Document:

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                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

     AGREEMENT dated as of May 16, 1991, by and among ANDOVER BANCORP, INC., a
Delaware corporation (the "Company") and its subsidiary, ANDOVER SAVINGS BANK, a
Massachusetts savings bank with its main office in Andover, Massachusetts (the
"Bank") (the Bank and the Company shall be hereinafter sometimes collectively
referred to as the "Employers") and GERALD T. MULLIGAN, currently of West
Roxbury, Massachusetts (the "Executive").

                                   WITNESSETH

     WHEREAS, the parties hereto desire to provide for the Executive's
employment by the Employers;

     NOW THEREFORE, in consideration of the mutual covenants contained herein,
the Employers and the Executive agree as follows:

     1.   EMPLOYMENT. The Employers agree to employ the Executive and the
Executive agrees to continue in the employ of the Employers on the terms and
conditions hereinafter set forth.

     2.   CAPACITY. The Executive shall serve the Company and the Bank as
President and Chief Executive Officer, subject to his election by the respective
Boards of Directors of the Company and the Bank.

     3.   EFFECTIVE DATE AND TERM. The commencement date (the "Commencement
Date") of this Agreement shall be the date first above written. Subject to the
provisions of Section 7, the term of the Executive's employment hereunder shall
be for three years from the Commencement Date; provided, however, that the term
hereof shall automatically extend for periods of one year commencing on the
third anniversary of the Commencement Date and on each subsequent anniversary
date thereafter unless the Company or the Bank, as the case may be, gives
written notice to the Executive at least six months prior to such anniversary
date that such term is not being extended. The last day of such term, as may be
so extended from time to time, is herein sometimes referred to as the
"Expiration Date."

     4.   COMPENSATION AND BENEFITS. The compensation and benefits payable to
the Executive under this Agreement shall be as follows:

          (a)  SALARY. For all services rendered by the Executive under this
     Agreement, the Employers shall pay the Executive a total salary at the rate
     of $190,000 per year.

The Executive's salary shall be payable in periodic installments in accordance
with the Employers' usual practices for their senior executives.

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          (b)  REGULAR BENEFITS. The Executive shall also be entitled to
     participate in any and all bonus incentive plans, stock option plans,
     employee stock ownership plans, employee benefit plans, medical insurance
     plans, life insurance plans, disability income plans, retirement plans, and
     other benefit plans from time to time in effect for senior executives of
     the Employers. Such participation shall be subject to (i) the terms of the
     applicable plan documents and applicable federal and state laws, (ii)
     generally applicable policies of the Employers, and (iii) the discretion of
     the respective Boards of Directors or of the Company and the Bank or any
     administrative or other committee provided for in or contemplated by such
     plan.

          (c)  OTHER BENEFITS. The Employers shall also provide the Executive
     with the use of an American-model automobile having a listed purchase price
     not in excess of $25,000, and payment of the initial registration and
     annual membership fees in the Lanam Club.

          (d)  BUSINESS EXPENSES. The Employers shall reimburse the Executive
     for all reasonable travel and other business expenses incurred by him in
     the performance of his duties and responsibilities, subject to such
     reasonable requirements with respect to substantiation and documentation as
     may be specified by the Employers.

          (e)  VACATION. The Executive shall be entitled to four weeks of
     vacation per year, to be taken at such times and intervals as shall be
     determined by the Executive with the approval of the Employers, which
     approval shall not be unreasonably withheld.

          (f)  STOCK OPTIONS. In addition to the regular stock options
     contemplated by Section 4(b) above, following execution of this agreement,
     and subject to approval by the Board of Directors of the Company, the
     Company shall grant to the Executive stock options evidencing the right to
     purchase 20,000 shares of the Common Stock of the Company at a purchase
     price per share equal to the fair market value of a share of the Company's
     Common Stock as of the grant date, which options shall vest as follows:
     10,000 on May 16, 1991, 5,000 on May 16, 1992, and 5,000 on May 16, 1993.

