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Section 1: 10-K



                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

      For the fiscal year ended December 31, 2004

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

      For the transition period from _________ to __________

                         Commission File Number: 1-15781

                          BERKSHIRE HILLS BANCORP, INC.
             (Exact name of registrant as specified in its charter)

                 Delaware                                04-3510455
------------------------------------------  ------------------------------------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization)

24 North Street, Pittsfield, Massachusetts                 01201
------------------------------------------  ------------------------------------
 (Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (413) 443-5601
          Securities registered pursuant to Section 12(b) of the Act:

                                                          Name of each exchange
         Title of each class:                              on which registered:
Common Stock, par value $0.01 per share                  American Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                Yes |X|   No |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in  Part  III of the  Form  10-K or any
amendment to this Form 10-K. |X|

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).

                                Yes |X|   No |_|

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  was $205  million,  based  upon the  closing  price of $37.10 as
quoted  on the  American  Stock  Exchange  as of the  last  business  day of the
registrant's most recently completed second fiscal quarter.

     The number of shares outstanding of the registrant's common stock as of
                         March 14, 2005, was 5,813,053.

                       DOCUMENTS INCORPORATED BY REFERENCE
         Portions of the Proxy Statement for the 2005 Annual Meeting of
    Stockholders are incorporated by reference in Part III of this Form 10-K.


                                       -1-
      

INDEX
--------------------------------------------------------------------------------

       
                                                                                               
PART I ..................................................................................     3

   ITEM 1. BUSINESS .....................................................................     3

   ITEM 2. PROPERTIES ...................................................................    35

   ITEM 3. LEGAL PROCEEDINGS ............................................................    36

   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..........................    36

PART II .................................................................................    36

   ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
           ISSUER PURCHASES OF EQUITY SECURITIES ........................................    36

   ITEM 6. SELECTED FINANCIAL DATA ......................................................    37

   ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
           OPERATION ....................................................................    39

   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................    49

   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................................    51

   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
           DISCLOSURE ...................................................................    96

   ITEM 9A. CONTROLS AND PROCEDURES .....................................................    96

   ITEM 9B. OTHER INFORMATION ...........................................................    96

PART III ................................................................................    97

   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..........................    97

   ITEM 11. EXECUTIVE COMPENSATION ......................................................    97

   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
            STOCKHOLDER MATTERS .........................................................    98

   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............................    98

   ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ......................................    98

PART IV .................................................................................    99

   ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ..................................    99

   SIGNATURES ...........................................................................   101
        


                                       -2-
      

                                     PART I

ITEM 1. BUSINESS
--------------------------------------------------------------------------------

Forward-Looking Statements
--------------------------

      This  report  contains  forward-looking   statements  that  are  based  on
assumptions  and may describe  future  plans,  strategies  and  expectations  of
Berkshire Hills Bancorp, Inc. (the "Company" or "Berkshire Hills") and Berkshire
Bank (the "Bank"). These forward-looking  statements are generally identified by
use  of the  words  "believe,"  "expect,"  "intend,"  "anticipate,"  "estimate,"
"project" or similar expressions.  Berkshire Hills' and Berkshire Bank's ability
to  predict  results  or the  actual  effect of future  plans or  strategies  is
inherently uncertain.  Factors which could have a material adverse effect on the
operations of Berkshire Hills and its subsidiaries  include, but are not limited
to,  changes in interest  rates,  national  and  regional  economic  conditions,
legislative  and regulatory  changes,  monetary and fiscal  policies of the U.S.
Government,  including  policies of the U.S.  Treasury  and the Federal  Reserve
Board, the quality and composition of the loan or investment portfolios,  demand
for loan products, deposit flows, competition,  demand for financial services in
Berkshire Hills' and Berkshire Bank's market area, changes in real estate market
values in Berkshire  Hills' and  Berkshire  Bank's  market area,  and changes in
relevant  accounting  principles and guidelines.  These risks and  uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Except as required by applicable law or
regulation,  Berkshire Hills does not undertake,  and specifically disclaims any
obligation, to release publicly the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of the statements or to reflect the  occurrence of anticipated or  unanticipated
events.

      Forward-looking statements also include, with limitation, those statements
relating  to the  anticipated  effects of the  Company's  proposed  merger  with
Woronoco  Bancorp,  Inc. The following  factors,  among others,  could cause the
actual results of the merger to differ materially from expectations: the ability
of the companies to obtain the required  stockholder or regulatory  approvals of
the merger;  the imposition of any regulatory  conditions or requirements on the
merger; the ability of the companies to consummate the merger;  Berkshire Hills'
ability  to  successfully  integrate  Woronoco  Bancorp  following  the  merger,
including  integration  of the  data  processing  system  and  retention  of key
personnel;  a materially adverse change in the financial condition,  operations,
or projected or actual earnings of either company;  the ability to fully realize
the expected cost savings and anticipated  revenues;  the ability to realize the
expected  cost  savings  and  anticipated  revenues on a timely  basis;  and any
material change in the local markets in which each company operates.

General
-------

      Berkshire Hills Bancorp,  Inc., a Delaware  corporation,  was organized in
January  2000 to  become  the  holding  company  for  Berkshire  Bank  upon  the
conversion of the Bank's former parent holding company,  Berkshire Bancorp, from
the mutual to stock form of  organization,  which occurred on June 27, 2000. The
Company  owns all of the  outstanding  shares of the Bank.  The  Company  has no
significant   liabilities.   Management   of  the   Company  and  the  Bank  are
substantially similar and the Company neither owns nor leases any property,  but
instead uses the premises, equipment and furniture of the Bank. Accordingly, the
information  set forth in this  report,  including  the  consolidated  financial
statements and related financial data, relates primarily to the Bank.

      The Bank is  regulated  by the  Massachusetts  Division  of Banks  and the
Federal  Deposit  Insurance  Corporation  (the "FDIC").  The Bank's deposits are
insured to the maximum  allowable  amount by the Bank Insurance Fund (the "BIF")
of the FDIC and the  Massachusetts  Depositors  Insurance Fund (the "DIF"),  the
Bank's excess deposit  insurer.  Berkshire Bank has been a member of the Federal
Home Loan Bank system since 1973.

      Founded  in  1846,  Berkshire  Bank is one of  Massachusetts'  oldest  and
largest  independent banks and the largest banking  institution based in western
Massachusetts.  Berkshire Bank is a community bank that accepts retail  deposits
from the general public in the areas  surrounding  its 12  full-service  banking
offices and uses those funds,  together with funds generated from operations and
borrowings,  to originate  residential  mortgage loans,  commercial business and
real estate loans and consumer loans, primarily automobile loans and home equity
lines of credit.  Berkshire Bank primarily  holds  adjustable rate loans that it
originates for investment,  but  occasionally  sells or securitizes  some of its
loans,  including ongoing sales of most newly originated fixed-rate  residential
mortgage  loans,  in the secondary  market.  Berkshire Bank also invests in U.S.
Government  and  Agency  securities,   mortgage-  and  asset-backed  securities,
including real estate mortgage investment  conduits and collateralized  mortgage
obligations,  municipal  notes and bonds,  debt and equity  securities and other
permissible investments.  Berkshire Bank's revenues are derived principally from
the generation of interest and fees on loans originated and, to a lesser extent,
interest and  dividends on its  investment  securities.  The Bank also  provides
various services,  which generate non-interest income.  Berkshire Bank's primary
sources of funds are  deposits,  principal  and  interest  payments on loans and
securities and advances from the Federal Home Loan Bank of Boston.


                                       -3-
      

Merger Agreement
----------------

      On December  16,  2004,  Berkshire  Hills and  Woronoco  Bancorp,  Inc., a
Delaware  corporation  ("Woronoco"),  entered into a definitive merger agreement
(the "Agreement"), pursuant to which Woronoco will merge with and into Berkshire
Hills, with Berkshire Hills being the surviving entity (the "Merger"). Under the
terms of the  Agreement,  the  stockholders  of Woronoco  will have the right to
elect to receive  either  $36.00 in cash or one share of Berkshire  Hills common
stock in exchange for each  Woronoco  share held by them,  subject to procedures
such that 75% of the  outstanding  Woronoco  common  shares are  converted  into
Berkshire Hills common stock and the balance is converted into cash. Immediately
following the Merger,  Woronoco  Savings Bank,  the  wholly-owned  subsidiary of
Woronoco, will merge with and into Berkshire Bank, with Berkshire Bank being the
surviving entity.

      The completion of the Merger is subject to approval by the stockholders of
both  companies and customary  regulatory  approvals.  The Merger is expected to
close in the second quarter of 2005.

      The above  description  of the Agreement does not purport to be a complete
statement of the parties'  rights and  obligations  under the  Agreement and the
transactions  contemplated  thereby.  The above  description is qualified in its
entirety by reference to the  Agreement,  a copy of which is attached as Exhibit
99.1 to the current  report on Form 8-K filed on  December  17,  2004,  which is
incorporated herein by reference.  A preliminary  Registration Statement on Form
S-4 was filed with the  Securities  and Exchange  Commission on February 3, 2005
for the issuance of additional  shares of common stock in  conjunction  with the
Agreement.

Company Website and Availability of Securities and Exchange Commission Filings
------------------------------------------------------------------------------

      The Company's Internet website is www.berkshirebank.com. The Company makes
available  free of charge on or through its website,  its annual reports on Form
10-K,  quarterly  reports on Form  10-Q,  current  reports on Form 8-K,  and any
amendments  to those  reports  filed  pursuant to Section  13(a) or 15(d) of the
Securities  Exchange  Act of 1934 as soon as  reasonably  practicable  after the
Company  electronically  files such  material with the  Securities  and Exchange
Commission.

Market Area
-----------

      Berkshire Bank is headquartered in Pittsfield, Massachusetts, in Berkshire
County.  Berkshire  Bank's  primary  deposit  gathering  and  lending  areas are
concentrated in the communities  surrounding its 11 full-service banking offices
located in Berkshire County. Additionally, the Bank has expanded its market area
into  Eastern  New York  through  the  opening  of a  full-service  branch and a
representative  office  in  2004.  The Bank  has  also  announced  plans to open
additional  full-service  offices in eastern New York. Berkshire Bank also makes
loans  primarily  throughout  western  Massachusetts,  northern  Connecticut and
southern Vermont.

      Berkshire   County,   the  western-most   county  in   Massachusetts,   is
approximately  two and  one-half  hours  from  both  Boston  and New York  City.
Berkshire County borders Vermont, Connecticut and New York. Berkshire County has
experienced a shift in its economy as manufacturing jobs have been replaced with
service-related  jobs,  primarily  in tourism,  social  service and health care.
Other than  Berkshire  Bank, the major  employers in the area include  Berkshire
Life  Insurance  Company of America,  Crane & Company,  GE  Plastics,  Berkshire
Health Systems,  General Dynamics Defense Systems,  Mead Corporation and several
institutions of higher education.

Competition
-----------

      The Bank faces  intense  competition  for the  attraction  of deposits and
origination of loans in its primary market area. As of June 30, 2004,  according
to information presented on the Federal Deposit Insurance Corporation's website,
the Bank held  approximately 33% of the deposits in Berkshire  County.  This was
the largest share of deposits out of 13 banks in the county, and was about twice
as large as the share of the next highest bank in the county. The Bank generally
competes  on the basis of  customer  service and  relationship  management,  the
pricing of loan and deposit products and wealth management  services.  Berkshire
Bank's most direct competition for deposits comes from one large credit union in
the area, which has a competitive advantage, as credit unions do not have to pay
state or federal taxes. The Bank also competes with  super-regional  banks, such
as Banknorth and Citizens Bank, which have  substantially  greater resources and
lending limits. Additionally, Berkshire Bank faces competition for deposits from
several other  commercial and savings banks operating in its primary market area
and, to a lesser extent,  from other financial  institutions,  such as brokerage
firms,  insurance  companies  and the mutual fund  industry,  as customers  seek
alternative  sources  of  investment  for  their  funds.  Berkshire  Bank  faces
competition  for  loans  from a  significant  number  of  traditional  financial
institutions,  primarily  savings banks and commercial banks in its market area,
as well as the mortgage  companies and mortgage brokers operating in its primary
market area. The increase of Internet-accessible  financial institutions,  which
solicit  deposits and  originate  loans on a nationwide  basis,  also  increases
competition  for  Berkshire  Bank's  customers.  Additionally,  competition  has
increased  as a result of  regulatory  actions  and  legislative  changes,  most
notably the enactment of the  Gramm-Leach-Bliley Act of 1999. These changes have
eased  restrictions  on  interstate  banking and the entrance into the financial
services  market  by  non-depository  and  non-traditional   financial  services
providers, including insurance companies,  securities brokerage and underwriting
firms  and  specialty  financial  services  companies  (such  as  Internet-based
providers).


                                       -4-
      

Lending Activities
------------------

      General.  The types of loans that Berkshire Bank may originate are limited
by federal and state laws and  regulations.  Interest rates charged by Berkshire
Bank  on  loans  are   affected   principally   by  Berkshire   Bank's   current
asset/liability  strategy,  the  demand  for such  loans,  the  supply  of money
available  for lending  purposes  and the rates  offered by  competitors.  These
factors,  in turn,  are  affected by general and economic  conditions,  monetary
policies  of the  federal  government,  including  the  Federal  Reserve  Board,
legislative tax policies and governmental budgetary matters.

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

       
         
                                                                          At December 31,
                                ----------------------------------------------------------------------------------------------------
                                       2004               2003                  2002                2001                 2000
                                ------------------  -------------------  ------------------  ------------------   ------------------
                                           Percent              Percent             Percent             Percent              Percent
                                              of                   of                  of                  of                   of
                                  Amount    Total    Amount      Total     Amount    Total     Amount    Total      Amount    Total
                                ------------------  -------------------  ------------------  ------------------   ------------------
                                                                       (Dollars in thousands)
                                                                                                                                   
Real estate loans:
 One- to four-family            $ 232,498     28%   $ 266,753      34%   $ 246,938      34%  $ 240,852      30%   $ 249,440      31%
 Commercial                       207,619     25      154,244      20      119,198      17      84,741      10       63,871       8
 Multi-family                      16,380      2       15,514       2       14,920       2      13,183       2       15,699       2
 Construction and land
      development                  38,702      5       34,719       4       17,627       2      22,936       3       14,290       2
                                ---------    ---    ---------     ---    ---------     ---   ---------     ---    ---------     ---
      Total real estate loans     495,199     60      471,230      60      398,683      55     361,712      45      343,300      43
                                ---------    ---    ---------     ---    ---------     ---   ---------     ---    ---------     ---

Consumer loans:
 Home equity lines of credit       54,157      6       45,783       5       40,713       6      34,439       4       34,471       4
 Automobile                       122,830     15      103,674      13      113,321      15     228,412      29      241,862      31
 Other                              4,292      1        4,506       1        5,017       1       7,792       1        6,800       1
                                ---------    ---    ---------     ---    ---------     ---   ---------     ---    ---------     ---
      Total consumer loans        181,279     22      153,963      19      159,051      22     270,643      34      283,133      36
                                ---------    ---    ---------     ---    ---------     ---   ---------     ---    ---------     ---

Commercial loans                  150,932     18      166,451      21      165,447      23     170,230      21      166,956      21
                                ---------    ---    ---------     ---    ---------     ---   ---------     ---    ---------     ---
      Subtotal                    827,410             791,644              723,181             802,585              793,389

Net deferred loan origination
      costs                           574                 110                   41                 172                  232
Unamortized premium/(discount)
   on purchased loans                 195                 473                 (200)               (203)                  --
                                ---------    ---    ---------     ---    ---------     ---   ---------     ---    ---------     ---
      Total loans                 828,179    100%     792,227     100%     723,022     100%    802,554     100%     793,621     100%
                                             ===                  ===                  ===                 ===                  ===

Allowance for loan losses          (9,337)             (8,969)             (10,308)            (11,034)             (10,216)
                                ---------           ---------            ---------           ---------            ---------
      Net loans                 $ 818,842           $ 783,258            $ 712,714           $ 791,520            $ 783,405
                                =========           =========            =========           =========            =========
        

Real Estate Lending
-------------------

      One- to  Four-Family  Real Estate Loans.  One of Berkshire  Bank's primary
lending  activities  is to  originate  loans  secured  by  one-  to  four-family
residences  located in its primary  market  area.  At December  31,  2004,  $232
million,  or  28%,  of  Berkshire  Bank's  total  loans  consisted  of  one-  to
four-family mortgage loans. Of the one- to four-family loans outstanding at that
date, 35% were fixed-rate mortgage loans and 65% were adjustable-rate loans.

      Berkshire  Bank  originates   fixed-rate   fully   amortizing  loans  with
maturities  of 15, 20 and 30 years.  Management  establishes  the loan  interest
rates based on market  conditions.  Berkshire  Bank offers  mortgage  loans that
conform to Fannie Mae and Freddie Mac  guidelines.  In addition,  Berkshire Bank
offers jumbo loan products,  which presently are loans in amounts over $359,650.
Berkshire Bank generally originates loans for its own portfolio,  but also sells
or  securitizes  some  fixed-rate  one- to  four-family  loans in the  secondary
market.  The  determination  of whether to sell or securitize  loans is reviewed
periodically  by management  as a means of managing the Company's  interest rate
risk profile or providing  liquidity.  The Company  currently  sells most of its
fixed-rate residential mortgage originations on a flow basis to secondary market
investors at the time of  origination.  Berkshire  Bank  generally  underwrites,
processes and closes its residential  mortgages following  conforming  secondary
market guidelines.

      Berkshire Bank also currently offers adjustable-rate  mortgage loans, with
an  interest  rate based on the  one-year,  three-  year or  five-year  Constant
Maturity  Treasury  index,  which adjust every one, three or five years from the
outset of the loan, with


                                       -5-
      

terms of up to 30 years.  Interest rate  adjustments on such loans range from 2%
to 5% during any  adjustment  period and are limited to no more than 6% over the
life of the loan.

      Adjustable-rate  mortgage loans help reduce  Berkshire  Bank's exposure to
changes in interest  rates.  There are,  however,  unquantifiable  credit  risks
resulting from the potential of increased  costs due to changed rates to be paid
by borrowers.  During periods of rising interest  rates,  the risk of default on
adjustable-rate  mortgage  loans  increases  as a result  of  repricing  and the
increased  payments  required to be made by  borrowers.  In  addition,  although
adjustable-rate  mortgage loans allow Berkshire Bank to increase the sensitivity
of its asset base to  changes in  interest  rates,  the extent of this  interest
sensitivity  is limited by the periodic and lifetime  interest  rate  adjustment
limits.  Because of these  considerations,  Berkshire Bank has no assurance that
yields on adjustable-rate  mortgage loans will be sufficient to offset increases
in Berkshire Bank's cost of funds during periods of rising interest rates. These
risks have not had a material adverse effect on Berkshire Bank to date.

      Berkshire Bank underwrites one- to four-family  residential mortgage loans
with  loan-to-value  ratios  of up to  100%  on a  one-  to  two-family  primary
residence,  up to 90% on a three- to four-family primary residence or a vacation
home, and up to 75% on a  condominium.  A borrower is required to obtain private
mortgage  insurance  on  loans  that  exceed  80%,  or  75%  in  the  case  of a
condominium,  of the appraised  value or sales price,  whichever is less, of the
secured property.  Berkshire Bank also generally requires fire, casualty, title,
hazard  insurance and, if  appropriate,  flood insurance to be maintained on all
properties  securing real estate loans made by Berkshire  Bank.  An  independent
licensed appraiser generally appraises all properties. At December 31, 2004, the
largest residential mortgage loan totaled $2.6 million. This loan was performing
according to its terms at December 31, 2004.

      To provide financing for low- and moderate-income families, Berkshire Bank
offers Federal Housing  Authority,  Veterans  Administration  and  Massachusetts
Housing Finance Agency residential mortgage loans to qualified  individuals with
adjustable- and fixed-rates of interest and terms of up to 30 years.  Such loans
may  be  secured  by  one-  to  four-family   residential   properties  and  are
underwritten  using  modified  underwriting  guidelines.   Berkshire  Bank  also
participates in the Good Samaritan Home Ownership Program, which is a non-profit
venture established to advise and assist low- and middle-income  families in the
purchase of their first home in  Berkshire  County.  Qualified  individuals  can
obtain  a  30-year  fixed-rate  mortgage  loan on a one- to  four-family,  owner
occupied property.

      Construction   and  Land   Development   Loans.   At  December  31,  2004,
construction and land development loans totaled $39 million,  or 5% of Berkshire
Bank's total loan portfolio,  of which $18 million was residential  construction
loans,  $13  million  was  commercial  construction  loans  and $8  million  was
commercial land development  loans. At December 31, 2004, the unadvanced portion
of construction and land development loans totaled $28 million.

      Berkshire  Bank  originates  construction  and land  development  loans to
individuals  for  the  construction  and  acquisition  of  personal  residences.
Berkshire Bank's  residential  construction and land development loans generally
provide for the payment of interest only during the construction phase, which is
usually fifteen months. At the end of the construction  phase, the loan converts
to a permanent  mortgage  loan.  Loans can be made with a maximum  loan to value
ratio of 85%,  provided that the borrower obtains private mortgage  insurance if
the loan balance exceeds 80% of the appraised value or sales price, whichever is
less, of the secured  property.  At December 31, 2004,  the largest  outstanding
residential  construction  and land  development  loan  commitment  was for $2.7
million,  $200,000  of  which  was  outstanding  at such  date.  This  loan  was
performing  according to its terms at December 31, 2004.  Construction  and land
development  loans  to  individuals  are  generally  made on the  same  terms as
Berkshire Bank's one- to four-family mortgage loans.

      Before  making a commitment to fund a  residential  construction  and land
development  loan,  Berkshire  Bank  requires an  appraisal  of the property and
planned improvements by an independent  licensed appraiser.  Berkshire Bank also
reviews and inspects each property before  disbursement of funds during the term
of the construction and land development loan. Loan proceeds are disbursed after
inspection based on the percentage of completion method.

      Berkshire  Bank also makes  construction  and land  development  loans for
commercial   development   projects,   including   multi-family  and  commercial
properties,  single-family subdivisions and condominiums. A feasibility study is
particularly   important  with  respect  to   multi-family   housing   projects,
hotel/motel construction and health care facilities.  These loans generally have
an interest only phase during construction then convert to permanent  financing.
Disbursement  of funds is at the sole  discretion of Berkshire Bank and is based
on the progress of construction. The maximum loan to value ratio for these loans
depends upon the type of commercial  development  project being undertaken,  but
generally will not exceed 80%. Loans secured by  single-family  subdivisions and
condominium projects may be made in amounts of up to 75% and 70%,  respectively,
of the appraised  value of the property or selling price,  whichever is less. At
December 31, 2004,  the largest  commercial  construction  and land  development
commitment was $5 million, of which $4 million was outstanding,  to a local real
estate developer  developing a 96-unit single family and condominium style mixed
income  housing  development  in  Berkshire  County.  This  loan was  performing
according to its terms at December 31, 2004.

      Berkshire  Bank  also  originates  land  loans  to local  contractors  and
developers for the purpose of making improvements thereon, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property,  have  loan


                                      -6-
      

to value ratios of 75% of the value of the land used for residential development
and 80% of the value of the land used for commercial  development  (based on the
lower of the acquisition  price or the appraised value of the land).  Land loans
are offered with a term of three years in which only  interest is required to be
paid each month. A balloon  payment for the principal plus any accrued  interest
is due at the end of the  three-year  period.  Berkshire  Bank's  land loans are
generally  secured by  property  in its  primary  market  area.  Berkshire  Bank
generally requires title insurance and, if applicable,  either a hazardous waste
survey or environmental insurance coverage.

      Construction  and land  development  financing is generally  considered to
involve a higher  degree of credit risk than  long-term  financing  on improved,
owner-occupied  real estate.  Risk of loss on a  construction  loan is dependent
largely upon the  accuracy of the initial  estimate of the  property's  value at
completion of construction  compared to the estimated cost (including  interest)
of construction  and other  assumptions.  If the estimate of  construction  cost
proves to be inaccurate,  Berkshire Bank may be required to advance funds beyond
the  amount  originally   committed  to  protect  the  value  of  the  property.
Additionally,  if the estimate of value proves to be inaccurate,  Berkshire Bank
may be confronted with a completed project having a value insufficient to assure
full  repayment.  As a  result  of the  foregoing,  construction  lending  often
involves the  disbursement  of substantial  funds with repayment  dependent,  in
part,  on the  success of the  ultimate  project  rather than the ability of the
borrower or guarantor to repay  principal  and  interest.  If Berkshire  Bank is
forced to foreclose on a project before or at completion  due to default,  there
can be no  assurance  that it will be able to recover all of the unpaid  balance
of, and accrued interest on, the loan and related foreclosure and holding costs.

