VILLAGE
  BANCORP

1997

annual report

table of contents

Letter to Stockholders o 2

Business o 4

Business/Selected Financial Data o 10

Management's Discussion & Analysis of Financial Condition
& Results of Operations o 11

Independent Auditors' Report o 15

Consolidated Balance Sheets o 16

Consolidated Statements of Income o 17

Consolidated Statements of Changes in Stockholders' Equity o 18

Consolidated Statements of Cash Flows o 19

Notes to Consolidated Financial Statements o 20

Officers, Board of Directors & Advisory Board of Directors o 34

Capital Stock, Annual Meeting, Request for Financial Information o 36

Banking Office Information o 36


                                      -44-
<PAGE>


1997

annual report

[GRAPHIC]

We are very  pleased  to report to you on the many  accomplishments  of  Village
Bancorp, Inc. and its sole subsidiary,  The Village Bank & Trust Company, during
1997. The past year was a period of strong growth for the  organization - growth
that we  believe  will allow your  company  to  compete  effectively  in today's
rapidly changing world.

The Corporation's  total assets on December 31, 1997, were  $222,549,000,  a 24%
increase from the total assets on December 31, 1996 of $179,550,000.  The Bank's
loan  portfolio  grew 17%  during  the year from the  $125,480,000  reported  on
December 31, 1996 to $146,350,000 at December 31, 1997. At December 31, 1997 the
Bank's investment portfolio totaled  $53,809,000,  up a significant 64% from the
December  31,  1996  total  of  $32,904,000.  The  Bank's  total  deposits  were
$203,808,000 on December 31, 1997, an increase of 25% from the total deposits of
$162,625,000 the year before.

The year 1997 was a very exciting one for the Bank and its staff. In June, a new
full service office was opened in Westport,  Connecticut.  One month later,  the
Bank completed its new building in CityCenter  Danbury and opened a full service
office to the public on July 19, 1997.  Over the Labor Day weekend,  most of the
Bank's back office  processing  departments were relocated to the top two floors
of the new Danbury  building.  Over time, having these areas of our operation in
our own building will save the Company  significant rental expense that it would
otherwise  pay.  The Bank also  undertook  a complete  conversion  of its teller
system to make the entire process more efficient.

These projects  helped produce the Bank's strong growth;  but also resulted in a
short term  increase in  expenses.  As a result,  net profit for the fiscal year
ending  December  31,  1997 was  $1,178,000,  down  from the 1996 net  profit of
$1,820,000.  These amounts  represent basic earnings per share of $ .62 for 1997
versus a basic earnings per share of $ .96 for 1996.  Fully diluted earnings per
share were $ .61 and $ .95 for 1997 and 1996, respectively. Many of the expenses
related to the new offices and the other projects were nonrecurring.  That fact,
combined  with  increased  business  both from the new offices and the  existing
operation, should produce increased profitability in 1998.

For our stockholders, the Company accomplished several goals during 1997. In the
fall a  Dividend  Reinvestment  and Stock  Purchase  Plan for  stockholders  was
implemented.  Response to this  program has been  excellent.  An Employee  Stock
Purchase Plan was also  introduced and we are pleased to report that over 30% of
our employees have decided to participate so far. Their interest in ownership of
the Company has a very positive  effect on their day to day efforts at producing
quality  service.  In  December,  the Board of  Directors  declared a 100% stock
dividend (the  functional  equivalent of a 2 for 1 stock split).  We believe the
addition  of our two new offices has  significantly  increased  the value of our
franchise  The Village Bank now has six offices  extending  from Westport to New
Milford, one of the most attractive markets in the country.

2 o Village Bancorp


                                      -45-
<PAGE>


letter to our stockholders
================================================================================


For our  customers,  the Bank  continues  to  enjoy a  reputation  for  quality,
personal  service - a  reputation  we work hard to maintain  and one we all take
pride in. We also recently  expanded our lobby hours while continuing the 8 a.m.
to 8 p.m.  daily  hours of the five  offices  that are  equipped  with  drive-up
windows.  Our 24 hour  telephone  inquiry  system  continues to be very popular,
averaging over 12,000 calls per month. Our Trust Department is expanding rapidly
as more and more people realize the critical need for these services.

We are  beginning  to  introduce  The  Village  Banker On Line,  which is a home
banking service that allows  customers an easy, safe, and convenient way to bank
at home,  pay  bills,  transfer  funds,  view  account  histories  and  maintain
financial  records.  To compliment the home banking service,  we also introduced
our newly designed web site which contains information about the Bank's products
and services,  investor relations,  stock quotes, and recent press releases. The
web site is located at www.villagebank.com.

Finally,  we are very proud of the positive  effect The Village Bank has on each
of the communities in which we do business.  As a strong and growing company, we
believe that our participation in the life of our towns is important.  Certainly
the Bank makes financial  contributions to many worthy groups and organizations.
However,  our influence goes much beyond that. We encourage our employees to get
involved.  They have done this in  significant  ways.  In all the towns where we
have a presence,  Village bankers are seemingly  everywhere,  volunteering their
time and effort on boards of agencies and organizations, raising funds for local
charities,  mentoring  young  people,  etc.  The monthly  list of our  community
involvement literally runs pages. Our leadership,  we believe, serves as a model
for other  organizations  and individuals  which affects the quality of life for
all of us.

We are very pleased to have you be a part of what we think is a special company.

                                   /s/ Robert V. Macklin
                                   --------------------------------------
                                   Robert V. Macklin
                                   President & Chief Executive Officer
[PHOTO]

                                   /s/ Edward J. Hannafin
                                   --------------------------------------
                                   Edward J. Hannafin
                                   Chairman& Chief Executive Officer

                                                          1997 Annual Report o 3


                                      -46-
<PAGE>


O    business
================================================================================


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

<TABLE>
<CAPTION>
                                                                (Dollar amounts in thousands)
                                                1997                         1996                         1995
===========================================================================================================================
                                     Average            Yield/    Average           Yield/    Average            Yield/
                                     Balance  Interest   Rate     Balance Interest   Rate     Balance  Interest   Rate
===========================================================================================================================
<S>                                 <C>        <C>       <C>    <C>        <C>       <C>     <C>        <C>        <C>
ASSETS

Interest earning assets:
   Loans(1)                         $135,525   $11,708   8.64%  $121,387   $10,472   8.63%   $116,556   $10,177    8.73%
   Taxable securities(2)              35,688     2,064   5.78     32,132     1,883   5.86      26,912     1,680    6.24
   Tax-exempt securities               6,836       312   4.56      2,495       121   4.85       2,284       112    4.90
   Interest bearing deposits              50         2   4.00         --        --                 --        --
   Federal funds sold                  7,745       417   5.38      5,994       317   5.29       6,329       371    5.86
---------------------------------------------------------------------------------------------------------------------------
   Total interest earning assets    $185,844   $14,503   7.80%  $162,008   $12,793   7.90%   $152,081   $12,340    8.11%
---------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
   Cash and due from banks             9,184                       8,004                        7,722
   Bank premises and equipment         2,760                       1,537                        1,608
   Accrued income and other assets     4,337                       2,532                        1,951
   Allowance for loan losses          (1,333)                     (1,299)                      (1,464)
---------------------------------------------------------------------------------------------------------------------------
TOTAL                               $200,792                    $172,782                     $161,898
===========================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest bearing liabilities:
   NOW accounts                     $ 42,522   $   645   1.52%  $ 39,029   $   622   1.59%   $ 35,759    $  622    1.74%
   Savings deposits                   48,035     1,317   2.74     46,200     1,320   2.86      44,334     1,230    2.77
   Time deposits                      74,730     4,174   5.59     54,990     3,011   5.48      50,413     2,761    5.48
   Federal funds purchased                15         1   6.67          8        --  --            556        33    5.94
---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities  $165,302   $ 6,137   3.71%  $140,227   $ 4,953   3.53%   $131,062    $4,646    3.54%
---------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities:
   Demand deposits                    17,773                      16,271                       15,974
   Other                               2,061                       1,670                        1,317
---------------------------------------------------------------------------------------------------------------------------
Total liabilities                    185,136                     158,168                      148,353
Stockholders' equity                  15,656                      14,614                       13,545
---------------------------------------------------------------------------------------------------------------------------
TOTAL                               $200,792                    $172,782                     $161,898
NET INTEREST INCOME                            $ 8,366                     $ 7,840                       $7,694
===========================================================================================================================

NET YIELD ON INTEREST
EARNING ASSETS                                           4.50%                       4.84%                         5.06%
===========================================================================================================================
</TABLE>

(1) For the purposes of these  computations,  nonaccruing  loans are included in
the daily average loan amounts  outstanding.  Interest  income  includes fees on
loans of $208,000, $198,000 and $165,000 in 1997, 1996 and 1995, respectively.

(2) Includes Federal Home Loan Bank stock.

4 o Village Bancorp


                                      -47-
<PAGE>


                                                              ------------------
                                                                   Business
                                                              ------------------


================================================================================


VOLUME/RATE ANALYSIS

The  following  table  sets  forth for the  periods  indicated  a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rate.

<TABLE>
<CAPTION>
                                                                    (In thousands)
                                           1997 Compared to 1996                        1996 Compared to 1995
                                      Increase (Decrease) Due to: (1)              Increase (Decrease) Due to: (1)
=========================================================================================================================
                                        Volume      Rate        Net                 Volume        Rate         Net
=========================================================================================================================
<S>                                    <C>        <C>         <C>                  <C>          <C>          <C>
Interest income on:
  Loans                                $ 1,224    $    12     $ 1,236              $   408      $  (113)     $   295
  Taxable securities                       199        (18)        181                  296          (93)         203
  Tax-exempt securities                    198         (7)        191                   10           (1)           9
   Interest bearing deposits                 1          1           2                   --           --           --
  Federal funds sold                        94          6         100                  (19)         (35)         (54)
-------------------------------------------------------------------------------------------------------------------------
TOTAL                                  $ 1,716    $    (6)    $ 1,710              $   695      $  (242)     $   453
=========================================================================================================================

Interest expense on:
  NOW accounts                         $    45    $   (22)    $    23              $    --      $    --      $    --
  Savings deposits                          (2)        (1)         (3)                 395         (305)          90
  Time deposits                          1,101         62       1,163                  250           --          250
   Federal funds purchased                   1         --           1                  (16)         (17)         (33)
-------------------------------------------------------------------------------------------------------------------------
TOTAL                                  $ 1,145    $    39     $ 1,184              $   629      $  (322)     $   307
=========================================================================================================================
</TABLE>

(1) The change in interest due to both rate and volume has been allocated to the
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.


SECURITIES PORTFOLIO

The following  table sets forth the balance sheet carrying  amount of securities
at the dates indicated:

<TABLE>
<CAPTION>
                                                             (In thousands)
                                                              December 31,
                                                 1997             1996            1995
============================================================================================
<S>                                            <C>              <C>              <C>
U.S. Treasury and other U.S.
  Government agencies                          $ 42,890         $ 30,218         $ 32,060
States and political subdivisions                10,886            2,639            2,444
Other                                                33               47               58
--------------------------------------------------------------------------------------------
TOTAL                                          $ 53,809         $ 32,904         $ 34,562
============================================================================================
</TABLE>

                                                          1997 Annual Report o 5


                                      -48-
<PAGE>


o    business (continued)
================================================================================


The following table sets forth the maturities of securities at December 31, 1997
and the weighted  average yields of such securities  (calculated on the basis of
the amortized cost and effective  yields weighted for the scheduled  maturity of
each  security).  Tax equivalent  adjustments  have not been made in calculating
yields on obligations of states and political subdivisions.

<TABLE>
<CAPTION>
                                                                  (Dollar amounts in thousands)
                                                                            Maturing
                                                           After One Year But     After Five Years But           After
                                   Within One Year         Within Five Years        Within Ten Years           Ten Years
                                   Amount     Yield         Amount     Yield        Amount     Yield        Amount      Yield
===============================================================================================================================
<S>                              <C>          <C>          <C>        <C>           <C>        <C>         <C>           <C>
U.S. Treasury and other U.S.
  Government agencies            $ 24,774     5.60%        $16,495    5.74%         $ 1,572    5.92%       $     49      8.04%
States and political
  subdivisions                        822     4.26           3,407    4.31            3,545    4.71           3,112      4.93
Other                                  13     5.08              20    6.50               --      --              --        --
-------------------------------------------------------------------------------------------------------------------------------
TOTALS                           $ 25,609     5.56%        $19,922    5.50%         $ 5,117    5.08%       $  3,161      4.98%
===============================================================================================================================
</TABLE>


LOAN PORTFOLIO

The  following  table shows the Bank's loan  distribution  (net of deferred loan
fees) at the end of each of the last three years:

<TABLE>
<CAPTION>
                                                                                  (In thousands)
                                                                                   December 31,
                                                                     1997              1996             1995
     ============================================================================================================
<S>                                                               <C>                <C>               <C>
     Real estate - mortgage and home equity                       $ 108,621          $ 96,345          $88,400
     Real estate - construction and land development                 14,012             7,953            7,737
     Installment and consumer credit                                  7,888             9,917           10,562
     Commercial and financial                                        17,138            12,621           12,892
     ------------------------------------------------------------------------------------------------------------
     TOTALS                                                       $ 147,659          $126,836          $119,591
     ============================================================================================================
</TABLE>

The following table shows the maturity of gross loans (excluding installment and
consumer  credit loans)  outstanding as of December 31, 1997.  Also provided are
the amounts due after one year classified according to sensitivity to changes in
interest rates.

<TABLE>
<CAPTION>
                                                                                      (In thousands)
                                                                                         Maturing
                                                                           After One Year
                                                               Within        But Within        After
                                                              One Year       Five Years     Five Years         Total
=======================================================================================================================
<S>                                                           <C>            <C>             <C>            <C>
Commercial and financial                                      $   7,539      $   6,991       $  2,608       $  17,138
Real estate - construction and land development                  11,815          2,141             56          14,012
Real estate - mortgage and home equity                              246          6,168        102,207         108,621
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                                         $  19,600      $  15,300       $104,871       $ 139,771
=======================================================================================================================

Loans maturing after one year with:
  Fixed interest rates                                                       $   5,074       $ 10,912
  Variable interest rates                                                       10,226         93,959
-----------------------------------------------------------------------------------------------------------------------
TOTAL                                                                        $  15,300       $104,871
=======================================================================================================================
</TABLE>

6 o Village Bancorp


                                      -49-
<PAGE>

                                                              ------------------
                                                                   Business
                                                              ------------------


================================================================================


NONACCRUAL AND PAST DUE LOANS

The following table summarizes the Bank's nonaccrual loans and loans past due 90
days or more:

                                                     (In thousands)
                                                      December 31,
                                            1997          1996          1995
================================================================================
Nonaccrual loans                           $1,299        $1,596        $  606
Accruing loans past due
  90 days or more                             323           157           230
--------------------------------------------------------------------------------
TOTAL                                      $1,622        $1,753        $  836
================================================================================

At December 31, 1997, $1,299,000 of nonaccrual loans were collateralized.