     5.   EXTENT OF SERVICE. During his employment hereunder, the Executive
shall, subject to the direction and supervision of the respective Boards of
Directors of the Company and the Bank, devote his full business time, best
efforts and business judgment, skill and knowledge to the advancement of the
Employers' interests and to the discharge of his duties and responsibilities
hereunder. He shall not engage in any other business activity, except as any be
approved by their respective Boards of Directors; PROVIDED, HOWEVER, that
nothing herein shall be construed as preventing the Executive from:

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          (a)  investing his assets in a manner not prohibited by Section 9(a)
     hereof, and in such from or manner as shall not require any material
     services on his part in the operations or affairs of the companies or other
     entities in which such investments are made;

          (b)  serving on the board of directors of any company subject to the
     prohibition set forth in Section 9(a) and provided that he shall not be
     required to render any material services with respect to the operations or
     affairs of any such company; or

          (c)  engaging in religious, charitable or other community or
     non-profit activities which do not impair his ability to fulfill his duties
     and responsibilities under this Agreement.

     5.   Relocation and Residence.

          (a)  The Executive agrees to relocate and established his principal
     resident and domicile within the Towns of Andover, North Andover or
     Boxford, Massachusetts on or before September 1, 1991. The Executive
     further agrees to maintain his principal residence and domicile with in the
     Towns of Andover, North Andover or Boxford, Massachusetts for the term of
     this Agreement. The Executive hereby acknowledges that the Employers have
     relied upon the Executive's covenant in this Section 6 in executing this
     Agreement and have conditioned his continued employment with them on the
     Executive's continued compliance with said covenant.

          (b)  The employers shall reimburse the Executive for all reasonable
     moving expenses incurred by the Executive in transporting the personal
     property of the Executive and his family to the Towns of Andover, North
     Andover or Boxford, Massachusetts, subject to such reasonable and
     documentation as may be specified by the Employers. In the event that such
     moving expenses are deemed not deductible by the Executive for federal
     income tax purposes, the Employers shall pay the Executive an additional
     sum sufficient to cover the Executive" federal income taxes on any such
     taxable moving expenses.

          (c)  Upon written request by the Executive given at any time during
     the six months following the execution of this Agreement, the Employers
     shall purchase the Executive's present residence located within West
     Roxbury, Massachusetts (the "Residence") in accordance with the terms and
     conditions set forth below. Following receipt by the Employers of written
     notice from the Executive requesting their purchase of the residence, the
     executive and the Employers shall each select a professional real estate
     appraiser who shall render an opinion as to the fair market value of the
     Residence. If the lower of the two appraised values is more than or equal
     to 90% of the higher

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     appraised value, the Employers shall purchase the Residence from the
     Executive at a purchase price equal to one-half of the sum of the two
     appraised values. If the lower of the two appraised values is less than 90%
     of the higher appraised value, the Executive and the Employers (or the two
     appraisers, if the Executive and the Employers cannot agree) shall select a
     third professional appraiser who shall render an opinion as to the fair
     market value of the Residence. Thereupon, the Employers shall purchase the
     Residence from the Executive at a purchase price equal to one-third of the
     sum of the three appraised values. The reasonable fees and disbursements of
     the appraisers shall be borne by the Employers.

     7.   TERMINATION AND TERMINATION BENEFITS.

     Notwithstanding the provisions of Section 3, the Executive's employment
hereunder shall terminate under the following circumstances:

          (a)  DEATH. In the event of the Executive's death during the
     Executive's employment hereunder, the Executive's employment shall
     terminate on the date of his death; provided, however, that the Executive's
     beneficiary or estate, as the case may be, shall be entitled to any unpaid
     amounts of compensation accrued to the date of death, plus the following
     benefits:

               (i)  For a period of six months subsequent to the date of the
               Executive's death, the Employers shall continue to pay an amount
               equal to the Executive's salary to the Executive's beneficiary
               designated in writing to the Employers prior to his death (or to
               his estate, if he fails to make such designation) at the salary
               rate in effect on the date of his death (unless an increased rate
               shall previously have been authorized to take effect as of a
               later date, in which case such increased rate shall apply), said
               payments to be made on the same periodic dates as salary payments
               would have been made to the Executive had he not died.