      Multi-Family  and  Commercial  Real Estate  Loans.  At December  31, 2004,
multi-family  and commercial  real estate loans totaled $224 million,  or 27% of
total loans.  Berkshire Bank originates  multi-family and commercial real estate
loans that are generally  secured by five or more unit  apartment  buildings and
properties  used  for  business   purposes  such  as  small  office   buildings,
industrial,  healthcare,  lodging or retail facilities  predominantly located in
Berkshire  Bank's  primary  market  area.   Berkshire  Bank's  multi-family  and
commercial  real  estate  loans  may  be  made  in  amounts  of up to 80% of the
appraised  value  of the  property  or the  selling  price,  whichever  is less.
Berkshire Bank's  multi-family and commercial real estate loans may generally be
made with terms of up to 20 years and  substantially all of which are originated
with  interest  rates that  adjust  periodically  and are  generally  indexed to
Berkshire  Bank's  base rate.  In  reaching  its  decision  on whether to make a
multi-family  or commercial  real estate loan,  Berkshire Bank considers the net
operating income and value of the property and the borrower's expertise,  credit
history and profitability.  In addition,  with respect to commercial real estate
rental  properties,  Berkshire Bank will also consider the term of the lease and
the  quality  of  the  tenants.  Berkshire  Bank  generally  requires  that  the
properties  securing these real estate loans have debt service  coverage  ratios
(the ratio of available  cash flows  before debt service to debt  service) of at
least  1.25x.  Credit  enhancements  in the  form of  additional  collateral  or
guarantees are normally  considered for start-up businesses without a qualifying
cash flow history. Environmental surveys or environmental insurance coverage are
generally  required for commercial  real estate loans.  Additionally,  in larger
real estate projects,  it is recommended  that a feasibility  study be obtained.
Generally,  multi-family  and commercial real estate loans made to corporations,
partnerships  and other business  entities  require  personal  guarantees by the
principals. The largest multi-family or commercial real estate loan relationship
at December  31, 2004  consisted of four loans to related  recreational  vehicle
camps located  throughout  New England and New York State  totaling $10 million.
This borrower is a national operator of recreational  vehicle  campgrounds.  All
loans to this borrower were performing  according to their terms at December 31,
2004.

      Loans  secured by  multi-family  and  commercial  real  estate  properties
generally  involve  larger  principal  amounts and a greater degree of risk than
one- to  four-family  residential  mortgage  loans.  Because  payments  on loans
secured  by  multi-family  and  commercial  real  estate  properties  are  often
dependent on the successful operation or management of the properties, repayment
of such loans may be affected by adverse conditions in the real estate market or
the  economy.  Berkshire  Bank seeks to  minimize  these  risks  through  strict
adherence to its underwriting standards.

Consumer Lending
----------------

      Automobile  Lending.  At December 31, 2004,  automobile loans totaled $123
million,  or 15% of Berkshire  Bank's total loans and 68% of consumer loans. The
Bank offers  fixed-rate  automobile  loans on a direct and  indirect  basis with
terms of up to 72 months for new and recent  model used cars and up to 66 months
for older model used cars.  Berkshire  Bank generally will make such loans up to
100% of the retail value shown in the NADA Used Car Guide.  The  interest  rates
offered differ depending on the age of the automobile and interest rates offered
by competitors.

      Berkshire Bank began offering indirect automobile loans through automobile
dealers over fifteen years ago. Currently,  Berkshire Bank maintains contractual
relationships  with  over  90  new  and  used  car  dealers  throughout  western
Massachusetts,  northern Connecticut,  eastern New York and southern Vermont. In
2001,  management determined to decrease the Bank's emphasis on lower quality or
sub-prime  automobile  loans and reduce the overall size of the automobile  loan
portfolio.  This  process  was  accelerated  through  the sale of $70 million of
sub-prime  automobile loans in 2002 and the sale of an additional $10 million of
sub-prime  automobile  loans in 2003.  At December 31,  2004,  $400,000 of lower
quality or sub-prime automobile loans remained. In 2004, Berkshire Bank achieved
19% growth in its  automobile  loan  portfolio,  while  adhering to its improved
standards.  At December  31, 2004,  the average FICO score of existing  consumer
loans (at origination) was 705.


                                      -7-
      

      Home  Equity  Lines of Credit and Other  Consumer  Loans.  Berkshire  Bank
offers home equity lines of credit secured by owner-occupied one- to four-family
residences.  At December 31, 2004,  outstanding loans under home equity lines of
credit  totaled $54 million,  or 6% of  Berkshire  Bank's total loans and 30% of
consumer loans.  Additionally,  at December 31, 2004, the unadvanced  amounts of
home equity lines of credit  totaled $57  million.  The  underwriting  standards
employed  by  Berkshire   Bank  for  home  equity  lines  of  credit  include  a
determination  of  the  applicant's   credit  history,   an  assessment  of  the
applicant's  ability to meet existing  obligations  and payments on the proposed
loan and the value of the  collateral  securing  the  loan.  Home  equity  loans
generally will not be made if the borrower's  first  mortgage  payment,  monthly
real  estate  payment  and  amortized  equity  line  payment  exceed  28% of the
borrower's  gross monthly  income.  Additionally,  the  borrower's  monthly debt
service cannot exceed 35% of the borrower's  gross monthly  income.  Home equity
lines of credit have monthly  adjustable  rates of interest which are indexed to
the prime rate as reported in The Wall Street  Journal.  Generally,  the maximum
combined  loan-to-value ratio on home equity lines of credit is 80% for loans up
to  $200,000  and 60% for loans  greater  than  $200,000.  A home equity line of
credit may be drawn  down by the  borrower  for an initial  period of five years
from the date of the loan  agreement.  During this period,  the borrower has the
option of paying,  on a monthly  basis,  either  principal  and interest or only
interest.  If not renewed,  the borrower has to pay back the amount  outstanding
under the line of credit over a term not to exceed ten years,  beginning  at the
end of the five-year period.

      Other consumer loans at December 31, 2004 amounted to $4 million, or 1% of
Berkshire  Bank's  total loans and 2% of  consumer  loans.  These loans  include
education,  collateral,  personal and unsecured loans, and second mortgage loans
other than home equity lines of credit.  Collateral loans are generally  secured
by a passbook  account,  a  certificate  of deposit  or  marketable  securities.
Unsecured loans generally have a maximum  borrowing  limitation of $10,000 and a
maximum  term of five years.  Second  mortgages  are  offered on  owner-occupied
primary  or  secondary  residences  and are  adjustable-rate,  either  adjusting
annually or with a five-year initial fixed period adjusting annually thereafter,
with terms up to 30 years.

      Loans secured by rapidly  depreciable  assets such as  automobiles or that
are unsecured  entail greater risks than one- to four-family  mortgage loans. In
such  cases,  repossessed  collateral  for a  defaulted  loan may not provide an
adequate source of repayment of the outstanding  loan balance,  since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
The remaining  deficiency often does not warrant further substantial  collection
efforts against the borrower beyond  obtaining a deficiency  judgment.  Further,
collections on these loans are dependent on the borrower's  continuing financial
stability and, therefore,  are more likely to be adversely affected by job loss,
divorce,  illness or personal  bankruptcy.  Finally,  the application of various
federal and state laws,  including  federal and state  bankruptcy and insolvency
laws,  may limit the amount  which can be  recovered on such loans if a borrower
defaults.

Commercial Lending
------------------

      Commercial Loans. At December 31, 2004, Berkshire Bank had $151 million in
commercial  loans which  amounted to 18% of total loans.  In  addition,  at such
date,  Berkshire Bank had $44 million of unadvanced  commercial lines of credit.
Berkshire Bank makes commercial business loans primarily in its market area to a
variety of professionals,  sole proprietorships and small businesses.  Berkshire
Bank's largest commercial loan relationship was a $6 million credit exposure, $5
million of which was outstanding at December 31, 2004, to a long-time  Berkshire
County customer secured by various types of business assets consisting primarily
of construction  equipment.  This loan was performing  according to its terms at
December 31, 2004.

      Berkshire Bank offers secured commercial term loans, which have maturities
of  greater  than one year and the  repayment  of which is  dependent  on future
earnings.  The term for repayment  will normally be limited to the lesser of the
expected  useful  life of the asset being  financed  or a fixed  amount of time,
generally  seven years or less.  Berkshire Bank also offers loans  originated to
finance a business' equipment and machinery, lines of credit, letters of credit,
time notes and Small  Business  Administration  guaranteed  loans.  In addition,
Berkshire Bank offers  revolving lines of credit called operating loans that are
secured by business assets other than real estate,  such as business  equipment,
inventory  and accounts  receivable.  Business  lines of credit have  adjustable
rates of  interest  and are  payable  on demand,  subject  to annual  review and
renewal. Time notes are short-term loans,  generally limited to 90 days which do
not require payment of principal or interest until maturity.

      When making  commercial  business  loans,  Berkshire  Bank  considers  the
financial  statements of the borrower,  the borrower's  payment  history of both
corporate and personal debt, the debt service capabilities of the borrower,  the
projected cash flows of the business, the viability of the industry in which the
customer  operates  and  the  value  of  the  collateral.   Policies   regarding
debt-service  coverage  ability and guarantees are similar to those which govern
commercial real estate lending.  Commercial business loans are generally secured
by a variety of collateral such as accounts receivable, inventory and equipment,
and are generally supported by personal guarantees.  Depending on the collateral
used to secure the loans,  commercial  loans are generally made in amounts of up
to 95% of the liquidation value of the collateral  securing the loan.  Berkshire
Bank generally does not make unsecured  commercial  loans; the largest unsecured
commercial  loan at December 31, 2004 had a balance of  $550,000.  This loan was
performing according to its terms at December 31, 2004.

      Unlike  residential  mortgage loans, which generally are made on the basis
of the borrower's  ability to make repayment from his or her employment or other
income,  and which are  secured by real  property  whose  value tends to be more
easily ascertainable, commercial loans are of higher risk and are made primarily
on the basis of the borrower's  ability to make repayment


                                      -8-
      

from the cash flows of the borrower's business. As a result, the availability of
funds for the  repayment of  commercial  loans may depend  substantially  on the
success of the business itself.  Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in value.

      Commercial  loans at December 31, 2004,  including  commercial real estate
and construction loans and excluding loans guaranteed by the U.S. Small Business
Administration,  broken  down  by  industry,  were as  follows:  non-residential
building operators - $58 million;  lodging - $46 million;  apartment buildings -
$34  million;  subdividers/developers  - $21 million;  automobile  dealers - $21
million; and recreational vehicle parks - $16 million.

      Loans to One Borrower.  The maximum amount that Berkshire Bank may lend to
one  borrower is limited by statute.  At December  31,  2004,  Berkshire  Bank's
statutory  limit  on  loans  to one  borrower  was $24  million.  At that  date,
Berkshire  Bank's  largest  amount  of  loans  to one  borrower,  including  the
borrower's  related  interests,  was  approximately $10 million and consisted of
five loans  secured by various types of business and real estate  assets.  These
loans were performing according to their terms at December 31, 2004.

      Maturity  of Loan  Portfolio.  The  following  table  shows the  remaining
contractual  maturity of  Berkshire  Bank's  total loans at December  31,  2004,
excluding the effect of future principal prepayments, and contractual repricing.

       
         
                                                                    At December 31, 2004
                            -------------------------------------------------------------------------------------------------
                                                                     Home
                             One- to  Construction    Commercial    Equity
                             Four-      and Land         and       Lines of                  Other
                             Family    Development   Multi-Family   Credit     Automobile   Consumer   Commercial      Total
                            --------   -----------   ------------  --------    ----------   --------   ----------    --------
                                                                       (In thousands)
                                                                                                                        
Amounts due in:
   One year or less         $  4,408     $23,357       $  2,859     $ 1,724     $  2,514     $  862     $ 50,585     $ 86,309
   More than one year
      to five years            9,302      15,345         22,007      13,981       91,928      1,781       28,372      182,716
   More than five years      218,788          --        199,133      38,452       28,388      1,649       71,975      558,385
                            --------     -------       --------     -------     --------     ------     --------     --------
      Total amount due      $232,498     $38,702       $223,999     $54,157     $122,830     $4,292     $150,932     $827,410
                            ========     =======       ========     =======     ========     ======     ========     ========
        


                                      -9-
      

      The following  table sets forth at December 31, 2004, the dollar amount of
loans  contractually  due after  December  31, 2005 and whether  such loans have
fixed interest rates or adjustable interest rates.

                                               Due After December 31, 2005
                                           ----------------------------------
                                             Fixed     Adjustable     Total
                                           --------    ----------    --------
                                                     (In thousands)
         Real estate loans:
            One- to four-family            $ 80,104     $147,986     $228,090
            Construction and land
                 development                     --       15,345       15,345
            Commercial and
                 multi-family                12,713      208,427      221,140
                                           --------     --------     --------
               Total real estate loans       92,817      371,758      464,575
         Home equity lines of credit             --       52,433       52,433
         Automobile                         120,316           --      120,316
         Other consumer                       2,128        1,302        3,430
         Commercial loans                    10,561       89,786      100,347
                                           --------     --------     --------
               Total                       $225,822     $515,279     $741,101
                                           ========     ========     ========

      Scheduled  contractual  principal  repayments  of loans do not reflect the
actual life of the loans. The average life of a loan is substantially  less than
its contractual  term because of prepayments.  Automobile  loans have relatively
short  average  lives  since they are fully  amortizing  with  final  maturities
generally no longer than six years.  In addition,  due-on-sale  clauses on loans
generally  give Berkshire  Bank the right to declare loans  immediately  due and
payable if, among other  things,  the borrower  sells the real property with the
mortgage and the loan is not repaid.  The average life of a mortgage  loan tends
to increase,  however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely,  tends to decrease
when rates on existing  mortgage  loans are  substantially  higher than  current
mortgage loan market rates.

      Loan  Approval   Procedures  and  Authority.   Berkshire   Bank's  lending
activities follow written,  non-discriminatory,  underwriting standards and loan
origination  procedures  established by Berkshire  Bank's Board of Directors and
management.  The Board of Directors has  authorized  the  following  persons and
groups of persons to approve loans up to the amounts  indicated:  several retail
lenders have been delegated authority to approve  residential  mortgage loans up
to  $300,000;  home equity  lines of credit  ranging  from  $50,000 to $300,000;
unsecured consumer loans from $5,000 to $30,000; and secured consumer loans from
$20,000 to $50,000.

      One- to four-family  mortgage loans and home equity loans from $300,000 to
$600,000 may be approved by a  combination  of individual  officer  authorities,
provided  that  approval  must  include  either  the  President  or Senior  Vice
President-Retail  Lending.  Approvals  from  $600,000  to $1.5  million  require
approvals of both the  President and the Senior Vice  President-Retail  Lending.
All residential loans in excess of $1.5 million require the approval of the Loan
and  Investment  Committee  of the  Board  of  Directors  or the  full  Board of
Directors.

      The Board of Directors has delegated the authority to approve loans to the
President,  the Senior Commercial Lender and several commercial loan officers in
amounts  ranging up to  $300,000  for  secured  commercial  loans and in amounts
ranging up to $175,000 for unsecured  commercial loans. Loans in excess of these
amounts  require the approval of a majority of the members of  Berkshire  Bank's
Senior Lending Committee, which consists of the Senior Commercial Lender and all
commercial loan officers.  The President,  the Credit Administration Officer and
the Loan Review  Officer are  non-voting  members of the Senior Loan  Committee.
Delegated approval authorities may be combined.  However,  individual limits may
be combined only up to $500,000 for commercial loan approvals  without requiring
approval  of the  Senior  Lending  Committee,  provided  that  commercial  loans
approved by a combination of authorities must include the approval of either the
President or the Senior  Commercial  Lender.  All commercial  loans in excess of
$1.5 million  require the approval of the Loan and  Investment  Committee of the
Board of Directors or the full Board of Directors.

      Loan   Originations,   Purchases  and  Sales.   Berkshire  Bank's  lending
activities  are conducted by its salaried and  commissioned  loan  personnel and
through its relationships with automobile dealers. Currently, Berkshire Bank has
contractual   relationships  with  over  90  automobile  dealers  who  originate
automobile  loans for  Berkshire  Bank.  Such loans are only made  following  an
underwriting  review and acceptance by Berkshire Bank. These loans are closed by
the  automobile  dealer on the  Bank's  forms and are  immediately  assigned  to
Berkshire  Bank,  which then  services  the loans.  On loans  originated  by its
automobile  dealers,  Berkshire Bank compensates the originator for the interest
rate paid on the loan that  exceeds a  specified  threshold,  up to a maximum of
four  points.  The  compensation  is paid at the  time the  loan is  closed  and
assigned to Berkshire  Bank. For the fiscal years 2004 and 2003,  Berkshire Bank
originated  or  purchased  $78  million  and $60  million of  automobile  loans,
respectively,  of which 95% and 91%,  respectively,  were originated  indirectly
through the automobile dealers.


                                      -10-
      

      From  time  to  time,   Berkshire   Bank  will  purchase  whole  loans  or
participations  in loans.  These loans are  underwritten  according to Berkshire
Bank's  underwriting  criteria and procedures and are generally  serviced by the
originating  lender  under  terms  of the  applicable  participation  agreement.
Berkshire Bank's only purchase in 2004 was a $147,000  participation interest in
a commercial loan. Amounts outstanding  related to loan participation  interests
purchased by Berkshire  Bank totaled $32 million and $51 million at December 31,
2004 and December  31,  2003,  respectively,  and  consisted  primarily of loans
secured by real estate.

      At  December  31,  2004,  Berkshire  Bank  was  servicing  $2  million  of
automobile loans, $13 million of commercial  business and commercial real estate
loan  participations  sold to others  and $48  million  of  residential  one- to
four-family   mortgage  loans.  The  residential  mortgage  servicing  portfolio
included the $46 million year-end balance of mortgages securitized to Fannie Mae
in 2003 and 2004;  the Bank  utilizes  the services of a  subcontract  servicing
provider for these loans. Loan servicing includes  collecting and remitting loan
payments,   accounting  for  principal  and  interest,   contacting   delinquent
borrowers,  supervising  foreclosures and property  dispositions  when there are
unremedied  defaults,  making  insurance  and  tax  payments  on  behalf  of the
borrowers and generally  administering the loans. The gross servicing fee income
from loans sold is generally 25 basis  points for one- to  four-family  mortgage
loans and 100 basis points for automobile loans of the total balance of the loan
being  serviced.  Commercial loan  participation  service fees are negotiated on
each transaction.

      Berkshire Bank generally  originates  loans for its own portfolio but from
time to time will sell or  securitize  loans in the  secondary  market  based on
prevailing  market  interest rate  conditions and an analysis of the composition
and risk of the loan  portfolio,  the  Bank's  interest  rate risk  profile  and
liquidity   needs.   Berkshire  Bank   securitized  $39  million  in  fixed-rate
residential one- to four-family  mortgages in 2004 and the Bank sold $11 million
of securitized mortgages in the fourth quarter of 2004.


                                      -11-
      

      The following table presents total loans originated,  purchased,  sold and
repaid  during the years  indicated.  Loan  originations  included new committed
lines of credit,  where applicable.  Loans exclude net deferred loan origination
costs and unamortized premium/discount on purchased loans.

       
         
                                                                   For the Years Ended December 31,
                                                                  -----------------------------------
                                                                    2004         2003          2002
                                                                  --------     --------     ---------
                                                                            (In thousands)
                                                                                               
      Loans at beginning of year                                  $791,644     $723,181     $ 802,985
                                                                  --------     --------     ---------
         Originations:
            Real estate loans:
               One-to four-family                                   66,606      113,606        88,770
               Construction and land development                    42,560       32,246        30,678
               Commercial                                           67,497       48,644        37,564
               Multi-family                                          3,046        2,862         5,242
                                                                  --------     --------     ---------
                  Total real estate loans                          179,709      197,358       162,254
                                                                  --------     --------     ---------
            Consumer loans:
               Home equity lines of credit                          24,940       15,380        16,361
               Automobile                                           77,670       60,174        54,284
               Other                                                 2,593        3,466         4,613
                                                                  --------     --------     ---------
                  Total consumer loans                             105,203       79,020        75,258
            Commercial loans:
               Commercial loans and lines of credit                 40,975       44,727        48,343
                                                                  --------     --------     ---------
                  Total loans originated                           325,887      321,105       285,855
                                                                  --------     --------     ---------

         Purchases:
            Real estate loans:
               Residential                                              --       53,814            --
               Commercial real estate                                   --        3,041         2,724
                                                                  --------     --------     ---------
                  Total real estate loans                               --       56,855         2,724
            Consumer loans:
               Other                                                    --           --            --
            Commercial loans:
               Commercial                                              147          500            --
                                                                  --------     --------     ---------
                  Total loans purchased                                147       57,355         2,724
                                                                  --------     --------     ---------

      Deduct:
            Principal loan repayments, prepayments, revolving
                 credit activity and other, net                    223,806      225,528       285,852
            Loan sales                                              25,608       65,400        73,625
            Securitization of loans                                 39,657       16,270            --
            Net loan charge-offs                                     1,197        2,799         6,906
            Transfers to real estate owned                              --           --         2,000
                                                                  --------     --------     ---------
                  Total deductions                                 290,268      309,997       368,383
                                                                  --------     --------     ---------
      Net increase (decrease) in loans                              35,766       68,463       (79,804)
                                                                  --------     --------     ---------
      Loans at end of year                                        $827,410     $791,644     $ 723,181
                                                                  ========     ========     =========
        

      Loan   Commitments.   Berkshire  Bank  issues  loan   commitments  to  its
prospective   borrowers   conditioned  on  the  occurrence  of  certain  events.
Commitments  are made in  writing  on  specified  terms and  conditions  and are
generally  honored  for up to 60 days  from  approval.  At  December  31,  2004,
Berkshire Bank had loan  commitments  and  unadvanced  loans and lines of credit
totaling $169  million,  of which $36 million was  commitments  to originate new
loans.

      Loan  Fees.  In  addition  to  interest  earned on loans,  Berkshire  Bank
receives income from fees derived from loan  originations,  loan  modifications,
late payments and for miscellaneous  services related to its loans.  Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions.

      Berkshire  Bank charges loan  origination  fees which are  calculated as a
percentage  of  the  amount  borrowed.  As  required  by  applicable  accounting
principles,  loan origination fees, discount points and certain loan origination
costs are deferred and


                                      -12-
      

recognized over the contractual  remaining lives of the related loans on a level
yield basis. At December 31, 2004, Berkshire Bank had approximately  $574,000 of
net deferred loan fees and costs. Berkshire Bank amortized approximately $77,000
of net deferred loan fees and costs during the year ended December 31, 2004.

      Loan  Administration.  Lending activities are governed by a Board approved
loan policy. The loan policy sets certain limits on concentrations of credit and
requires  periodic  reporting  of  concentrations  to the  Board.  The  Bank has
designated  internal staff who perform  post-closing loan documentation  review,
quality  control and ongoing loan review.  The Bank's policy is to assign a risk
rating to all commercial  loans and loan review staff perform an ongoing program
of loan and risk rating reviews.  Management  also employs an independent  third
party for loan reviews, as discussed in "Allowance for Loan Losses."

      Nonperforming  Assets,  Delinquencies  and Impaired Loans. When a borrower
fails to make a required  loan  payment,  Berkshire  Bank  attempts  to cure the
deficiency by mailing a past due notice on the 10th day after payment is due. In
most cases,  delinquencies are cured promptly. If a delinquency continues beyond
the 15th day after the  payment is due,  the loan will  appear on a  delinquency
list and the account  officer will contact the borrower.  While  Berkshire  Bank
generally  prefers to work with  borrowers to resolve  problems,  Berkshire Bank
generally will initiate  foreclosure or other proceedings no later than the 90th
day of a delinquency, as necessary, to minimize any potential loss.

      Management  informs the Board of Directors  monthly of the amount of loans
delinquent more than 30 days, all loans in  foreclosure,  and all foreclosed and
repossessed  property that Berkshire Bank owns.  Berkshire Bank generally ceases
accruing  interest on all  commercial  and  residential  loans when principal or
interest  payments are delinquent 90 days or more unless  management  determines
the loan  principal  and  interest  to be  fully-secured  and in the  process of
collection.  Once  management  determines  that interest is  uncollectible,  the
accrual of interest income on a loan is discontinued and all interest previously
accrued is reversed against current period interest income.  In 2001, to enhance
its risk management practices, the Bank initiated a more conservative policy for
automobile  loans  whereby all  delinquent  automobile  loans  remain on accrual
status until they reach 120 days delinquent.  At that time they are charged-off,
except for those  customers  who are in  bankruptcy  proceedings  with a secured
loan, in which case the loan is transferred to nonaccrual status.

      The following table sets forth information regarding  nonperforming assets
and loans  that were 90 days or more  past due and still  accruing  at the dates
indicated.

       
         
                                                       At December 31,
                                      --------------------------------------------------
                                       2004       2003       2002       2001       2000
                                      ------     ------     ------     ------     ------
                                                    (Dollars in thousands)
                                                                                     
Nonaccruing loans:
   One- to four-family real estate    $  327     $  348     $  230     $  310     $  390
   Commercial real estate                147        496         --         --         --
   Commercial                            523      1,887      2,850      2,077        466
   Consumer                              155        468        661        315      2,013
                                      ------     ------     ------     ------     ------
      Total nonperforming loans        1,152      3,199      3,741      2,702      2,869
Real estate owned                         --         --      1,500         --         50
                                      ------     ------     ------     ------     ------
      Total nonperforming assets      $1,152     $3,199     $5,241     $2,702     $2,919
                                      ======     ======     ======     ======     ======
Total nonperforming loans as a
   percentage of total loans            0.14%      0.40%      0.52%      0.34%      0.36%
Total nonperforming assets as a
   percentage of total assets           0.09%      0.26%      0.36%      0.26%      0.29%
Loans 90 days or more past due
   and still accruing (1)             $   65     $  306     $  590     $1,306     $   --

        

----------
(1)   Reflects the Bank's  policy on  delinquent  automobile  loans  whereby all
      delinquent  automobile loans remain on accrual status until they reach 120
      days  delinquent,  at which  time  they are  charged  off.  Prior to 2001,
      automobile loans past due 90 days or more were reported as nonaccrual.