A loan is put on  nonaccrual  basis when the loan  becomes past due ninety days,
except for instances  where there are factors known to management  which reflect
favorably  on the ability of the  customer to fulfill the  obligation.  The Bank
would have recorded an additional $74,000, $59,000 and $51,000 of gross interest
income  in 1997,  1996 and  1995,  respectively,  if  nonaccrual  loans had been
current.


SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes the activity in the allowance for loan losses:

<TABLE>
<CAPTION>
                                                                          (Dollar amounts in thousands)
                                                                     1997             1996              1995
================================================================================================================
<S>                                                                <C>              <C>               <C>
Allowance at beginning of year                                     $ 1,356          $ 1,311           $ 1,551
Charge-offs:
   Commercial and financial                                             --               --                95
  Installment and consumer credit                                       77               69               183
  Real estate - mortgage                                                42              104               186
----------------------------------------------------------------------------------------------------------------
  Total charge-offs                                                    119              173               464
================================================================================================================
Recoveries:
   Commercial and financial                                              1               10                 8
   Installment and consumer credit                                      10                7                 6
   Real estate - mortgage                                                1               81                --
----------------------------------------------------------------------------------------------------------------
  Total recoveries                                                      12               98                14
================================================================================================================
Net charge-offs                                                        107               75               450
Provision for loan losses (1)                                           60              120               210
----------------------------------------------------------------------------------------------------------------
Allowance at end of year                                           $ 1,309          $ 1,356           $ 1,311
================================================================================================================
Ratio of net charge-offs (recoveries) during the
  year to average loans outstanding                                   .079%            .062%             .385%
================================================================================================================
</TABLE>

(1) The amount  charged to operations  and the related  balance in the allowance
for loan losses is based upon  periodic  evaluations  of the loan  portfolio  by
management.  These evaluations  consider several factors which include,  but are
not limited to, general economic conditions,  loan portfolio composition,  prior
loan loss experience and management's estimation of potential losses.

The  allowance  for loan losses is  considered  adequate by  management to cover
known and  unknown  risk  elements  in the  portfolios.  This  consideration  is
affected by the Bank's real estate lending  portfolio which represents the major
portion of the growth in the loan  portfolios.  Real estate loans are  generally
well  collateralized,  and are  therefore  reflected  as such in the  allowance.
Management  anticipates no material increase or decrease in charge-off  activity
in 1998.

                                                          1997 Annual Report o 7


                                      -50-
<PAGE>


o    business (continued)
================================================================================


DEPOSITS

The  average  daily  amount of  deposits  and rates  paid on such  deposits  are
summarized for the periods indicated in the following table:

<TABLE>
<CAPTION>
                                                                      (Dollar amounts in thousands)
                                                                         Year Ended December 31,
                                                        1997                      1996                      1995
===========================================================================================================================
                                                Amount        Rate        Amount        Rate        Amount         Rate
===========================================================================================================================
<S>                                            <C>            <C>         <C>           <C>         <C>            <C>
Noninterest bearing and
  demand deposits                              $ 17,773                   $ 16,271                  $ 15,974
NOW accounts                                     42,522       1.52%         39,029      1.59%         35,759       1.74%
Savings deposits                                 48,035       2.74          46,200      2.86          44,334       2.77
Time deposits                                    74,730       5.59          54,990      5.48          50,413       5.48
---------------------------------------------------------------------------------------------------------------------------
TOTAL                                          $183,060                   $156,490                  $146,480
===========================================================================================================================
</TABLE>

Maturities of time  certificates  of deposit of $100,000 or more  outstanding at
December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>

                                                         (In thousands)
                                                  Time Certificates of Deposit
     ===========================================================================
     <S>                                                 <C>
     Three months or less                                $   5,498
     Over three through six months                           2,487
     Over six through twelve months                          4,384
     Over twelve months                                      2,278
     ---------------------------------------------------------------------------
     TOTAL                                               $  14,647
     ===========================================================================
</TABLE>

RETURN ON EQUITY AND ASSETS

The following table shows consolidated  operating and capital ratios for each of
the last three years:
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                                       1997      1996      1995
================================================================================
<S>                                                     <C>      <C>        <C>
Return on average assets                                .59%     1.05%      .81%
Return on average stockholders' equity                 7.52     12.45      9.72
Dividend payout ratio                                 59.02     35.26     34.78
Equity to assets ratio (1)                             7.80      8.46      8.37
================================================================================
</TABLE>

(1) Ratio is based upon average stockholders' equity and average asset balances.

MARKET RISK

As a financial  institution,  the Company's  primary component of market risk is
interest rate volatility. Any fluctuation in interest rates will impact both the
level of income and expense  recorded on a large percentage of the Bank's assets
and liabilities,  and the fair value of all interest earning assets. In general,
financial  institutions are negatively affected by an increase in interest rates
to the extent that  interest-bearing  liabilities mature or reprice more rapidly
than interest-earning assets. The Bank does not own any trading assets, nor does
it have any hedging  transactions in place such as interest rate swaps and caps.
Based on the  nature of the  Bank's  operations,  it is not  subject  to foreign
exchange or commodity price risk.

The Bank's earnings are primarily  dependent on its net interest income which is
the difference (the "spread")  between the yields earned on its interest earning
assets,  such as loans  and  investments,  and the  rates  paid on its  interest
bearing liabilities, primarily deposits.

8 o Village Bancorp


                                      -51-
<PAGE>


                                                              ------------------
                                                                   Business
                                                              ------------------


================================================================================


Asset/liability  management  is the  measurement  and  analysis  of  the  Bank's
exposure to changes in the interest rate environment.  The principal  objectives
of the Bank's interest rate risk  management  activites are to: (a) evaluate the
interest rate risk included in certain balance sheet accounts; (b) determine the
level  of  risk   appropriate   given  the  Bank's  business  focus,   operating
environment,  capital and liquidity requirements and performance objectives; and
(c) manage this risk consistent with Board of Director approved guidelines.  The
Bank's interest rate management strategy is designed to stabilize the spread and
preserve  capital over a broad range of interest  rate  scenarios,  while at the
same time enhancing  income.  Management  realizes certain risks are inherent in
the  financial  services  industry and that the goal is to identify and minimize
these risks.  Various  strategies are in place to control the Bank's exposure to
interest  rate risk.  The Bank has an  Asset/Liability  Committee  comprised  of
senior management which is primarily  responsible for monitoring and determining
methods of managing the rate  sensitivity and repricing  characteristics  of the
balance sheet  components.  This is done consistent with maintaining  acceptable
levels of both risk and net interest  income.  This committee meets on a regular
basis.   Quarterly   reports  are  provided  to  the  Board  of  Directors   for
informational purposes and to ensure compliance with policy.

The following  table sets forth the dollar  amount,  weighted  average  interest
rates and  estimated  fair value (see Note 15 to the  financial  statements)  of
selected assets and  liabilities  that are scheduled to mature within the stated
time frames as of December 31, 1997:

<TABLE>
<CAPTION>
Maturities (dollars in thousands)
                                                               Scheduled Maturity dates
                             1998          1999          2000         2001        2002      Thereafter    Total     Fair Value
===============================================================================================================================
<S>                        <C>           <C>          <C>          <C>          <C>          <C>         <C>         <C>
Assets:
   Securities              $  26,391     $  9,713     $  6,600     $  2,452     $  1,157     $  8,278    $ 54,591    $ 54,763
   Weighted average
     interest rate (%)          5.59         5.60         5.44         5.48         5.15         5.04        5.47
   Home equity loans             275          351        1,485          550        1,447        5,776       9,884       9,884
   Weighted average
     interest rate (%)          9.75         9.98         9.86         9.90         9.94         9.97        9.94
   Real estate loans          11,786        2,907          241          731          598       96,690     112,953     113,817
   Weighted average
     interest rate (%)          8.00         8.72         9.33         9.63         8.46         7.84        7.90
   Installment and
     commercial loans         13,650        4,682        3,054        1,873        1,147          620      25,026      24,949
   Weighted average
     interest rate (%)          9.50         9.29         8.91         9.50         9.34         9.42        9.38
-------------------------------------------------------------------------------------------------------------------------------
   TOTAL                   $  52,102     $ 17,653     $ 11,380     $  5,606     $  4,349     $111,364    $202,454    $203,413
===============================================================================================================================

Liabilities:
   Non-interest
     bearing deposits      $  20,764     $     --     $     --     $     --     $     --     $     --    $ 20,764    $ 20,764
   Weighted average
     interest rate (%)            --           --           --           --           --           --          --
   Now, savings &
     money market            100,014           --           --           --           --           --     100,014     100,014
   Weighted average
     interest rate (%)          1.84           --           --           --           --           --        1.84
   Certificates of deposit    69,950        8,648        3,440          533          459           --      83,030      83,209
   Weighted average
     interest rate (%)          5.35         5.90         6.05         5.74         6.12           --        5.44
-------------------------------------------------------------------------------------------------------------------------------
   TOTAL                   $ 190,728     $  8,648     $  3,440     $    533     $    459     $     --    $203,808    $203,987
===============================================================================================================================
</TABLE>

Although the Bank is subject to interest rate risk as described above, loans and
deposits of the Bank have  historically  been largely stable and the Company has
not  experienced  any  significant  adverse  effects on net income in periods of
rapidly changing interest rates. Accordingly, no prepayment, deposit decay rates
or reinvestment  assumptions have been reflected in the above table.  Management
makes a concious  effort to match the maturities or the repricing time frames of
assets with the liabilities  that fund them, to limit the period of time between
repricing on  adjustable  rate assets in portfolio and to minimize the volume of
fixed-rate assets held.

                                                          1997 Annual Report o 9


                                      -52-
<PAGE>


o    business/selected financial data
================================================================================


INTEREST RATE SENSITIVITY

The following  table sets forth the dollar amount of rate  sensitive  assets and
liabilities that contractually reprice within the stated time frames at December
31, 1997:

<TABLE>
<CAPTION>
                                                                      (Dollar amounts in thousands)
Rate Sensitive Assets:
                                                   1 Year or less     1 - 5 Years      Over 5 Years         Total
======================================================================================================================
<S>                                                  <C>               <C>              <C>               <C>
Loans (net of deferred loan fees)                    $ 107,383         $  27,904        $  12,372         $ 147,659
Securities                                              26,391            19,922            8,278            54,591
----------------------------------------------------------------------------------------------------------------------
Total                                                  133,774            47,826           20,650           202,250
======================================================================================================================

Rate Sensitive Liabilities:
Deposits                                               169,863            13,181               --           183,044
----------------------------------------------------------------------------------------------------------------------
Gap (Repricing difference)                           $ (36,089)        $  34,645        $  20,650         $  19,206
======================================================================================================================
Cumulative gap                                       $ (36,089)        $  (1,444)       $  19,206
======================================================================================================================
Cumulative ratio of rate
  sensitive assets to liabilities                          .79               .99             1.10
======================================================================================================================
</TABLE>


SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the last five years:

<TABLE>
<CAPTION>
                                                       (In thousands, except per share amounts)
                                                                Year Ended December 31,
                                      1997              1996             1995              1994             1993
======================================================================================================================
<S>                                 <C>              <C>               <C>              <C>               <C>
Net interest income                 $  8,366         $   7,840         $   7,694        $   7,002         $   6,744
Provision for loan losses                 60               120               210              311                45
Net income                             1,178             1,820             1,316              707               994
----------------------------------------------------------------------------------------------------------------------
Per share data:  (1)
  Net income - basic earnings       $    .62         $     .96         $     .70        $     .37         $     .53
  Net income - diluted earnings          .61               .95               .69              .37               .53
  Cash dividends declared                .36              .335               .24             .315               .26
----------------------------------------------------------------------------------------------------------------------
Balance sheet totals:
  Average assets                    $200,792         $ 172,782         $ 161,898        $ 149,505         $ 143,365
  Average deposits                   183,075           156,498           146,480          135,642           129,752
  Average stockholders' equity        15,656            14,614            13,545           13,095            12,824
======================================================================================================================
</TABLE>

The following  table sets forth selected  quarterly  financial data for 1997 and
1996:

<TABLE>
<CAPTION>
                                                         (In thousands, except per share amounts)
                                                 1997 Quarters                               1996 Quarters
                                    Total   Fourth   Third   Second    First    Total   Fourth    Third   Second    First
===========================================================================================================================
<S>                                <C>      <C>      <C>     <C>      <C>      <C>      <C>      <C>      <C>      <C>
Net interest income                $8,366   $2,250   $2,106  $2,041   $1,969   $7,840   $1,947   $1,995   $1,933   $1,965
Provision for loan losses              60       15       15      15       15      120       30       30       30       30
Net income                          1,178      223      231     315      409    1,820      549      458      421      392
---------------------------------------------------------------------------------------------------------------------------
Per share data: (1)
Net income - basic earnings        $  .62   $  .12   $  .12  $  .17   $  .21   $  .96   $  .29   $  .24   $  .22   $  .21
Net income - diluted earnings         .61      .12      .12     .16      .21      .95      .29      .24      .22      .20
Cash dividends declared               .36      .09      .09     .09      .09     .335      .09     .085     .085     .075
===========================================================================================================================
</TABLE>

(1) Per share data prior to 1997 has been  adjusted for the 100% stock  dividend
issued in 1997.