               (ii) For a period of six months subsequent to the date of the
               Executive's death, the Executive's beneficiary designated in
               writing to the Employers prior to his death (or to his estate, if
               he fails to make such designation) shall continue to receive all
               benefits described in Section 4(b) above existing on the date of
               death (except for any cash bonus plans which shall be pro-rated
               through the date of death). For purposes of application of such
               benefits, the Executive shall be treated as if he had remained in
               the employ of the Employers, with an annual total salary at the
               rate in effect on the date of death (unless an increased rate
               shall previously have been authorized to take effect as of a
               later date, in which case such increased rate shall

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               apply), and service credits will continue to accrue during such
               period as if the Executive has remained in the employ of the
               Employers.
               (iii) If, in spite of the provisions of Section 7(a)(ii) above,
               benefits or service credits under any benefit plan shall not be
               payable or accrued under any such plan to the Executive, or to
               the Executive's beneficiary or estate, because the Executive is
               no longer deemed to be an employee of the employers, the
               Employers themselves shall pay or provide for payment of such
               benefits (calculated as if all such service credits had been
               accrued) to or for the benefit of the Executive, or to the
               Executive's beneficiary or estate.

          (b)  TERMINATION BY THE EMPLOYERS FOR CAUSE. The Executive's
     employment hereunder may be terminated without further liability on the
     part of the Employers effective immediately by a resolution of the Board of
     Directors of the Company or the Bank, as the case may be, for cause by
     written notice to the Executive setting forth in reasonable detail the
     nature of such cause. Only the following shall constitute "cause" for such
     termination:

               (i)  Deliberate dishonesty of the Executive with respect to the
               Employers or any subsidiary or affiliate thereof.

               (ii) Conviction of the Executive of a crime involving moral
               turpitude.

Gross and willful failure to perform a substantial portion of his duties and
responsibilities hereunder.

          (a)  TERMINATION BY THE EXECUTIVE. The Executive's employment
     hereunder may be terminated effective immediately by the Executive by
     written notice to the Board immediately by the Executive by written notice
     to the Board of Directors of the Company or the Bank, as the case may be,
     in the event of material breach by either of the Employers of this
     Agreement. From and after the effective date of any termination by the
     Executive of his employment hereunder, in the absence of such a breach by
     the Company or the Bank, as the case may be, the Employers will have no
     further liability to the Executive for salary or other compensation or
     benefits, except as provided pursuant to compensation or benefits, except
     as provided pursuant to any other agreement to which the Executive and the
     Employers are parties or any compensation or benefit plan of the Employers
     in which the Executive is a participant.

          (b)  TERMINATION BY THE EMPLOYERS WITHOUT CAUSE. The Executive's
     employment with the Company or the Bank, as the case may be, may be
     terminated without cause by a resolution of the

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     Board of Directors of the Company or the Bank, respectively, on written
     notice to the Executive.

          (c)  CERTAIN TERMINATION BENEFITS. In the event of termination
     pursuant to the first sentence of Section 7(c) or pursuant to Section 7(d),
     the Executive shall be entitled to the following benefits:

               (i)  For the period subsequent to the date of termination until
               the Expiration Date, the Employers shall continue to pay the
               Executive a total salary at the rate in effect on the date of
               termination (unless an increased rate shall previously have been
               authorized to take effect as of a later date, in which case such
               increased rate shall apply).
               (ii) For the period subsequent to the date of termination until
               the Expiration Date, the Executive shall continue to receive all
               benefits described in Section 4(b) above existing on the date of
               termination (except for any cash bonus plans, which shall be
               pro-rated through the date of termination). For purposes of
               application of such benefits, the Executive shall be treated as
               if he had remained in the employ of the employers, with an annual
               total salary at the rate in effect on the date of termination
               (unless an increased rate shall previously have been authorized
               to take effect as of a later date, in which case such increased
               rate shall apply) and service credits will continue to accrue
               during such period as if the Executive had remained in the employ
               of the Employers.
               (iii) If, in spite of the provisions of Section 7(e)(ii) above,
               benefits or service credits under any benefit plan shall not be
               payable or accrued under any such plan to the Executive, or to
               the Executive's dependents, beneficiaries or estate, because the
               Executive is no longer deemed to be an employee of the Employers,
               the Employers themselves shall pay or provide for payment of such
               benefits (calculated as if all such service credits had been
               accrued) to or for the benefit of the Executive or the
               Executive's dependents, beneficiaries or estate.

               (a)  SET-OFF. The Employers shall be entitled to set off against
          any cash compensation to be provided to the Executive under Section
          7(e)(i) above, one-half of the amount of any cash compensation
          received by the Executive from other employment during the period in
          which the Executive receives cash compensation under Section 7(e)(i).
          The Executive shall inform the Employers of any such amounts of cash
          compensation and shall refund to the Employers any amounts which the
          Employers have paid which exceed the amounts due from the employers
          after application of the set-off provided for in this paragraph.
          Notwithstanding the foregoing and any other provision of this
          Agreement, the Executive shall be under no obligation to seek or
          accept any employment after termination of employment with the
          Employers for any reason.

