Income Deferral Plan.
| |  | ------- |  | ----------------------------------

| |  | 10(viii) |  | Bank
Owned Life Insurance Plan.
| |  | -------- |  | -------------------------------

| |  | 21. |  | Subsidiaries
of Registrant.
| |  | --- |  | ---------------------------

| |  | 23. |  | Independent
AuditorsConsent.
| |  | --- |  | -----------------------------

| |  | 99. |  | Proxy
Statement for the 2002 Annual Meeting of Shareholders to be filed with the SEC.
| |  | --- |  | -------------------------------------------------------------------------------------

| |  |  |  | 
| |  |  |  | 

|42
|--

|SIGNATURES





Pursuant to the

requirements of Section 13 of the Securities Exchange Act of 1934, the Company

has duly caused this report to be signed on its behalf by the undersigned,

thereunto duly authorized on February 26, 2002.





ALLIANCE BANCORP OF NEW ENGLAND, INC.by
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|/s/ Joseph H. RossiJoseph

H. RossiPresident/CEO |  | 
|------------------------------------------------ |  | 

|Pursuant to the

requirements of the Securities Exchange Act of 1934, this report has been signed

below by the following directors and officers on behalf of the Company on

February 26, 2002:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|/s/ Robert

C. BoardmanRobert C. BoardmanDirector |  | /s/ Patricia A. NobletPatricia A. Noblet Director
|------------------------------------------------- |  | -------------------------------------------------

|/s/ Joseph

P. CaposselaJoseph P. CaposselaDirector |  | /s/ Kenneth R. PetersonKenneth R. Peterson

Vice Chairman
|--------------------------------------------------- |  | ---------------------------------------------------------

|/s/ Rodney

C. DimockRodney C. DimockDirector |  | /s/ Matthew L. ReiserMatthew L. ReiserDirector
|--------------------------------------------- |  | ----------------------------------------------

|/s/ D.

Anthony GuglielmoD. Anthony GuglielmoChairman |  | /s/ Joseph H. RossiJoseph H. Rossi

Director/President/CEO
|----------------------------------------------------- |  | ----------------------------------------------------------

|/s/ Reginald

U. MartinReginald U. MartinDirector |  | /s/ David H. GonciDavid H. Gonci Senior Vice

President/Chief FinancialOfficer/Treasurer
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------

|/s/ Douglas

J. MoserDouglas J. MoserDirector |  | 
|--------------------------------------------- |  | 

|43
|--