10 o Village Bancorp


                                      -53-
<PAGE>


          ----------------------------------------------------------------------
               Business / Selected Financial Data / Management's Discussion
                 & Analysis of Financial Condition & Results of Operations
          ----------------------------------------------------------------------


o    management's discussion & analysis of financial condition
     & results of operations
================================================================================


General

Village  Bancorp,  Inc.  (Company) is a  Connecticut  incorporated  bank holding
company and parent  corporation  of the Village Bank & Trust Company  (Village),
which is the only  subsidiary  of the  Company.  During  1997,  the Bank  opened
full-service  branches  in  Danbury  and  Westport,  Connecticut.  The  Westport
location was opened in June of 1997 in leased office space. The Danbury location
was opened in July of 1997 in the Bank's new  three-story,  17,000  square  foot
office building.  In January 1994,  Village  Bancorp,  Inc. and Liberty National
Bank  (Liberty)  jointly  announced the signing of an agreement by which Village
Bancorp, Inc. would acquire all of the outstanding common stock of Liberty. This
acquisition  took place in November of 1994. In June of 1995,  Liberty  National
Bank was merged into The Village Bank & Trust Company.  All historical financial
data has been restated to include both entities for all periods  presented.  The
Bank  functions as a financial  intermediary  acting as depository and lender of
funds to its  customers,  and generates  its income from the interest  earned on
invested  assets  less  interest  paid  on its  deposits  and  interest  bearing
liabilities.  The Bank is a member of the Federal Deposit Insurance  Corporation
(FDIC)  and the  deposits  of the Bank  are  insured  by the FDIC to the  extent
provided by law. The Bank offers all general commercial banking services allowed
by both  State and  Federal  regulations.  The  Company  does not  engage in any
non-banking  activities  that are  permitted  to bank  holding  companies  under
enacted  regulations.  The Bank is subject to intense  competition  from various
financial  institutions  and other  companies  or firms that  engage in similiar
activities.  Bank holding  companies and banks are  extensively  regulated under
both federal and state law. As of December  31, 1997,  the Bank had 97 full-time
equivalent  employees.  Most  full-time  employees  are eligible for group life,
health and medical and disability insurance.  Village Bank & Trust employees are
eligible  for  participation  in a 401(k)  plan after one year of  service.  The
Company is listed on the National  Association of Securities  Dealers  Automated
Quotation System ("NASDAQ")  SmallCap Stock Market price quotation service under
the symbol "VBNK". Village began operating a trust department and offering trust
services in the third quarter of 1993.

COMPARISON OF 1997 TO 1996

Financial Condition

The Company had total assets of $222,549,000 on December 31, 1997 as compared to
assets of  $179,550,000  on December 31,  1996.  The most  significant  areas of
increase over the past year were in loans, which increased  $20,823,000  (16.4%)
and securities, which increased $20,905,000 (63.5%).

The growth in these two areas was funded  mainly by an increase  of  $41,183,000
(25.3%) in the Bank's deposits. This increase in loans is primarily attributable
to a combination of factors.  The Bank continued its increased  marketing effort
in this area.  The new branch  offices  increased  the  Bank's  presence  in the
marketplace,  with the Westport branch opening an entirely new market. The sales
force was expanded late in 1996 in both the mortgage and commercial  loan areas,
this helped to increase the volume of business.  The  expanded  adjustable  rate
product line has been well received.  The Bank generally retains adjustable rate
loans for its own  portfolio,  this  contributed to the increase in the mortgage
loan area.

The loan portfolio of the Bank includes $122,633,000 of real estate, home equity
and construction mortgages.  This is 83.1% of the Bank's total loan portfolio as
of December 31, 1997.  This is in  comparison  to  $104,298,000  (82.2%) in real
estate  related  loans  outstanding  on  December  31,  1996.  Due to this  high
percentage  of real  estate  loans the  management  of the Bank is  continuously
monitoring real estate values and the general economic  conditions in the Bank's
lending areas so that it may take appropriate action when necessary.

Capital Resources

The  Company,  aware  that its  capital  position  is a measure  of its  ongoing
viability and ability to compete effectively in the highly competitive financial
services industry,  strives to maintain a strong capital position. With a strong
capital position,  the Company has the ability to effectively compete now and in
the  future  and  to  be  better  able  to  withstand  economic  instability  or
uncertainty.  The Company had a leverage  ratio of 7.80% on December 31, 1997 as
compared to 8.46% on December 31, 1996.

In 1989 the Federal Deposit Insurance  Corporation approved a final Statement of
Policy on Risk-Based Capital to be implemented over a two-year transition period
beginning at December 31, 1990.  Risk weights are assigned to balance  sheet and
off-balance  sheet items and are used to calculate the Bank's capital ratios. On
December 31, 1997 the required minimum capital was 8.0% of total capital to risk
weighted assets and 4.0% Tier 1 capital to risk weighted  assets.  The Company's
ratios on December  31, 1997 were 13.06% total  capital  ratio and 12.06% Tier 1
capital ratio, which exceed the minimum requirements.  These ratios for December
31, 1996 were 14.62% and 13.43%,  respectively.  Management  does not anticipate
any event that would cause the Company to fall below the minimum requirements at
December 31, 1998, and anticipates that the Company will continue to have excess
"risk-based" capital.

                                                         1997 Annual Report o 11


                                      -54-
<PAGE>


o    management's discussion & analysis of financial condition
     & results of operations (continued)
================================================================================


Results of Operations

Net income for 1997 was  $1,178,000  as compared to  $1,820,000  for 1996.  This
decrease  was  primarily  the result of an increase  in  expenses  incurred as a
result of the completion and related move into the Bank;s new three story office
building in Danbury,  Connecticut  along with the opening of a new  full-service
branch office in Westport,  Connecticut  in leased  office  space.  Net interest
income for 1997 amounted to $8,366,000 as compared to $7,840,000  for 1996.  Net
interest  income  increased  primarily  as a result of the  increase in interest
income on loans.

Income Taxes

The  Company's  provision  for income taxes was $585,000 for 1997 as compared to
$471,000 for 1996. The increase in the Company's  provision for income taxes was
primarily  the result of the 1996  receipt of a tax refund  settlement  from the
State  of  Connecticut.   For  more  information  please  see  Note  10  to  the
Consolidated Financial Statements.

Assets and Related Income Analysis

Loans  outstanding  on December  31, 1997  totaled  $147,659,000  as compared to
$126,836,000  outstanding  on  December  31,  1996.  The  increase  in the  loan
portfolio  of  $20,823,000  (16.4%)  was for the most part  attributable  to the
majority of real estate loans  originated  being variable  rate,  which the Bank
primarily holds for its own portfolio.  There was also an increased sales effort
in the commercial loan area which encreased the outstandings by $4,517,000.  The
majority of loans at the Bank are and have been real estate related. Loan income
increased  $1,236,000  from  $10,472,000  for 1996 to $11,708,000 for 1997. This
increase is due to an increase in average  outstanding  loans from  $121,623,000
for 1996 to $135,772,000 for 1997, coupled with a slight increase in the average
rate earned from 8.61% in 1996 to 8.62% in 1997.

Securities,   which  consist  of  securities   held-to-maturity  and  securities
available-for-sale,  increased  $20,905,000 (63.5%) from $32,904,000 at December
31, 1996 to $53,809,000 at December 31, 1997.  Income from securities  increased
$329,000  (16.5%) from $2,000,000 for the 1996 period to $2,329,000 for the 1997
period.  This increase  resulted  primarily  from an increase in average  dollar
amount  outstanding from $34,570,000 for 1996 to $41,760,000 for 1997, offset by
a decrease in average rate earned from 5.79% for 1996 to 5.58% for 1997. In 1997
there were no net security  gains or losses;  there were net security  losses of
$17,000 in 1996. The Bank has the positive intent and ability to hold securities
designated  as  held-to-maturity  until  maturity and does not engage in trading
activities.  Securities  available-for-sale are used to compensate for liquidity
forecasting deviations.

Federal funds sold decreased  $6,600,000 from $6,600,000 at December 31, 1996 to
$0 at December 31, 1997.  Federal funds sold income  increased  $100,000 (31.5%)
from $317,000 for 1996 to $417,000 for 1997.  This increase  resulted  primarily
from an increase in average dollar amount outstanding from $5,994,000 in 1996 to
$7,745,000  in 1997  coupled  with an increase  in the average  rate earned from
5.29% for 1996 to 5.38% in 1997.

Liability and Related Expense Analysis

Deposits increased $41,183,000 (25.3%) from $162,625,000 at December 31, 1996 to
$203,808,000  at December 31, 1997.  Interest on deposits  increased  $1,184,000
(23.9%)  from  $4,953,000  for 1996 to  $6,137,000  for 1997.  This  increase is
attributable  to an increase  in the  average  dollar  amount  outstanding  from
$156,489,000  for 1996 to $183,060,000 in 1997,  coupled with an increase in the
average rate paid of 3.17% for 1996 to 3.35% for 1997.

Salary and benefits expenses  increased $535,000 (17.5%) from $3,064,000 in 1996
to  $3,599,000  in 1997,  primarily as a result of the increase in the number of
personnel due to the opening of the two new branch office locations.

Net  occupancy  expenses  increased  $218,000  (37.5%) from  $582,000 in 1996 to
$800,000 in 1997,  furniture and equipment  expenses  increased  $62,000 (23.6%)
from $263,000 in 1996 to $325,000 in 1997, both as result of additional expenses
due to the opening of the full-service branch locations in Westport and Danbury,
Connecticut.

Supplies expenses increased $89,000 (50.6%) from $176,000 in 1996 to $265,000 in
1997,  mainly as a result of expenses  incurred in the opening of the new branch
offices.

Data  processing  services  increased  $63,000  (13.4%) from $470,000 in 1995 to
$533,000 in 1996,  as a result of increased  use of services  offered along with
increased volumes.

Provision for Loan Losses

The provision for loan losses decreased  $60,000 (100.0%) from $120,000 for 1996
to $60,000 for 1997. The economy and the real estate market in the Bank's market
areas are closely  monitored by  management  to maintain an  allowance  for loan
losses that is considered  adequate.  The loan loss  allowance was $1,309,000 to
support loan portfolios of  $147,659,000,  or a loan loss reserve ratio of .89%.
This is in comparison to a ratio of 1.07% for 1996. Management believes that the
allowance for loan losses is adequate.

12 o Village Bancorp


                                      -55-
<PAGE>


             -------------------------------------------------------------------
                  Management's Discussion & Analysis of Financial Condition
                                 & Results of Operations
             -------------------------------------------------------------------


================================================================================


Interest Rate Sensitivity

Financial  institutions  have become  increasingly  concerned about matching the
repricing  ability  of  interest-earning  assets  to the  repricing  ability  of
interest-bearing  liabilities.  Interest rate risk occurs when these  repricings
occur in  different  time  frames.  An interest  rate  sensitivity  "gap" is the
difference between the repricing assets and the repricing  liabilities  occuring
in a given time frame. A positive "gap" occurs when the asset amount exceeds the
liability  amount. A negative "gap" occurs when the liability amount exceeds the
asset amount. In a falling interest rate environment a negative "gap" would tend
to increase the institution's net interest income,  while a positive "gap" would
have an adverse effect.  In a rising interest rate  environment a positive "gap"
would tend to increase the institution's  net interest income,  while a negative
"gap" would have an adverse effect. Normally institutions attempt to match these
repricings   while   maintaining  an  adequate   interest  rate  spread  without
compromising the quality of assets. The Bank's interest rate sensitivity for the
one year or less  time  frame  consists  of  $133,774,000  of  repricing  assets
compared to $169,863,000 of repricing  liabilities.  For more information please
see "Business".

Liquidity

Liquidity is the ability to provide funds for loan requests,  unexpected deposit
outflows and meeting  other  recurring  financial  obligations.  The Bank,  as a
financial  intermediary,  monitors its liquidity position carefully,  so that it
might identify trends that could impact its  liquidity/cash  flow position.  The
Bank experiences little in seasonal liquidity fluctuation.  Loan commitments are
also closely  monitored to assure these commitments do not negatively affect the
Bank's planned  liquidity  position.  Primary liquidity is comprised of cash and
due from banks,  interbank  overnight federal funds sold and securities maturing
in less than one year. These assets  aggregated  $36,762,000,  or 16.5% of total
assets, as of December 31, 1997, as compared to $25,689,000  (14.7%) at December
31, 1996. The Bank has borrowing capabilities from the Federal Home Loan Bank of
Boston,  which is available as a  supplemental  source of funding for  liquidity
purposes.  Management closely monitors the Bank's  liquidity/cash  flow position
and does not anticipate any liquidity problems in the future.

Impact of Inflation

The  quantitative  impact of  inflation  is  subjective  in  interpretation  and
difficult and imprecise to measure in the financial services industry. Inflation
poses a financial risk as the Bank's assets  consist mainly of financial  assets
which are funded by deposit liabilities of varying maturities and deposit yields
as opposed to physical or real assets.  With few fixed or physical  assets,  the
Bank has a low degree of operating  leverage  which  mitigates the  inflationary
impact.  The  financial  leverage  ratio of capital to total  assets is the most
effective  measure of a  financial  institution's  viability  and its ability to
withstand inflationary pressures.

Year 2000

The Corporation and the Bank are aware of the significant  impact that Year 2000
("Y2K")  will  have on  financial  services  companies,  as  such,  the Bank has
established a program to address Y2K issues. The Board of Directors monitors the
project  and  its  ongoing   implementation.   The  costs  associated  with  the
implementation  of  changes to deal with Y2K  issues is not  expected  to have a
material  impact on the Bank's  financial  statements,  however  there can be no
assurances that Y2K will not to some degree affect the operations of the Bank.


COMPARISON OF 1996 TO 1995

Financial Condition

The Company had total assets of $179,550,000 on December 31, 1996 as compared to
assets of  $174,277,000  on December  31,  1995.  The most  significant  area of
increase over the past year was in loans, which increased $7,245,000 (6.1%).

Loan growth was funded mainly by an increase of $4,086,000  (2.6%) in the Bank's
deposits.  This increase in loans is primarily  attributable to a combination of
factors.  The Bank  increased its marketing  effort in this area and at the same
time brought on board two loan  originators.  In addition the Bank also expanded
the  adjustable  rate  product line with a new  selection of choices.  These new
product  lines  have  been  well  received,  and as the Bank  generally  retains
adjustable rate loans for its own portfolio, this contributed to the increase in
the mortgage loan area.

The loan portfolio of the Bank includes $104,298,000 of real estate, home equity
and construction mortgages.  This is 82.2% of the Bank's total loan portfolio as
of December 31,  1996.  This is in  comparison  to  $96,137,000  (80.4%) in real
estate  related  loans  outstanding  on  December  31,  1995.  Due to this  high
percentage  of real  estate  loans the  management  of the Bank is  continuously
monitoring real estate values and the general economic  conditions in the Bank's
lending areas so that it may take appropriate action when necessary.