      Nonaccruing commercial loans and commercial real estate loans decreased to
$670,000 at December 31, 2004 from $2.4  million at December 31, 2003  primarily
as the  result  of  the  sale  of the  largest  non-performing  commercial  loan
relationship totaling $1.3 million,  payments collected on accounts remaining on
nonaccruing   status  and  $356,000  in  gross   commercial  loan   charge-offs.
Nonaccruing  consumer  loans and past accruing  loans  delinquent  over 90 days,
decreased due to the sale of the sub-prime  automobile  loan  portfolio near the
end of 2003.  Interest  income that would have been  recorded for the year ended
December  31,  2004,  had  nonaccruing  loans been  current  according  to their
original  terms,  amounted to $173,000.  The amount of interest  income on those
loans that was included in net income in 2004 was $8,000.


                                      -13-
      

      The following table sets forth the  delinquencies in Berkshire Bank's loan
portfolio as of the dates indicated.

       
         
                                At December 31, 2004                    At December 31, 2003
                       --------------------------------------  --------------------------------------
                           60-89 Days       90 Days or More        60-89 Days       90 Days or More
                       ------------------  ------------------  ------------------  ------------------
                       Number   Principal  Number   Principal  Number   Principal  Number   Principal
                         of      Balance     of      Balance     of      Balance     of      Balance
                        Loans   of Loans    Loans   of Loans    Loans   of Loans    Loans   of Loans
                       ------   ---------  ------   ---------  ------   ---------  ------   ---------
                                                  (Dollars in thousands)
                                                                                                
Real estate loans:
   One- to four-
        family              4    $  277         2    $  258         3    $  236         3    $  220
   Commercial               2       304        --        --        --        --        --        --
   Multi-family            --        --        --        --        --        --        --        --
Consumer loans:           
   Home equity lines      
        of credit          --        --        --        --        --        --        --        --
   Auto and other          30       101        35       135        80       460        85       612
Commercial loans            3        45        --        --         1        36         6       215
                       ------    ------    ------    ------    ------    ------    ------    ------
      Total                39    $  727        37    $  393        84    $  732        94    $1,047
                       ======    ======    ======    ======    ======    ======    ======    ======

Delinquent loans to
   total loans           0.19%     0.09%     0.18%     0.05%     0.42%     0.09%     0.47%     0.13%

         
                                At December 31, 2002
                       -------------------------------------
                           60-89 Days       90 Days or More
                       ------------------  -----------------
                       Number   Principal  Number  Principal
                         of      Balance     of      Balance
                        Loans   of Loans    Loans   of Loans
                       ------   ---------  ------  ---------
                              (Dollars in thousands)
                                                        
Real estate loans:
   One- to four-
        family              3    $  207         4    $   92
   Commercial              --        --        --        --
   Multi-family            --        --        --        --
Consumer loans:      
   Home equity lines 
        of credit          --        --        --        --
   Auto and other         120       924       118       893
Commercial loans            2        49         4       110
                       ------    ------    ------    ------
      Total               125    $1,180       126    $1,095
                       ======    ======    ======    ======

Delinquent loans to
   total loans           0.57%     0.16%     0.57%     0.15%
        

      Real Estate Owned.  Real estate  acquired by Berkshire Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at the
date of foreclosure,  establishing a new cost basis.  Holding costs and declines
in fair value after  acquisition are expensed.  At December 31, 2004,  Berkshire
Bank had no foreclosed real estate.

      Asset  Classification.  Regulators  have adopted  various  regulations and
practices  regarding  problem  assets  of  financial  institutions.  Under  such
regulations,  federal and state  examiners  have  authority to identify  problem
assets during  examinations and, if appropriate,  require them to be classified.
Berkshire Bank performs an internal analysis of its loan portfolio and assets to
classify  such  loans and  assets  similar to the manner in which such loans and
assets are classified by the federal banking regulators. In addition,  Berkshire
Bank  regularly  analyzes  the losses  inherent  in its loan  portfolio  and its
nonperforming loans to determine the appropriate level of the allowance for loan
losses.

      There  are  four  classifications  for  problem  assets:  loss,  doubtful,
substandard and special mention. An asset classified as "loss" is normally fully
charged-off.  "Substandard"  assets have one or more defined  weaknesses and are
characterized  by the distinct  possibility  that the insured  institution  will
sustain some loss if the deficiencies are not corrected.  Nonaccruing  loans are
normally  classified as  substandard.  "Doubtful"  assets have the weaknesses of
substandard assets with the additional  characteristic  that the weaknesses make
collection  or  liquidation  in full on the basis of currently  existing  facts,
conditions  and values  questionable,  and there is a high  possibility of loss.
Assets that do not currently  expose the insured  institution to sufficient risk
to warrant  classification in one of the  aforementioned  categories but possess
weaknesses are designated "special mention."


                                      -14-
      

      At  December  31,  2004,  Berkshire  Bank had no loss rated  loans and two
doubtful rated  commercial  loans totaling  $391,000.  The following  table sets
forth  Berkshire  Bank's  substandard  and special mention loans at December 31,
2004.

                                        Substandard            Special Mention
                                    --------------------    --------------------
                                     Number                 Number
                                      of       Principal      of       Principal
                                     Loans      Balance      Loans      Balance
                                    -------    ---------    -------    ---------
                                              (Dollars in thousands)
         Real estate loans:
            One- to four-family           6     $   484           5     $   276
            Commercial                    6       4,216           5       8,436
            Multi-family                  2         659          --          --
            Construction and land
                 development             --          --           1         938
         Consumer loans:
            Automobile                   51         215          19          81
            All other                     5           6           5           6
         Commercial loans                41       5,594          53       8,310
                                    -------     -------     -------     -------
               Total                    111     $11,174          88     $18,047
                                    =======     =======     =======     =======

      Berkshire Bank had no substandard loans greater than $500,000,  which were
not  performing  according to their terms on December 31, 2004.  At December 31,
2004,  the largest  three  substandard  commercial  relationships  totaled  $5.4
million. These relationships were rated substandard during 2004. At December 31,
2004,  they were  performing  in  accordance  with  their  terms and not  deemed
impaired by management.

      Allowance for Loan Losses. In originating loans, Berkshire Bank recognizes
that  losses  will be  experienced  on loans and that the risk of loss will vary
with, among other things, the type of loan being made, the  creditworthiness  of
the borrower over the term of the loan, general economic  conditions and, in the
case of a secured loan, the quality of the security for the loan. Berkshire Bank
maintains an  allowance  for loan losses to absorb  losses  inherent in the loan
portfolio.  The allowance for loan losses  represents  management's  estimate of
probable  losses based on information  available as of the date of the financial
statements.

      The loan  portfolio and other credit  exposures are regularly  reviewed by
management  to evaluate  the  adequacy of the  allowance  for loan  losses.  The
methodology  for  assessing  the   appropriateness  of  the  allowance  includes
comparison to actual losses, peer group comparisons,  industry data and economic
conditions.  In  addition,  management  employs an  independent  third  party to
perform  an  annual  review  of  all  of  Berkshire   Bank's   commercial   loan
relationships  exceeding $1 million,  all material  credits on Berkshire  Bank's
watch list or classified as substandard and a random sampling of new loans.  The
regulatory  agencies,  as an integral part of their  examination  process,  also
periodically  review Berkshire  Bank's allowance for loan losses.  Such agencies
may require  Berkshire Bank to make additional  provisions for estimated  losses
based upon judgments different from those of management.

      In assessing the  allowance  for loan losses,  loss factors are applied to
various pools of  outstanding  loans and certain unused  commitments.  Berkshire
Bank  segregates the loan  portfolio  according to risk  characteristics  (i.e.,
mortgage loans, home equity, other consumer, commercial). Loss factors are based
on management's judgment,  including  consideration of the collectibility of the
loan portfolio, including past loan loss experience, known and inherent risks in
the nature and volume of the  portfolio,  information  about  specific  borrower
situations and estimated  collateral  values and economic  conditions.  The loss
factors may be adjusted for significant factors that, in management's  judgment,
affect the collectibility of the portfolio as of the evaluation date.

      Berkshire Bank has adopted  Statements 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--an  amendment
to SFAS No. 114."  Generally,  nonaccruing  commercial loans are deemed impaired
and  evaluated  for  specific  valuation  allowances.  At December  31, 2004 and
December 31, 2003,  Berkshire  Bank had  $787,000  and  $388,000,  respectively,
recorded  investment in impaired  loans,  which had no specific  allowances  and
$393,000  and $2.0  million  in loans  with  specific  valuation  allowances  of
$230,000  and  $267,000,  respectively.  All or a portion of  general  loan loss
allowances  established to cover probable losses related to assets classified as
substandard  or  doubtful  can  be  included  in  determining  an  institution's
regulatory  capital,   while  specific  valuation  allowances  for  loan  losses
generally do not qualify as regulatory capital.

      In addition,  management  assesses the allowance using factors that cannot
be associated  with specific  credit or loan  categories.  These factors include
management's  subjective  evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio.  The allowance methodology reflects


                                      -15-
      

management's  objective  that the  overall  allowance  appropriately  reflects a
margin for the imprecision  necessarily inherent in estimates of expected credit
losses.

      Although management  believes that it uses the best information  available
to establish the allowance for loan losses,  future adjustments to the allowance
for loan losses may be necessary  and results of  operations  could be adversely
affected if  circumstances  differ  substantially  from the assumptions  used in
making its  determinations.  Furthermore,  while  Berkshire Bank believes it has
established  the  allowance  for  loan  losses  in  conformity  with  accounting
principles  generally accepted in the United States of America,  there can be no
assurance that regulators,  in reviewing  Berkshire Bank's loan portfolio,  will
not request  Berkshire  Bank to  increase  its  allowance  for loan  losses.  In
addition,  because future events  affecting  borrowers and collateral  cannot be
predicted with certainty,  there can be no assurance that the existing allowance
for loan losses is adequate or that increases  will not be necessary  should the
quality of any loan deteriorate as a result of the factors  discussed above. Any
material  increase  in the  allowance  for  loan  losses  may  adversely  affect
Berkshire Bank's financial condition and results of operations.

      The following table presents an analysis of Berkshire Bank's allowance for
loan losses for the years indicated.

       
         
                                                 At or For the Years Ended December 31,
                                       -----------------------------------------------------------
                                         2004         2003         2002         2001         2000
                                       -------      -------      -------      -------      -------
                                                         (Dollars in thousands)
                                                                                              
Allowance for loan losses,
      beginning of year                $ 8,969      $10,308      $11,034      $10,216      $ 8,534
                                       -------      -------      -------      -------      -------
Charged-off loans:
   One- to four-family real estate          --           --           --            2           --
   Multi-family                             --           --           --          222           --
   Commercial real estate                  138           --          510           --           19
   Consumer                              1,846        4,175        9,074        5,989        1,422
   Home equity lines of credit              --           32           --           52           --
   Commercial                              218          157          444          797          469
                                       -------      -------      -------      -------      -------
      Total charged-off loans            2,202        4,364       10,028        7,062        1,910

Recoveries on loans previously
      charged-off                        1,005        1,565        3,122          705          422
                                       -------      -------      -------      -------      -------
Net loans charged-off                    1,197        2,799        6,906        6,357        1,488
Provision for loan losses                1,565        1,460        6,180        7,175        3,170
                                       -------      -------      -------      -------      -------
Allowance for loan losses,
      end of year                      $ 9,337      $ 8,969      $10,308      $11,034      $10,216
                                       =======      =======      =======      =======      =======

Ratios:
Net loans charged-off to average
      total loans                         0.15%        0.35%        0.87%        0.78%        0.20%
Allowance for loan losses to
      total loans                         1.13         1.13         1.43         1.37         1.29
Allowance for loan losses to
      nonperforming loans               810.50       280.37       275.54       408.36       356.08
Net loans charged-off to allowance
      for loan losses                    12.82        31.21        67.00        57.61        14.57
Recoveries to charged-off loans          45.64        35.86        31.13         9.98        22.09
        


                                      -16-
      

      The following table presents the  approximate  allocation of the allowance
for loan losses by loan  categories at the dates indicated and the percentage of
such amounts to the total allowance and to total loans. Management believes that
the  allowance can be allocated by category only on an  approximate  basis.  The
allocation of the allowance to each category is not  indicative of future losses
and does not  restrict the use of any of the  allowance to absorb  losses in any
category.

       
         
                                                                       At December 31,
                         -----------------------------------------------------------------------------------------------------------
                                       2004                                  2003                                 2002
                         ----------------------------------   ----------------------------------   ---------------------------------
                                   Percent of                            Percent of                           Percent of
                                    Allowance    Percent of              Allowance    Percent of              Allowance   Percent of
                                     in Each       Loans                  in Each       Loans                  in Each      Loans
                                     Category     in Each                 Category     in Each                 Category    in Each
                                     to Total   Category to               to Total   Category to               to Total  Category to
                         Amount     Allowance   Total Loans   Amount     Allowance   Total Loans   Amount     Allowance  Total Loans
                         -------   ----------   -----------   -------    ----------  -----------   -------    ---------  -----------
                                                                    (Dollars in thousands)
                                                                                                                                  
Real estate loans        $ 4,263          46%          60%    $ 3,436          38%          60%    $ 2,289          22%         55%
Consumer loans             1,730          18           22       2,171          24           19       4,650          45          22
Commercial loans           3,344          36           18       3,362          38           21       3,369          33          23
                         -------     -------      -------     -------     -------      -------     -------     -------     -------
   Total allowance
      for loan losses    $ 9,337         100%         100%    $ 8,969         100%         100%    $10,308         100%        100%
                         =======     =======      =======     =======     =======      =======     =======     =======     =======

         
                                                   At December 31,
                         -----------------------------------------------------------------------
                                       2001                                  2000
                         ----------------------------------   ----------------------------------
                                   Percent of                            Percent of
                                    Allowance    Percent of              Allowance    Percent of
                                     in Each       Loans                  in Each       Loans
                                     Category     in Each                 Category     in Each
                                     to Total   Category to               to Total   Category to
                         Amount     Allowance   Total Loans   Amount     Allowance   Total Loans
                         -------   ----------   -----------   -------    ----------  -----------
                                                (Dollars in thousands)
                                                                                              
Real estate loans        $ 2,347          21%          45%    $ 2,337          23%          43%
Consumer loans             4,217          38           34       4,528          44           36
Commercial loans           4,470          41           21       3,351          33           21
                         -------     -------      -------     -------     -------      -------
   Total allowance
      for loan losses    $11,034         100%         100%    $10,216         100%         100%
                         =======     =======      =======     =======     =======      =======
        

Investment Securities Activities
--------------------------------

      General. Under Massachusetts law, Berkshire Bank has authority to purchase
a wide range of investment securities. As a result of changes in federal banking
laws, however,  financial  institutions such as Berkshire Bank may not engage as
principals  in any  activities  that are not  permissible  for a national  bank,
unless  the  Federal  Deposit  Insurance  Corporation  has  determined  that the
investments  would  pose no  significant  risk to the  Bank  Insurance  Fund and
Berkshire Bank is in compliance with applicable capital standards.  In 1993, the
Regional  Director  of the  Federal  Deposit  Insurance  Corporation  approved a
request by Berkshire  Bank to acquire and retain  certain  listed  stocks and/or
registered  stocks  subject  to  certain  conditions.   The  Company  makes  its
investments  through  Berkshire Bank or one of the Bank's  security  corporation
subsidiaries  and is  generally  not  subject  to any such  restrictions  on its
investment authority. See "Regulation and Supervision."

      Berkshire  Bank's main  source of income has been and will  continue to be
derived  from  its  loan  portfolio.  The  investment  securities  portfolio  is
primarily  used to provide for  Berkshire  Bank's  cash flow  needs,  to provide
adequate  liquidity  to protect  the safety of customer  deposits  and to earn a
reasonable return on investment. The average maturity or repricing and the types
of securities are based upon the  composition and quality of the loan portfolio,
interest  rate  risk  and  Berkshire  Bank's  liquidity   position  and  deposit
structure.

      Berkshire   Bank's   investment   policy  divides   investments  into  two
categories,  fixed income and equity  portfolios.  The primary objectives of the
fixed  income  portfolio  are to: (1)  maintain an adequate  source of liquidity
sufficient to meet regulatory and operating requirements,  including funding for
loans; (2) safeguard  against deposit  outflows,  reduced loan  amortization and


                                      -17-
      

increased  loan  demand;  and (3) manage  interest  rate risk.  The fixed income
securities portfolio primarily consists of debt issues,  including corporate and
municipal bonds, U.S.  Government and Agency obligations and mortgage-backed and
asset-backed securities,  including collateralized mortgage obligations and real
estate mortgage investment conduits.  A collateralized  mortgage obligation is a
mortgage-backed  bond that separates  mortgage  pools into different  maturities
called "tranches."  Tranches pay different rates of interest and can mature in a
few months,  or a few years;  actual maturities may differ from expectations due
to interest rate fluctuations.  Real estate mortgage investment conduits, a type
of  collateralized   mortgage   obligation,   are  similar  in  that  securities
representing an undivided interest in such mortgages are issued.  However,  real
estate mortgage  investment  conduits have more  flexibility than other types of
collateralized  mortgage  obligations as issuers can separate mortgage pools not
only into different  maturity  classes but also into different risk classes.  At
present,  100% of  Berkshire  Bank's  mortgage-backed  securities  are issued or
guaranteed  by agencies of the U.S.  Government,  which carry lower  credit risk
than   mortgage-backed   securities  of  a  private   issuer.   When  purchasing
mortgage-backed securities in the past two years, the Bank has focused on buying
adjustable rate  mortgage-backed  securities  that have limited  extension risk,
such as five- and  seven-year  hybrid and  10-year  fixed  rate  mortgage-backed
securities.  These  securities  typically have an average duration of 3-5 years.
Other types of  asset-backed  securities  in which  Berkshire  Bank  invests are
typically  collateralized  by the cash  flow  from a pool of  automobile  loans,
credit card  receivables,  consumer  loans and other similar  obligations.  Both
mortgage-backed and asset-backed  securities carry the risk that changing market
interest rates may cause a change in market value.

      The marketable equity securities portfolio is currently managed to produce
capital gains through price  appreciation  and lowering  taxable  income through
deductions permitted for a portion of dividends received.  The marketable equity
securities  portfolio consists primarily of bank, utility and industrial stocks.
However,  Berkshire Bank has  restructured  its investment  portfolio by placing
less emphasis on equity securities.  At December 31, 2004,  equities,  excluding
Federal Home Loan Bank and Savings Bank Life  Insurance  stock,  comprised 3% of
the  investment  portfolio  compared  to 4% at  December  31,  2003.  The  gross
unrealized gains associated with the marketable equity securities portfolio were
$8 million at December 31, 2004.  At such date,  there were no gross  unrealized
losses. As discussed below,  unrealized gains and losses on these securities are
included in  accumulated  other  comprehensive  income in equity,  and thus,  if
equity prices decline due to unfavorable market conditions or other factors, the
Company's capital would decrease.

      SFAS No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities,"  requires that  securities be  categorized  as  "held-to-maturity,"
"trading securities" or "available-for-sale," based on management's intent as to
the ultimate  disposition of each security.  SFAS No. 115 allows debt securities
to be classified as  "held-to-maturity"  and reported in financial statements at
amortized cost only if the reporting  entity has the positive intent and ability
to hold those securities to maturity.  Securities that might be sold in response
to changes in market interest rates, changes in the security's  prepayment risk,
increases in loan demand,  or other  similar  factors  cannot be  classified  as
"held-to-maturity."  Debt and  equity  securities  held for  current  resale are
classified as "trading securities." These securities are reported at fair value,
and unrealized gains and losses on the securities would be included in earnings.
Berkshire  Bank does not currently use or maintain a trading  account.  Debt and
equity  securities  not  classified  as either  "held-to-maturity"  or  "trading
securities"  are  classified  as  "available-for-sale."   These  securities  are
reported at fair value,  and  unrealized  gains and losses on the securities are
excluded from earnings and included in accumulated other  comprehensive  income,
net of taxes.

      The Loan and Investment Committee of the Board of Directors is responsible
for developing and reviewing  Berkshire  Bank's  investment  policy.  Investment
decisions are made in accordance with Berkshire Bank's investment policy and are
based upon the quality of a particular investment, its inherent risks, Berkshire
Bank's  liquidity  needs,  prospects  for  yield  and/or  appreciation  and  the
potential tax consequences.  While general  investment  strategies are developed
and authorized by the Loan and Investment  Committee,  the execution of specific
investment  actions and the day-to-day  oversight of Berkshire Bank's investment
portfolio  rests  with the  President  and the  Treasurer.  These  officers  are
authorized to execute  investment  transactions up to specified  limits based on
the type of  security  without  the prior  approval  of the Loan and  Investment
Committee.  However,  such purchases require a review of the Loan and Investment
Committee at their next  scheduled  meeting.  The Board of Directors  receives a
monthly report of all securities transactions made during the previous month.

      Berkshire  Bank's  investment  policy  allows the use of  certain  hedging
strategies,  including  the  purchase  of options in an effort to  increase  the
return and decrease the risk on the  securities  portfolio.  Berkshire  Bank has
used covered call option strategies in the past and may continue to do so in the
future.  Berkshire Bank has not used interest rate futures or options on futures
as part of its interest rate hedging strategies.


                                      -18-
      

      The  following  table  presents  the  amortized  cost  and  fair  value of
Berkshire  Bank's  available-for-sale  securities,  by type of security,  at the
dates indicated.

       
         
                                                                           At December 31,
                                              -------------------------------------------------------------------------
                                                      2004                      2003                      2002
                                              ---------------------     ---------------------     ---------------------
                                              Amortized      Fair       Amortized      Fair       Amortized      Fair
                                                Cost         Value        Cost         Value        Cost         Value
                                              ---------    --------     ---------    --------     ---------    --------
                                                                          (In thousands)
                                                                                                                  
Mortgage-backed securities:
   Freddie Mac                                $ 75,846     $ 75,388     $ 53,883     $ 53,638     $  3,558     $  3,605
   Fannie Mae                                  248,052      247,139      185,018      185,551        3,066        3,051
   Private label REMICs                             37           37          653          648        9,761        9,750
   Ginnie Mae                                       21           21           32           33           52           54
                                              --------     --------     --------     --------     --------     --------
      Total mortgage-backed securities         323,956      322,585      239,586      239,870       16,437       16,460
                                              --------     --------     --------     --------     --------     --------

Other investment securities:
   Obligations of U.S. Treasury and
       U.S. Government Agencies                  1,106        1,113       20,840       20,969       98,058       98,719
   Corporate bonds and notes                     8,977        8,977       17,102       17,310       31,284       31,637
   Municipal notes                              19,169       19,172       12,294       12,282           --           --
   Asset-backed securities                         441          452        2,566        2,106        6,956        6,772
   Marketable equity securities                  5,193       13,105        6,515       14,888       11,132       19,581
                                              --------     --------     --------     --------     --------     --------
      Total other investment securities         34,886       42,819       59,317       67,555      147,430      156,709
                                              --------     --------     --------     --------     --------     --------

      Total available-for-sale securities     $358,842     $365,404     $298,903     $307,425     $163,867     $173,169
                                              ========     ========     ========     ========     ========     ========
        

      The  following  table  presents  the  amortized  cost  and  fair  value of
Berkshire Bank's held-to-maturity  securities, by type of security, at the dates
indicated.

       
         
                                                                           At December 31,
                                              -------------------------------------------------------------------------
                                                      2004                      2003                      2002
                                              ---------------------     ---------------------     ---------------------
                                              Amortized      Fair       Amortized      Fair       Amortized      Fair
                                                Cost         Value        Cost         Value        Cost         Value
                                              ---------    --------     ---------    --------     ---------    --------
                                                                          (In thousands)
                                                                                                                  
Mortgage-backed securities:
   Freddie Mac                                $  1,578     $  1,569     $ 10,163     $ 10,146     $ 17,120     $ 17,164
   Fannie Mae                                    2,445        2,422        3,743        3,742       11,657       11,688
   Ginnie Mae                                      692          681        2,452        2,435        1,010        1,016
                                              --------     --------     --------     --------     --------     --------
      Total mortgage-backed securities           4,715        4,672       16,358       16,323       29,787       29,868
                                              --------     --------     --------     --------     --------     --------

Other investment securities:
   Municipal notes and other
         obligations                            25,227       25,227       20,545       20,545       14,480       14,480
                                              --------     --------     --------     --------     --------     --------

      Total held-to-maturity securities       $ 29,942     $ 29,899     $ 36,903     $ 36,868     $ 44,267     $ 44,348
                                              ========     ========     ========     ========     ========     ========
        

      At December 31, 2004, the largest exposure to any securities  issuer had a
book value $4 million, excluding government and agency securities. This security
is a development bond issued by a local service agency.


                                      -19-
      

      The  following   table  presents  the  activity  in  the   mortgage-backed
securities and other investment securities portfolios for the years indicated.