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     8.   DISABILITY. If, due to physical or mental illness, the Executive shall
be disabled so as to be unable to perform substantially all of his duties and
responsibilities hereunder, the Board of Directors of the Company or the Bank,
as the case may be, may designate another executive to act in his place during
the period of such disability. Notwithstanding any such designation, the
Executive shall continue to receive his full salary and benefits under Section 4
of this Agreement until he becomes eligible for disability income under the
employers' disability income plan. While receiving disability income payments
under such plan, the Executive shall not receive any salary under Section 4(a),
but shall continue to participate in the Employers' benefit plans and to receive
other benefits as specified in Section 4 until the Expiration Date. In the
absence of a disability income plan at the time of such disability, the
Employers shall pay the Executive benefits equal to those the Executive would
have received if the Employers' current disability income plan were in effect at
such time. If any question shall arise as to whether during any period the
Executive was disabled so as to be unable to perform substantially all of his
duties and responsibilities and at the request of the Employers will, submit to
the Employers a certification in reasonable detail by a physician selected by
the Executive or his guardian to whom the employers have no reasonable objection
as to whether the Executive was so disabled and such certification shall for the
purposes of this Agreement be conclusive of the issue. If such question shall
arise and the Executive shall fail to submit such certification, the Employer's
determination of such issue shall be binding on the Executive.

     9.   NONCOMPETITION AND CONFIDENTIAL INFORMATION.

          (a)  NONCOMPETITION. During the term of the Executive's employment
     hereunder, and either (i) a period of one year following the date of
     termination of the Executive's employment with either the Company or the
     Bank by the Executive or by either of the Employers for cause pursuant to
     Section 7(b) hereof, or (ii) the period during which the Employers continue
     to provide benefits to the Executive pursuant to Sections 7(e)(i) - (iii)
     hereof in the event of termination pursuant to the first sentence of
     Section 7(c) or pursuant to Section 7(d), the Executive shall not directly
     or indirectly, whether as owner, partner, shareholder (other than as the
     owner of less than 2% of the outstanding capital stock of a publicly-traded
     corporation), consultant, agent, employee, co-venturer or otherwise, of or
     through any Person (as defined in Section 11) having its main office in the
     Employers' market area (defined as the Massachusetts municipalities of
     Andover, North Andover, Lawrence, Methuen and Tewksbury) compete in said
     market area with the banking or any other business conducted by either of
     the Employers during the period of his employment hereunder, nor will he
     attempt to hire any employee of either of the Employers, assist in such
     hiring by any other Person, encourage any such

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     employee to terminate his or her relationship with either of the Employers,
     or solicit or encourage any customer of either of the Employers to
     terminate its relationship with such Employer or to conduct with any other
     Person any business or activity which such customer conducts or could
     conduct with such Employer.

          (b)  CONFIDENTIAL INFORMATION. The Executive will not disclose to any
     other Person (except as required by applicable law or in connection with
     the performance of his duties and responsibilities hereunder), or use for
     his own benefit or gain, any confidential information of either of the
     Employers obtained by him incident to his employment with the Employers.
     The term "confidential information" includes, without limitation, financial
     information, business plans, prospects and opportunities (such as lending
     relationships, financial product developments, or facilities) which have
     been discussed or considered by the management of the Employers but does
     not include any information which has become part of the public domain by
     means other than the Executive's non-observance of his obligations
     hereunder. Notwithstanding anything to the contrary herein, this provision
     shall survive any termination of this Agreement.

          (c)  RELIEF; INTERPRETATION. The Executive agrees that the Employers
     shall be entitled to injunctive relief for any breach by him of the
     covenants contained in Sections 9(a) or 9(b). In the event that any
     provision of this Section 9 shall be determined by any court of competent
     jurisdiction to be unenforceable by reason of its being extended over too
     great a period of time, too large a geographic area, or too great a range
     of activities, it shall be interpreted to extend only over the maximum
     period of time, geographic area, or range of activities as to which it may
     be enforceable. For purposes of this Section 9, the term "Employers" shall
     mean the Company, the Bank and any of their respective subsidiaries or
     affiliates.