Capital Resources

The  Company had a leverage  ratio of 8.46% on December  31, 1996 as compared to
8.37% on December 31, 1995.  On December 31, 1996 the required  minimum  capital
was 8.0% of total  capital  to risk  weighted  assets and 4.0% Tier 1 capital to
risk  weighted  assets.  The  Company's  ratios on December 31, 1996 were 14.62%
total  capital ratio and 13.43% Tier 1 capital  ratio,  which exceed the minimum
requirements.  These  ratios for  December  31,  1995 were  14.64%  and  13.84%,
respectively. Management does not anticipate any event that

                                                         1997 Annual Report o 13


                                      -56-
<PAGE>


o    management's discussion & analysis of financial condition
     & results of operations (continued)
================================================================================


would cause the Company to fall below the minimum  requirements  at December 31,
1998,  and  anticipates  that the Company  will  continue  to have excess  "risk
-based" capital.

Results of Operations

Net income for 1996 was  $1,820,000  as compared  to  $1,316,000  for 1995.  Net
interest  income for 1996 amounted to  $7,840,000 as compared to $7,694,000  for
1995.  Net interest  income  increased  primarily as a result of the increase in
interest income on loans.

Income Taxes

The  Company's  provision  for income taxes was $471,000 for 1996 as compared to
$984,000 for 1995.  The change in the  Company's  provision for income taxes was
primarily due to the Company  utilizing tax loss carry  forwards  available as a
result of the 1994  acquisition of Liberty National Bank, along with the receipt
of a tax refund settlement from the State of Connecticut.

Assets and Related Income Analysis

Loans  outstanding  on December  31, 1996  totaled  $126,836,000  as compared to
$119,591,000  outstanding  on  December  31,  1995.  The  increase  in the  loan
portfolio  of  $7,245,000  (6.1%)  was for the  most  part  attributable  to the
majority of real estate loans  originated  being variable  rate,  which the Bank
primarily holds for its own portfolio. The majority of loans at the Bank are and
have been real estate related.  Loan income increased  $295,000 from $10,177,000
for 1995 to $10,472,000 for 1996. This increase is due to an increase in average
outstanding loans from $116,921,000 for 1995 to $121,623,000 for 1996, offset by
a decrease in the average rate earned from 8.70% in 1995 to 8.61% in 1996.

Securities,   which  consist  of  securities   held-to-maturity  and  securities
available-for-sale, decreased $1,658,000 (4.8%) from $34,562,000 at December 31,
1995 to  $32,904,000  at December 31,  1996.  Income from  securities  increased
$208,000  (11.6%) from $1,792,000 for the 1995 period to $2,000,000 for the 1996
period.  This increase  resulted  primarily  from an increase in average  dollar
amount  outstanding from $29,196,000 for 1995 to $34,570,000 for 1996, offset by
a decrease in average rate earned from 6.14% for 1995 to 5.79% for 1996. In 1996
there were net  security  losses of $17,000;  there were net  security  gains of
$70,000 in 1995. The Bank has the positive intent and ability to hold securities
designated  as  held-to-maturity  until  maturity and does not engage in trading
activities.  Securities  available-for-sale are used to compensate for liquidity
forecasting deviations.

Federal funds sold decreased  $1,600,000 (19.5%) from $8,200,000 at December 31,
1995 to  $6,600,000 at December 31, 1996.  Federal  funds sold income  decreased
$54,000  (14.6%)  from  $371,000 for 1995 to $317,000  for 1996.  This  decrease
resulted  primarily  from a decrease in the  average  rate earned from 5.86% for
1995 to 5.29%  in  1996,  coupled  with a  decrease  in  average  dollar  amount
outstanding from $6,329,000 in 1995 to $5,994,000 in 1996.

Liability and Related Expense Analysis

Deposits  increased  $4,086,000 (2.6%) from $158,539,000 at December 31, 1995 to
$162,625,000  at December  31,  1996.  Interest on deposits  increased  $307,000
(6.6%)  from  $4,646,000  for 1995 to  $4,953,000  for 1996.  This  increase  is
attributable  to an increase  in the  average  dollar  amount  outstanding  from
$146,480,000  for 1995 to  $156,489,000 in 1996. The average rate paid was 3.17%
for both the 1995 and 1996 period.

Data  processing  services  increased  $63,000  (13.4%) from $470,000 in 1995 to
$533,000 in 1996,  as a result of increased  use of services  offered along with
increased volumes.

Advertising  increased $21,000 (16.8%) from $125,000 in 1995 to $146,000 in 1996
as a result of an increased emphasis in this area.

Other operating  expenses  increased  $218,000  (28.9%) from $754,000 in 1995 to
$972,000 in 1996. This increase was primarily due to a $152,000  increase in the
legal and  professional  expense,  from  $72,000  in 1995 to  $224,000  in 1996,
resulting  from  professional  fees  incurred  in  connection  with a tax refund
settlement  from the State of Connecticut.  In addition,  director and committee
fees increased $53,000, from $106,000 in 1995 to $159,000 in 1996.

Provision for Loan Losses

The provision for loan losses  decreased  $90,000 (42.9%) from $210,000 for 1995
to $120,000  for 1996.  The  economy  and the real  estate  market in the Bank's
market areas are closely  monitored by  management  to maintain an allowance for
loan losses that is considered adequate.  The loan loss allowance was $1,356,000
to support loan  portfolios  of  $126,836,000,  or a loan loss reserve  ratio of
1.07%. This is in comparison to a ratio of 1.10% for 1995.  Management  believes
that the allowance for loan losses is adequate.

Liquidity

Primary liquidity is comprised of cash and due from banks,  interbank  overnight
federal funds sold and securities  maturing in less than one year.  These assets
aggregated  $25,689,000,  or 14.7% of total assets,  as of December 31, 1996, as
compared to $37,745,000 (21.7%) at December 31, 1995.

14 o Village Bancorp


                                      -57-
<PAGE>


0    independent auditors' report
================================================================================

[LOGO] Deloitte & Touche LLP
                              Stamford Harbor Park      Telephone: (203)708-4000
                              333 Ludlow Street         Facsimile: (203)708-4797
                              P.O. Box 10098
                              Stamford, Connecticut 06904

INDEPENDENT AUDITORS' REPORT


To the Stockholders and Board of Directors of
Village Bancorp, Inc.


We have audited the  consolidated  balance sheets of Village  Bancorp,  Inc. and
subsidiary  (the  "Company")  as of December 31, 1997 and 1996,  and the related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 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 Village Bancorp,
Inc. and  subsidiary as of December 31, 1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP


January 23, 1998

------------------
Deloitte & Touche
Tohmatsu
International


                                                         1997 Annual Report o 15


                                      -58-
<PAGE>


1997
annual report

o    consolidated balance sheets
================================================================================

<TABLE>
<CAPTION>
                                                                                   (In thousands)
                                                                                    December 31,
                                                                                 1997           1996
      ==================================================================================================
<S>                                                                          <C>           <C>
      ASSETS
      Cash and due from banks                                                $  11,153     $   8,545
      Federal funds sold                                                            --         6,600
      --------------------------------------------------------------------------------------------------
      Cash and cash equivalents                                                 11,153        15,145
      --------------------------------------------------------------------------------------------------
      Securities:
         Available-for-sale, at fair value                                      19,427        15,706
         Held-to-maturity, at amortized cost (fair value of $34,554
         and $17,135 in 1997 and 1996)                                          34,382        17,198
      Federal Home Loan Bank stock, at cost                                        782           712
      Loans, net of deferred loan fees                                         147,659       126,836
      Allowance for loan losses                                                (1,309)       (1,356)
      --------------------------------------------------------------------------------------------------
        Loans - net                                                            146,350       125,480
      --------------------------------------------------------------------------------------------------
      Loans held for sale                                                        1,686            50
      Bank premises and equipment - net                                          5,256         1,509
      Accrued income and other assets                                            3,513         3,750
      --------------------------------------------------------------------------------------------------
      Total Assets                                                           $ 222,549     $ 179,550
      ==================================================================================================
      LIABILITIES AND STOCKHOLDERS' EQUITY

      LIABILITIES
      Deposits:
        Noninterest bearing                                                  $  20,764     $  15,125
        Interest bearing                                                       183,044       147,500
      --------------------------------------------------------------------------------------------------
          Total deposits                                                       203,808       162,625
      --------------------------------------------------------------------------------------------------
      Income taxes                                                                  26           275
      Other liabilities                                                          2,842         1,353
      --------------------------------------------------------------------------------------------------
          Total liabilities                                                    206,676       164,253
      --------------------------------------------------------------------------------------------------

      Commitments and contingent  liabilities (Note 5, 14)

      STOCKHOLDERS' EQUITY
      Common stock, $3.33 par value; authorized, 10,000,000 shares;
         issued and outstanding, 1,908,634 shares in 1997 and 952,117
         in 1996                                                                 6,356         3,171
      Additional paid-in capital                                                 4,851         7,996
      Retained earnings                                                          4,635         4,143
      Net unrealized gains (losses) on securities available-for-sale,
         net of tax                                                                 31          (13)
      --------------------------------------------------------------------------------------------------
          Total stockholders' equity                                            15,873        15,297
      --------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                             $ 222,549     $ 179,550
      ==================================================================================================
</TABLE>

16 o Village Bancorp


                                      -59-
<PAGE>


       -------------------------------------------------------------------------
            Consolidated Balance Sheets / Consolidated Statements of Income
       -------------------------------------------------------------------------


consolidated statements of income
================================================================================

<TABLE>
<CAPTION>
                                                             (In thousands, except per share data)
                                                                    Year Ended December 31,

                                                             1997            1996            1995
======================================================================================================
<S>                                                        <C>             <C>             <C>
INTEREST INCOME

Loans, including fees                                      $ 11,708        $ 10,472        $ 10,177
Securities:
  Taxable                                                     2,017           1,879           1,680
  Tax-exempt                                                    312             121             112
Federal funds sold                                              417             317             371
Dividends on Federal Home Loan Bank stock                        49               4              --
------------------------------------------------------------------------------------------------------
    Total interest income                                    14,503          12,793          12,340
INTEREST EXPENSE                                              6,137           4,953           4,646
------------------------------------------------------------------------------------------------------
NET INTEREST INCOME                                           8,366           7,840           7,694
PROVISION FOR LOAN LOSSES                                        60             120             210
------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES                                   8,306           7,720           7,484
------------------------------------------------------------------------------------------------------
OTHER INCOME

Service charges                                                 343             332             359
Security gains (losses) - net                                    --            (17)              70
Other operating income                                          225             175             138
------------------------------------------------------------------------------------------------------
    Total other income                                          568             490             567
------------------------------------------------------------------------------------------------------
OTHER EXPENSES

Salaries and employee benefits                                3,599           3,064           2,991
Net occupancy                                                   800             582             547
Other real estate owned                                           4              18              37
Furniture and equipment                                         325             263             290
Data processing services                                        615             533             470
Regulatory assessments                                           20               3             148
Printing, stationery and supplies                               265             176             220
Advertising                                                     240             146             125
Appraisal fees                                                   72              55              51
Postage                                                         122             107             118
Other operating expenses                                      1,049             972             754
------------------------------------------------------------------------------------------------------
    Total other expenses                                      7,111           5,919           5,751
------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES                                    1,763           2,291           2,300
PROVISION FOR INCOME TAXES                                      585             471             984
------------------------------------------------------------------------------------------------------
NET INCOME                                                 $  1,178        $  1,820        $  1,316
======================================================================================================
PER SHARE DATA(1)

Net income - basic earnings                                $    .62        $    .96        $    .70
Net income - diluted earnings                              $    .61             .95             .69
Cash dividends                                             $    .36        $   .335        $    .24
======================================================================================================
</TABLE>

See notes to consolidated financial statements.
(1) 1996 and 1995 data has been adjusted for the 100% stock  dividend  issued in
1997.

                                                         1997 Annual Report o 17


                                      -60-
<PAGE>


1997
annual report

o    Consolidated statements of changes
     in stockholders' equity
================================================================================

<TABLE>
<CAPTION>
                                                                    (In thousands, except share data)
                                                        Common Stock                        Net Unrealized
                                                  ----------------------     Additional     Gains (Losses)
                                                  Number of                   Paid-In       on Securities       Retained
                                                   Shares        Amount       Capital     Available-For-Sale    Earnings
===========================================================================================================================
<S>                                                <C>          <C>           <C>             <C>               <C>
BALANCE AT JANUARY 1, 1995                         946,949      $ 3,153       $ 7,959         $   (157)         $ 2,099
Net income                                                                                                        1,316
Cash dividends declared, $.24* per share                                                                           (455)
Exercise of options                                  3,999           14            21
Retirement of stock                                   (631)          (2)            2
Change in net unrealized gains (losses) on
  securities available-for-sale, net of tax                                                        198
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995                       950,317        3,165         7,982               41            2,960
Net income                                                                                                        1,820
Cash dividends declared, $.335* per share                                                                          (637)
Exercise of options                                  1,800            6            14
Change in net unrealized gains (losses) on
  securities available-for-sale, net of tax                                                        (54)
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996                       952,117        3,171         7,996              (13)           4,143
Net income                                                                                                        1,178
Cash dividends declared, $.36* per share                                                                           (686)
Exercise of options                                  2,200            7            33
100% Stock dividend                                954,317        3,178        (3,178)
Change in net unrealized gains (losses) on
  securities available-for-sale, net of tax                                                         44
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                     1,908,634      $ 6,356       $ 4,851         $     31          $ 4,635
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
* Adjusted for the 100% stock dividend issued in 1997.