       
         
                                                                     For the Years Ended December 31,
                                                                 ---------------------------------------
                                                                    2004           2003           2002
                                                                 ---------      ---------      ---------
                                                                              (In thousands)
                                                                                                  
   Mortgage-backed securities:
   Mortgage-backed securities, beginning of year                 $ 256,228      $  46,247      $  39,901
   Purchases                                                       117,869        266,586         63,065
   Securitized mortgages                                            39,657         16,270             --
   Repayments and prepayments                                      (72,631)       (66,918)       (56,037)
   Sales                                                           (11,336)        (5,139)            --
   Net premium                                                        (867)          (801)          (525)
   Decrease in unrealized gain                                      (1,663)           (17)          (157)
                                                                 ---------      ---------      ---------
      Net increase in mortgage-backed securities                    71,029        209,981          6,346
                                                                 ---------      ---------      ---------
         Mortgage-backed securities, end of year                   327,257        256,228         46,247
                                                                 ---------      ---------      ---------

   Other investment securities:
   Other investment securities, beginning of year                   88,100        171,189         97,808
   Purchases                                                        32,816         83,227        195,005
   Sales                                                            (4,833)       (12,133)       (13,112)
   Loss on impairment of securities                                     --             --           (673)
   Maturities and calls                                            (46,347)      (147,286)       (84,606)
   Repayments and prepayments                                       (1,049)        (5,140)        (3,191)
   Net premium                                                        (336)          (994)          (578)
   Decrease in unrealized gain                                        (305)          (763)       (19,464)
                                                                 ---------      ---------      ---------
      Net (decrease)/increase in other investment securities       (20,054)       (83,089)        73,381
                                                                 ---------      ---------      ---------
         Other investment securities, end of year                   68,046         88,100        171,189
                                                                 ---------      ---------      ---------
            Total securities, end of year                        $ 395,303      $ 344,328      $ 217,436
                                                                 =========      =========      =========
        

      The following table presents certain  information  regarding the amortized
cost, weighted average yields and estimated  maturities of Berkshire Bank's debt
securities at December 31, 2004.

       
         
                                                            At December 31, 2004
                                   -----------------------------------------------------------------------
                                                                More than One        More than Five Years
                                     One Year or Less        Year to Five Years          to Ten Years
                                   --------------------     --------------------     --------------------
                                               Weighted                 Weighted                 Weighted
                                   Amortized    Average     Amortized    Average     Amortized    Average
                                     Cost        Yield        Cost        Yield        Cost        Yield
                                   ---------   --------     ---------   --------     ---------   --------
                                                           (Dollars in thousands)
                                                                                                        
Obligations of U.S. Treasury
   and U.S. Government Agencies    $  1,000        4.56%    $     88        6.14%    $     18        6.13%
Mortgage-backed securities           11,206        2.33      294,114        4.19       23,351        4.51
Municipal and IRB                     8,634        2.06        4,296        4.46        8,131        3.96
Corporate bonds and notes             3,882        4.55           --          --        2,987        5.18
Asset-backed securities                  --          --          441        6.12           --          --
                                   --------                 --------                 --------
      Total                        $ 24,722        2.67%    $298,939        4.19%    $ 34,487        4.44%
                                   ========                 ========                 ========

         
                                               At December 31, 2004
                                   ---------------------------------------------
                                    More than Ten Years             Total
                                   --------------------     --------------------
                                               Weighted                 Weighted
                                   Amortized    Average     Amortized    Average
                                     Cost        Yield        Cost        Yield
                                   ---------   --------     ---------   --------
                                               (Dollars in thousands)
                                                                               
Obligations of U.S. Treasury
   and U.S. Government Agencies    $     --          --%    $  1,106        4.71%
Mortgage-backed securities               --          --      328,671        4.15
Municipal and IRB                    23,335        4.44       44,396        3.89
Corporate bonds and notes             2,108        3.76        8,977        4.57
Asset-backed securities                  --          --          441        6.12
                                   --------                 --------
      Total                        $ 25,443        4.38%    $383,591        4.13%
                                   ========                 ========
        


                                      -20-
      

Deposit Activities and Other Sources of Funds
---------------------------------------------

      General.  Deposits  are the major  source of funds  for  Berkshire  Bank's
lending  and other  investment  activities.  In  addition,  Berkshire  Bank also
generates  funds  internally  from loan  repayments,  prepayments  and sales and
maturing  investment  securities.  Scheduled  loan  repayments  are a relatively
stable source of funds,  while deposit inflows and outflows and loan prepayments
are  influenced  significantly  by  general  interest  rates  and  money  market
conditions.  Berkshire Bank uses  borrowings  from the Federal Home Loan Bank of
Boston as an  additional  source of funding for loan and  securities  investment
activity.

      Deposit  Accounts.  Substantially  all of  Berkshire  Bank's  deposits are
generated from the areas surrounding its branch offices. Berkshire Bank offers a
wide  variety  of deposit  accounts  with a range of  interest  rates and terms.
Berkshire  Bank may  periodically  offer  special  interest  rates and terms for
limited  periods  of  time.   Berkshire   Bank's  deposit  accounts  consist  of
interest-bearing checking,  noninterest-bearing checking, regular savings, money
market savings and certificates of deposit.  The initial maturities of Berkshire
Bank's  certificate of deposit accounts range from three months to ten years. In
addition, Berkshire Bank offers retirement accounts, including Traditional IRAs,
Roth  IRAs,  Simple  IRAs,  Self-Directed  IRAs and Keogh  accounts,  simplified
employee pension plan,  profit-sharing qualified plan and money purchase pension
plan accounts.

      Berkshire Bank also offers a variety of deposit accounts  designed for the
businesses  operating in its market area.  Deposit  account  terms vary with the
principal  differences  being the  minimum  balance  deposit,  early  withdrawal
penalties, limits on the number of transactions and the interest rate. Berkshire
Bank's business banking deposit  products include a commercial  checking account
that  provides  an  earnings  credit to offset  monthly  service  charges  and a
checking  account  specifically  designed  for small  businesses.  Additionally,
Berkshire  Bank offers sweep  accounts and money market  accounts for businesses
and IOLTA interest  checking and escrow  accounts.  Berkshire Bank has sought to
increase  its  commercial  deposits  through  the  offering  of these  products,
particularly  to  its  commercial  borrowers  and  to  the  municipalities  that
participate in its government banking program.

      Berkshire  Bank  reviews its deposit mix and pricing on a weekly basis and
believes it offers competitive interest rates on its deposit products. Berkshire
Bank  determines  the rates paid based on a number of factors,  including  rates
paid by  competitors,  Berkshire  Bank's  need  for  funds  and  cost of  funds,
Berkshire  Bank's  current  asset/liability  structure,  the amount of  maturing
deposits and movements of market interest  rates.  Berkshire Bank currently does
not utilize brokers to obtain deposits but may choose to do so in the future.

      In the unlikely event  Berkshire Bank is  liquidated,  depositors  will be
entitled to full payment of their deposit accounts before any payment is made to
Berkshire Hills as the sole stockholder of Berkshire Bank. The Federal Home Loan
Bank and other  creditors of Berkshire  Bank also have priority  over  Berkshire
Hills for repayment of their claims.

      The following  table  presents the deposit  activity of Berkshire Bank for
the years indicated.

                                             For the Years Ended December 31,
                                             --------------------------------
                                                2004       2003       2002
                                              -------    -------    -------
                                                      (In thousands)

         Increase before interest credited    $ 3,152    $34,022    $21,854
         Interest credited                     12,393     13,862     17,777
                                              -------    -------    -------
               Net increase                   $15,545    $47,884    $39,631
                                              =======    =======    =======

      At December 31, 2004,  Berkshire Bank had certificate of deposit  accounts
in amounts of $100,000 or more maturing as follows:

                                                                Weighted
                                                                 Average
               Maturity Period                     Amount         Rate
               ---------------------------------------------------------
                                                  (Dollars in thousands)
               Three months or less               $ 26,484        1.88%
               Over 3 months through 6 months       22,493        2.29
               Over 6 months through 12 months      24,384        3.23
               Over 12 months                       66,737        4.01
                                                  --------
                     Total                        $140,098        3.19%
                                                  ========


                                      -21-
      

      The following table presents  information  concerning average balances and
weighted  average  interest rates on Berkshire  Bank's deposit  accounts for the
years indicated.

       
         
                                                               For the Years Ended December 31,
                          ---------------------------------------------------------------------------------------------------------
                                        2004                                2003                                2002
                          ---------------------------------   ---------------------------------   ---------------------------------
                                      Percent                             Percent                             Percent
                                      of Total     Weighted               of Total     Weighted               of Total     Weighted
                           Average    Average       Average    Average    Average       Average    Average    Average       Average
                           Balance    Deposits       Rate      Balance    Deposits       Rate      Balance    Deposits       Rate
                          ---------------------------------   ---------------------------------   ---------------------------------
                                                                   (Dollars in thousands)
                                                                                                                                  
NOW accounts              $ 97,886          11%        0.09%  $ 90,170          11%        0.17%  $ 83,399          11%        0.75%
Money market accounts      160,265          19         1.29    132,497          16         1.24    117,950          15         1.69
Savings                    168,551          20         0.77    170,749          21         1.01    157,444          21         1.70
Certificates of deposit    320,982          38         2.78    330,116          41         3.13    320,418          42         3.91
Demand accounts            103,752          12           --     91,627          11           --     82,752          11           --
                          --------    --------                --------    --------                --------    --------      
      Total               $851,436         100%        1.46%  $815,159         100%        1.70%  $761,963         100%        2.33%
                          ========    ========                ========    ========                ========    ========      
        

      Certificates  of  Deposit by Rates and  Maturities.  The  following  table
presents the amount of certificate accounts categorized by rates and maturities,
for the periods and years indicated.

       
         
                    Period to Maturity from December 31, 2004
                  ---------------------------------------------
                  Less Than     One to      Two to       Over            Total at December 31,
                     One          Two        Three       Three     --------------------------------
                     Year        Years       Years       Years       2004        2003        2002
                  ---------    --------    --------    --------------------    --------    --------
                                                    (In thousands)
                                                                                              
0.00-4.00%         $156,442    $ 68,381    $  7,906    $  9,412    $242,141    $247,036    $236,829
4.01-5.00%           14,877       1,249       5,178      24,055      45,359      40,113      43,019
5.01-6.00%            1,270       1,944         226       9,690      13,130      16,947      20,196
6.01-7.00%            2,879         571       6,776       2,622      12,848      15,428      28,423
7.01% and above       1,797          --          --          --       1,797       1,826       1,722
                   --------    --------    --------    --------    --------    --------    --------
         Total     $177,265    $ 72,145    $ 20,086    $ 45,779    $315,275    $321,350    $330,189
                   ========    ========    ========    ========    ========    ========    ========
        

      Borrowings.  Berkshire  Bank utilizes  advances from the Federal Home Loan
Bank of Boston to  supplement  its supply of lendable  funds and to meet deposit
withdrawal  requirements.  The Federal  Home Loan Bank of Boston  functions as a
central reserve bank providing credit for savings banks and certain other member
financial  institutions.  As a member of the  Federal  Home Loan Bank of Boston,
Berkshire Bank is required to own capital stock in the Federal Home Loan Bank of
Boston and may apply for  advances  on the  security  of the  capital  stock and
certain of its mortgage loans and other assets,  principally securities that are
obligations of, or guaranteed by, the U.S. Government or its agencies,  provided
certain  creditworthiness  standards  have been  met.  Advances  are made  under
several different credit programs. Each credit program has its own interest rate
and range of maturities.  Depending on the program, limitations on the amount of
advances are based on the financial  condition of the member institution and the
adequacy of  collateral  pledged to secure the credit.  At  December  31,  2004,
Berkshire Bank had the ability to borrow a total of  approximately  $361 million
from the  Federal  Home Loan Bank of Boston.  At that date,  Berkshire  Bank had
outstanding  advances  of $328  million.  The Bank had a line of credit with the
Federal Home Loan Bank totaling $13 million at December 31, 2004;  there were no
outstanding  borrowings  under this line. In addition,  Berkshire Bank had a $50
million  repurchase  agreement  line  of  credit  with a  nationally  recognized
broker-dealer.   At  December  31,  2004,  Berkshire  Bank  had  no  outstanding
borrowings against this agreement.


                                      -22-
      

      The following  tables  present  certain  information  regarding  Berkshire
Bank's  Federal  Home Loan Bank  advances  during the  periods  and at the dates
indicated.

                                             For the Years Ended December 31,
                                            ----------------------------------
                                              2004         2003         2002
                                            --------     --------     --------
                                                  (Dollars in thousands)
      Maximum amount of advances
         outstanding at any month end       $327,926     $251,465     $143,053
      Average advances outstanding           305,642      167,621      140,406
      Weighted average rate paid
         on advances                            2.73%        2.91%        4.01%

                                                      At December 31,
                                            ----------------------------------
                                              2004         2003         2002
                                            --------     --------     --------
                                                  (Dollars in thousands)
      Balance outstanding at end of year    $327,926     $251,465     $133,002
      Weighted average rate on advances
         at end of year                         3.11%        2.61%        3.27%

      Berkshire Bank has offered retail repurchase agreements to selected higher
balance  customers  and certain  municipalities.  These  agreements  were direct
obligations  of  Berkshire  Bank to repay at maturity or on demand the  purchase
price of an undivided interest in a U.S.  Government or agency security owned by
Berkshire Bank. Since these agreements are not deposits, they are not insured by
the Federal Deposit Insurance  Corporation.  At December 31, 2004, there were no
such retail repurchase  agreements,  although the Bank may offer such agreements
in the future.

      The following tables represent  certain  information  regarding  Berkshire
Bank's retail repurchase  agreements at or for the years ended December 31, 2003
and 2002. There were no repurchase  agreements  booked in 2004 or outstanding at
December 31, 2004.

                                                           For the Years
                                                        Ended December 31,
                                                      ----------------------
                                                         2003       2002
                                                        ------     ------
                                                      (Dollars in thousands)
      Maximum amount of retail repurchase
         agreements outstanding at any month end        $  500     $1,830
      Average retail repurchase agreements
         outstanding                                        88      1,349
      Weighted average rate paid on retail
         repurchase agreements                            1.24%      1.72%

                                                          At December 31,
                                                      ----------------------
                                                         2003       2002
                                                        ------     ------
                                                      (Dollars in thousands)
      Balance outstanding at end of year                $   --     $  700
      Weighted average rate on retail repurchase
         agreements at end of year                          --%      1.59%

Wealth Management Services
--------------------------

      Berkshire  Bank  wealth  management   provides  services  to  individuals,
partnerships,  corporations and other  institutions and also acts as a fiduciary
of estates and conservatorships and as a trustee under various wills, trusts and
other  plans.  Berkshire  Bank  emphasizes  the growth of its wealth  management
services primarily to increase fee-based income.  Berkshire Bank has implemented
several  policies  governing the practices and  procedures of trust  operations,
including  policies  relating to maintaining  confidentiality  of trust records,
investment of trust property,  handling  conflicts of interest,  and maintaining
impartiality.  At December  31,  2004,  assets  under  management  totaled  $358
million. Wealth management fee income totaled $2.7 million in 2004.


                                      -23-
      

Government Banking
------------------

      Berkshire Bank offers  full-service  government banking for cities,  towns
and municipal school districts in western  Massachusetts  and southern  Vermont.
Berkshire Bank offers  municipalities all aspects of financial advisory services
for the sale of notes and bonds,  actively  working  with bond  counsel,  rating
agencies,  consulting  agencies and bond buyers.  Additionally,  Berkshire  Bank
offers a wide range of municipal deposit products and checking accounts, as well
as the origination of payroll accounts. At December 31, 2004, Berkshire Bank was
working with approximately 68 municipal entities.

Technology
----------

      Core bank systems,  transaction  processing,  electronic banking and other
financial  technologies  are significant  aspects of the competitive and control
environment in which the Company  operates.  These  technologies are integral to
the Company's  operations  and to the  achievement  of its business  strategies.
Following the sale of its investment  interest in EastPoint  Technologies,  LLC,
the Company  entered into an agreement  with the acquirer for the  conversion of
the Company's core processing systems to the acquirer's  technology  platform in
2005.  This  technology  partner  is  a  prominent  industry  provider  of  data
processing  and  related  technologies.  The sale of  EastPoint  eliminated  its
operating costs to the Company and resulted in a technology  partnership  better
suited to ensure the proper infrastructure as the Bank expands.

Risk Factors
------------

      Berkshire Bank's increased emphasis on commercial and consumer lending may
expose it to increased  lending risks.  At December 31, 2004,  $577 million,  or
70%, of Berkshire Bank's portfolio consisted of commercial and multi-family real
estate loans,  commercial  construction  loans,  commercial  business  loans and
consumer  loans.  Berkshire Bank intends to continue to emphasize these types of
lending.  Consumer loans entail greater risks than one- to four-family  mortgage
loans  because  they  are  secured  by  rapidly   depreciable   assets  such  as
automobiles,  or to a lesser extent,  are unsecured.  Commercial loans generally
expose a lender to greater risk of non-payment and loss than one- to four-family
residential  mortgage loans because  repayment of the loans often depends on the
successful  operation of the property  and the income  stream of the  borrowers.
Commercial loans also typically involve larger loan balances to single borrowers
or groups of  related  borrowers  compared  to one- to  four-family  residential
mortgage loans. Additionally, many of Berkshire Bank's commercial borrowers have
more than one loan  outstanding  with Berkshire Bank.  Consequently,  an adverse
development with respect to one loan or one credit relationship can expose it to
a  significantly  greater risk of loss compared to an adverse  development  with
respect to a one- to four-family residential mortgage loan.

      Berkshire Bank's geographic expansion and growth, if not successful, could
negatively impact earnings. The Company's operations have grown in recent years,
both organically and through acquisitions.  In the past year, Berkshire Bank has
expanded its geographic  presence by opening a representative  office in Albany,
New York and by  acquiring a branch  office in  Oriskany  Falls,  New York.  The
Company has also  recently  obtained  regulatory  approval to establish a branch
office in Albany,  New York and  intends to  establish  additional  branches  in
eastern New York, including in the Albany metropolitan area.  Additionally,  the
Company will expand into the Springfield,  Massachusetts  metropolitan area with
the completion of its proposed acquisition of Woronoco Bancorp.

      The success of this  expansion  will depend on the acceptance by customers
of  the  Company  and  its  products  and  services   into  these  new  markets.
Additionally,  the  profitability of Berkshire  Bank's  expansion  strategy will
depend on whether the income it  generates  in the new  markets  will offset the
increased expenses of operating a larger entity with increased  personnel,  more
branch locations and additional product  offerings.  Berkshire Bank expects that
it may take a period of time  before  certain  of its new  branches  can  become
profitable,  especially  in  areas  in  which  Berkshire  Bank  does not have an
established physical presence.  During this period, operating these new branches
may negatively impact net income.

      Additionally, in connection with the Company's expansion, the Company will
need to increase its operational and financial procedures, systems and controls.
If the Company has difficulty in doing so, it could harm the Company's business,
results of operations and financial condition.

      The Company may fail to realize the  anticipated  benefits of its proposed
merger with  Woronoco  Bancorp,  Inc.  The  success of the merger with  Woronoco
Bancorp,  Inc. will depend on many factors,  including the Company's  ability to
realize  anticipated  cost savings and revenue  enhancements  and to combine the
businesses of the Company and Woronoco  Bancorp in a manner that permits  growth
opportunities  to  occur  and that  does not  materially  disrupt  the  existing
customer  relationships  of Woronoco  Bancorp and its  subsidiaries or result in
decreased revenues  resulting from any loss of customers.  If the Company is not
able to successfully  achieve these objectives,  the anticipated benefits of the
merger may not be fully  realized or at all or may take  longer to realize  than
expected.


                                      -24-
      

      The Company and Woronoco  Bancorp have operated and,  until the completion
of the merger, will continue to operate,  independently. It is possible that the
integration  process could result in a loss of key personnel,  the disruption of
the Company or Woronoco  Bancorp's  ongoing  businesses  or  inconsistencies  in
standards,  controls,  procedures and policies that adversely affect the Company
and Woronoco's ability to maintain relationships with customers and employees or
to achieve the anticipated benefits of the merger.

      Rising interest rates may hurt the Company's profits.  Interest rates were
recently at  historically  low levels.  However,  since June 30, 2004,  the U.S.
Federal  Reserve has  increased its target for the federal funds rates six times
to 2.50%.  If  interest  rates  continue to rise,  and if rates on deposits  and
borrowings  reprice  upwards  faster  than the rates on loans  and  investments,
Berkshire  Bank would  experience  compression  of interest rates spread and net
interest margin,  which would have a negative effect on profitability.  However,
in the past year, Berkshire Bank has undertaken several steps to position itself
better for an increase in market  interest  rates,  including the origination of
adjustable-rate  loans and the sale and  securitization  of fixed-rate  mortgage
loans.  See "Item 7A - Quantitative  and  Qualitative  Disclosures  About Market
Risk."

      A downturn in the local  economy or a decline in real estate  values could
hurt the Company's profits.  Nearly all of Berkshire Bank's loans are secured by
real estate or made to businesses in western Massachusetts.  As a result of this
concentration, a downturn in the local economy could cause significant increases
in nonperforming  loans,  which would hurt profits.  In recent years,  there has
been a  significant  increase in real estate  values in Berkshire  Bank's market
area. As a result of rising home prices,  Berkshire  Bank's loans have been well
collateralized.  A decline in real estate  values  could cause some of Berkshire
Bank's mortgages to become inadequately  collateralized,  which would expose the
Company to a greater risk of loss.

      Strong  competition  within  Berkshire  Bank's  market area could hurt the
Company's  profit and growth.  Berkshire Bank faces intense  competition both in
making  loans  and  attracting  deposits.  This  competition  has  made  it more
difficult  for it to make new loans and at times has  forced it to offer  higher
deposit  rates.  Price  competition  for  loans  and  deposits  might  result in
Berkshire Bank earning less on loans paying more on deposits, which would reduce
net interest income.  Competition also makes it more difficult to grow loans and
deposits.  Some of the  institutions  with which  Berkshire  Bank  competes have
substantially  greater  resources  and lending  limits than it has and may offer
services that Berkshire Bank does not provide.  Competition will likely increase
in the future as a result of legislative,  regulatory and technological  changes
and the continuing trend of consolidation  in the financial  services  industry.
The Company's  profitability  depends upon Berkshire Bank's continued ability to
compete successfully in its market area.

      Because  of  Berkshire  Bank's  heavy  reliance  on  technology  and  data
processing, Berkshire Bank's business could be materially and adversely affected
if Berkshire Bank's conversion and upgrading of various computer systems are not
performed properly.  Berkshire Bank relies heavily on technology,  including the
use of data processing and core application  software,  to conduct its business.
Berkshire Bank is in the process of updating and converting many of its systems,
including changing its data processor.  If Berkshire Bank encounters problems in
either  converting  or  upgrading  any of its  systems or in  operating  the new
systems once  installed it could affect  Berkshire  bank's ability to adequately
process and account for customer transactions,  which could significantly affect
the Company's business, financial condition and results of operation.

      Berkshire Bank and the Company operate in a highly  regulated  environment
and may be adversely affected by changes in laws and regulations. The Company is
subject to extensive  regulation,  supervision  and examination by the Office of
Thrift Supervision,  its chartering authority,  and Berkshire Bank is subject to
extensive  supervision and examination by the  Massachusetts  Division of Banks,
its chartering  authority,  and the Federal Deposit  Insurance  Corporation,  as
insurer of Berkshire Bank's deposits.  Such regulations and supervision  governs
the activities in which an institution and its holding  company may engage,  and
are intended  primarily for the protection of the insurance fund and depositors.
Regulatory  authorities  have  extensive  discretion  in their  supervisory  and
enforcement activities,  including the imposition of restrictions on operations,
the  classification  of assets and  determination  of the level of allowance for
loan losses. Any change in such regulation and oversight, whether in the form of
regulatory  policy,  regulations,  legislation or  supervisory  claim may have a
material impact on Berkshire Bank's operations.

Personnel
---------

      As of December 31, 2004, the Bank had 241 full-time equivalent  employees.
The employees are not  represented by a collective  bargaining unit and the Bank
will strive to continue its strong relationship with its employees.


                                      -25-
      

Subsidiary Activities
---------------------

      The following are  descriptions of Berkshire Bank's  subsidiaries,  all of
which are  wholly-owned.  All subsidiaries are incorporated in Massachusetts and
are indirectly owned by Berkshire Hills.

      North Street  Securities  Corporation  ("North  Street") is qualified as a
"securities corporation" for Massachusetts income tax purposes. Income earned by
a  qualifying  securities  corporation  is  generally  entitled  to special  tax
treatment from  Massachusetts  income tax. As of December 31, 2004, North Street
had  assets  totaling  $140  million,  consisting  primarily  of  a  variety  of
investment securities.

      Woodland Securities, Inc. ("Woodland"), is also qualified as a "securities
corporation"  for  Massachusetts  income tax purposes.  As of December 31, 2004,
Woodland   had  assets  of  $233   million   consisting   primarily   of  agency
mortgage-backed  securities.  The Bank has pledged all of its shares of Woodland
to the Federal Home Loan Bank of Boston to secure its borrowing facility.

      Gold  Leaf   Securities   Corporation   is  qualified  as  a   "securities
corporation"  for  Massachusetts  income tax purposes.  As of December 31, 2004,
Gold Leaf  Securities  Corporation  had assets  totaling $9 million,  consisting
primarily of Industrial Revenue Bonds.

      Berkshire Financial Planning, Inc. (formerly known as Gold Leaf Investment
Services,  Inc.)  previously  offered  access to brokerage  services,  through a
partnership   with  UVEST   Investment   Services,   a   registered   securities
broker-dealer.  These  services  are  now  being  offered  through  the  Bank in
partnership  with  Commonwealth   Financial  Network,  a  registered  securities
broker/dealer.  This  subsidiary  changed  its name from  Gold  Leaf  Investment
Services,  Inc. in 2004.  Berkshire  Financial  Planning,  Inc.  was inactive at
December 31, 2004.