     10.  CONFLICTING AGREEMENTS. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of hi obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants against
competition or similar convenants which would affect the performance of his
obligations hereunder.

     11.  DEFINITION OF "PERSON". For purposes of this Agreement, the term
"Person" shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.

     12.  WITHHOLDING. All payments made by the Employers under this Agreement
shall be net of any tax or other amounts required to be withheld by the
Employers under applicable law.

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     13.  Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employers, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 13. Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel and/or incur
other costs and expenses in connection with the enforcement of any or all of the
Executive's rights under this Agreement, the Employers shall pay (or the
Executive shall be entitled to recover from the Employers, as the case may be)
the Executive's reasonable attorneys' fees and other reasonable costa and
expenses in connection the enforcement of said rights (including the enforcement
of any arbitration award in court) regardless of the final outcome, unless and
to the extent the arbitrators shall determine that under the circumstances
recovery by the Executive of all or a part of any such fees and costs and
expenses would be unjust.

     14.  Assignment; Successors and Assigns, etc. Neither the Employers nor the
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided, however, that the Employers may assign its rights under this
Agreement without the consent of the Executive in the event either of the
Employers shall hereafter effect a reorganization, consolidate with or merge
into any other Person, or transfer all or substantially all of its properties or
assets to any other Person. This Agreement shall inure to the benefit of and be
binding upon the Employers and the Executive, their respective successors,
executors, administrators, heirs and permitted assigns. In the event of the
Executive's death prior to the completion by the employers of all payments due
him under this Agreement, the Employers shall continue such payments to the
Executive's beneficiary designated in writing to the Employers prior to his
death (or to his estate, if he fails to make such designation).

     15.  Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.

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     16.  ALLOCATION OF OBLIGATIONS BETWEEN EMPLOYERS. The obligations of the
Employers under this Agreement are intended to be the joint and several
obligations of the Bank and the Company and the Employers shall, as between
themselves, allocate these obligations in a manner agreed upon by them.

     17.  WAIVER. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.

     18.  NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Employers or, in the case of the Bank, at its main offices, attention of the
Clerk or, in the case of the Company, at its main office, attention of the
Secretary.

     19.  AMENDMENT. This Agreement may be amended or modified only be a written
instrument signed by the Executive and by a duly authorized representative of
each of the Employers.

     20.  GOVERNING LAW. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.

     IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Executive and by the Employers, by its duly authorized officer, as of the
date first above written.

                                                  /s/Gerald T. Mulligan
                                                  ---------------------
                                                  GERALD T. MULLIGAN

                                                  ANDOVER SAVINGS BANK

                                                  /s/Robert M. Henderson
                                                  ----------------------
                                                  Title: Chairman

                                                  ANDOVER BANCORP, INC.

                                                  /s/ Robert M. Henderson
                                                  -----------------------
                                                  Title: Chairman<PAGE>   1

                                                                    EXHIBIT 10.8

                     ANDOVER BANCORP, INC. STOCK OPTION PLAN

                                                        May 8, 1986
                                                        as amended May 22, 1986,
                                                        January 29, 1987 and
                                                        November 2, 1987

1.   PURPOSE

     This Stock Option Plan (the "Plan") is intended as a performance incentive
for officers and full-time employees of Andover Bancorp, Inc. (the
"Corporation") or its Subsidiaries (as hereinafter defined) to enable the
persons to whom options are granted (the "Optionees") to acquire or increase a
proprietary interest in the success of the Corporation. The Corporation intends
that this purpose will be effected by the granting of "incentive stock options"
("Incentive Options") as defined in Section 422A(b) of the Internal Revenue Code
of 1986, as amended (the "Code"), nonqualified stock options ("Nonqualified
Options") and stock appreciation rights under the Plan. The terms "Subsidiaries"
includes any corporations in which stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock is owned directly or
indirectly by the Corporation.

2.   OPTIONS TO BE GRANTED AND ADMINISTRATION

     (a)  Options granted under the Plan may be either Incentive Options or
Nonqualified Options.