18 o Village Bancorp


                                      -61-
<PAGE>


            --------------------------------------------------------------------
                 Consolidated Statements of Changes in Stockholder's Equity
                          / Consolidated Statements of Cash Flows
            --------------------------------------------------------------------


consolidated statements of cash flows
================================================================================

<TABLE>
<CAPTION>
                                                                             (In thousands)
                                                                         Year Ended December 31,
                                                                1997              1996             1995
==============================================================================================================
<S>                                                           <C>               <C>              <C>
OPERATING ACTIVITIES
Net income                                                    $   1,178         $  1,820         $   1,316
Adjustments to reconcile net income to net cash
 provided by
     operating activities:
     Provision for loan losses                                       60              120               210
     Depreciation and amortization                                  339              242               262
     Accretion of security discounts, net                          (251)            (196)             (194)
     Deferred income taxes                                           (4)            (213)               --
     Security losses (gains), net                                    --               17               (70)
Increase (decrease) in deferred loan fees                           (59)              16              (134)
Origination of loans held for sale                              (10,159)          (6,934)           (5,295)
Proceeds from sales of loans                                      8,600            7,513             4,790
Gains on sales of loans                                             (77)             (77)              (47))
Decrease (increase) in accrued income and other assets              206           (1,492)               85
Increase (decrease) in other liabilities                          1,240               38               824
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                         1,073              854             1,747
--------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale                 --            2,307             8,535
Proceeds from maturities of securities held-to-maturity           4,160            6,350            10,598
Proceeds from maturities of securities available-for-sale         9,099           16,719             4,600
Purchases of securities held-to-maturity                        (21,245)          (9,583)           (1,088)
Purchases of securities available-for-sale                      (12,591)         (14,047)          (20,900)
Purchase of Federal Home Loan Bank stock                            (70)            (712)               --
Net increase in loans                                           (20,869)          (7,336)          (13,582)
Purchases of premises and equipment                              (4,086)            (201)             (176)
--------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                           (45,602)          (6,503)          (12,013)
--------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits                                         41,183            4,086            15,118
Cash dividends                                                     (686)            (637)             (455)
Net proceeds from issuance of common stock                           40               20                35
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                        40,537            3,469            14,698
--------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS                                            (3,992)          (2,180)            4,432
CASH AND CASH EQUIVALENTS:
  BEGINNING OF YEAR                                              15,145           17,325            12,893
--------------------------------------------------------------------------------------------------------------
     END OF YEAR                                              $  11,153         $ 15,145         $  17,325
==============================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid on deposits                                     $   5,439         $  5,202         $   3,787
Income tax payments                                                 939              898               896
==============================================================================================================
</TABLE>

See notes to consolidated financial statements.

                                                         1997 Annual Report o 19


                                      -62-
<PAGE>


1997
annual report


o    notes to consolidated
     financial statements
================================================================================


1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations -- Village  Bancorp,  Inc. and its subsidiary,  The Village
Bank & Trust Company (the "Bank"),  collectively  the "Company",  are engaged in
the business of commercial  banking.  Headquartered  in Ridgefield,  the Company
operates six branch offices in Fairfield and Litchfield counties in Connecticut.
The Company  principally is engaged in lending and deposit gathering  activities
within these counties.  The Company's future prospects are largely  dependent on
its  ability  to compete  with  entities  having  greater  resources  and on the
performance of the local economy.  A wide range of loan and deposit products and
trust services are offered to the customer.  Customer convenience and responsive
service  are  emphasized.  Over 80% of loans are  collateralized  by real estate
located  in  Fairfield,  Litchfield  and  adjacent  counties.  Within  this area
employment  levels and related  economic  activity  generally are not materially
dependent on any one employer.

Organization -- In November of 1994,  Village  Bancorp,  Inc.  acquired  Liberty
National Bank ("Liberty").  Each share of Liberty stock was converted into .2298
shares of Village Bancorp, Inc. common stock. This transaction was accounted for
using the pooling-of-interests method and, accordingly, all historical financial
data has been  restated to include both entities for all periods  presented.  On
June 20,  1995,  the  Company  merged  Liberty  into  the Bank and now  operates
Liberty's  former office as a branch office.  In this  transaction,  Liberty was
combined with the Bank as a combination  of entities  under common  control and,
accordingly, was accounted for in a manner similiar to a pooling of interests.

Basis  of  Financial  Statement   Presentation  --  The  Company's  consolidated
financial  statements include the Bank and have been prepared in accordance with
generally accepted accounting  principles and conform with predominant practices
used within the banking  industry.  All  significant  intercompany  accounts and
transactions  are  eliminated  in  consolidation.  In preparing  such  financial
statements, management is required to make estimates and assumptions that affect
the  reported  amounts  of  assets  and  liabilities  as  of  the  date  of  the
consolidated balance sheet and the revenues and expenses for the period.  Actual
results could differ significantly from those estimates.

Estimates that are particularly  susceptible to significant change relate to the
determination  of the  allowance  for loan losses,  the valuation of real estate
acquired in connection  with  foreclosures  or in  satisfaction of loans and the
valuation   allowance  for  deferred  tax  assets.   In   connection   with  the
determination of the allowance for loan losses and real estate owned, management
obtains independent appraisals for significant properties.

Management  believes  that the  allowance  for loan  losses is  adequate.  While
management uses available  information to recognize possible loan losses, future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions,  particularly  in the Bank's service area,  Fairfield and Litchfield
Counties,  Connecticut. In addition, regulatory agencies, as an integral part of
their  examination  process,  periodically  review the Bank's allowance for loan
losses.  Such agencies may recommend to the Bank that it recognize  additions to
the allowance based on their judgements of information  available to them at the
time of their examination.

Allowance  for Loan  Losses -- The  allowance  for loan losses is  sustained  by
charges to operating  expense.  Loans are charged against the allowance for loan
losses when  management  believes  that the  collectibility  of the principal is
unlikely;  recoveries  of  previously  charged  off  loans are  restored  to the
allowance.  The  allowance  for loan losses is  maintained  at a level  believed
adequate  by  management  to  absorb  potential  losses  inherent  in  the  loan
portfolio.  Management's determination of the adequacy of the allowance is based
on an evaluation of the loan portfolio and other pertinent  factors,  including,
but not limited to, past loan loss experience, composition of the loan portfolio
and current economic factors.

Consolidated  Statements  of  Cash  Flows  -- For  purposes  of  presenting  the
consolidated statements of cash flows, cash equivalents include amounts due from
banks  and  federal  funds  sold.  Generally,  federal  funds  sold have one day
availability.

Securities  --  Securities  held-to-maturity  are stated at cost,  adjusted  for
accumulated  amortization  of premiums  and  accretion  of  discounts,  which is
calculated  on a  method  that  approximates  the  interest  method.  Securities
available-for-sale  are stated at estimated  fair value.  The  determination  to
include  debt   securities   as   securities   held-to-maturity   or  securities
available-for-sale  is made at the time of purchase and is based on such factors
as the overall  interest rate  sensitivity of the Company,  projected  liquidity
needs,  and the Company's  long-term  investment  strategies.  The Bank does not
acquire securities for the purpose of engaging in trading activities. When sales
occur,  gains or  losses  on the sale of  securities  are  recognized  using the
specific  identification method. The Bank has the positive intent and ability to
hold its securities classified as held-to-maturity for their economic life.

20 o Village Bancorp


                                      -63-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


Loans --  Interest  income  on loans is  recognized  based on rates  applied  to
principal  amounts  outstanding.  Loans are  placed on  nonaccrual  status  when
management  believes  that  interest  or  principal  on  such  loans  may not be
collected in the normal course of business.  Interest payments received on loans
in  nonaccrual  status are applied,  based on  management's  judgement as to the
collectibility  of loan  principal,  either as a reduction  of  principal  or as
interest  income.  Such loans are  restored  to accrual  status when there is no
longer  doubt  concerning  collectibility  and the  borrower  has  performed  in
accordance  with the terms of the loan.  Loans  held for sale are  stated at the
lower of cost or estimated fair value.

Loan origination and commitment fees, net of certain loan origination costs, are
deferred and the net amount  amortized as an  adjustment  of the related  loan's
yield.  Loan fees  deferred in 1997 and 1996  aggregated  $203,000 and $274,000,
respectively.  Loan  costs  deferred  in 1997 and 1996  aggregated  $18,000  and
$18,000,  respectively.  Net amounts  amortized to income  aggregated  $260,000,
$213,000 and $433,000 in 1997, 1996 and 1995, respectively.

Impaired  Loans  --  The  Company  adopted  Statement  of  Financial  Accounting
Standards ("SFAS") No. 114,  "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118,  "Accounting  by Creditors for  Impairment of a Loan
Income  Recognition and Disclosures",  as of January 1, 1995.  Adoption of these
statements  did not result in any adjustment to the allowance for loan losses as
of January 1, 1995.

A loan is  recognized  as impaired  when it is probable  that  principal  and/or
interest are not  collectible in accordance  with the  contractual  terms of the
loan.  When a loan is considered  impaired,  it is placed on nonaccrual  status.
Income is  recorded  using the income  recognition  principles  outlined  above.
Measurement of impairment is based on the present value of expected  future cash
flows  discounted  at the  loan's  effective  interest  rate,  or, at the loan's
observable  market  price or the fair  value of the  collateral,  if the loan is
collateral  dependent.  Small homogeneous  loans such as residential  mortgages,
home equity  loans,  installment  loans and consumer  credit are not  separately
reviewed for impaired status. These loans typically are for maturities less than
five years and require monthly payments.  Separate  allocations of the allowance
for loan  losses  are made  based upon  trends  and prior  loss  experience  and
composition  of  credit  risk in  these  types  of  loans.  This  evaluation  is
inherently  subjective as it requires material estimates that may be susceptible
to significant change.

If the fair value of an impaired loan is less than the related  recorded amount,
a  specific  valuation  allowance  is  established  or the write down is charged
against the  allowance  for loan losses if the  impairment  is  considered to be
permanent.

Bank  Premises and  Equipment -- Bank premises and equipment are stated at cost,
less accumulated  depreciation and  amortization.  Depreciation and amortization
are computed using the straight-line method based upon estimated useful lives or
the  lease  term,  if  shorter,  up to 39 years  for  premises  and 15 years for
equipment.

Income Taxes -- An asset and liability approach is used for financial accounting
and  reporting  for  income  taxes.  Deferred  tax assets  and  liabilities  are
recognized for the future tax consequences  attributable to differences  between
the financial  statement  carrying  amounts of assets and  liabilities and their
respective  tax bases.  Deferred tax assets and  liabilities  are measured using
enacted  tax rates  expected  to apply to  taxable  income in the years in which
those temporary  differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period the change is enacted.

Other Real Estate -- Other real estate includes  properties which are foreclosed
or received in  settlement  of a loan,  and real  property  not used in trade or
business. The properties are recorded at the lower of cost or fair value (net of
estimated costs of disposition) at the date  transferred.  Losses arising at the
time of  acquisition of such  properties  are charged  against the allowance for
loan losses.  Subsequent  write-downs of the carrying value of these  properties
may be required and would be charged to operations.  At December 31, 1997, other
real estate was $154,000. There was no other real estate at December 31, 1996.

Earnings Per Share -- SFAS No. 128,  "Earnings Per Share",  became effective for
the  Company in the fourth  quarter of 1997,  and  requires  restatement  of all
prior-period  earnings per share  ("EPS").  SFAS 128  requires  that "Basic EPS"
exclude  dilution  and be  computed  by  dividing  income  available  to  common
stockholders by the weighted-average number of common shares outstanding for the
period;  "Diluted  EPS"  reflects  the  potential  dilution  that could occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common  stock that would then
share in the  earnings  of the entity.  Adoption of SFAS 128 had no  significant
effect on the Company's previously reported EPS.

Stock-Based   Compensation   --  SFAS  No.  123,   "Accounting  for  Stock-Based
Compensation",   establishes  a  fair  value  based  method  of  accounting  for
stock-based compensation plans and encourages, but does not require, entities to
adopt that method of accounting for all employee stock compensation  plans. SFAS
No. 123 also establishes fair value as the measurement basis for transactions in
which an entity  acquires goods or services from  non-employees  in exchange for
equity  instruments.  However,  SFAS No. 123  permits  entities  to  continue to
measure compensation costs for stock-based compensation plans using the

                                                         1997 Annual Report o 21


                                      -64-
<PAGE>


o    notes to consolidated
     financial statements (continued)
================================================================================


instrinsic value based method of accounting  prescribed by Accounting Principles
Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
present proforma disclosure of net income and earnings per share, as if the fair
value based method of  accounting  prescribed  by SFAS No. 123 had been applied.
Effective  January 1, 1996, the Company  adopted SFAS No. 123 and has elected to
continue to measure  compensation  cost for  stock-based  compensation  plans in
accordance with the provisions of APB Opinion No. 25.

Transfers and  Servicing of Financial  Assets -- SFAS No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
specifies  accounting  and  reporting  standards  for transfers and servicing of
financial  assets and  extinguishments  of  liabilities  and for  distinguishing
whether  a  transfer  of  financial   assets  in  exchange  for  cash  or  other
consideration  should be accounted for as a sale or as a pledge of collateral in
a secured  borrowing.  SFAS No. 125 is effective  for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996,  except for certain  provisions  (relating to the  accounting  for secured
borrowings  and  collateral  and the  accounting  for transfers and servicing or
repurchase   agreements,   dollar   rolls,   securities   lending  and  similiar
transactions)  which have been deferred until January 1, 1998 in accordance with
SFAS No. 127,  "Deferral of the  Effective  Date of Certain  Provisions  of FASB
Statement No. 125."  Adoption of the effective  provisions of SFAS No. 125 as of
January 1, 1997 has not had, and the adoption of the remaining provisions is not
expected to have, any material  effect on the Company's  consolidated  financial
statements.

Pending  Accounting  Pronouncemnts.  -- SFAS No.  130  "Reporting  Comprehensive
Income," requires that all items that are components of  "comprehensive  income"
be reported in a financial  statement that is displayed with the same prominence
as other financial statements. Comprehensive income is defined as the "change in
equity (net assets) of a business  enterprise  during a period from transactions
and other  events and  circumstances  from  nonowner  sources.  It includes  all
changes in equity during a period except those  resulting  from  investments  by
owners and  distributions  to owners."  SFAS No. 130  requires  companies to (a)
classify  items of other  comprehensive  income by their  nature in a  financial
statement and (b) display the accumulated balance of other comprehensive  income
separately from retained  earnings and additional  paid-in capital in the equity
section of a statement of financial  position.  SFAS No. 131,  "Disclosure About
Segments of an Enterprise and Related  Information,"  requires that  enterprises
report certain financial and descriptive information about operating segments in
complete sets of financial  statements and in condensed financial  statements of
interim  periods issued to  stockholders.  It will require the Company to report
certain  information about its products and services,  geographic areas in which
it operates and its major customers. SFAS Nos. 130 and 131 are effective for the
Company in 1998. As the requirements of these standards are  disclosure-related,
their implementation will have no impact on the Company's financial condition or
results of operations.

Reclassifications  -- Certain prior year amounts in the  consolidated  financial
statements have been reclassified to conform with the current presentation.