      Gold Leaf Insurance Agency,  Inc. offers a full-line of products including
automobile, home, business and life insurance. 

      Berkshire  Hills'  subsidiaries,   in  addition  to  Berkshire  Bank,  are
described  below.  These  companies are  incorporated in  Massachusetts  and are
wholly owned by Berkshire Hills.

      Berkshire Hills Funding  Corporation was established in 2000 to lend funds
to Berkshire Bank's Employee Stock Ownership Plan ("ESOP") to purchase shares of
Berkshire Hills common stock in the initial public offering.

      Berkshire Hills  Technology,  Inc. is discussed  below under  discontinued
operations.

Discontinued Operations
-----------------------

      Berkshire  Hills  Technology,  Inc. was established in May 2001 to invest,
own and sell any type of  business  enterprise  including,  but not  limited to,
corporations  and  limited  liability  companies.  In June  2001,  along  with a
consortium of five other financial  institutions,  Berkshire  Hills  Technology,
Inc. invested $4.7 million in EastPoint  Technologies,  LLC  ("EastPoint").  The
Company's equity interest in EastPoint equaled 60.3%.  EastPoint,  headquartered
in Bedford,  New  Hampshire,  is a software  and data  processing  provider  for
financial  institutions.  On June 18, 2004, EastPoint was sold to EP Acquisition
Corp., a subsidiary of Open Solutions Inc.  (NASDAQ:  OPEN), for $7.0 million in
cash.  The Company  received  approximately  $2.6  million for its 60.3%  equity
interest  and  recorded a $75,000  loss on sale,  which was included in the 2004
loss from discontinued operations. Berkshire Hills Technology, Inc. was inactive
at December 31, 2004.

Segment Reporting
-----------------

      Management  monitors  the  revenue  streams of the  various  products  and
services in evaluating the Company's operations and financial  performance.  All
of the Company's operations are considered by management to be aggregated in one
reportable operating segment. Prior to their discontinuation,  the operations of
Berkshire Hills Technology, Inc., were evaluated on a stand-alone basis.

REGULATION AND SUPERVISION
--------------------------

General
-------

      As a savings and loan holding company, Berkshire Hills is required to file
reports with, and otherwise comply with the rules and regulations of, the Office
of Thrift Supervision  ("OTS").  As a savings bank chartered by the Commonwealth
of Massachusetts, Berkshire Bank is subject to extensive regulation, examination
and  supervision  by the  Massachusetts  Commissioner  of Banks,  as its primary
regulator,  and  the  Federal  Deposit  Insurance  Corporation,  as the  deposit
insurer.  Berkshire  Bank is a member of the Federal  Home Loan Bank system and,
with respect to deposit  insurance,  of the Bank  Insurance  Fund


                                      -26-
      

managed by the Federal Deposit Insurance  Corporation.  Berkshire Bank must file
reports  with  the  Commissioner  of Banks  and the  Federal  Deposit  Insurance
Corporation  concerning its  activities  and financial  condition in addition to
obtaining  regulatory approvals prior to entering into certain transactions such
as  mergers  with,  or  acquisitions   of,  other  savings   institutions.   The
Commissioner of Banks and /or the Federal Deposit Insurance  Corporation conduct
periodic  examinations  to  test  Berkshire  Bank's  safety  and  soundness  and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the  protection of the insurance  fund and
depositors.  The  regulatory  structure  also gives the  regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for  regulatory  purposes.  Any  change  in  such  regulatory  requirements  and
policies,  whether by the Commissioner of Banks,  the Federal Deposit  Insurance
Corporation  or Congress,  could have a material  adverse impact on the Company,
the Bank and their operations.  Certain  regulatory  requirements  applicable to
Berkshire Bank and to the Company are referred to below or elsewhere herein. The
description  of  statutory  provisions  and  regulations  applicable  to savings
institutions  and their  holding  companies set forth in this Form 10-K does not
purport to be a complete  description of such statutes and regulations and their
effects on Berkshire  Bank and Berkshire  Hills and is qualified in its entirety
by reference to the actual laws and regulations.

Massachusetts Banking Laws and Supervision
------------------------------------------

      Massachusetts   savings  banks  are   regulated  and   supervised  by  the
Massachusetts  Commissioner of Banks. The Massachusetts Commissioner of Banks is
required to regularly  examine each  state-chartered  bank.  The approval of the
Massachusetts  Commissioner of Banks is required to establish or close branches,
to merge with  another  bank,  to form a holding  company,  to issue stock or to
undertake many other activities. Any Massachusetts bank that does not operate in
accordance with the  regulations,  policies and directives of the  Massachusetts
Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks
may suspend or remove directors or officers of a bank who have violated the law,
conducted a bank's  business in a manner that is unsafe,  unsound or contrary to
the depositors' interests, or been negligent in the performance of their duties.
In  addition,  the  Massachusetts  Commissioner  of Banks has the  authority  to
appoint  a  receiver  or  conservator  if it is  determined  that  the  bank  is
conducting its business in an unsafe or unauthorized  manner,  and under certain
other circumstances.

      All  Massachusetts-chartered  savings  banks are required to be members of
the Depositors  Insurance  Fund, a private  deposit  insurer,  which insures all
deposits  in member  banks in excess of Federal  Deposit  Insurance  Corporation
deposit  insurance  limits.  Member banks are required to pay the assessments of
the fund.  In  addition,  the Mutual  Savings  Central  Fund acts as a source of
liquidity to its members in supplying them with low-cost  funds,  and purchasing
qualifying obligations from them.

      The powers that  Massachusetts-chartered  savings banks can exercise under
these laws are summarized below.

      Lending Activities. A Massachusetts-chartered savings bank may make a wide
variety of mortgage loans including  fixed-rate  loans,  adjustable-rate  loans,
variable-rate loans,  participation loans, graduated payment loans, construction
and development loans, condominium and co-operative loans, second mortgage loans
and  other  types  of  loans  that  may be made in  accordance  with  applicable
regulations.  Commercial  loans may be made to corporations and other commercial
enterprises  with or without  security.  Consumer and personal loans may also be
made with or without security.  Loans to individual  borrowers generally must be
limited  to 20% of the  total of a bank's  capital  accounts  and  stockholders'
equity.

      Investments Authorized.  Massachusetts-chartered  savings banks have broad
investment  powers  under   Massachusetts  law,  including   so-called  "leeway"
authority for investments that are not otherwise  specifically  authorized.  The
investment powers  authorized under  Massachusetts law are restricted by federal
law to permit, in general, only investments of the kinds that would be permitted
for national banks. Berkshire Bank has authority to invest in all of the classes
of loans and investments  that are permitted by its existing loan and investment
policies.

      Payment of Dividends. A savings bank may only pay dividends on its capital
stock if such payment would not impair the bank's  capital  stock.  No dividends
may  be  paid  to  stockholders  of  a  bank  if  such  dividends  would  reduce
stockholders'  equity of the bank  below the amount of the  liquidation  account
required  by  the  Massachusetts  conversion  regulations.   Additionally,   the
Massachusetts  Commissioner  of Banks may restrict the payment of dividends by a
bank if it is determined  that such payment would result in safety and soundness
concerns.

      Parity  Regulation.  Effective  November 19, 2002,  Massachusetts  law was
amended to increase the powers of Massachusetts  banks under certain conditions.
As a result of such amendment,  a Massachusetts  bank may engage in any activity
or offer any product or service if the  activity,  product or service is engaged
in or offered in accordance with  regulations  promulgated by the  Massachusetts
Commissioner  of Banks  and has been  authorized  for  national  banks,  federal
thrifts or state banks in a state other than  Massachusetts;  provided  that the
activity is  permissible  under  applicable  federal and  Massachusetts  law and
subject to the same limitations and  restrictions  imposed on the national bank,
federal thrift or out-of-state bank that had previously been granted the power.


                                      -27-
      

      Assessments.  Savings  banks  are  required  to  pay  assessments  to  the
Commissioner of Banks to fund  operations.  The expense paid for state exam fees
and assessments for the fiscal year ended December 31, 2004 totaled $41,000.

Federal Regulations
-------------------

      Capital   Requirements.   Under  Federal  Deposit  Insurance   Corporation
regulations, federally insured state-chartered banks that are not members of the
Federal Reserve System ("state non-member  banks"),  such as Berkshire Bank, are
required  to  comply  with  minimum  leverage  capital   requirements.   For  an
institution  determined by the Federal Deposit  Insurance  Corporation to not be
anticipating  or experiencing  significant  growth and to be in general a strong
banking organization, rated composite 1 under the Uniform Financial Institutions
Rating System  established  by the Federal  Financial  Institutions  Examination
Council,  the minimum capital leverage  requirement is a ratio of Tier 1 capital
to total assets of 3%. For all other institutions,  the minimum leverage capital
ratio is not less  than 4%.  Tier 1 capital  is the sum of common  stockholders'
equity,  noncumulative perpetual preferred stock (including any related surplus)
and minority investments in certain subsidiaries, less intangible assets (except
for certain servicing rights and credit card  relationships) and a percentage of
certain nonfinancial equity investments.

      Berkshire  Bank  must  also  comply  with the  Federal  Deposit  Insurance
Corporation  risk-based  capital  guidelines.   The  Federal  Deposit  Insurance
Corporation guidelines require state non-member banks to maintain certain levels
of regulatory capital in relation to regulatory  risk-weighted assets. The ratio
of  regulatory  capital to  regulatory  risk-weighted  assets is  referred to as
Berkshire  Bank's  "risk-based  capital  ratio."  Risk-based  capital ratios are
determined by allocating  assets and specified  off-balance  sheet items to four
risk-weighted  categories ranging from 0% to 100%, with higher levels of capital
being required for the categories  perceived as  representing  greater risk. For
example,  under  the  Federal  Deposit  Insurance  Corporation's  risk-weighting
system,  cash and  securities  backed by the full  faith and  credit of the U.S.
Government  are given a 0% risk  weight,  loans  secured by one- to  four-family
residential  properties  generally have a 50% risk weight and  commercial  loans
have a risk weighting of 100%.

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

      The Federal Deposit  Insurance  Corporation  Improvement Act required each
federal  banking agency to revise its risk-based  capital  standards for insured
institutions  to ensure that those  standards take adequate  account of interest
rate  risk,  concentration  of  credit  risk,  and the  risk  of  nontraditional
activities,  as well as to reflect the actual  performance  and expected risk of
loss  on  multi-family   residential   loans.  The  Federal  Deposit   Insurance
Corporation,  along  with the other  federal  banking  agencies,  has  adopted a
regulation  providing that the agencies will take into account the exposure of a
bank's  capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy.

      As a savings and loan  holding  company  regulated by the Office of Thrift
Supervision,  Berkshire Hills is not, under current law, subject to any separate
regulatory capital requirements.

      Berkshire  Bank's  regulatory  capital at December 31, 2004 is included in
the Stockholders' Equity note of the Company's financial statements in Item 8 of
this  report.  At  December  31,  2004,  Berkshire  Bank met each of its capital
requirements.

      Standards  for Safety and  Soundness.  The federal  banking  agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness to
implement  safety and soundness  standards.  The guidelines set forth the safety
and soundness  standards that the federal  banking  agencies use to identify and
address  problems at insured  depository  institutions  before  capital  becomes
impaired.  The guidelines address internal controls and information  systems, an
internal audit system,  credit underwriting,  loan documentation,  interest rate
risk exposure, asset growth, asset quality, earnings and compensation,  and fees
and benefits.  If the  appropriate  federal  banking agency  determines  that an
institution fails to meet any standard prescribed by the guidelines,  the agency
may  require  the  institution  to submit to the  agency an  acceptable  plan to
achieve compliance with the standard.

Investment Activities
---------------------

      Under  federal  law,  all   state-chartered   Federal  Deposit   Insurance
Corporation insured banks,  including savings banks, have generally been limited
to activities as principal and equity  investments of the type and in the amount
authorized for national  banks,  notwithstanding  state law. The Federal Deposit
Insurance  Corporation   Improvement  Act  and  the  Federal  Deposit  Insurance
Corporation permit exceptions to these limitations. For example, state chartered
banks, such as Berkshire Bank, may, with Federal Deposit  Insurance  Corporation
approval, continue to exercise grandfathered state authority to invest in common
or  preferred  stocks  listed on a national  securities  exchange  or the NASDAQ
National  Market and in the shares of an  investment  company  registered  under
federal  law.  In  addition,   the  Federal  Deposit  Insurance  Corporation  is
authorized to permit such institutions to engage in state authorized  activities
or investments that do not meet this standard (other than non-subsidiary  equity
investments) for institutions that meet all applicable  capital  requirements if
it is determined  that such  activities or investments do not pose a


                                      -28-
      

significant  risk  to  the  Bank  Insurance  Fund.  All  non-subsidiary   equity
investments,  unless  otherwise  authorized  or approved by the Federal  Deposit
Insurance  Corporation,  must have been  divested by December 19, 1996,  under a
Federal Deposit  Insurance  Corporation-approved  divestiture  plan, unless such
investments  were  grandfathered by the Federal Deposit  Insurance  Corporation.
Berkshire  Bank  received  grandfathering  authority  from the  Federal  Deposit
Insurance  Corporation  in  February  1993 to  invest in  listed  stocks  and/or
registered shares. The maximum permissible investment is 100% of Tier 1 capital,
as specified by the Federal Deposit Insurance Corporation's regulations,  or the
maximum amount  permitted by Massachusetts  Banking Law,  whichever is less. The
Federal Deposit Insurance  Corporation also required that Berkshire Bank provide
prior notice to the agency if it  increases  the holdings of listed stock and/or
registered  shares  as a  percentage  of Tier 1  equity  capital  by  25%.  Such
grandfathering  authority may be terminated upon the Federal  Deposit  Insurance
Corporation's  determination  that such  investments pose a safety and soundness
risk to Berkshire  Bank or if Berkshire Bank converts its charter or undergoes a
change in control. As of December 31, 2004, Berkshire Bank had marketable equity
securities,  including  money market  preferred  stocks,  with a market value of
$13.1 million, which were held under such grandfathering authority.

Interstate Banking and Branching
--------------------------------

      The  Interstate  Banking Act permits a bank,  such as Berkshire  Bank,  to
acquire an institution by merger in a state other than Massachusetts  unless the
other state has opted out of the Interstate  Banking Act. The Interstate Banking
Act also  authorizes  de novo  branching  into  another  state if the host state
enacts a law expressly  permitting out of state banks to establish such branches
within its borders.  During 2004,  Berkshire  Bank acquired a branch in Oriskany
Falls,  New York. At its  interstate  branches,  Berkshire  Bank may conduct any
activity that is authorized under  Massachusetts law that is permissible  either
for a New York bank (subject to applicable  federal  restrictions) or a New York
branch of an out-of-state national bank.

Prompt Corrective Regulatory Action
-----------------------------------

      Federal law  requires,  among other things,  that federal bank  regulatory
authorities  take "prompt  corrective  action" with respect to banks that do not
meet minimum capital requirements.  For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized,  undercapitalized,
significantly undercapitalized and critically undercapitalized.

      The Federal  Deposit  Insurance  Corporation  has adopted  regulations  to
implement the prompt corrective action legislation.  An institution is deemed to
be  "well  capitalized"  if it has a total  risk-based  capital  ratio of 10% or
greater,  a Tier 1  risk-based  capital  ratio of 6% or greater,  and a leverage
ratio of 5% or greater.  An institution is "adequately  capitalized" if it has a
total  risk-based  capital ratio of 8% or greater,  a Tier 1 risk-based  capital
ratio of 4% or greater  and  generally  a leverage  ratio of 4% or  greater.  An
institution is  "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier 1 risk-based  capital ratio of less than 4%, or generally a
leverage  ratio of less than 4% (3% or less for  institutions  with the  highest
examination   rating).   An   institution   is  deemed   to  be   "significantly
undercapitalized"  if it has a total risk-based capital ratio of less than 6%, a
Tier 1  risk-based  capital  ratio of less than 3%, or a leverage  ratio of less
than 3%. An institution is considered to be "critically  undercapitalized" if it
has a ratio of tangible  equity (as defined in the  regulations) to total assets
that is equal to or less than 2%. As of December  31, 2004,  Berkshire  Bank met
the conditions to be classified a "well capitalized" institution.

      "Undercapitalized"  banks  must  adhere to  growth,  capital  distribution
(including  dividend) and other limitations and are required to submit a capital
restoration  plan. No  institution  may make a capital  distribution,  including
payment as a dividend,  if it would be  "undercapitalized"  after the payment. A
bank's  compliance  with such plan is required to be  guaranteed  by any company
that controls the undercapitalized  institution in an amount equal to the lesser
of 5% of the  institution's  total  assets when deemed  undercapitalized  or the
amount  necessary  to  achieve  the  status  of  adequately  capitalized.  If an
"undercapitalized"  bank fails to submit an acceptable plan, it is treated as if
it is "significantly  undercapitalized."  "Significantly undercapitalized" banks
must comply with one or more of a number of additional  restrictions,  including
but not limited to an order by the Federal Deposit Insurance Corporation to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from  correspondent  banks or dismiss
directors  or officers,  and  restrictions  on interest  rates paid on deposits,
compensation  of  executive  officers  and capital  distributions  by the parent
holding company.  "Critically  undercapitalized"  institutions  must comply with
additional sanctions including,  subject to a narrow exception,  the appointment
of a receiver or conservator within 270 days after it obtains such status.

Transactions with Affiliates
----------------------------

      Under current federal law,  transactions  between depository  institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. In a holding company context, at a minimum, the parent holding company of a
savings  bank and any  companies  which are  controlled  by such parent  holding
company are  affiliates of the savings bank.  Generally,  Section 23A limits the
extent to which the  savings  bank or its  subsidiaries  may engage in  "covered
transactions" with any one affiliate to 10% of such savings bank's capital stock
and surplus,  and contains an aggregate limit on all such  transactions with all
affiliates to 20% of capital stock and surplus.  The term "covered  transaction"
includes,  among other things, the making of loans or other extensions of credit
to an affiliate and the purchase of assets from an  affiliate.  Section 23A also
establishes  specific collateral  requirements for loans or extensions of credit
to, or  guarantees,  acceptances  on  letters  of credit  issued on behalf of an
affiliate.


                                      -29-
      

Section  23B  requires  that  covered  transactions  and a broad  list of  other
specified transactions be on terms substantially the same, or no less favorable,
to  the  savings  bank  or  its   subsidiary   as  similar   transactions   with
non-affiliates.

      Further,  federal law  restricts an  institution  with respect to loans to
directors, executive officers, and principal stockholders ("insiders"). Loans to
insiders and their  related  interests  may not exceed,  together with all other
outstanding  loans to such persons and affiliated  entities,  the  institution's
total  capital and  surplus.  Loans to insiders  above  specified  amounts  must
receive the prior approval of the board of directors. Further, loans to insiders
must  be  made  on  terms  substantially  the  same  as  offered  in  comparable
transactions   to  other   persons,   except  that  such  insiders  may  receive
preferential  loans made under a benefit or compensation  program that is widely
available to Berkshire  Bank's  employees  and does not give  preference  to the
insider over the employees.  Federal law places additional  limitations on loans
to executive officers.

Enforcement
-----------

      The  Federal  Deposit  Insurance  Corporation  has  extensive  enforcement
authority over insured savings banks, including Berkshire Bank. This enforcement
authority  includes,  among  other  things,  the  ability to assess  civil money
penalties,  to issue  cease  and  desist  orders  and to  remove  directors  and
officers. In general,  these enforcement actions may be initiated in response to
violations of laws and regulations and unsafe or unsound practices.

      The Federal Deposit Insurance  Corporation has authority under federal law
to  appoint  a  conservator  or  receiver  for an  insured  bank  under  limited
circumstances.  The Federal  Deposit  Insurance  Corporation  is required,  with
certain  exceptions,  to appoint a receiver or conservator  for an insured state
non-member bank if that bank was "critically undercapitalized" on average during
the calendar quarter  beginning 270 days after the date on which the institution
became "critically undercapitalized." See "Prompt Corrective Regulatory Action."
The Federal Deposit Insurance Corporation may also appoint itself as conservator
or  receiver  for  an  insured  state  non-member   institution  under  specific
circumstances on the basis of the institution's  financial condition or upon the
occurrence  of  other  events,   including:  (1)  insolvency;   (2)  substantial
dissipation of assets or earnings through violations of law or unsafe or unsound
practices; (3) existence of an unsafe or unsound condition to transact business;
and (4)  insufficient  capital,  or the  incurring  of losses that will  deplete
substantially  all of the institution's  capital with no reasonable  prospect of
replenishment without federal assistance.

Insurance of Deposit Accounts
-----------------------------

      The  Federal  Deposit   Insurance   Corporation   maintains  a  risk-based
assessment  system.  The  Federal  Deposit  Insurance   Corporation  assigns  an
institution  to one of  three  capital  categories  based  on the  institution's
financial  information  consisting  of  (1)  well  capitalized,  (2)  adequately
capitalized or (3) undercapitalized,  and one of three supervisory subcategories
within each capital group.  The supervisory  subgroup to which an institution is
assigned is based on a supervisory  evaluation  provided to the Federal  Deposit
Insurance  Corporation  by  the  institution's  primary  federal  regulator  and
information,  which the Federal Deposit Insurance  Corporation  determines to be
relevant  to the  institution's  financial  condition  and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and  supervisory  category  that it is assigned.  Assessment  rates for
insurance fund deposits  currently  range from 0 basis points for the healthiest
institutions  to 27 basis points of assessable  deposits for the  riskiest.  The
Federal  Deposit  Insurance  Corporation  is authorized to raise the  assessment
rates.  The Federal Deposit  Insurance  Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If the
Federal  Deposit  Insurance  Corporation  takes  such  action,  it could have an
adverse effect on the earnings of Berkshire Bank.

      The Federal  Deposit  Insurance  Corporation  may  terminate  insurance of
deposits if it finds that the  institution is in an unsafe or unsound  condition
to  continue  operations,  has  engaged in unsafe or unsound  practices,  or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation.  The management of the Bank does not know
of any  practice,  condition  or  violation  that might lead to  termination  of
deposit insurance.

      Berkshire  Bank,  as a member of the  Depositors  Insurance  Fund, is also
subject to its assessments. See "- Massachusetts Banking Laws and Supervision."

Federal Reserve System
----------------------

      The Federal Reserve Board regulations  require depository  institutions to
maintain   noninterest-earning   reserves  against  their  transaction  accounts
(primarily  NOW and  regular  checking  accounts).  The  Federal  Reserve  Board
regulations  generally  provide that  reserves be maintained  against  aggregate
transaction  accounts  as  follows:  for that  portion of  transaction  accounts
aggregating $47.6 million less an exemption of $7 million (which may be adjusted
by the Federal  Reserve  Board) the reserve  requirement is 3%; and for accounts
greater  than  $47.6  million,  the  reserve  requirement  is 10%  (which may be
adjusted  by the  Federal  Reserve  Board  between 8% and 14%) of the portion in
excess  of  $47.6  million.   Berkshire   Bank  is  in  compliance   with  these
requirements.


                                      -30-
      

Community Reinvestment Act
--------------------------

      Under the Community  Reinvestment  Act, as implemented by Federal  Deposit
Insurance Corporation regulations,  a state non-member bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit  needs of its entire  community,  including  low and  moderate-income
neighborhoods.  The  Community  Reinvestment  Act neither  establishes  specific
lending  requirements  or  programs  for  financial  institutions  nor limits an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular community. The Community Reinvestment
Act requires the Federal Deposit Insurance  Corporation,  in connection with its
examination of an institution, to assess the institution's record of meeting the
credit  needs of its  community  and to consider  such record when it  evaluates
applications made by such institution.  The Community  Reinvestment Act requires
public  disclosure  of  an  institution's  Community  Reinvestment  Act  rating.
Berkshire  Bank's latest  Community  Reinvestment  Act rating  received from the
Federal Deposit Insurance Corporation was "Outstanding."

      Berkshire Bank is also subject to similar  obligations under Massachusetts
Law, which has an additional CRA rating category.  The  Massachusetts  Community
Reinvestment Act requires the Massachusetts  Banking  Commissioner to consider a
bank's Massachusetts  Community  Reinvestment Act rating when reviewing a bank's
application  to  engage  in  certain  transactions,   including  mergers,  asset
purchases and the  establishment of branch offices or automated teller machines,
and provides  that such  assessment  may serve as a basis for the denial of such
application.  Berkshire Bank's latest Massachusetts  Community  Reinvestment Act
rating received from the Massachusetts Division of Banks was "Outstanding."

Federal Home Loan Bank System
-----------------------------

      The Bank is a member of the Federal Home Loan Bank system,  which consists
of 12 regional  Federal Home Loan Banks.  The Federal Home Loan Bank  provides a
central credit facility primarily for member institutions.  Berkshire Bank, as a
member of the Federal Home Loan Bank of Boston,  is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank of Boston.  Berkshire Bank
was in compliance with this  requirement with an investment in Federal Home Loan
Bank of Boston stock at December 31, 2004 of $17.0 million.