     (b)  The Plan shall be administered by a committee (the "Option Committee")
of not less than three directors appointed by the Board of Directors of the
Corporation. None of the members of the Option Committee shall be an officer or
other full-time employee of the Corporation. No person shall serve as a member
of the Option Committee if such person is then eligible, or has been eligible at
any time during the prior twelve months, to receive stock options, or stock
appreciation rights under the Plan or any other option, stock purchase or
similar plan of the Corporation or its Subsidiaries. It is the intention of the
Corporation that the Plan shall be administered, in accordance with the
provisions of Section 4 hereof, in a manner consistent with the provisions of
Rule 16b-3(b) (entitled "Disinterested Administrators") as promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). Action by the Option Committee shall require the
affirmative vote of a majority of all its members.

     (c)  Subject to the terms and conditions of the Plan, the Option Committee
shall have the power:

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          (i)  To determine from time to time the options to be granted to
          eligible persons under the Plan and to prescribe the terms and
          provisions (which need not be identical) of each option granted under
          the Plan to such persons;
          (ii) To construe and interpret the Plan and options granted thereunder
          and to establish, amend, and revoke rules and regulations for
          administration of the Plan. In this connection, the Option Committee
          may correct any defect or supply any omission, or reconcile any
          inconsistency in the Plan, or in any option agreement, in the manner
          and to the extent it shall deem necessary or expedient to make the
          Plan fully effective. All decisions and determinations by the Option
          Committee in the exercise of this power shall be final and binding
          upon the Corporation and Optionees; and
          (iii) Generally, to exercise such powers and to perform such acts as
          are deemed necessary or expedient to promote the best interests of the
          Corporation with respect to the Plan.

3.   STOCK

     (a)  The stock subject to the options granted under the Plan shall be
shares of the Corporation's authorized but unissued common stock, par value $.10
per share (the "Common Stock"). The total number of shares that may be issued
pursuant to options or stock appreciation rights granted under the Plan shall
not exceed an aggregate of 500,000 shares of Common Stock. Such number shall be
subject to adjustment as provided in Section 8 hereof.

     (b)  Whenever any outstanding option under the Plan expires, is cancelled
or is otherwise terminated (other than by exercise), the shares of Common Stock
allocable to the unexercised portion of such option may again be the subject of
options under the Plan, except for options surrendered as provided in Section 7
hereof.

4.   ELIGIBILITY

     (a)  Incentive Options and/or Nonqualified Options may be granted only to
officers and other full-time employees of the Corporation or its Subsidiaries,
including members of the Board of Directors who are also officers or other
full-time employees of the Corporation or its Subsidiaries.

     (b)  No person shall be eligible to receive any option under the Plan, if
at the date of grant such person beneficially owns in excess of ten percent
(10%) of the outstanding Common Stock of the Corporation.

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     (c)  With respect to Incentive Options granted after December 31, 1986, the
aggregate fair market value (determined at the time each respective option is
granted) of the stock with respect to which Incentive Options are exercisable
for the first time by any individual during any calendar year (under all plans
of the Corporation and its parent and subsidiary corporations as defined in
Section 425 of the Code) shall not exceed $100,000. Any option granted in excess
of the foregoing limitation shall be clearly and specifically designated as not
being an Incentive Option.

5.   TERMS OF THE OPTION AGREEMENTS

     Each option agreement shall contain such provisions as the Option Committee
shall from time to time deem appropriate. Option agreements need not be
identical, but each option agreement by appropriate language shall include the
substance of all of the following provisions:

     (a)  EXPIRATION. Notwithstanding any other provision of the Plan or of any
option agreement, each option shall expire on the date specified in the option
agreement, which date shall not be later than the tenth anniversary of the date
on which the option was granted.

     (b)  MINIMUM SHARES EXERCISABLE. The minimum number of shares with respect
to which an option may be exercised at any one time shall be 100 shares, or such
lesser number as is subject to exercise under the option at the time.

     (c)  EXERCISE.

          (i)  Each option shall be exercisable in such installments (which need
     not be equal) and at such times as designated by the Option Committee. To
     the extent not exercised, installments shall accumulate and be exercisable,
     in whole or in part, at any time after becoming exercisable, but not later
     than the date the option expires.

          (ii) In the event of a Change in Control of the Corporation (as
     defined in (f) below), all options outstanding as of the date of such
     Change in Control shall become vested and immediately exercisable.

          (iii) The exercise of options granted hereunder shall be subject to
     the receipt of any prior regulatory approvals that may be required.