2. Earnings Per Share

The only dilutive  potential  common shares were  attributable  to stock options
outstanding  (See Note 9). A summary of the basic and diluted earnings per share
calculations for 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>

                                     Income           Shares      Per-Share
================================================================================
1997
<S>                                <C>              <C>              <C>
Basic EPS                          $1,178,000       1,905,441        $.62
Effect of
Dilutive Securities -
Stock Options                              --          36,389          --
Diluted EPS                        $1,178,000       1,941,830        $.61

1996
Basic EPS                          $1,820,000       1,902,375        $.96
Effect of
Dilutive Securities -
Stock Options                              --          16,127          --
Diluted EPS                        $1,820,000       1,918,502        $.95

1995
Basic EPS                          $1,316,000       1,893,159        $.70
Effect of
Dilutive Securities -
Stock Options                              --           7,493          --
Diluted EPS                        $1,316,000       1,900,652        $.69
</TABLE>

3. Cash and Due from Banks

The Bank is required by Federal  regulation  to maintain  average  cash  reserve
balances.  Throughout 1997, daily cash reserves and compensating balances served
to satisfy this requirement and averaged approximately $3,237,000.

22 o Village Bancorp


                                      -65-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


4. Securities

The  aggregate   amortized   cost  and  estimated   fair  values  of  securities
held-to-maturity   and  securities   available-for-sale   at  December  31,  are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        1997
                                                                  Gross        Gross      Estimated
                                                    Amortized   Unrealized   Unrealized     Fair
                                                      Cost         Gains      (Losses)      Value
=======================================================================================================
<S>                                                 <C>          <C>          <C>          <C>
SECURITIES HELD-TO-MATURITY

U.S. Treasury securities                            $ 16,792     $     23     $     (4)    $ 16,811
Mortgage-backed securities of
  U.S. Government agencies                             6,704           24           (2)       6,726
Obligations of states and political subdivisions      10,886          147          (16)      11,017
-------------------------------------------------------------------------------------------------------
Total                                               $ 34,382     $    194     $    (22)    $ 34,554
=======================================================================================================
SECURITIES AVAILABLE-FOR-SALE

U.S. Treasury securities                            $ 18,993     $     54     $     (2)    $ 19,045
Mortgage-backed securities of
  U.S. Government agencies                               346            3           --          349
Other                                                     33           --           --           33
-------------------------------------------------------------------------------------------------------
Total                                               $ 19,372     $     57     $     (2)    $ 19,427
=======================================================================================================


<CAPTION>
                                                                        1996
                                                                   Gross       Gross      Estimated
                                                   Amortized     Unrealized  Unrealized     Fair
                                                      Cost         Gains      (Losses)      Value
=======================================================================================================
<S>                                                 <C>          <C>          <C>          <C>
SECURITIES HELD-TO-MATURITY

U.S. Treasury securities                            $  9,824     $     31     $    (96)    $  9,759
Mortgage-backed securities of
  U.S. Government agencies                             4,735           15          (34)       4,716
Obligations of states and political subdivisions       2,639           37          (16)       2,660
-------------------------------------------------------------------------------------------------------
Total                                               $ 17,198     $     83     $   (146)    $ 17,135
=======================================================================================================
SECURITIES AVAILABLE-FOR-SALE

U.S. Treasury securities                            $ 15,250     $      6     $    (27)    $ 15,229
Mortgage-backed securities of
   U.S. Government agencies                              430           --           --          430
Other                                                     48           --           (1)          47
-------------------------------------------------------------------------------------------------------
Total                                               $ 15,728     $      6     $    (28)    $ 15,706
=======================================================================================================
</TABLE>

At December 31, 1997, securities with an amortized cost of $1,134,000 and a fair
value of $1,142,000  were pledged to secure public funds and for other  purposes
as  required  by law and  banking  regulation.  There were no gains or losses on
securities  transactions in 1997. Gross gains on sales of securities in 1996 and
1995 were $5,000 and  $77,000,  respectively,  and gross losses were $22,000 and
$7,000, respectively.

The  amortized  cost and fair value of  securities  at  December  31,  1997,  by
contractual  maturity,  are shown below.  Expected  maturities  will differ from
contractual  maturities  because  issuers  may have the  right to call or prepay
obligations with or without call or prepayment penalties.

                                                         1997 Annual Report o 23


                                      -66-
<PAGE>


o    notes to consolidated
     financial statements (continued)
================================================================================

<TABLE>
<CAPTION>
                                                        (In thousands)
                                                       December 31, 1997
     =========================================================================================
                                        Available-for-sale            Held-to-maturity
                                                     Estimated                     Estimated
                                      Amortized        Fair         Amortized        Fair
                                        Cost           Value          Cost           Value
     =========================================================================================
     <S>                             <C>            <C>             <C>            <C>
     Within 1 year                   $ 12,725       $ 12,725        $ 12,884       $ 12,899
     After 1 but within 5 years         5,086          5,115          14,517         14,553
     After 5 but within 10 years        1,561          1,587           3,820          3,862
     After 10 years                        --             --           3,161          3,240
     -----------------------------------------------------------------------------------------
     Totals                          $ 19,372       $ 19,427        $ 34,382       $ 34,554
     =========================================================================================
</TABLE>

In December  1995,  the Company  transferred  a security  having a fair value of
$353,000   (carrying   value  of  $336,000)  from  its   "held-to-maturity"   to
"available-for-sale"  securities.  This was done to  respond  to  changes in the
interest rate environment and to align the Company's interest rate gap position.
This transfer was made in accordance with FASB's "A Guide to  Implementation  of
Statement  115  on  Accounting  for  Certain  Investments  in  Debt  and  Equity
Securities"  issued in  November  1995.  Concurrent  with the  adoption  of this
guidance,  corporations  were permitted through December 31, 1995, to reclassify
their  "available-for-sale"  and  "held-to-maturity"  securities without calling
into question the past intent of an entity to hold  securities  to maturity.  As
this security was sold before  year-end 1995, the gain on the sale was reflected
in the Company's results of operations in that year.

5. Loans

The composition of the loan portfolio is summarized as follows:

<TABLE>
<CAPTION>
                                                                         (In thousands)
                                                                          December 31,
                                                                      1997           1996
     ===========================================================================================
<S>                                                                <C>             <C>
     Real estate - mortgage and home equity                        $ 108,825       $  96,608
     Real estate - construction and land development                  14,012           7,953
     Installment and consumer credit                                   7,888           9,917
     Commercial and financial                                         17,138          12,621
     -------------------------------------------------------------------------------------------
     Total loans                                                     147,863         127,099

     Deferred loan fees, net                                            (204)           (263)
     Allowance for loan losses                                        (1,309)         (1,356)
     -------------------------------------------------------------------------------------------
     Loans - net                                                   $ 146,350       $ 125,480
     ===========================================================================================
</TABLE>

In the normal course of business there are outstanding  various  commitments and
contingent  liabilities,  such as guarantees  and  commitments to extend credit,
which are not reflected in the financial  statements.  Such commitments  involve
elements of credit and interest rate risk in excess of the amount  recognized in
the  consolidated  balance  sheet.  The Bank controls these risks through credit
approvals,  limits and monitoring  procedures.  Commitments generally have fixed
expiration dates or other termination  clauses and may require payment of a fee.
Since a portion of these  commitments are expected to expire without being drawn
upon, the total  commitment  amounts do not  necessarily  represent  future cash
requirements.  At  December  31,  1997,  existing  commitments  were as follows:
commitments to originate loans - $13,459,000,  unused  revolving lines of credit
on residential properties,  including home equity - $8,775,000, unused revolving
lines of credit on commercial real estate and  construction - $6,106,000,  stand
by  letters  of  credit -  $1,939,000  and  unused  consumer  lines of  credit -
$2,417,000. At December 31, 1996, these commitments were as follows: commitments
to  originate  loans  -  $13,740,000,   unused  revolving  lines  of  credit  on
residential  properties,  including home equity - $10,455,000,  unused revolving
lines of credit on commercial real estate and  construction - $5,373,000,  stand
by  letters  of  credit  -  $1,843,000  and  unused  consumer  lines  of  credit
$2,241,000.

24 o Village Bancorp


                                      -67-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


Substantially all of the Bank commercial and residential  lending activities are
with  customers  located in  Fairfield  and  Litchfield  counties,  Connecticut.
Although lending activities are diversified,  a substantial portion of many Bank
customers' net worth is dependent on local real estate values.

The Bank has  established  credit  policies  applicable  to each type of lending
activity in which it engages,  evaluates the  credit-worthiness of each customer
and,  in most  cases,  lends  up to 80% of the  fair  value  of the  collateral,
depending on the Bank's evaluation of the borrowers' creditworthiness.  The fair
value of collateral is monitored on an ongoing basis and  additional  collateral
is obtained when warranted. Real estate is the primary form of collateral. While
collateral  provides  assurance  as a secondary  source of  repayment,  the Bank
ordinarily  requires  the  primary  source  of  repayment  to be  based  on  the
borrower's ability to generate continuing cash flows.

Changes in the allowance for loan losses are summarized as follow:
<TABLE>
<CAPTION>

                                                        (In thousands)
                                                   Year Ended December 31,
                                              1997          1996          1995
================================================================================
<S>                                        <C>           <C>           <C>
Balance, beginning of year                 $ 1,356       $ 1,311       $ 1,551
Provision for loan losses
  charged to operating expense                  60           120           210
Loans charged off                             (119)         (173)         (464)
Recoveries on loans
  previously charged off                        12            98            14
--------------------------------------------------------------------------------
Balance, end of year                       $ 1,309       $ 1,356       $ 1,311
================================================================================
</TABLE>

For management purposes, portions of this allowance are allocated to segments of
the loan  portfolio  based on  perceived  credit  risks.  At December  31, 1997,
management allocated $275,000 of the balance in the allowance for loan losses to
specific credit risks,  which includes $174,000 of reserves that relate to loans
that are considered impaired,  and $1,034,000 is considered to be an unallocated
or general allowance.  Based on regulatory  constraints all or a portion of this
allowance is  considered  to be capital for purposes of  determining  compliance
with certain regulatory capital standards (see Note 8).

The principal portion of loans delinquent as to principal or interest for ninety
days or more, including nonaccrual loans, is as follows:

                                                           (In thousands)
                                                            December 31,
                                                       1997              1996
================================================================================
Loans 90 days or more past due:
Real estate-mortgage and home equity                 $  1,557         $  1,629
Installment and consumer credit                            65              124
--------------------------------------------------------------------------------
Total                                                $  1,622         $  1,753
================================================================================

                                                         1997 Annual Report o 25


                                      -68-
<PAGE>


o    notes to consolidated
     financial statements (continued)
================================================================================


At December 31, 1997 and 1996 there were restructured  loans of $831,000 and $0,
respectively.   Loans  on  which  interest  is  not  being  accrued   aggregated
approximately   $1,299,000  and  $1,596,000  at  December  31,  1997  and  1996,
respectively.  The Bank would have recorded an additional  $74,000,  $59,000 and
$51,000  of gross  interest  income  in 1997,  1996 and 1995,  respectively,  if
nonaccrual  loans  had  been  current.  At  December  31,  1997,  there  were no
commitments to lend additional  funds to borrowers whose loans are classified as
nonaccrual or were restructured.

The recorded  investment in loans that are considered to be impaired at December
31,  1997  and  1996  was  $1,427,000  and  $1,576,000,  respectively.  Specific
valuation  allowances of $174,000 and $215,000 for 1997 and 1996,  respectively,
have been established.  During 1997 and 1996 the average recorded  investment in
impaired  loans was  approximately  $1,418,000  and $791,000,  respectively.  No
interest  income was recognized on impaired or nonaccrual  loans,  either on the
accrual or on the cash basis method of interest recognition. Generally, the fair
value of the above loans was  determined  using the fair value of the underlying
collateral.

6. Bank Premises and Equipment

Bank  premises  and  equipment,  at  cost,  and  accumulated   depreciation  and
amortization are summarized as follows:

                                                             (In thousands)
                                                              December 31,
                                                           1997         1996
     ===========================================================================
     Land                                                $   175       $   175
     Premises                                              4,673         1,646
     Equipment                                             2,606         1,628
     Leasehold improvements                                  387           441
     ---------------------------------------------------------------------------
     Total                                                 7,841         3,890
     Accumulated depreciation and amortization            (2,585)       (2,381)
     ---------------------------------------------------------------------------
     Bank premises and equipment - net                   $ 5,256       $ 1,509
     ===========================================================================

The Bank  completed the  construction  of a new three story building in Danbury,
Connecticut,  in July of 1997.  The first floor of this new building  contains a
full-service  branch office.  The second and third floors are being utilized for
the deposit and loan back-office operations of the bank.

7. Deposits

Included  in  interest   bearing   deposits  are   certificates  of  deposit  in
denominations  of  $100,000  or more.  These  certificates  and their  remaining
maturities are as follows:.

                                                             (In thousands)
                                                              December 31,
                                                           1997         1996
     ===========================================================================
     Three months or less                                $ 5,498       $ 1,932
     Over three through six months                         2,487         2,763
     Over six through twelve months                        4,384         2,558
     Over twelve months                                    2,278           887
     ---------------------------------------------------------------------------
     Total                                               $14,647       $ 8,140
     ===========================================================================

26 o Village Bancorp


                                      -69-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


NOW accounts, included in interest bearing deposit liabilities, were $49,107,000
and $43,321,000 at December 31, 1997 and 1996, respectively.

8. Stockholders' Equity

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

Capital adequacy  regulations require the Company and Bank to maintain or exceed
minimum  amounts and ratios (set forth in the tables  below) of Total and Tier 1
Capital (as defined in the  regulations)  to risk weighted  assets (as defined),
and Tier 1 capital  (as  defined)  to average  assets (as  defined).  Management
believes  that the Company and Bank meet all capital  adequacy  requirements  to
which  it is  subject,  and is  considered  well  capitalized  under  regulatory
guidelines, as of December 31, 1997.

As of December 31, 1997, the most recent  notification  from the Federal Deposit
Insurance  Corporation  categorized  the  Bank as  well  capitalized  under  the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized  the Bank must maintain or exceed minimum total  risk-based,  Tier 1
risk-based  and Tier 1 leverage  ratios as set forth in the table.  There are no
conditions  or events since that  notification  that  management  believes  have
changed the Bank's category.