      The  Federal  Home Loan Banks are  required  to provide  funds for certain
purposes including  contributing  funds for affordable  housing programs.  These
requirements  could  reduce the amount of  dividends  that the Federal Home Loan
Banks pay to their members and result in the Federal Home Loan Banks  imposing a
higher rate of interest on advances to their members.  For the years ended 2004,
2003,  2002,  2001, and 2000,  cash dividends from the Federal Home Loan Bank of
Boston to Berkshire Bank amounted to approximately $513,000, $249,000, $283,000,
$304,000 and $333,000, respectively. Further, there can be no assurance that the
impact of recent or future  legislation  on the Federal Home Loan Banks will not
also cause a decrease in the value of the  Federal  Home Loan Bank stock held by
the Bank.

Holding Company Regulation
--------------------------

      Federal law allows a state  savings  bank that  qualifies  as a "Qualified
Thrift Lender," discussed below, to elect to be treated as a savings association
for purposes of the savings and loan holding company  provisions of federal law.
Such election  allows its holding  company to be regulated as a savings and loan
holding  company  by the  Office of  Thrift  Supervision  rather  than as a bank
holding company by the Federal Reserve Board.  Berkshire Bank made such election
and the Company is a  non-diversified  unitary  savings and loan holding company
within the meaning of federal law. As such,  the Company is registered  with the
Office  of  Thrift   Supervision  and  has  adhered  to  the  Office  of  Thrift
Supervision's regulations and reporting requirements. In addition, the Office of
Thrift  Supervision  may  examine  and  supervise  the Company and the Office of
Thrift   Supervision  has  enforcement   authority  over  the  Company  and  its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift  Supervision  to restrict or prohibit  activities  that are
determined  to  be  a  serious  risk  to  the  subsidiary  savings  institution.
Additionally,  Berkshire  Bank is  required  to  notify  the  Office  of  Thrift
Supervision  at least 30 days before  declaring any dividend to the Company.  By
regulation,  the Office of Thrift  Supervision may restrict or prohibit the Bank
from paying dividends.

      As a unitary  savings and loan holding  company,  the Company is generally
not  restricted  under  existing laws as to the types of business  activities in
which it may engage. The  Gramm-Leach-Bliley  Act of 1999 expanded the authority
of bank holding companies to affiliate with other financial  services  companies
such  as   insurance   companies   and   investment   banking   companies.   The
Gramm-Leach-Bliley Act, however,  provided that unitary savings and loan holding
companies may only engage in activities permitted to a financial holding company
under the  legislation  and those  permitted  for a  multiple  savings  and loan
holding  company.  Unitary  savings and loan companies  existing prior to May 4,
1999, such as the Company, were grandfathered as to the unrestricted activities.
Upon  any  non-supervisory   acquisition  by  the  Company  of  another  savings
association  as a  separate  subsidiary,  the  Company  would  become a multiple
savings  and loan  holding  company.  Federal  law  limits the  activities  of a
multiple  savings  and loan  holding  company  and its  non-insured  institution
subsidiaries  primarily to  activities  permissible  for bank holding  companies
under  Section  4(c)(8) of the Bank  Holding  Company  Act,  provided  the prior
approval of the Office of Thrift  Supervision is obtained,  to other  activities
authorized by Office of Thrift Supervision regulation and to those permitted for


                                      -31-
      

financial  holding  companies.  Multiple savings and loan holding  companies are
generally   prohibited   from   acquiring  or  retaining   more  than  5%  of  a
non-subsidiary  company  engaged in  activities  other than those  permitted  by
federal law.

      Federal law prohibits a savings and loan holding company from, directly or
indirectly,  acquiring  more  than 5% of the  voting  stock of  another  savings
association  or  savings  and loan  holding  company or from  acquiring  such an
institution  or company by merger,  consolidation  or  purchase  of its  assets,
without  prior  written  approval  of  the  Office  of  Thrift  Supervision.  In
evaluating  applications by holding  companies to acquire savings  associations,
the  Office  of  Thrift  Supervision  considers  the  financial  and  managerial
resources and future prospects of the Company and the institution involved,  the
effect of the  acquisition on the risk to the insurance  funds,  the convenience
and needs of the community and competitive factors.

      The  Office  of  Thrift  Supervision  is  prohibited  from  approving  any
acquisition  that would result in a multiple  savings and loan  holding  company
controlling  savings  institutions  in  more  than  one  state,  except  for (1)
interstate supervisory  acquisitions by savings and loan holding companies,  and
(2) the acquisition of a savings institution in another state if the laws of the
state of the target savings institution specifically permit such acquisitions.

      To be  regulated  as a savings and loan  holding  company by the Office of
Thrift Supervision (rather than as a bank holding company by the Federal Reserve
Board),  the Bank must  qualify as a Qualified  Thrift  Lender.  To qualify as a
Qualified Thrift Lender,  the Bank must maintain  compliance with the test for a
"domestic  building and loan  association,"  as defined in the Internal  Revenue
Code, or with a Qualified  Thrift Lender Test. Under the Qualified Thrift Lender
Test,  a  savings  institution  is  required  to  maintain  at least  65% of its
"portfolio  assets" (total assets less: (1) specified liquid assets up to 20% of
total assets; (2) intangibles, including goodwill; and (3) the value of property
used to conduct business) in certain "qualified thrift  investments"  (primarily
residential mortgages and related investments, including certain mortgage-backed
and related  securities) in at least 9 months out of each 12 month period. As of
December 31, 2004,  Berkshire  Bank  maintained  93% of its portfolio  assets in
qualified  thrift  investments.  Berkshire Bank also met the QTL test in each of
the prior twelve months and, therefore, met the QTL Test.

      Acquisition of the Company.  Under the Federal Change in Bank Control Act,
a notice must be  submitted  to the Office of Thrift  Supervision  if any person
(including a company), or group acting in concert, seeks to acquire "control" of
a savings and loan holding  company.  Under certain  circumstances,  a change in
control may occur, and prior notice is required,  upon the acquisition of 10% or
more of the  Company's  outstanding  voting  stock,  unless the Office of Thrift
Supervision  has  found  that the  acquisition  will not  result  in a change of
control of the  Company.  Under the Change in Bank  Control  Act,  the Office of
Thrift  Supervision  has 60 days from the  filing of a  complete  notice to act,
taking  into  consideration   certain  factors,   including  the  financial  and
managerial  resources  of  the  acquirer  and  the  anti-trust  effects  of  the
acquisition.  Any  company  that  acquires  control  would  then be  subject  to
regulation as a savings and loan holding company.

      Massachusetts  Holding  Company  Regulation.  In  addition  to the federal
holding company regulations,  a bank holding company organized or doing business
in Massachusetts  must comply with any regulation under the  Massachusetts  law.
The term "bank  holding  company,"  for the  purposes of  Massachusetts  law, is
defined  generally to include any company which,  directly or indirectly,  owns,
controls  or holds with power to vote more than 25% of the voting  stock of each
of two or more  banking  institutions,  including  commercial  banks  and  state
co-operative banks, savings banks and savings and loan associations and national
banks,  federal  savings  banks and federal  savings and loan  associations.  In
general, a holding company controlling, directly or indirectly, only one banking
institution  will not be deemed to be a bank holding company for the purposes of
Massachusetts  law. Under  Massachusetts law, the prior approval of the Board of
Bank  Incorporation  is required before the following:  any company may become a
bank holding  company;  any bank  holding  company  acquires  direct or indirect
ownership  or  control  of  more  than  5% of the  voting  stock  of,  or all or
substantially all of the assets of, a banking  institution;  or any bank holding
company merges with another bank holding company.  Although the Company is not a
bank holding company for purposes of Massachusetts  law, any future  acquisition
of ownership,  control,  or the power to vote 25% or more of the voting stock of
another  banking  institution  or bank holding  company would cause it to become
such. Except for the planned merger with Woronoco Bancorp, Inc., the Company has
no current plan or  arrangement  to acquire  ownership  or control,  directly or
indirectly, of 25% or more of the voting stock of another banking institution.

Federal Securities Laws
-----------------------

      The Company's  common stock is registered with the Securities and Exchange
Commission  under the Exchange  Act. The Company is subject to the  information,
proxy  solicitation,  insider trading  restrictions and other requirements under
the Exchange Act.

      The  registration  under the Securities Act of shares of common stock does
not cover the resale of such  shares.  Shares of the common  stock  purchased by
persons  who  are  not   affiliates  of  the  Company  may  be  resold   without
registration.  The  resale  restrictions  of Rule 144 under the  Securities  Act
govern shares purchased by an affiliate of the Company. If the Company meets the
current public  information  requirements  of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including  those that require the affiliate's  sale to be aggregated with those
of  other  persons)  would  be  able  to  sell  in the  public  market,  without
registration,  a number of shares not to exceed, in any three-month  period, the
greater of (1) 1% of the  outstanding  shares of the  Company or (2) the average
weekly  volume of trading in such  shares  during the


                                      -32-
      

preceding four calendar  weeks.  Future  provision may be made by the Company to
permit  affiliates to have their shares registered for sale under the Securities
Act under specific circumstances.

Financial Privacy
-----------------

      In accordance with the Gramm-Leach-Bliley  Financial  Modernization Act of
1999,  federal banking  regulators adopted rules that limit the ability of banks
and other  financial  institutions  to  disclose  non-public  information  about
consumers to nonaffiliated  third parties.  These limitations require disclosure
of privacy policies to consumers and, in some circumstances,  allow consumers to
prevent  disclosure of certain  personal  information to a  nonaffiliated  third
party. The privacy provisions of the GLB Act affect how consumer  information is
transmitted  through  diversified  financial  companies  and conveyed to outside
vendors.

Anti-Money Laundering Initiatives and the USA Patriot Act
---------------------------------------------------------

      A major focus of governmental  policy on financial  institutions in recent
years has been aimed at combating money laundering and terrorist financing.  The
USA PATRIOT Act of 2001 (the "USA  Patriot  Act")  substantially  broadened  the
scope of United States  anti-money  laundering  laws and regulations by imposing
significant  new compliance and due diligence  obligations,  creating new crimes
and penalties and expanding  the  extra-territorial  jurisdiction  of the United
States.   The  United  States  Treasury   Department  has  issued  a  number  of
implementing  regulations which apply to various requirements of the USA Patriot
Act  to  financial   institutions  such  as  Berkshire  Bank  and  broker-dealer
subsidiaries.  These regulations impose obligations on financial institutions to
maintain appropriate  policies,  procedures and controls to detect,  prevent and
report money  laundering  and terrorist  financing and to verify the identity of
their  customers.  Failure of a financial  institution to maintain and implement
adequate  programs to combat money  laundering  and terrorist  financing,  or to
comply with all of the relevant  laws or  regulations,  could have serious legal
and reputational consequences for the institution.

FEDERAL AND STATE TAXATION ON INCOME
------------------------------------

Federal Income Taxation
-----------------------

      General.  The Company and Berkshire Bank report their income on a calendar
year basis using the accrual method of  accounting.  The federal income tax laws
apply  to the  Company  and  Berkshire  Bank  in the  same  manner  as to  other
corporations  with some  exceptions,  including  particularly  Berkshire  Bank's
reserve for bad debts discussed below.  The following  discussion of tax matters
is  intended  only as a  summary  and does  not  purport  to be a  comprehensive
description  of the tax  rules  applicable  to  Berkshire  Bank or the  Company.
Berkshire  Bank's  federal income tax returns have been either audited or closed
under the statute of  limitations  through tax year 1999. For its 2004 tax year,
Berkshire Bank's maximum federal income tax rate was 35%.

      Bad Debt Reserves.  For fiscal years  beginning  before December 31, 1995,
thrift  institutions which qualified under certain  definitional tests and other
conditions of the Internal  Revenue Code of 1986, as amended,  were permitted to
use certain  favorable  provisions to calculate  their  deductions  from taxable
income  for  annual  additions  to their bad debt  reserve.  A reserve  could be
established for bad debts on qualifying real property loans,  generally  secured
by interests in real property  improved or to be improved,  under the percentage
of  taxable   income  method  or  the   experience   method.   The  reserve  for
non-qualifying loans was computed using the experience method.

      Federal  legislation  enacted  in 1996  repealed  the  reserve  method  of
accounting  for bad debts and the  percentage  of taxable  income method for tax
years  beginning  after 1995 and required  savings  institutions to recapture or
take into  income  certain  portions  of their  accumulated  bad debt  reserves.
Approximately  $844,000 of the Bank's  accumulated bad debt reserves will not be
recaptured   into  taxable   income   unless  the  Bank  makes  a   "nondividend
distribution" to the Company as described below.

      Distributions.  If  the  Bank  makes  "nondividend  distributions"  to the
Company,  they will be considered to have been made from the Bank's unrecaptured
tax bad debt reserves,  including the balance of its reserves as of December 31,
1987, to the extent of the "nondividend distributions," and then from the Bank's
supplemental  reserve for losses on loans, to the extent of those reserves,  and
an amount based on the amount distributed, but not more than the amount of those
reserves,   will  be  included  in  the  Bank's  taxable   income.   Nondividend
distributions  include  distributions  in  excess  of  the  Bank's  current  and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock,  and  distributions in partial or complete
liquidation.  Dividends paid out of the Bank's  current or accumulated  earnings
and profits will not be included in the Bank's taxable income.

      The  amount  of  additional  taxable  income  triggered  by a  nondividend
distribution  is an amount  that,  when reduced by the tax  attributable  to the
income, is equal to the amount of the distribution. Therefore, if the Bank makes
a nondividend distribution to the Company,  approximately one and one-half times
the amount of the distribution not in excess of the amount of the reserves would
be includable in income for federal income tax purposes,  assuming a 35% federal
corporate  income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.


                                      -33-
      

State Taxation
--------------

      Massachusetts  Taxation.  The  Massachusetts  excise tax rate for  savings
banks is currently 10.5% of federal taxable income,  adjusted for certain items.
Taxable income includes gross income as defined under the Internal Revenue Code,
plus interest  from bonds,  notes and  evidences of  indebtedness  of any state,
including Massachusetts,  less deductions,  but not the credits, allowable under
the provisions of the Internal Revenue Code,  except no deduction is allowed for
bonus  depreciation  or for taxes  paid to the state  which are based on income.
Carryforwards and carrybacks of net operating losses are not allowed.

      A financial  institution or business  corporation is generally entitled to
special tax  treatment as a "securities  corporation,"  provided  that:  (a) its
activities are limited to buying,  selling,  dealing in or holding securities on
its own behalf and not as a broker;  and (b) it has applied for,  and  received,
classification  as  a  "securities  corporation"  by  the  Commissioner  of  the
Massachusetts  Department of Revenue.  A securities  corporation  that is also a
bank holding  company  under the Code must pay a tax equal to 0.33% of its gross
income.  A securities  corporation  that is not a bank holding company under the
Code  must pay a tax  equal to 1.32% of its gross  income.  Three of the  Bank's
subsidiaries,   North  Street  Securities  Corporation,   Gold  Leaf  Securities
Corporation  and  Woodland  Securities,   Inc.,  are  Massachusetts   securities
corporations.

      Delaware  Taxation.  As a Delaware  holding  company not earning income in
Delaware,  the  Company  is exempt  from  Delaware  corporate  income tax but is
required to file an annual  report with and pay an annual  franchise  tax to the
State of Delaware.


                                      -34-
      

ITEM 2. PROPERTIES
--------------------------------------------------------------------------------

      The Company and the Bank currently conduct their business through the main
office located in Pittsfield,  Massachusetts,  and 12 other full-service banking
offices and two other facilities  listed below. The Company and the Bank believe
their facilities are adequate to meet their present and immediately  foreseeable
needs.

       
         
                                                                                         Net Book Value
                                                                                           of Property
                                         Lease        Original Year                        or Leasehold
                                          Or             Leased         Date of Lease    Improvements at
Location                                  Own          or Acquired       Expiration     December 31, 2004
--------                                 -----        -------------     -------------   -----------------
                                                                                          (In thousands)
                                                                                                 
Main Office

24 North Street
Pittsfield, Massachusetts                 Own              1898              --               $1,588

Banking Offices

244 Main Street
Great Barrington, Massachusetts           Own              1950              --                1,956

103 North Main Street
Sheffield, Massachusetts                  Own              1966              --                  173

Old Town Hall
43 East Street
Pittsfield, Massachusetts                Lease             1969            2030                  444

2 Depot Street
West Stockbridge, Massachusetts           Own              1975              --                  296

165 Elm Street
Pittsfield, Massachusetts                 Own              1977              --                  258

255 Stockbridge Road
Great Barrington, Massachusetts           Own              1985              --                  205

37 Main Street
North Adams, Massachusetts               Lease             1985            2015(1)               314

1 Park Street
Lee, Massachusetts                        Own              1991              --                  208

32 Main Street
Stockbridge, Massachusetts                Own              1991              --                  247

66 West Street
Pittsfield, Massachusetts                Lease             1998            2009(2)               145

Allendale Shopping Center
39 Cheshire Road
Pittsfield, Massachusetts                Lease             2001            2021(3)             1,170

212 Main Street
Oriskany Falls, New York                  Own              2004              --                  185

Other Offices

66 Allen Street (4)
Pittsfield, Massachusetts                 Own              1999              --                2,050

54 State Street - Suite 804 (5)
Albany, New York                         Lease             2004            2006                   --
        

----------
(1)   Berkshire Bank has one option to renew for ten years.

(2)   Berkshire Bank has two options to renew, each for an additional  five-year
      period.

(3)   Berkshire Bank has four options to renew, each for an additional five-year
      period.

(4)   This facility houses Berkshire Bank's Commercial  Lending Division,  Asset
      Management/Trust Division and Government Banking Department.

(5)   This facility houses  Berkshire  Bank's  Representative  Office,  at which
      loans are processed; however, no deposits are taken at this site.


                                      -35-
      

ITEM 3. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

      At December 31, 2004, neither the Company nor the Bank was involved in any
pending legal proceedings believed by management to be material to the Company's
financial  condition  or results of  operations.  Periodically,  there have been
various claims and lawsuits involving  Berkshire Bank, such as claims to enforce
liens,  condemnation  proceedings on properties in which the Bank holds security
interests,  claims involving the making and servicing of real property loans and
other issues incident to the Bank's business.  However,  neither the Company nor
the Bank is a party to any pending legal  proceedings  that it believes,  in the
aggregate,  would have a material  adverse effect on the financial  condition or
operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------------------------

      No matters were submitted to a vote of security  holders during the fourth
quarter of 2004.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------

      The common stock is traded on the American Stock Exchange under the symbol
"BHL." As of March 3, 2005, the Company had approximately 927 holders of record.
The following table sets forth, for the quarters  indicated,  the daily high and
low sales price for the common stock and the dividends  paid.  The closing price
of the  Company's  common  stock on March 3, 2005 was  $34.81.  The  Company  is
subject to the requirements of Delaware law, which generally limits dividends to
an amount  equal to the excess of the net assets of the  Company  (the amount by
which total assets exceed total  liabilities)  over its statutory capital or, if
there is no  excess,  to its net  profits  for the  current  and/or  immediately
preceding fiscal year.

                                  For the Year Ended December 31, 2004
                        --------------------------------------------------------
                        4th Quarter    3rd Quarter    2nd Quarter    1st Quarter
                        -----------    -----------    -----------    -----------
High                       $38.20         $39.20         $37.30         $39.20

Low                        $34.55         $34.80         $32.46         $34.40

Dividend Paid              $ 0.12         $ 0.12         $ 0.12         $ 0.12

                                  For the Year Ended December 31, 2003
                        --------------------------------------------------------
                        4th Quarter    3rd Quarter    2nd Quarter    1st Quarter
                        -----------    -----------    -----------    -----------
High                       $37.60         $34.30         $28.80         $24.08

Low                        $33.40         $28.00         $22.75         $21.77

Dividend Paid              $ 0.12         $ 0.12         $ 0.12         $ 0.12

      The Company did not  repurchase  any shares in the fourth quarter of 2004.
On June 3, 2003, the Company  authorized  the purchase of up to 300,000  shares,
from  time to time,  subject  to market  conditions.  The  repurchase  plan will
continue  until it is completed or terminated  by the Board of Directors.  As of
December 31, 2004,  111,955 shares remain available for purchase under the plan.
No plans expired  during the three months ended  December 31, 2004.  The Company
has no plans that it has elected to terminate prior to expiration or under which
it does not intend to make further purchases.


                                      -36-
      

ITEM 6. SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------

      The following summary data is based in part on the consolidated  financial
statements and accompanying  notes, and other schedules  appearing  elsewhere in
this Form 10-K.  Historical data is also based in part on, and should be read in
conjunction with, prior filings with the SEC.

       
         
                                                                         At or For the Years Ended December 31,
                                                       --------------------------------------------------------------------------
                                                           2004            2003            2002            2001           2000
                                                       -----------     -----------     -----------     -----------    -----------
                                                                      (Dollars in thousands, except per share data)
                                                                                                                         
Selected Financial Data:
   Total assets                                        $ 1,310,115     $ 1,218,548     $ 1,045,947     $ 1,030,701    $ 1,011,340
   Loans, net                                              818,842         783,258         712,714         791,920        783,405
   Investment securities:
      Available-for-sale                                   365,404         307,425         173,169         104,446         99,309
      Held-to-maturity                                      29,942          36,903          44,267          33,263         32,238
      Federal Home Loan Bank (FHLB) stock                   16,974          12,923           7,440           7,027          5,651
      Savings Bank Life Insurance stock                      2,043           2,043           2,043           2,043          2,043
   Deposits                                                845,789         830,244         782,360         742,729        729,594
   Federal Home Loan Bank advances                         327,926         251,465         133,002         133,964        101,386
   Repurchase agreements                                        --              --             700           1,890          2,030
   Total stockholders' equity                              131,736         123,175         120,569         139,323        161,322
   Real estate owned                                            --              --           1,500              --             50
   Nonperforming loans                                       1,152           3,199           3,741           2,702          2,869

Selected Operating Data:
   Total interest and dividend income                  $    61,081     $    56,308     $    64,128     $    75,796    $    71,018
   Total interest expense                                   20,724          18,742          23,428          33,560         33,468
                                                       -----------     -----------     -----------     -----------    -----------
      Net interest income                                   40,357          37,566          40,700          42,236         37,550
   Provision for loan losses                                 1,565           1,460           6,180           7,175          3,170
                                                       -----------     -----------     -----------     -----------    -----------
      Net interest income after provision
         for loan losses                                    38,792          36,106          34,520          35,061         34,380
                                                       -----------     -----------     -----------     -----------    -----------
   Non-interest income:
      Service charges and fees                               5,418           4,961           4,659           4,289          3,763
      Gain on sales and dispositions of
         securities, net                                     1,483           3,077          14,470             268            423
      Gain (loss) on sale of loans                              85          (1,854)        (10,702)             --             --
      Other                                                    778             264          (2,000)          2,526            560
                                                       -----------     -----------     -----------     -----------    -----------
         Total non-interest income                           7,764           6,448           6,427           7,083          4,746
                                                       -----------     -----------     -----------     -----------    -----------
         Total non-interest expense                         28,977          28,243          37,279          28,927         32,184
                                                       -----------     -----------     -----------     -----------    -----------
      Income from continuing operations
          before income taxes                               17,579          14,311           3,668          13,217          6,942
      Provision for income taxes                             5,639           5,161             885           4,334          2,360
                                                       -----------     -----------     -----------     -----------    -----------
      Income from continuing operations                     11,940           9,150           2,783           8,883          4,582
                                                       -----------     -----------     -----------     -----------    -----------
     (Loss) income from discontinued operations (1)           (653)           (282)         (1,040)             43             --
    Income tax (benefit) expense                              (222)            (97)           (354)             15             --
                                                       -----------     -----------     -----------     -----------    -----------
    Net (loss) income from discontinued operations            (431)           (185)           (686)             28             --
                                                       -----------     -----------     -----------     -----------    -----------
         Net income                                    $    11,509     $     8,965     $     2,097     $     8,911    $     4,582
                                                       ===========     ===========     ===========     ===========    ===========

Dividends per share                                    $      0.48     $      0.48     $      0.48     $      0.43    $      0.10
Earnings per share
       Basic                                           $      2.18     $      1.70     $      0.39     $      1.42            N/A
       Diluted                                         $      2.01     $      1.57     $      0.36     $      1.35            N/A
(footnotes on following page)
        


                                      -37-
      

       
         
                                                                                  At or For the Years Ended December 31,
                                                                         -------------------------------------------------------
                                                                           2004        2003        2002        2001        2000
                                                                         -------     -------     -------     -------     -------
                                                                               (Dollars in thousands, except per share data)
                                                                                                                            
Selected Operating Ratios and Other Data (2):
   Performance Ratios:
      Average yield on interest-earning assets                              5.00%       5.35%       6.49%       7.80%       8.04%
      Average rate paid on interest-bearing liabilities                     1.97        2.10        2.85        4.25        4.64
      Interest rate spread (3)                                              3.03        3.25        3.64        3.55        3.40
      Net interest margin (4)                                               3.30        3.57        4.12        4.35        4.25
      Average interest-bearing assets to interest-bearing liabilities     116.06      118.01      120.33      123.04      122.53
      Net interest income after provision for loan losses
         to non-interest expense                                          133.87      127.84       92.60      121.21      106.82
      Non-interest expense as a percent of average assets                   2.25        2.53        3.54        2.80        3.44
      Return on average assets (5)                                          0.89        0.80        0.20        0.86        0.49
      Return on average equity (6)                                          9.06        7.28        1.54        5.74        3.72
      Average equity to average assets                                      9.86       11.04       12.96       15.00       13.15
      Dividend payout ratio (7)                                            22.02       28.24      123.08       30.28         N/A
      Efficiency ratio (8)                                                 62.02       66.00       70.06       58.97       76.86

   Regulatory Capital Ratios:
      Tier 1 capital to average assets                                      9.18        8.97       10.04       11.02       14.54
      Total capital to risk-weighted assets                                14.24       14.10       15.18       15.73       20.15

   Asset Quality Ratios:
      Nonperforming loans as a percent of
         total loans (9)                                                    0.14        0.40        0.52        0.34        0.36
      Nonperforming assets as a percent of
         total assets (10)                                                  0.09        0.26        0.36        0.26        0.29
      Allowance for loan losses as a percent of
         total loans                                                        1.13        1.13        1.43        1.37        1.29
      Allowance for loan losses as a percent of
         nonperforming loans                                              810.50      280.37      275.54      408.36      356.08
      Net loans charged-off as a percent of
         average total loans                                                0.15        0.35        0.87        0.78        0.20
   Share Data:
      Book value per share                                               $ 22.43     $ 20.87     $ 19.71     $ 21.68     $ 21.02
      Tangible book value per share                                      $ 21.19     $ 19.13     $ 18.00     $ 20.04     $ 20.21
      Market price at year end                                           $ 37.15     $ 36.20     $ 23.55     $ 20.25     $ 15.75
        

----------
(1)   Discontinued operations relate to the Company's previous 60.3% interest in
      EastPoint  Technologies,  LLC (a provider of bank core systems  software).
      The assets and operations of EastPoint were acquired in 2001 and were sold
      in June 2004. Results in 2004 include a $75,000 loss recorded on the sale.