     (d)  PURCHASE PRICE. The purchase price per share of Common Stock under
each option shall be not less than the fair market value of the Common Stock on
the date the option is granted. For the purposes of the Plan, the fair market
value of the Common Stock shall be determined in good faith by the Option
Committee.

<PAGE>   4

     (e)  RIGHTS OF OPTIONEES. No Optionee shall be deemed for any purpose to be
the owner of any shares of Common Stock subject to any option unless and until
(i) the option shall have been exercised pursuant to the terms thereof, (ii) the
Corporation shall have issued and delivered the Shares to the Optionee, and
(iii) the Optionee's name shall have been entered as a stockholder of record on
the books of the Corporation. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Common Stock.

     (f)  CHANGE IN CONTROL. For purposes of the Plan, a "Change in Control"
shall be deemed to have occurred in either of the following events: (i) if there
has occurred a change in control which the Corporation would be required to
report in response to Item 1 of Form 8-K promulgated under the 1934 Act, or, if
such regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission pursuant to the 1934 Act which are intended
to serve similar purposes or (ii) when any "person" (as such term is used in
Section 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Corporation representing twenty-five percent
(25%) or more of the total number of votes that may be generally cast for the
election of directors of the Corporation, and in the case of either (i) or (ii)
above, the Corporation's Board of Directors has not consented to such event by a
two-thirds vote of all of the members of the Board of Directors then in office
adopted prior to such event. In addition, a Change in Control shall be deemed to
have occurred if, as the result of, or in connection with, any tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, persons
who were directors of the Corporation before such transaction shall cease to
constitute a majority of the Board of Directors of the Corporation or of any
successor institution.

     (g)  TRANSFER. No options or stock appreciation rights shall be
transferable by the Optionee other than by will or the laws of descent and
distribution, and options or stock appreciation rights may be exercised during
the Optionee's lifetime only by the Optionee, or his or her guardian or legal
representative.

6.   METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE

     (a)  Any option granted under the Plan may be exercised by the Optionee by
delivering to the Option Committee on any business day a written notice
specifying the number of shares of Common Stock the Optionee then desires to
purchase (the "Notice").

<PAGE>   5

     (b)  Payment for the shares of Common Stock purchased pursuant to the
exercise of an option shall be made either in (i) cash equal to the option price
for the number of shares specified in the Notice (the "Total Option Price"), or
(ii) if authorized by the applicable option agreement, shares of Common Stock of
the Corporation having a fair market value, as determined in good faith by the
Option Committee, equal to or less than the Total Option Price, plus cash in an
amount equal to the excess, if any of the Total Option Price over the fair
market value of such shares of Common Stock.

7.   STOCK APPRECIATION RIGHTS

     (a)  The Option Committee may, but shall not be obligated to, include stock
appreciation rights in any option agreement, on such terms and conditions as it
deems appropriate in each case. Such stock appreciation rights shall permit the
Optionee, at his or her election, to surrender to the Corporation the right to
exercise such option (or portion thereof) in consideration for the payment by
the Corporation of any amount equal to the excess of the fair market value on
the date of such surrender of the shares of Common Stock subject to such option
(or portion thereof) surrendered over the exercise price of such shares. Such
payment may be made, at the discretion of the Option Committee upon the request
of the Optionee, in shares of Common Stock valued at the fair market value
thereof on the date of such surrender or in cash, or any combination thereof.

     (b)  Any election by an Optionee to exercise stock appreciation rights
included in any option agreement by settlement in cash shall be made only during
the period beginning on the third business day following the date of the release
for publication of quarterly or annual financial information and ending on the
twelfth business day following such date. This condition shall be deemed to be
satisfied when the specified financial data appears on or in a wire service,
financial news service or newspaper of general circulation or is otherwise first
made publicly available. No stock appreciation right may be exercised within six
months from the date of grant thereof, except that this limitation shall not
apply in the event that death or disability of the Optionee occurs prior to the
expiration of such six-month period.

     (c)  Any option surrendered as provided in this Section 7 shall be
cancelled by the Corporation and shall not be subject to further grant.

     (d)  The Option Committee shall be authorized hereunder to make payment to
the Optionee in shares of Common Stock only if Section 61 and 83 of the Code
apply to the Common Stock transferred to the Optionee.