The Company's and Bank's  capital  amounts and ratios are presented in the table
that follows:

<TABLE>
<CAPTION>
                                                  (Dollar amounts in thousands)
                                                                                           Minimum
                                                                     Minimum         To Be Well Capitalized
                                                                   For Capital       Under Prompt Corrective
                                                  Actual        Adequacy Purposes      Action Provisions
Company                                      Amount    Ratio     Amount     Ratio       Amount     Ratio
------------------------------------------------------------------------------------------------------------
At December 31, 1997
<S>                                        <C>         <C>      <C>          <C>       <C>          <C>
Total Capital (to Risk Weighted Assets)    $  17,151   13.06%   $ 10,505     8.0%         N/A       N/A
Tier 1 Capital (to Risk Weighted Assets)      15,842   12.06       5,253     4.0          N/A       N/A
Tier 1 Capital (to Average Assets)            15,842    7.17       8,842     4.0          N/A       N/A

At December 31, 1996
Total Capital (to Risk Weighted Assets)    $  16,666   14.62%   $  9,120     8.0%         N/A       N/A
Tier 1 Capital (to Risk Weighted Assets)      15,310   13.43       4,560     4.0          N/A       N/A
Tier 1 Capital (to Average Assets)            15,310    8.80       6,960     4.0          N/A       N/A

Bank
------------------------------------------------------------------------------------------------------------
At December 31, 1997
Total Capital (to Risk Weighted Assets)    $  17,076   13.01%   $ 10,499     8.0%      $ 13,124     10.0%
Tier 1 Capital (to Risk Weighted Assets)      15,767   12.01       5,250     4.0          7,874      6.0
Tier 1 Capital (to Average Assets)            15,767    7.14       8,839     4.0         11,049      5.0

At December 31, 1996
Total Capital (to Risk Weighted Assets)    $  16,585   14.56%   $  9,114     8.0%      $ 11,393     10.0%
Tier 1 Capital (to Risk Weighted Assets)      15,229   13.37       4,557     4.0          6,836      6.0
Tier 1 Capital (to Average Assets)            15,229    8.76       6,657     4.0          8,696      5.0
</TABLE>

                                                         1997 Annual Report o 27


                                      -70-
<PAGE>


o    notes to consolidated
     financial statements (continued)
================================================================================


Capital   ratios  are  computed   excluding   unrealized   gains  or  losses  on
available-for-sale  securities,  net of  tax  effect,  which  is  included  as a
component of stockholders' equity for financial reporting purposes.

9. Stock Option Plans

The  Company  and Bank  have two stock  option  plans  for  their  officers  and
employees to be granted and issued by the Board of Directors  from time to time.
The first plan,  adopted in 1988,  provides for 43,292 shares to be reserved for
issuance.  The second plan,  adopted in 1996,  provides for 150,000 shares to be
reserved for issuance.  There are currently 12,092 shares available for issuance
under this 1988 plan. In 1997 and 1996, 23,800 and 78,400 shares,  respectively,
were granted  under the 1996 plan to the Bank's  officers.  There are  currently
49,800 shares  available for issuance under the 1996 plan.  Options issued under
the plans must be granted at the fair value of the Company's common stock on the
date of grant and expire five years from the grant date. In addition, all grants
vest immediately  upon issuance.  1996 and 1995 share amounts have been adjusted
for the 100% stock dividend issued in 1997.

Stock option transactions under the Plans were as follows:

<TABLE>
<CAPTION>
                                                                      Shares Underlying      Weighted Average
                                                                           Options            Exercise Price
     ---------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>
     Outstanding and exercisable Options as of January 1, 1995:             43,326               $  5.53
     Options exercised                                                       7,998                  4.34
     Options expired                                                         6,128                  7.11
     ---------------------------------------------------------------------------------------------------------
     Outstanding and exercisable Options as of December 31, 1995:           29,200               $  5.50
     Options granted                                                        78,400                  9.50
     Options exercised                                                       3,600                  5.50
     ---------------------------------------------------------------------------------------------------------
     Outstanding and exercisable Options as of December 31, 1996:          104,000                  8.52
     Options granted                                                        23,800                 13.19
     Options exercised                                                       4,400                  9.14
     Options expired                                                         2,000                  9.50
     ---------------------------------------------------------------------------------------------------------
     Outstanding and exercisable Options as of December 31, 1997:          121,400               $  9.39
     ---------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes  information  regarding  options  outstanding and
exercisable as of December 31, 1997:

            Range of                       Weighted Average     Weighted Average
        Exercise Prices       Number        Remaining Life       Exercise Price
     ---------------------------------------------------------------------------
       $ 5.50 - $ 15.63       121,400        3.03 years             $ 9.39

28 o Village Bancorp


                                      -71-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


As  described  in Note 1, the Bank  continues  to apply APB  Opinion  No. 25 and
related  interpretations  in  accounting  for the  Plans,  and  accordingly,  no
compensation  cost has been recognized in 1997 or 1996. If compensation cost for
the Plans had been  determined  consistent  with the method of SFAS No. 123, the
Bank's net income and  earnings  per share for the year ended  December 31, 1997
would have been reduced to the pro forma amounts indicated as follows:

                                                1997                     1996
--------------------------------------------------------------------------------
                                              (In thousands, except share data)
Net income          As reported               $ 1,178                   $ 1,820
                    Pro forma                     989                     1,696
Basic EPS           As reported                   .62                       .96
                    Pro forma                     .52                       .89
Diluted EPS         As reported                   .61                       .95
                    Pro forma                     .51                       .88

The weighted average fair value of options granted under the Plans was $7.95 for
1997 and $3.16 for 1996 and were  estimated  on the date of the grants using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used: dividend yield- 1997--3.12%, 1996--3.46%, expected volatility-
1997--24.66%,   1996--22.26%,   risk  free  interest   rate-   1997--5.39-5.40%,
1996--5.95%,  expected  lives of 3 years for both 1997 and 1996. No options were
granted in 1995.

10. Income Taxes

A  reconciliation  of the income tax provision to the amount  computed using the
statutory federal tax rate is as follows

<TABLE>
<CAPTION>
                                                                     (Dollar amounts in thousands)
                                                                        Year Ended December 31,
                                                           1997             1996             1995
====================================================================================================
<S>           <C>                                         <C>              <C>              <C>
Income tax at 34% of pre-tax income                       $  599           $  778           $  782
Connecticut corporation tax, net of federal tax benefit       57              (14)             171
Effect of tax-exempt income                                  (91)             (36)             (38)
Merger expenses                                               --               --                5
Change in valuation allowance                                (25)            (214)              --
Other items, net                                              45              (43)              64
----------------------------------------------------------------------------------------------------
Provision for income taxes                                $  585           $  471           $  984
====================================================================================================
Effective rate                                              33.2%           20.6%             42.7%
====================================================================================================
</TABLE>

The components of the provision for income taxes are as follows:

                                                         (In thousands)
                                                     Year Ended December 31,
                                                  1997        1996        1995
================================================================================
Current income taxes:
   Federal                                       $  454      $  762      $  725
   State                                            160         136         259
--------------------------------------------------------------------------------
Total                                               614          898        984

Deferred income tax (benefit) expense
   Federal                                           69         (56)         --
   State                                            (73)       (157)         --
--------------------------------------------------------------------------------
Total                                                (4)       (213)         --

Change in valuation allowance                       (25)       (214)         --
--------------------------------------------------------------------------------
Total provision for income taxes                 $  585      $  471      $  984
================================================================================

                                                         1997 Annual Report o 29


                                      -72-
<PAGE>


o    notes to consolidated
     financial statements (continued)
================================================================================


Deferred income tax assets and liabilities at December 31, 1997 and 1996 reflect
the  impact of  temporary  differences  between  values  recorded  as assets and
liabilities   for  financial   reporting   purposes  and  values   utilized  for
remeasurement  in  accordance  with the tax laws.  The tax effects of  temporary
differences giving rise to the Company's deferred tax assets and liabilities are
as follows:

                                                        (In thousands)
                                                          December 31,
                                                     1997              1996
     ===========================================================================
     Deferred tax assets:
          Allowance for loan losses                $   341           $   360
          Deferred loan fees                            66               103
          Deferred compensation                         80                72
          Net operating loss                           718               647
          Available for sale securities                  -                 9
          State tax credit                             103               148
          Other                                         11                 0
     ---------------------------------------------------------------------------
          Total                                      1,319             1,339
     ---------------------------------------------------------------------------
     Deferred tax liabilities:
          Available for sale securities                 24                --
          Treasury securities                           35                76
          Depreciation                                  39                70
          Other                                         61                37
     ---------------------------------------------------------------------------
          Total                                        159               183
     ---------------------------------------------------------------------------
     Valuation allowance                              (396)             (421)
     ---------------------------------------------------------------------------
     Net deferred tax assets                       $   764           $   735
     ===========================================================================

The Company has net operating  loss  carryforwards  ("NOL's") for federal income
tax purposes at December 31, 1997 of approximately  $1,828,000 expiring in years
2003 through 2008.  The NOL's relate to the  acquisition of Liberty in 1994. Due
to  limitations  on their use, a valuation  allowance  has been  established  to
reduce the NOL's to the amount that, more likely than not, will be realized.

11. Employee Benefit Plan

The Bank has an  incentive  savings  plan under  Section  401(k) of the Internal
Revenue Code. Employees are eligible to participate after one year of continuous
service.  The plan allows  participating  employees  to defer up to 15% of their
compensation on a pre-tax basis, within code limitations,  through contributions
to the plan. In accordance  with the provisions of the plan, the Bank matches up
to 6% of the employee contributions with a percentage determined by the Board of
Directors.  Matching contributions of $48,000,  $43,000 and $38,600 were charged
to operating expenses in 1997, 1996 and 1995, respectively.

30 o Village Bancorp


                                      -73-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


12. Village Bancorp, Inc. (Parent Company Only)
Condensed Financial Statements

Condensed balance sheets are as follows:

                                                            (In thousands)
                                                             December 31,
                                                        1997             1996
================================================================================
ASSETS
--------------------------------------------------------------------------------
Investment in subsidiary                              $ 15,798         $ 15,222
Other assets                                                75               75
--------------------------------------------------------------------------------
TOTAL ASSETS                                          $ 15,873         $ 15,297
================================================================================
STOCKHOLDERS' EQUITY                                  $ 15,873         $ 15,297
================================================================================

Condensed operating results are as follows:
<TABLE>
<CAPTION>
                                                                         (In thousands)
                                                                     Year Ended December 31,
                                                               1997            1996            1995
=====================================================================================================
<S>                                                          <C>             <C>             <C>
Dividend income from Bank                                    $   686         $   637         $   455
Equity in undistributed income of subsidiary                     492           1,183             861
-----------------------------------------------------------------------------------------------------
Net income                                                   $ 1,178         $ 1,820         $ 1,316
=====================================================================================================
</TABLE>

Condensed statements of cash flows are as follows:

<TABLE>
<CAPTION>
                                                                         (In thousands)
                                                                     Year Ended December 31,
                                                               1997            1996            1995
=====================================================================================================
<S>                                                          <C>             <C>             <C>
OPERATING ACTIVITIES:
   Net income                                                $ 1,178         $ 1,820         $ 1,316
   Equity in undistributed income of subsidiary                 (492)         (1,183)           (861)
-----------------------------------------------------------------------------------------------------
       Net cash provided by operating activities             $   686         $   637         $   455
=====================================================================================================
INVESTING ACTIVITIES:
   Investment in subsidiaries                                $   (40)        $   (20)        $   (35)
-----------------------------------------------------------------------------------------------------
       Net cash used in investing activities                 $   (40)        $   (20)        $   (35)
=====================================================================================================
FINANCING ACTIVITIES:
   Cash dividends paid                                       $  (686)        $  (637)        $  (455)
   Net proceeds from issuance of common
     stock and capital contribution                               40              20              35
-----------------------------------------------------------------------------------------------------
       Net cash used in financing activities                 $  (646)        $  (617)        $  (420)
=====================================================================================================
</TABLE>

                                                         1997 Annual Report o 31


                                      -74-
<PAGE>


O    notes to consolidated
     financial statements (continued)
================================================================================


There are various  restrictions  which limit the ability of a bank subsidiary to
transfer  funds in the form of cash  dividends,  loans or advances to the parent
company.  Under  Connecticut  law,  the  approval  of the primary  regulator  is
required  if the  dividend  declared  by the  bank in any year  exceeds  the net
profits of that year combined with its retained net profits of the preceding two
years.

In addition,  the Company is subject to  restrictions  under the Federal Reserve
Act. These  restrictions  limit the transfer of funds to the parent company,  in
the form of loans or extensions of credit,  investments and purchases of assets.
Such  transfers are limited in amount to 10% of the bank's  capital and surplus.
These transfers are also subject to various collateral requirements.

13. Related Party Transactions

Certain directors and executive officers, including their immediate families and
companies in which they are principals, are loan customers of the Bank. Loans to
these persons aggregated approximately $5,540,000 and $4,644,000 at December 31,
1997 and 1996, respectively. During 1997 new loans to related parties aggregated
11,004,000 and loan payments aggregated $10,108,000.  The maximum amount of such
loans  outstanding  during  1997  and  1996  was  $11,167,000  and  $10,220,000,
respectively.

Two  directors  and four  stockholders  of the Company  are  partners in a joint
venture  which is leasing  certain  real  estate to the Bank.  The terms of such
lease are described further in Note 14.

14. Commitments and Contingent Liabilities

In July 1985,  the Bank entered into a five-year  noncancelable,  branch  office
lease  arrangement.  The lease  contains a provision  which allows for an annual
adjustment to the minimum payment to reflect changes in the Consumer Price Index
and a provision for two five-year renewal options, which have been exercised.

In March 1993,  the Bank  entered into a five-year  noncancelable,  office lease
arrangement  with related  parties (see Note 13).  Minimum  payments  under this
operating  lease started at $82,400 a year. The lease contains a provision which
allows for a five percent annual increase and provides for two five-year renewal
options.

The Bank is leasing  space for its Shelter  Rock Road,  Danbury  office  under a
lease agreement that extends through  October 31, 2001.  Minimum  payments under
this lease start at $39,360 per year.

In April 1997,  the Bank entered into a ten-year  noncancelable,  branch  office
lease  arrangement.  The lease  contains a provision  which allows for an annual
increase and provides for a five-year renewal option.