(2)   Regulatory  Capital Ratios are end-of-period  ratios.  Regulatory  average
      assets  are for the last  quarter.  Performance  Ratios are based on daily
      averages.  Asset Quality  Ratios are  end-of-period  ratios except for the
      charge-off ratio, which is for the year.

(3)   Difference between weighted average yield on  interest-earning  assets and
      weighted average cost of interest-bearing liabilities.

(4)   Net interest income as a percentage of average interest-earning assets.

(5)   Net income divided by average total assets.

(6)   Net income divided by average total equity.

(7)   Dividends  per share  divided  by basic  earnings  per  share.  Comparable
      figures for 2000 are not available.

(8)   Operating  expenses  divided  by net  interest  income  plus  non-interest
      income,  less gain on sale of  securities,  plus loss on sale of sub-prime
      loans in 2003 and 2002.  For purposes of the 2002  computation,  severance
      payments  of  $6.9  million  were   deducted  from   operating   expenses.
      Discontinued   operations  income  and  expenses  are  excluded  from  the
      computation of the efficiency ratio.

(9)   Nonperforming loans consist of nonaccrual loans.

(10)  Nonperforming assets consist of nonperforming loans and real estate owned.


                                      -38-
      

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
--------------------------------------------------------------------------------

General
-------

      Management's discussion and analysis of financial condition and results of
operations is intended to assist in  understanding  the financial  condition and
results of operations of the Company. The information  contained in this section
should be read in conjunction  with the  consolidated  financial  statements and
accompanying notes contained in this report.

Critical Accounting Policies
----------------------------

      The Company has established various accounting policies,  which govern the
application of generally  accepted  accounting  principles in the preparation of
the  financial  statements.  Certain  accounting  policies  involve  significant
judgments  and  assumptions  by  management  that have a material  impact on the
carrying  value of certain  assets and  liabilities.  Management  considers such
accounting  policies to be  critical  accounting  policies.  The  judgments  and
assumptions  used by  management  are based on historical  experience  and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions  made by management,  actual results
could  differ  from these  judgments  and  estimates  that could have a material
impact on the  carrying  values of assets  and  liabilities  and the  results of
operations  of the  Company.  The  Company  believes  the policy  related to the
allowance for loan losses is a critical accounting policy that requires the most
significant  judgments and estimates used in the preparation of the Consolidated
Financial  Statements.  Refer  to  Footnote  1  to  the  Consolidated  Financial
Statements,  "Summary of Significant  Accounting Policies" and the allowance for
loan loss discussion in Item 1.  "Business,"  for a detailed  description of the
estimation processes and methodology related to the allowance for loan losses.

Operating Strategy
------------------

      The  mission  of  Berkshire  Bank  is to be an  independent,  full-service
community  bank  committed to being the  "financial  institution  of choice" for
people and businesses in Berkshire County and neighboring  communities.  It will
achieve this by  consistently  meeting and  exceeding  the  expectations  of its
customers in the delivery of quality financial  services and products.  The Bank
values and  respects  its  customers  and  employees  and strives to maintain an
environment within which customers want to bank and employees will want to work.

      The Bank  offers a wide  range of  deposit,  loan,  investment  and wealth
management  products to its customers.  In recent years, the Bank's strategy has
been to  enhance  profitability  through  controlled  balance  sheet  growth  by
emphasizing the origination of real estate mortgages,  commercial loans and home
equity  loans,  increasing  sources  of  non-interest  income  and by  improving
operating  efficiencies  while  managing  its capital  position and limiting its
credit and interest rate risk  exposure.  The Bank's  strategy has also included
expansion of its office locations into contiguous markets.

      The Bank is  primarily  a lending  institution,  which  does a good job of
cross-selling products in an effort to "own" the "whole customer." While it does
not offer the highest  rates on deposits  in its market,  it has still  achieved
strong growth in its core deposit base. In addition,  being  vigilant in expense
control through efficiency  efforts,  including the implementation of Six Sigma,
is critical and we believe those efforts will help  earnings.  To accomplish its
objectives, the Bank has sought to:

      o     Expand the services and products it offers.

      o     Provide superior customer service.

      o     Build customer relationships.

      o     Provide innovative  products,  increase the functionality of its ATM
            network and expand the capability of its call center.

      o     Increase fee income by broadening  non-depository  product offerings
            and services.

      o     Continue  to increase  its  emphasis on high  quality  consumer  and
            commercial loans.

      o     Control   credit   risk  by   continuing   to  employ   conservative
            underwriting standards to minimize the level of new problem assets.

      o     Improve asset quality by exiting the indirect  sub-prime  automobile
            loan business.

      o     Manage interest rate risk by emphasizing investments in shorter-term
            loans   and   investment   securities,   engaging   in   the   sale,
            securitization  and purchase of loans and by managing the  Company's
            sources of  borrowed  funds,  such as its ability to borrow from the
            FHLB of Boston.

      o     Limit equity price risk and  reductions to capital with decreases in
            its  equity  securities  portfolio  by  selling  a  portion  of  its
            marketable equity securities portfolio.


                                      -39-
      

      o     Operate more  efficiently by: (1) increasing  core deposits  through
            aggressive   cross-selling  of  products  and  using  a  disciplined
            approach to deposit  pricing;  and (2) utilizing "Six Sigma" process
            improvement  infrastructure,   which  is  designed  to  improve  the
            Company's operating efficiencies.

      o     Invest primarily in debt instruments that provide adequate liquidity
            to  meet  cash  flow  needs  and to  earn  a  reasonable  return  on
            investment.

      The  Company  established  profitability  goals at the end of 2002,  to be
achieved in three years,  consisting  of a return on assets of 1.0%, a return on
equity of 10.0% and an efficiency ratio of under 60%.  Earnings growth is always
a priority for a public company and balancing  this with  community  involvement
and employee retention is paramount to the Company's management.

      As global and local economies continue to improve, the Company will strive
to take advantage of growth opportunities, both organic and through non-dilutive
acquisitions.  While industry  consolidation  continues to increase  acquisition
multiples,  making  acquisitions  increasingly  more  difficult to achieve,  the
Company will prudently  continue to explore  opportunities that will improve its
franchise and be accretive to shareholders.

Fourth Quarter Events and Recent Developments
---------------------------------------------

      In  December  2004,  the  Company  announced  that it had  entered  into a
definitive agreement to acquire Woronoco Bancorp, Inc., which will create a $2.0
billion  company.  Also,  in connection  with the merger,  the Bank will acquire
Woronoco  Savings Bank, the  wholly-owned  subsidiary of Woronoco  Bancorp.  The
combined  institution  will be a formidable  commercial  and  community  banking
franchise, with significant non-interest income potential,  management synergies
and solid  asset  quality.  It will  serve  customers  through  a network  of 22
full-service branches in western Massachusetts and New York.

      Also in December 2004, the Company acquired Berkshire  Financial Planning,
Ltd. adding clients and additional  financial  planning  resources to the Bank's
growing wealth management group. In October 2004, the Bank acquired its Oriskany
Falls, New York branch,  including about $8 million in new deposits,  the Bank's
first  full-service  office  in New  York.  The  Bank  announced  plans  to open
additional offices in Eastern New York in 2005. The Bank opened a representative
office  in  Albany  in  July  2004,  for the  specific  purpose  of  originating
commercial loans.

      Total  loans  increased  by $10  million in the fourth  quarter.  The Bank
purchased  a $10  million  single  premium  bank owned life  insurance  ("BOLI")
contract,  bringing  total BOLI  investments  to $18  million.  These  contracts
provide earnings credits,  which are recorded as non-interest income. The growth
in loans and BOLI  contracts was offset by a $23 million  decrease in securities
available for sale during the quarter.

      Deposit transaction  accounts (demand deposits and NOW accounts) increased
by $10 million, or 5%, during the quarter. This was offset by decreases in other
deposit categories,  with total deposits decreasing by $7 million, or 1%, during
the quarter.

      Service fee income increased $172,000,  or 14%, as compared to the quarter
ended  September  30, 2004.  All major service fee  categories  increased in the
fourth quarter.  The largest fee increase was in wealth management service fees,
which increased by 13% compared to the prior quarter.

      The  return on  average  stockholders'  equity  increased  to 9.72% in the
fourth  quarter of 2004,  compared  to 9.71% and 8.49% in the prior  quarter and
fourth quarter of 2003,  respectively.  For these periods, the return on average
assets  increased  to 0.97%  from  0.92% and 0.86%;  the  efficiency  ratio also
improved to 60.80% from 61.60% and 62.86%. These improvements primarily resulted
from growth in net  interest  income and service  fee  income,  combined  with a
modest  increase in  non-interest  expense.  Results in the fourth  quarter came
close to achieving the Company's  near-term goals of a 10.0% return on equity, a
1.0% return on assets, and an efficiency ratio under 60%.

Comparison of Financial Condition at December 31, 2004 and 2003
---------------------------------------------------------------

      Total  Assets.  Total  assets at  year-end  2004 were  $1.31  billion,  an
increase  of $92  million,  or 8%,  from $1.22  billion at  year-end  2003.  The
increase was primarily due to a $68 million gross  increase in loans  (excluding
the effect of $39 million in mortgage loans converted to securities in the first
quarter).  Loan growth  resulted  from record loan  originations  totaling  $326
million in 2004.  Asset growth was largely  funded by a $76 million  increase in
Federal Home Loan bank advances, and an increase of $16 million in deposits.

      Total Loans.  Total loans  increased to $828 million at year-end 2004. The
Bank  securitized  $39  million of one- to  four-family  longer-term  fixed rate
mortgages,  as it  continued  to liquefy  and reduce its  exposure  to loans and
investments  with longer  maturities.  Excluding this transfer,  the $68 million
gross increase in loans amounted to a 9% growth rate due to the Company's record
loan origination  volume in 2004. All loan categories  increased  (excluding the
mortgage  transfer),  except for commercial


                                      -40-
      

business loans. The biggest increase was in commercial mortgages,  which grew by
$53 million,  or 35%.  Commercial and commercial  real estate loan  originations
benefited from business development outside of Berkshire County, which accounted
for 30% of these  originations,  including  21% in Eastern  New York,  where the
Company opened new offices in 2004.  Consumer loans increased by $19 million, or
18%,  primarily  due to  marketing  efforts  aimed at  generating  high  quality
automobile  loans with FICO scores above 700. Loan  originations  also benefited
from a strong  local real  estate  market,  which was  supported  by a generally
favorable interest rate environment.

      Asset  Quality.  There was no foreclosed  real estate at either  year-end.
Total nonaccruing loans decreased to $1.15 million, or 0.09% of total assets, at
year-end 2004,  compared to $3.20 million,  or 0.26% of total assets at year-end
2003.  This  improvement  included  the  benefit  of the  sale  of  the  largest
nonperforming  commercial loan  relationship,  which had a $1.3 million balance.
Net loan  charge-offs  were $1.2  million in 2004,  or 0.15% of  average  loans,
compared to $2.8 million,  or 0.35% of average  loans,  in 2003.  Charge-offs in
2003 included losses on the remaining  portfolio of sub-prime  automobile loans,
which were sold in December  2003.  The allowance  for loan losses  increased by
$368,000 to $9.3 million at year-end 2004; the allowance measured 1.13% of total
loans at both year-ends. The allowance was 811% of nonaccruing loans at year-end
2004,  compared to 280% at the prior  year-end.  The level of the  allowance  is
determined  in  accordance  with  a  critical   accounting   policy  subject  to
uncertainty,  which  is  discussed  further  in  Item 1 of  this  report.  Loans
delinquent  60-89 days totaled  $727,000 at year-end  2004,  measuring  0.09% of
total loans, which was flat from the prior year-end. Substandard loans increased
to $11.2  million from $7.0  million due to the  addition of several  commercial
relationships, which were performing and are expected to continue to perform.

      Investment Securities. Total investment securities (including Federal Home
Loan Bank stock and Savings Bank Life Insurance stock) increased to $414 million
at year-end  2004.  This  increase  included the $39 million  securitization  of
residential  mortgages.  During  October,  the Company sold $11 million of these
securitized  mortgages.  Excluding the impact of these transactions,  investment
securities  grew by $27  million,  or 8%,  compared to $359  million at year-end
2003.  In  2004,   securities  purchases  consisted  primarily  of  pass-through
mortgage-backed  securities with average repricing intervals of 3-5 years, which
have limited risk of interest rate extension. These securities were purchased to
leverage  the  Bank's  capital  and  reduce   interest  rate  risk  exposure  to
longer-term  investments  while taking advantage of a steep yield curve. The net
unrealized gain in the portfolio was $6.6 million at year-end 2004,  compared to
$8.5 million at year-end 2003,  primarily due to the recognition of $1.5 million
in net gains on sale during the year.

      Other Assets.  Goodwill  decreased by $4.4 million in 2004 due to the sale
of the assets of the Company's EastPoint  Technologies,  LLC subsidiary in June.
Goodwill booked in relation to  acquisitions in 2004 totaled $1.0 million.  Bank
owned life  insurance  increased  by $10 million due to the purchase of a single
premium contract in October.

      Deposits.  Total deposits increased by $16 million, or 2%, to $846 million
in 2004.  The increase for the year was primarily due to a $22 million  increase
in core deposit balances (total deposits excluding certificates),  which grew by
4% to $531 million at year-end.  Contributing  to this growth were  increases of
$13 million,  or 7%, in transaction  accounts and $17 million,  or 12%, in money
market accounts.  The Bank actively pursued  relationships  through its branding
campaign  initiated in early 2004.  Deposit  growth also included the benefit of
the $8 million  Oriskany  Falls  branch  purchase in October.  Savings  accounts
decreased  by $8  million,  or 5%,  and  certificate  accounts  decreased  by $6
million,  or 2%, in 2004.  The pricing  environment  became more  competitive in
2004, as short-term  interest rates began to increase in line with actions taken
by the Federal Reserve to increase short-term interest rates,  following several
years of decreases to comparatively low levels.

      Borrowings.  Borrowings  increased by $76 million, or 30%, to $328 million
at  year-end  2004.  The Bank took  advantage  of the lower  cost of  borrowings
relative  to the cost of time  deposits  to fund  asset  growth.  This  increase
represented new borrowings with terms ranging from one month to four years.

      Equity.  Total  stockholders'  equity increased by $8.6 million, or 7%, to
$131.7  million at  year-end  2004,  primarily  due to the  benefit of  retained
earnings. Cash dividends remained unchanged at $0.48 per share in 2004, totaling
$2.6 million,  and treasury stock purchases totaled $2.5 million.  Tangible book
value per share was $21.19 at  year-end  2004,  compared  to $19.13 at the prior
year-end.  The ratio of stockholders'  equity to total assets measured 10.06% at
year-end 2004, compared to 10.11% at the prior year-end.


                                      -41-
      

Comparison of Operating Results for the Years Ended December 31, 2004 and 2003.
-------------------------------------------------------------------------------

      Net  Income.  Net  income  for the year 2004 was a record  $11.5  million,
compared to $9.0 million for 2003. Net income from continuing operations totaled
$11.9  million for the year 2004,  compared to $9.2 million for 2003,  excluding
the loss from discontinued operations of EastPoint Technologies,  LLC, which was
sold in June 2004.  Earnings from continuing  operations were a record $2.08 per
diluted share for the year 2004, an increase of 30% over prior year results. Net
income after the loss from discontinued  operations was $2.01 per diluted share,
an increase of 28% over prior year results.

      The Company's  performance in 2004 benefited from a $2.8 million  increase
in net interest income,  resulting from growth in loans and  investments.  Total
service fee income  increased by 9% in 2004, while  non-interest  expense growth
was limited to 3%. The return on average stockholders' equity increased to 9.06%
in 2004,  compared to 7.28% in 2003. The return on average  assets  increased to
0.89% from 0.80% for the same  periods.  The  efficiency  ratio also improved to
62.0% from 66.0%.

      Net Interest Income. Net interest income increased by $2.8 million, or 7%,
to $40.4  million in 2004,  compared to $37.6 million in 2003.  Average  earning
assets increased by $171 million,  or 16% in 2004. This growth in earning assets
more than offset the impact of a decrease in the net interest margin to 3.30% in
2004 from 3.57% in the prior year.  Interest rates had declined to relative lows
in 2003 and 2004,  prompting  higher  prepayment  speeds for loans and  mortgage
backed  securities.  These proceeds were reinvested at lower yields,  reflecting
lower  market rates and  management's  strategy to shorten the duration of these
assets.  The Company used borrowings to fund earning asset growth,  lowering the
cost of new funds compared to higher costing time certificates of deposit.

      Average  earning  asset  growth was  concentrated  in  average  investment
securities,  which  increased  by $180  million in 2004,  reflecting  securities
purchased during 2003 and 2004, as well as the  securitization of $56 million in
residential  mortgages  during that period.  The yield on investment  securities
improved to 4.07% in 2004 from 3.49% in 2003.  The yield on loans  decreased  to
5.50% from  5.96%.  The  benefit of prime rate  increases  in 2004 was more than
offset by the impact of prepayments and the mortgage securitization.  Due to the
declining  loan yield and the shift in mix  towards  lower  yielding  investment
securities, the yield on earning assets decreased to 5.00% from 5.35%.

      Average interest bearing liabilities increased by $162 million, or 18%, in
2004.  Growth in average interest  bearing deposits totaled $24 million,  or 3%,
and was  concentrated  in money market  accounts,  the average  balance of which
increased by $28 million,  or 21%. In the  generally low rate  environment,  and
with short-term  rates  increasing for the first time in several years,  deposit
demand favored money market accounts  compared to time  certificates of deposit,
the average  balance of which  decreased by $9 million  during the year. NOW and
savings account rates also decreased in the low rate environment.  These changes
led to a decrease  in the cost of  interest  bearing  deposits to 1.66% in 2004,
compared  to 1.92% in the  prior  year.  Average  borrowings  increased  by $138
million,  or 82%, in 2004 as the Bank borrowed in a range of targeted maturities
from  one  month to four  years to fund  asset  growth.  The cost of  borrowings
decreased to 2.73% from 2.91%.  These  decreases in deposit and borrowing  costs
both contributed to the decline in the cost of interest  bearing  liabilities to
1.97% from 2.10%.

      The  reduction  in funding  costs  helped to mitigate  the 0.35% impact of
declining  asset  yields,  with the result  that the net  interest  spread  only
decreased  by 0.22%  to 3.03% in 2004  from  3.25% in the  prior  year.  The net
interest margin  decreased by 0.27% to 3.30% from 3.57%. The further decrease in
the net interest margin reflected the higher  leveraging  strategy in 2004. Also
contributing  to this change was a $10 million  investment  in a bank owned life
insurance  ("BOLI")  contract,  shifting  earnings on this amount from  interest
income to non-interest income. Additionally,  the bank increased its investments
in lower- yielding tax preferred municipal investments. The Bank's fully taxable
equivalent net interest margin was 3.37% in 2004, compared to 3.61% in 2003. The
Bank  benefited  from a $12 million,  or 13%,  increase in average  non-interest
bearing demand deposit accounts.  The Bank's relationship  oriented  promotional
strategies has resulted in the growth of these attractive balances.

      The trend of the  changes in yields and costs  caused  the  quarterly  net
interest  margin to decline  from a 2003 high of 3.73% in the second  quarter of
2003 to a low of 3.19% in the second  quarter of 2004.  The margin  improved  to
3.29% in the third and fourth quarters of 2004. As discussed further in Item 7A,
the result of  management's  strategies  in 2004 was to make the Bank more asset
sensitive to better position itself for increases in prevailing  market interest
rates.  While the Bank's interest rate sensitivity model indicates that the Bank
should  benefit from  additional  anticipated  increases in short-term  interest
rates,  the  benefit to net  interest  income  may be  mitigated  by  additional
flattening of the yield curve and increased deposit price competition related to
possible deposit disintermediation in a rising rate environment.

      Provision  for Loan Losses.  The  provision for loan losses is a charge to
earnings in an amount  sufficient to maintain the allowance for loan losses at a
level deemed  adequate by the Company.  The level of the allowance is determined
in accordance with a critical accounting policy subject to uncertainty, which is
discussed  further  in Item 1 of this  report.  The  level of the  allowance  at
year-end  2004 was  discussed  in the previous  section on Asset  Quality in the
discussion of financial condition at December 31, 2004.


                                      -42-
      

      The  provision  for loan losses was $1.57  million in 2004, an increase of
$105,000,  or 7%, from 2003. The provision measured 131% of net loan charge-offs
in 2004. This measurement was 52% in 2003 due primarily to the reversal of about
$1.0 million of previously  provided loan loss provision  subsequent to the sale
of the remaining sub-prime automobile loan portfolio in December 2003.

      Non-Interest  Income.  Non-interest  income increased by $1.32 million, or
20%, to $7.76  million in 2004 from $6.45 million in 2003.  Non-interest  income
measured  16.1%  of  total  net  interest  and  non-interest  revenues  in 2004,
increasing  from  14.6%  in the  prior  year.  Wealth  management  service  fees
increased  by  $422,000,  or 19%, due to the  Company's  focus on building  this
source of  revenues.  Total  assets  under  management  increased by 19% to $358
million at year-end 2004,  compared to $302 million at the prior  year-end.  Net
gains and losses on sales of loans and securities  totaled $1.57 million in 2004
compared  to $1.22  million  in 2003.  Securities  gains in 2004 were  primarily
related to sales of equity  securities,  as the Company  continued to reduce its
exposure to potential  equity price risk.  The Company also  reported an $81,000
gain on the sale of $11 million in securitized  mortgages in the fourth quarter.
In 2003, the Company recorded higher securities gains,  along with $1.85 million
in loan sale losses related to the sale of sub-prime automobile loans. All other
non-interest income increased by $308,000, or 66%, to $778,000 in 2004 primarily
due to higher income earned on cash  surrender  value related to the purchase of
additional bank owned life insurance in October 2004.

      Non-Interest Expense. Total non-interest expense increased by $734,000, or
3%, to $29.0 million in 2004, compared to $28.2 million in 2003. As a percentage
of total average assets,  non-interest expense measured 2.25% in 2004, improving
from  2.53% in the prior  year as  expense  growth  was held well  below the 16%
increase in average  assets.  Excluding  foreclosed  asset expense and all other
non-interest  expense,  the other categories of expense all increased,  with the
increase  totaling $1.85 million,  or 8%, in 2004 compared to 2003.  This growth
primarily  related to overall growth in the business  activities of the Company.
Full-time  equivalent  employees  of the  Bank  totaled  241 at  year-end  2004,
decreasing  by 2%  from  247 at  year-end  2003.  Salary  and  benefit  expenses
increased by $716,000,  or 4%, due to higher  benefits,  commissions,  and stock
awards expense. The net expense of foreclosed real estate and repossessed assets
decreased by $525,000,  or 50%, due to the sale of sub-prime automobile loans in
December 2003. The $587,000 reduction in all other non-interest expense included
the benefit of a $243,000 reduction in FDIC insurance expense, a $211,000 refund
of Delaware  franchise  tax,  and a $131,000  reduction  in meetings  and travel
expense.

      Income Tax Expense. Total income tax expense increased by $353,000, or 7%,
in 2004  compared  to 2003.  The  effective  tax rate  declined to 32.0% in 2004
compared  to 35.7% in  2003.  The  higher  rate in 2003 was  largely  due to the
disallowance  by  Massachusetts  of the dividends  received  deduction  from the
Bank's  REIT.  The  Bank  benefits  from  securities  purchased  in  the  Bank's
subsidiary securities corporations,  which are taxed at a lower state income tax
rate. Additionally,  the effective income tax rate benefits from tax preferences
on income from additional  purchases of municipal securities and bank owned life
insurance contracts in 2004.