<PAGE>   6

     (e)  Notwithstanding the foregoing, a stock appreciation right may not be
settled in either cash or shares of the Corporation's Common Stock, if such
settlement would result in the settlement of the stock appreciation right not
complying with Rule 16b-3(e) under the Exchange Act or any successor provision
thereto.

8.   ADJUSTMENT UPON CHANGES IN CAPITALIZATION

     (a)  If the shares of the Corporation's Common Stock as a whole are
increased, decreased, changed into or exchanged for, a different number or kind
of shares or securities of the Corporation, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or the like, an appropriate and proportionate adjustment
shall be made in the number and kind of shares subject to the Plan and in the
number, kind, and per share exercise price of shares or other securities subject
to unexercised options or portions thereof granted prior to any such change. In
the event of any such adjustment in an outstanding option, the Optionee
thereafter shall have the right to purchase the number of shares or securities
under such option at the per share price or per unit price, as so adjusted,
which the Optionee could purchase for the total purchase price applicable to the
option immediately prior to such adjustment.

     (b)  Adjustments under this Section 8 shall be determined by the Option
Committee and such determinations shall be conclusive. The Option Committee
shall have the discretion and power in any such event to determine and to make
effective provision for acceleration of the time or times at which any option or
portion thereof shall become exercisable. No fractional shares of Common Stock
shall be issued under the plan on account of any adjustment specified above.

9.   EFFECT OF CERTAIN TRANSACTIONS

     In the case of (i) the dissolution or liquidation of the Corporation, (ii)
a reorganization, merger or consolidation in which the Corporation is acquired
by another entity or in which the Corporation is not the surviving corporation,
or (iii) the sale of all or substantially all of the property of the Corporation
to another corporation, the Plan and the options issued hereunder shall
terminate on the effective date of such transaction, unless provision is made in
connection with such transaction for the assumption of options theretofore
granted under the Plan, or the substitution for such options of new options of
the successor corporation or parent thereof, with appropriate adjustment as to
the number and kind of shares and the per share exercise prices, as provided in
Section 8. In the event of such termination, all outstanding options shall be
exercisable in full for at least 15 days prior to the date of such termination
whether or not otherwise exercisable during such period.

<PAGE>   7

10.  RELEASE OF FINANCIAL INFORMATION

     A copy of the Corporation's annual report to stockholders shall be
delivered to each Optionee at the time such report is distributed to the
Corporation's stockholders. Upon request, the Corporation shall furnish to each
Optionee a copy of its most recent annual report and each quarterly report and
current report filed under the 1934 Act since the end of the Corporation's prior
fiscal year.

11.  AMENDMENT OF THE PLAN

     The Board of Directors may amend the Plan at any time, and from time to
time, subject to any required regulatory approval and to the limitation that,
except as provided in Sections 8 and 9 hereof, no amendment shall be effective
unless approved by the stockholders of the Corporation in accordance with
applicable law and regulations at an annual or special meeting held within
twelve months before or after the date of adoption of such amendment, where such
amendment will:

     (a)  increase the number of shares of Common Stock as to which options may
be granted under the Plan;

     (b)  change in substance Section 4 hereof relating to eligibility to
participate in the Plan;

     (c)  change the minimum option price;

     (d)  increase the maximum term of options provided herein; or

     (e)  otherwise materially increase the benefits accruing to participants
under the Plan.

     Except as provided in Sections 8 and 9 hereof, rights and obligations under
any option granted before any amendment of the Plan shall not be altered or
impaired by such amendment, except with the consent of the Optionee.

12.  NONEXCLUSIVITY OF THE PLAN

     Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to stockholders for approval shall be construed as having
created any limitations on the power of the Board of Directors to adopt such
other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.

<PAGE>   8

13.  GOVERNMENT AND OTHER REGULATIONS; GOVERNING LAW

     (a)  The obligation of the Corporation to sell and deliver shares of Common
Stock with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Option Committee.

     (b)  The Plan shall be governed by Massachusetts law, except to the extent
that such law is preempted by federal law.

     (c)  The Plan is intended to comply with the provisions of Rule 16b-3
promulgated under the 1934 Act. Any provision inconsistent with such Rule shall
be inoperative and shall not affect the validity of the Plan.

14.  TERMINATION OF GRANTING OF OPTIONS UNDER PLAN

     No option may be granted under the Plan after May 8, 1996, which is the
tenth anniversary of the date the Plan became effective as the Andover Savings
Bank 1986 Stock Option Plan.

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