Total rent expense for 1997, 1996 and 1995 was $434,000,  $255,000 and $248,000,
respectively,  which  amounts  are net of  $36,000,  $0 and  $19,000 of sublease
income in 1997, 1996 and 1995.Future minimum lease payments at December 31, 1997
are as follows:

Year Ending December 31,                                       Amount
                                                           (In thousands)
================================================================================
             1998                                            $   477
             1999                                                407
             2000                                                415
             2001                                                353
             2002                                                335
          Thereafter                                           1,598
--------------------------------------------------------------------------------
             Total                                           $ 3,585
================================================================================

15. Estimated Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
disclosure  of the  estimated  fair  values of  certain  financial  instruments.
Estimated  fair  values  are as of  December  31,  1997 and  1996 and have  been
determined using available market  information and various valuation  estimation
methodologies.  Considerable  judgment is required to  interpret  the effects on
fair value of such items as future expected loss  experience,  current  economic
conditions,  risk  characteristics  of various  financial  instruments and other
factors.  The estimates  presented herein are not necessarily  indicative of the
amounts that the Company would realize in a current market  exchange.  Also, the
use of different market assumptions  and/or estimation  methodologies may have a
material effect on the determination of the estimated fair values.

32 o Village Bancorp


                                      -75-
<PAGE>


                            ----------------------------------------------------
                                 Notes to Consolidated Financial Statements
                            ----------------------------------------------------


================================================================================


<TABLE>
<CAPTION>
                                                               As of December 31,
                                                     1997                               1996
                                                        Estimated                           Estimated
                                            Carrying       Fair                Carrying       Fair
                                             Amount       Value                 Amount       Value
=====================================================================================================
                                                               (In thousands)
<S>                                         <C>          <C>                   <C>          <C>
Assets:
Cash and cash equivalents                   $ 11,153     $ 11,153              $ 15,145     $ 15,145
Securities                                    54,591       54,763                33,616       33,553
Loans                                        145,051      145,837               123,884      124,275
Loans held for sale                            1,686        1,706                    50           51
Accrued income receivable                      1,881        1,881                 1,401        1,401

Liabilities:
Deposits without stated maturities           122,341      122,341               106,625      106,625
Time deposits                                 81,467       81,646                56,000       55,972
Accrued interest payable                       1,610        1,610                   912          912
=====================================================================================================
</TABLE>

The fair value  estimates  presented  above are based on  pertinent  information
available to management as of December 31, 1997 and 1996. Although management is
not aware of any factors  that would  significantly  affect the  estimated  fair
value  amounts,  such  amounts  have not  been  comprehensively  revalued  since
December  31, 1997 and,  therefore,  current  estimates of fair value may differ
significantly from the amounts presented above.

Fair value methods and assumptions are as follows:

Cash and Cash  Equivalents,  Accrued  Income  Receivable  and  Accrued  Interest
Payable -- The carrying amount is a reasonable estimate of fair value.

Securities -- The fair value of securities was estimated  based on quoted market
prices or dealer quotes, if available.  If a quote is not available,  fair value
is estimated using quoted market prices for similar securities.

Loans -- The fair value of fixed rate loans has been  estimated  by  discounting
projected  cash flows using  current  rates for similar  loans.  For loans which
reprice to market  rates or mature  within a one year time frame,  the  carrying
amount is a reasonable  estimate of fair value.  The value of impaired  loans of
approximately   $1,427,000  and  $1,576,000  at  December  31,  1997  and  1996,
respectivly,are  estimated to have a fair value of approximately  $1,254,000 and
$1,361,000. This estimate is net of other specific and general allowances and is
very  subjective  and may not be  indicative  of what  would  be  realized  in a
liquidation situation.

Deposits Without Stated  Maturities -- Under the provisions of SFAS No. 107, the
estimated fair value of deposits with no stated  maturity,  such as non-interest
bearing  demand  deposits,  savings  accounts,  NOW  accounts,  money market and
checking accounts, is equal to the amount payable on demand.

Time  Deposits  -- The fair  value of  certificates  of  deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.

Off  Balance  Sheet Risk -- As  described  in Note 4, the Company was a party to
financial  instruments  with  off-balance  sheet risk at December 31, 1997. Such
financial  instruments  consist of commitments to extend permanent financing and
letters of credit.  If the options are exercised by the  prospective  borrowers,
these financial instruments will become  interest-bearing assets of the Company.
If the options expire,  the Company retains any fees paid by the counterparty in
order to obtain the  commitment or guarantee.  The fair value of  commitments is
estimated based upon fees currently  charged to enter into similiar  agreements,
taking  into  account  the  remaining  terms of the  agreements  and the present
creditworthiness of the  counterparties.  For fixed-rate  commitments,  the fair
value estimation takes into consideration an interest rate risk factor. The fair
value of guarantees and letters of credit is based on fees currently charged for
similiar agreements. The fair value of these off-balance sheet items at December
31,  1997 and 1996,  respectively,  approximates  the  recorded  amounts  of the
related  fees,  which are not  material.  The  Company  has not engaged in hedge
transactions such as interest rate futures contracts or interest rate swaps.

                                                         1997 Annual Report o 33


                                      -76-
<PAGE>


1997
annual report


O    officers, board of directors &
     advisory board of directors
================================================================================


Village Bancorp, Inc.

Officers

Edward J. Hannafin, Chairman of the Board
Nicholas R. DiNapoli, Vice Chairman of
  the Board
Enrico J. Addessi, Secretary of the Board
Robert V. Macklin, President & Chief Executive
  Officer
James R. Umbarger, Executive Vice President

Board of Directors

Enrico J. Addessi, President -
  Addessi of Ridgefield, Inc.
Jose P. Boa, President -
  Diversified Maintenance Corporation
Richard O. Carey, Owner -
  Connecticut Land Company
Madeline F. Contegni, Partner -
  Prudential Prime Properties
Jeanne M. Cook, Travel Industry Consultant
Nicholas R. DiNapoli, President -
  DiNapoli Development Company, Inc.
Edward J. Hannafin, Attorney - (Principal) Collins,
  Hannafin, Garamella, Jaber & Tuozzolo, P.C.
Joseph L. Knapp, Officer - Knapp Brothers, Inc.
Carl H. Lecher, President - Carl Lecher, Inc.
Robert V. Macklin, President - Village Bancorp, Inc.
Antonio M. Resendes, Department Head -
  Henry Abbott Technical School
Thomas F. Reynolds, Partner -
  Reynolds & Rowella, CPA
Robert Scala, Private Investor
James R. Umbarger, Executrive Vice President -
  Village Bancorp, Inc.



The Village Bank & Trust Company

Officers

Edward J. Hannafin, Chairman of the Board
Nicholas R. DiNapoli, Vice Chairman of the Board
Robert V. Macklin, President & Chief Executive
  Officer
Enrico J. Addessi, Secretary of the Board
Robert Scala, Assistant Secretary of the Board
James R. Umbarger, Executive Vice President &
  Treasurer
Kenneth M. Griffin, Senior Vice President
George W. Hermann, Senior Vice President
Gerard P. Shpunt, Senior Vice President &
  Controller
Paul T. Budrow, Vice President
Dennis J. Fitzgerald,  Vice President
Kathleen Leach, Vice President
Maria J. Murphy, Vice President
Deborah L. Roche, Vice President
Jane Saunders, Vice President
Mary Lou Bell, Assistant Vice President
Joanne Boyer, Assistant Vice President
Richard Fink, Assistant Vice President
Dolores F. Mezo, Assistant Vice President
Maura E. Saraceno, Assistant Vice President
Rita Sedor, Assistant Vice President
Paul M. Schmiedel, Assistant Vice President
William Gabriele, Assistant Treasurer
Marc Hirschenfang, Assistant Treasurer
Claudia K. St. John, Assistant Treasurer
Emma Cardoso, Banking Officer - Operations

34 o Village Bancorp


                                      -77-
<PAGE>


             -------------------------------------------------------------------
                  Officers, Board of Directors, Advisory Board of Directors
             -------------------------------------------------------------------


================================================================================


The Village Bank & Trust Company

Board of Directors

Enrico J. Addessi, President -
  Addessi of Ridgefield, Inc.
Jose P. Boa, President -
  Diversified Maintenance Corporation
Richard O. Carey, Owner -
  Connecticut Land Company
Madeline F. Contegni, Partner -
  Prudential Prime Properties
Jeanne M. Cook, Travel Industry Consultant
Nicholas R. DiNapoli, President -
  DiNapoli Development Co., Inc.
Edward J. Hannafin, Attorney - (Principal)
  Collins, Hannafin, Garamella, Jaber &
  Tuozzolo, P.C.
Joseph L. Knapp, Officer - Knapp Brothers, Inc.
Carl H. Lecher, President - Carl Lecher, Inc.
Robert V. Macklin, President -
  Village Bancorp, Inc.
Antonio M. Resendes, Department Head -
  Henry Abbott Technical School
Thomas F. Reynolds, Partner -
  Reynolds & Rowella, CPA
Robert Scala, Private Investor
James R. Umbarger, Executive Vice President  -
  Village Bancorp, Inc.

Advisory Board of Directors

Lewis J. Finch, Real Estate Investor -
  Chairman of the Board Emeritus
James Belote, Teacher-
  Ridgefield Public Schools
Loretta Brickley, Zoning Enforcement Officer -
  New Milford
Joseph Brunetti, Retired
Eugene Buccini, Dean - Ancell School,
  Western Connecticut State University
Joseph F. Buzaid, Jr., Owner -
  Powerhouse Appliances
George M. Cohan, Attorney - (Partner)
  Cohan & Kulawitz
Elie S. Coury, Attorney
Paul Dewitt, Owner - Economy Printing
Wendy DiNapoli,Vice President -
  DiNapoli Development, Co., Inc.
Delfina do Nascimento, Co-Owner -
  N&T Enterprises
Eric G. Erhardt, President -
  Ridgefield European Motors, Inc.
Barry Finch, Realtor - Finch Associates
Patrick Fortin, Owner -
  Pat's Sales & Service, Inc.
Dr. Joshua Friedman, President -
  Electro-Lite Corporation
Morley M. Goldberg, M.D. - Physician
Clark A. Heydon, Jr., D.D.S. - Orthodontist
Carmine Iapaluccio. Jr., Owner -
  C. Iapaluccio Co.
George Kaufman, President -
  International Tire Warehouses, Inc.
Paul J. Kuehner, Vice President -
  Building & Land Technology, Inc.
Nicholas M. LaCava, Owner -
  Asco Supply Company, Inc.
Edward J. Manzi, President -
  Woodbury Insurance
Joseph F. Millett, Owner - The Athletic Club
Fred P. Montanari, Real Estate Investor
Abraham Morelli, Jr., First Selectman -
  Town of Ridgefield
Thomas B. Nash, Publisher - The Acorn Press
Louis Nazzaro, Partner - Nazzaro Contracting
Del Overby, Community Leader
R. David Piersall, Real Estate Investor
Gino B. Polverari, Retired
Deborah Pritchard, Vice President -
  Chemical Marketing Concepts, Inc.
Gerald A. Rabin, Owner -
  Ridgefield Hardware Company, Inc.
Octavio Rebelo, Owner - Rebelo's  Realty
Perry Salvagne, Owner - Hodge Insurance
  Agency
Robert J. Sharp, President -
  Newman/Sharp Racing, Inc.
Jeffery Sienkiewicz, Attorney - (Partner)
  Sienkiewicz & McKenna
Thomas M. Sinchak, Attorney
Wayne Skelly,  Zoning Enforcement Officer -
  City of Danbury
John Spatola, Self Employed
O.H. Stark, Marketing Consultant
Donald C. Sturges, Partner - Sturges Bros., Inc.
William W. Sullivan, Attorney - (Partner)
  Sullivan & Biraglia, P.C.
Luis A. Tomas, Owner - European's Furniture
Gino Torcellini, Retired
Valentine Ventura, Owner - Ventura's Insurance
Gerry Ward, President -
  Gerry Ward & Associates

                                                         1997 Annual Report o 35


                                      -78-
<PAGE>


1997
annual report


O    capital stock, annual meeting,
     request for financial information
================================================================================


Capital Stock

Village Bancorp,  Inc. stock is listed on the NASDAQ SmallCap Market. The prices
of the Company's  common stock as quoted by NASDAQ and the dividends paid during
1997 and 1996 are as follows:

                           1997                               1996

                Bid       Ask       Dividend      Bid        Ask      Dividend
                ---       ---       --------      ---        ---      --------
1st Quarter   $10.50    $11.4375   $.09/Share    $9.375    $10.125   $.075/Share
2nd Quarter   $11.00    $11.75     $.09/Share    $9.50     $10.25    $.085/Share
3rd Quarter   $12.375   $13.50     $.09/Share    $9.50     $10.25    $.085/Share
4th Quarter   $19.25    $22.00     $.09/Share    $10.375   $11.25    $.09/Share

As of December 31, 1997 there were 1,209 stockholders of record.

Annual Meeting

The Company's  annual meeting will be held on Monday April 27, 1998,  8:00 PM at
The Village Bank & Trust Company, 25 Prospect Street,  Ridgefield,  Connecticut.
Stockholders  who cannot  attend are urged to  exercise  their  right to vote by
proxy.

Request for Financial Information

The Company  will  provide  without  charge to each  stockholder,  upon  written
request,  a copy of the Company's  Annual Report on Form 10-K.  Written requests
should be directed to Enrico J. Addessi,  Secretary,  c/o Village Bancorp, Inc.,
P.O. Box 366, Ridgefield, CT 06877.

This Statement has not been  reviewed,  nor confirmed for accuracy or relevance,
by the Federal Deposit Insurance Corporation.

O    The Village Bank & Trust Company
     banking office information
================================================================================

<TABLE>
<S>                           <C>                                <C>
RIDGEFIELD                    WILTON                             NEW MILFORD
25 Prospect Street            219  Town Green                    54 Bridge Street
Ridgefield, CT 06877          Wilton, CT 06897                   New Milford, CT 06776
Manager: Dolores Mezo         Manager: Rita Sedor                Manager:  Maura Saraceno
(203)438-9551                 (203)762-8409                      (860) 350-3460

DANBURY                       WESTPORT                           CITYCENTER DANBURY
28 Shelter Rock Road          244 Post Road East                 2 National Place
Danbury, CT 06810             Westport, CT 06880                 Danbury, CT 06810
Manager: William Gabriele     Manager:  Maria Murphy             Manager:  Paul Schmiedel
(203)798-9696                 (203) 291-7888(203)798-9696        (203) 778-7555
</TABLE>



                                      -79-