      Net Loss from  Discontinued  Operations.  The Company sold its interest in
the  assets of  EastPoint  Technologies,  LLC in June  2004.  All  revenues  and
expenses related to EastPoint have been  reclassified as related to discontinued
operations.  A $75,000 loss recorded on the sale was included with the loss from
operations  reported in 2004. The net loss from discontinued  operations,  after
applicable  income tax expense,  was  $431,000 in 2004,  compared to $185,000 in
2003. Results in 2003 included project related revenues of $2.82 million,  which
declined to $623,000 for the nearly six months that  EastPoint  was operating in
2004.

Comparison of Operating Results for the Years Ended December 31, 2003 and 2002
------------------------------------------------------------------------------

      Net Income. Net income totaled $9.0 million for the year 2003, an increase
of $6.9  million,  or 328%,  from $2.1  million  for 2002.  Net  income for 2003
included $437,000 in charges related to a non-recurring retirement benefit while
net income for 2002  included  $8.3  million in charges in  connection  with the
restructuring  of the Company's  senior  management and the  reorganizing of the
Company's long-term business strategy.  Basic and diluted earnings per share for
2003 were $1.70 and $1.57, respectively,  compared to basic and diluted earnings
of $0.39 and $0.36, respectively, for 2002.

      Net Interest Income.  Net interest income is the largest  component of the
Company's  revenue  stream  and is  the  difference  between  the  interest  and
dividends earned on the loan and investment  portfolios and the interest paid on
the Company's funding sources, primarily customer deposits and advances from the
Federal Home Loan Bank of Boston. Net interest income decreased $3.1 million, or
8%, to $37.6 million in 2003,  from $40.7 million in 2002, as the relatively low
market interest rate  environment  led to a high number of loan  prepayments and
refinancings,  which  had  a  negative  impact  on  earnings,  and  due  to  the
reinvestment of the proceeds from the December 2002 sale of sub-prime automobile
loans in lower yielding loans.  Average earning assets increased $64 million, or
6%,  to $1.05  billion  in 2003 from $988  million  in 2002,  while the yield on
average earnings assets declined to 5.35% from 6.49% for the twelve-month period
ended  December  31,  2003.  Partially  offsetting  the  decline in the yield on
average earning assets was a 75-basis point decrease in the rate paid on average
interest-bearing  liabilities  from the same period last year. As a result,  the
Company's  net  interest  margin  for  2003  and  2002  were  3.57%  and  4.12%,
respectively.


                                      -43-
      

      Interest and  dividend  income  declined  $7.8  million,  or 12%, to $56.3
million for 2003 from $64.1  million  for 2003 as interest  earned on the Bank's
loan portfolio  decreased $9.2 million,  or 16%, from $56.9 million for 2003 due
to the sale of $70 million of higher rate sub-prime automobile loans in December
2002 and the impact of lower market interest rates resulting from  comparatively
stronger loan refinance  activity.  The lower loan interest income also reflects
the  forfeiture  of $65,000 in accrued  interest and a write-down of $180,000 of
dealer  reserve  related to the December  2003 sale of $9.9 million of sub-prime
automobile  loans.  Interest and  dividend  income on the  Company's  investment
portfolio,  including  FHLB and SBLI stock,  equaled  $8.5  million in 2003,  an
increase of $1.8  million,  or 26%,  from $6.8 million  earned in 2002 as higher
average balances were able to offset lower average yields earned.

      The  decrease in interest and dividend  income was  partially  offset by a
decrease in interest  expense which  decreased  $4.7  million,  or 20%, to $18.7
million  for  2003  from  $23.4  million  for  2002  due to  lower  rates  paid,
particularly  on the Bank's  deposit  accounts.  Interest  expense  on  deposits
totaled $13.9 million for 2003, a decrease of $3.9 million, or 22.0%, from $17.8
million  for 2002.  Average  interest-bearing  deposit  balances  increased  $44
million to $724  million in 2003 from $679  million in 2002,  but were more than
offset by a lower  average rate of 1.92% paid in 2003 compared to 2.62% in 2002.
Interest expense on FHLB advances and other  borrowings  totaled $4.9 million in
2003, a decrease of $771,000,  or 14%,  from $5.7 million in 2002,  due to lower
rates paid, as new lower-cost  borrowings replaced maturing higher cost advances
and as a result of the Bank's  prepayment  of higher  cost  advances in December
2002.

      Provision for Loan Losses.  The provision for loan losses  decreased  $4.7
million,  or 76%, to $1.5 million in 2003 from $6.2 million in 2002. The sale of
$10  million of  sub-prime  automobile  loans in December  2003  resulted in the
reversal of approximately $1 million of previously provided loan loss provision.
In assessing the provision for year 2003,  management took into consideration an
$18 million  decrease in sub-prime  automobile loans from December 31, 2002. The
Company also considered net loan charge-offs  which decreased $4 million,  to $3
million in 2003,  from $7 million in 2002.  Foremost in this decrease were gross
consumer loan charge-offs which declined $5 million in 2003 and consisted mainly
of sub-prime automobile loans. Additionally,  management considered the level of
delinquent loans,  which declined from 1.40% of total loans at year-end 2002, to
0.67% at year-end 2003.

      At December 31, 2003,  the  allowance for loan losses was $9.0 million and
represented 1.13% of total loans and 280.37% of nonperforming  loans compared to
$10.3 million, 1.43% and 275.54%, respectively, at year-end 2002. The decline in
the  allowance is  consistent  with  improvement  in the  Company's  credit risk
profile, particularly in consideration of the significant reduction in sub-prime
automobile  loans. The level of the allowance is determined in accordance with a
critical accounting policy subject to uncertainty, which is discussed further in
Item 1 of this report.

      Non-Interest Income. Non-interest income totaled $6.5 million for 2003, an
increase of $21,000,  or 0.3%, over $6.4 million for 2002.  Non-interest  income
for 2003  included  a $3.1  million  gain on the sale of  securities,  which was
partially  offset by $2.4  million in charges  relating to the sale of sub-prime
automobile  loans  and the  valuation  adjustment  in  repossessed  automobiles.
Non-interest  income for 2002 included several items related to the reorganizing
of the  Company's  long-term  business  strategy  that took  place in the fourth
quarter  of 2002.  A $14.8  million  gain on the sale of equity  securities  was
nearly  offset by $13.4  million in charges  relating  to the sale of  sub-prime
automobile loans, the write-down of one security,  the write-down of repossessed
automobiles,  and the prepayment penalty on FHLB advances.  In addition,  wealth
management service fees increased  $289,000,  or 15%, in 2003 due to an increase
of $42 million, or 17%, in trust assets under management.

      Non-Interest Expenses. Non-interest expenses totaled $28.2 million for the
year 2003  compared to $37.3  million for 2002.  Salaries and  benefits  expense
declined $7.1  million,  as expenses for 2002 included $6.9 million of severance
payments for three  executive  officers and one senior vice  president,  and the
retirement of seven directors. Expenses pertaining to foreclosed real estate and
other loans  decreased  $2.2  million to $1.0  million in 2003  compared to $3.3
million in 2002, primarily due to a decrease in the expenses associated with the
inventory and sale of repossessed automobiles.

      Income Tax Expense.  Income taxes for the year 2003 were $5.1 million,  an
increase of $4.5 million from $531,000 in 2002,  due to increased  income before
taxes,  as well as an increase in the  effective tax rate to 35.7% for 2003 from
20.2% for 2002.  The increase in the effective tax rate for 2003 was largely due
to the disallowance by Massachusetts of the dividend deduction received from the
Bank's REIT.  The lower rate paid in 2002 was primarily due to a higher level of
qualifying dividends received to pre-tax income in 2002 compared to 2003.

      Discontinued Operations. The net loss from discontinued operations, net of
income tax expense,  was $185,000 in 2003,  decreasing by $501,000 from $686,000
in 2002. This  improvement  reflected a $271,000,  or 4%, increase in fee income
and a decrease in the provision for  uncollectible  receivables,  which had been
boosted by a $500,000 charge in December 2002.


                                      -44-
      

Average Balances, Interest and Average Yields/Cost
--------------------------------------------------

      The following table presents  certain  information for the years indicated
regarding average daily balances of assets and liabilities, as well as the total
dollar  amounts of interest  income  from  average  interest-earning  assets and
interest  expense  on average  interest-bearing  liabilities  and the  resulting
average  yields and costs.  The  yields  and costs for the years  indicated  are
derived by dividing income or expense by the average daily balances of assets or
liabilities, respectively, for the years presented. The yields and rates include
fees which are considered adjustments to yields.

       
         
                                                                             For the Years Ended December 31,
                                                    -------------------------------------------------------------------------------
                                                                    2004                                      2003
                                                    -------------------------------------      ------------------------------------
                                                                                  Average                                   Average
                                                     Average                       Yield/       Average                      Yield/
                                                     Balance        Interest        Rate        Balance       Interest        Rate
                                                    ----------      --------      -------      ----------     --------      -------
                                                                                  (Dollars in thousands)
                                                                                                                               
Interest-earning assets:
   Loans (1)                                        $  795,533      $ 43,766        5.50%      $  800,133      $47,683        5.96%
   Investment securities (2)                           423,965        17,276        4.07          243,930        8,516        3.49
   Short-term investments                                3,036            39        1.28            7,714          109        1.41
                                                    ----------      --------                   ----------       ------
         Total interest-earning assets               1,222,534        61,081        5.00        1,051,777       56,308        5.35
   Non-interest earning assets                          67,009                                     64,056
                                                    ----------                                 ----------
         Total assets                               $1,289,543                                 $1,115,833
                                                    ==========                                 ==========

Interest-bearing liabilities:
   Deposits:
      NOW accounts                                      97,886            88        0.09%          90,170          155        0.17%
      Money market accounts                            160,265         2,070        1.29          132,497        1,648        1.24
      Savings accounts                                 168,551         1,296        0.77          170,749        1,731        1.01
      Certificates of deposit                          320,982         8,939        2.78          330,116       10,328        3.13
                                                    ----------      --------                   ----------       ------
         Total interest-bearing deposits               747,684        12,393        1.66          723,532       13,862        1.92
      Borrowings                                       305,642         8,331        2.73          167,709        4,880        2.91
                                                    ----------      --------                   ----------       ------
         Total interest-bearing liabilities          1,053,326        20,724        1.97          891,241       18,742        2.10
                                                                    --------                                    ------
      Non-interest-bearing demand
         deposits                                      103,752                                     91,627
      Other non-interest-bearing
         liabilities                                     5,369                                      9,817
                                                    ----------                                 ----------
            Total liabilities                        1,162,447                                    992,685
      Equity                                           127,096                                    123,148
                                                    ----------                                 ----------
            Total liabilities and equity            $1,289,543                                 $1,115,833
                                                    ==========                                 ==========
      Net interest-earning assets                   $  169,208                                 $  160,536
                                                    ==========                                 ==========
      Net interest income                                           $ 40,357                                   $37,566
                                                                    ========                                   =======
      Interest rate spread                                                          3.03%                                     3.25%

      Net interest margin (net interest income
         as a percentage of total average
         interest-earning assets)                                                   3.30%                                     3.57%
      Total average interest-earning assets
         to total average interest-bearing
         liabilities                                                              116.06%                                   118.01%

         
                                                      For the Years Ended December 31,
                                                    ------------------------------------
                                                                   2002
                                                    ------------------------------------
                                                                                 Average
                                                      Average                     Yield/
                                                      Balance      Interest        Rate
                                                    ----------     --------      -------
                                                           (Dollars in thousands)
                                                                                    
Interest-earning assets:
   Loans (1)                                        $  791,328      $56,910        7.19%
   Investment securities (2)                           168,664        6,762        4.01
   Short-term investments                               27,870          456        1.64
                                                    ----------      -------
         Total interest-earning assets                 987,862       64,128        6.49
   Non-interest earning assets                          63,948
                                                    ----------
         Total assets                               $1,051,810
                                                    ==========

Interest-bearing liabilities:
   Deposits:
      NOW accounts                                      83,399          623        0.75%
      Money market accounts                            117,950        1,988        1.69
      Savings accounts                                 157,444        2,669        1.70
      Certificates of deposit                          320,415       12,497        3.90
                                                    ----------      -------
         Total interest-bearing deposits               679,208       17,777        2.62
      Borrowings                                       141,755        5,651        3.99
                                                    ----------      -------
         Total interest-bearing liabilities            820,963       23,428        2.85
                                                                    -------
      Non-interest-bearing demand
         deposits                                       82,751
      Other non-interest-bearing
         liabilities                                    11,935
                                                    ----------
            Total liabilities                          915,649
      Equity                                           136,161
                                                    ----------
            Total liabilities and equity            $1,051,810
                                                    ==========
      Net interest-earning assets                   $  166,899
                                                    ==========
      Net interest income                                           $40,700
                                                                    =======
      Interest rate spread                                                         3.64%

      Net interest margin (net interest income
         as a percentage of total average
         interest-earning assets)                                                  4.12%
      Total average interest-earning assets
         to total average interest-bearing
         liabilities                                                             120.33%
        

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

(2)   The average balance of investment  securities is based on ammortized cost.
      Securities  include  Federal  Home Loan Bank stock and  Savings  Bank Life
      Insurance stock.


                                      -45-
      

Rate/Volume Analysis
--------------------

      The following  table presents the effects of changing rates and volumes on
the interest  income and interest  expense of  Berkshire  Bank.  The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume).  The volume column shows the effects  attributable  to changes in
volume (changes in volume  multiplied by prior rate). The net column  represents
the sum of the prior columns.  For purposes of this table,  changes attributable
to  changes  in both rate and  volume,  which  cannot be  segregated,  have been
allocated  proportionately based on the absolute value of the change due to rate
and the change due to volume.

       
         
                                                  Year Ended December 31, 2004           Year Ended December 31, 2003
                                                           Compared to                            Compared to
                                                  Year Ended December 31, 2003           Year Ended December 31, 2002
                                               ----------------------------------     ----------------------------------
                                                   Increase (Decrease) Due to             Increase (Decrease) Due to
                                                 Rate        Volume        Net          Rate        Volume         Net
                                               --------     --------     --------     --------     --------     --------
                                                                            (In thousands)
                                                                                                                   
Interest-earning assets:
   Loans                                       $ (3,644)    $   (273)    $ (3,917)    $(12,205)    $  2,978     $ (9,227)
   Investment securities                          1,610        7,150        8,760          (45)       1,799        1,754
   Short-term investments                            (9)         (61)         (70)         (55)        (292)        (347)
                                               --------     --------     --------     --------     --------     --------
      Total interest-earning assets              (2,043)       6,816        4,773      (12,305)       4,485       (7,820)
                                               --------     --------     --------     --------     --------     --------

Interest-bearing liabilities:
   Deposits:
      NOW accounts                                  (82)          15          (67)        (523)          55         (468)
      Money market accounts                          65          357          422         (642)         302         (340)
      Savings accounts                             (413)         (22)        (435)      (1,188)         250         (938)
      Certificates of deposit                    (1,113)        (276)      (1,389)      (2,561)         392       (2,169)
                                               --------     --------     --------     --------     --------     --------
         Total deposits                          (1,543)          74       (1,469)      (4,914)         999       (3,915)
   Borrowings                                      (281)       3,732        3,451       (2,570)       1,799         (771)
                                               --------     --------     --------     --------     --------     --------
         Total interest-bearing liabilities      (1,824)       3,806        1,982       (7,484)       2,798       (4,686)
                                               --------     --------     --------     --------     --------     --------
Increase (decrease) in net interest
   income                                      $   (219)    $  3,010     $  2,791     $ (4,821)    $  1,687     $ (3,134)
                                               ========     ========     ========     ========     ========     ========
        

Liquidity and Capital Resources
-------------------------------

      Liquidity is the ability to meet current and future financial  obligations
of a short-term  nature.  The Bank further  defines  liquidity as the ability to
respond to the needs of depositors  and borrowers,  as well as  maintaining  the
flexibility  to take advantage of investment  opportunities.  The Bank's primary
sources of funds consist of deposit inflows, loan repayments,  maturities,  loan
sales,  paydowns of mortgage-backed  securities,  sales/calls of investments and
borrowings  from the  Federal  Home Loan Bank of Boston.  While  maturities  and
scheduled amortization of loans and securities are predictable sources of funds,
deposit outflows,  sales/calls of investment securities, loan sales and mortgage
prepayments  are  greatly   influenced  by  general  interest  rates,   economic
conditions and competition.

      The Bank's primary investing  activities are: (1) originating  residential
one- to four-family  mortgage loans,  commercial business and real estate loans,
multi-family  loans,  home equity  lines of credit and consumer  loans,  and (2)
investing in mortgage- and asset-backed  securities,  U.S. Government and agency
obligations,  and debt  securities.  These  activities  are funded  primarily by
principal  and  interest  payments  on loans,  proceeds  from sales of loans and
investment securities,  maturities of securities, deposits and Federal Home Loan
Bank of Boston  advances.  During the years  ended  December  31, 2004 and 2003,
Berkshire  Bank's loan  originations  totaled  $326  million  and $321  million,
respectively.  At  December  31,  2004  and  2003,  the  Bank's  investments  in
investment securities totaled $395 million and $344 million,  respectively.  The
Bank experienced a net increase in total deposits of $16 million and $48 million
for the years ended December 31, 2004 and 2003, respectively.  Deposit flows are
affected by the overall level of interest rates, the interest rates and products
offered  by the Bank and its  local  competitors  and  other  factors.  The Bank
closely  monitors its  liquidity  position on a daily basis.  If the Bank should
require funds beyond its ability to generate them internally, additional sources
of funds are  available  through  advances  or a line of credit with the Federal
Home Loan Bank and through a  repurchase  agreement  line of credit a nationally
recognized broker-dealer.

      Outstanding  commitments for all loans and unadvanced  construction  loans
and lines of credit  totaled $169 million at December  31, 2004.  Management  of
Berkshire Bank  anticipates that it will have sufficient funds available to meet
its current loan  commitments.  Certificates  of deposit  that are  scheduled to
mature in one year or less from December 31, 2004 totaled $177 million. The Bank
relies  primarily  on  competitive  rates,  customer  service and  long-standing
relationships  with customers to


                                      -46-
      

retain  deposits.  Occasionally,  the Bank will also offer  special  competitive
promotions to its customers to increase  retention and promote  deposit  growth.
Based upon the Bank's historical  experience with deposit retention,  management
believes  that,  although  it is  not  possible  to  predict  future  terms  and
conditions upon renewal, a significant portion of such deposits will remain with
the Bank.

      The Bank must satisfy various regulatory capital requirements administered
by the  federal  and state  banking  agencies  including  a  risk-based  capital
measure.  The risk-based capital guidelines include both a definition of capital
and a framework for calculating  risk-weighted assets by assigning balance sheet
assets and  off-balance  sheet items to broad risk  categories.  At December 31,
2004,  Berkshire Bank exceeded all of its regulatory  capital  requirements with
Tier 1 capital of $106 million,  or 8.1% of average  assets,  which is above the
required  level of $52 million,  or 4%, and total  capital of $119  million,  or
12.7% of risk-weighted assets, which is above the required level of $75 million,
or 8%. The Bank meets the conditions to be considered "well  capitalized"  under
regulatory guidelines.

      The primary  source of funding for  Berkshire  Hills is dividend  payments
from  Berkshire  Bank,  and, to a lesser  extent,  earnings on deposits  held by
Berkshire Hills. Dividend payments by Berkshire Bank have primarily been used to
fund  stock   repurchase   programs  and  pay  dividends  to  Berkshire   Hills'
shareholders.   The  Bank's   ability  to  pay   dividends   and  other  capital
distributions  to  Berkshire  Hills is  generally  limited by the  Massachusetts
banking   regulations  and   regulations  of  the  Federal   Deposit   Insurance
Corporation.  See  "Regulation  and  Supervision  -  Massachusetts  Regulation."
Additionally,  the  Massachusetts  Commissioner  of Banks  and  Federal  Deposit
Insurance  Corporation may prohibit the payment of dividends which are otherwise
permissible by regulation for safety and soundness reasons.  Any dividend by the
Bank beyond its current year's earnings and prior two years' retained net income
would  require the  approval of the  Massachusetts  Commissioner  of Banks,  and
notification to or approval of the Federal Deposit Insurance Corporation and the
Office  of  Thrift  Supervision.  To the  extent  the Bank  were to apply  for a
dividend  distribution to Berkshire Hills in excess of the regulatory  permitted
dividend amount, no assurances can be made such application would be approved by
the regulatory authorities.

      Berkshire  Hills  is  currently  engaged  in its  sixth  stock  repurchase
program. In the current program, 188,045 shares out of an announced 300,000 have
been  purchased  through  December 31, 2004.  The Company has  sufficient  funds
available to complete the repurchase  program without having a material  adverse
effect on liquidity.

      This  discussion  of  liquidity  and  capital  resources  does not include
considerations  related to the pending merger  agreement with Woronoco  Bancorp,
Inc. A preliminary  registration  statement,  subject to subsequent changes, was
filed with the SEC on February 3, 2005. This statement discusses the offering of
additional  shares of the Company's  common stock in conjunction with the merger
agreement.

      Contractual  Obligations.  The following table sets forth, at December 31,
2004,  the  dollar  amount  of the  Bank's  contractual  obligations  and  their
subsequent time period.  This table does not include  obligations related to the
Company's  merger  agreement  with  Woronoco  Bancorp,  Inc.,  which is  pending
regulatory and shareholder approval.

       
         
                                                            Commitments by Period
                                     ---------------------------------------------------------------------
                                                 Less than One   One to Three   Three to Five   After Five
                                      Total          Year           Years           Years         Years
                                     --------    -------------   ------------   -------------   ----------
Contractual Obligations                                         (In thousands)
                                                                                                    
Long-term debt obligations (1)       $327,926      $152,589        $101,573        $ 37,000      $ 36,764
Operating lease obligations (2)         4,185           491             991             962         1,741
Purchase obligations (3)                2,561         2,006             385             170            --
                                     --------      --------        --------        --------      --------
Total Contractual Obligations        $334,672      $155,086        $102,949        $ 38,132      $ 38,505
                                     ========      ========        ========        ========      ========
        

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

(2)   Consists of leases of four Bank offices through 2030.

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

Off-Balance Sheet Arrangements
------------------------------

      In the normal course of  operations,  the Company  engages in a variety of
financial  transactions that, in accordance with generally  accepted  accounting
principles  are not  recorded  in the  Company's  financial  instruments.  These
transactions involve, to varying degrees,  elements of credit, interest rate and
liquidity  risk.  Such  transactions  are used  primarily  to manage  customers'
requests for funding and take the form of loan  commitments and lines of credit.
A further  presentation  of the  Company's  off-


                                      -47-
      

balance  sheet  arrangements  is presented in Footnote  12,  "Off-Balance  Sheet
Activities" in the Notes to the Consolidated Financial Statements.

      For the year ended  December 31,  2004,  the Company did not engage in any
off-balance  sheet  transactions  reasonably likely to have a material effect on
the Company's financial condition, results of operation or cash flows.

Impact of Inflation and Changing Prices
---------------------------------------

      The consolidated financial statements and related financial data presented
in this Form 10-K have been prepared in conformity  with  accounting  principles
generally  accepted  in  the  United  States  of  America,   which  require  the
measurement of financial  position and operating  results in terms of historical
dollars,  without  considering changes in the relative purchasing power of money
over time due to inflation. Unlike many industrial companies,  substantially all
of the assets and  liabilities  of Berkshire  Bank are monetary in nature.  As a
result,  interest  rates  have a more  significant  impact on  Berkshire  Bank's
performance than the general level of inflation.  Interest rates may be affected
by  inflation,  but the direction and magnitude of the impact may vary. A sudden
change in inflation (or expectations about inflation),  with a related change in
interest rates, would have a significant impact on our operations.

Impact of New Accounting Pronouncements
---------------------------------------

      Please refer to the note on Recent Accounting  Pronouncements in Note 1 to
the  financial   statements   for  a  detailed   discussion  of  new  accounting
pronouncements.


                                      -48-
      

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------

Management of Interest Rate Risk and Market Risk Analysis
---------------------------------------------------------

      Qualitative  Aspects of Market Risk. The Bank's most  significant  form of
market risk is interest rate risk. The principal  objectives of Berkshire Bank's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts,  determine the level of risk  appropriate  given
its business strategy, operating environment, capital and liquidity requirements
and performance objectives,  and manage the risk consistent with its established
policies.   Berkshire  Bank  maintains  an  Asset/Liability  Committee  that  is
responsible  for reviewing its  asset/liability  policies and interest rate risk
position,  which meets  quarterly  and  reports  trends and  interest  rate risk
position  to the Loan and  Investment  Committee  and  Board of  Directors  on a
quarterly basis. The Asset/Liability  Committee consists of five senior officers
of the Bank and the Senior  Financial  Analyst.  The extent of the  movement  of
interest  rates is an  uncertainty  that  could  have a  negative  impact on the
earnings of Berkshire Bank.

      In recent years, Berkshire Bank has managed interest rate risk by:

      o     emphasizing the origination and purchase of  adjustable-rate  loans,
            selling newly  originated  fixed rate mortgages on a flow basis and,
            from time to time,  selling a portion of its longer term  fixed-rate
            loans as market interest rate conditions dictate;

      o     securitizing  a  portion  of  the  Bank's   long-term,   fixed  rate
            mortgages;

      o     originating shorter-term commercial and consumer loans;

      o     investing in high quality liquid investment  securities that provide
            adequate   liquidity   and   flexibility   to  take   advantage   of
            opportunities  that may arise from  fluctuations  in market interest
            rates,  the overall  maturity  and duration of which is monitored in
            relation to the repricing of its loan and funding portfolios;

      o     promoting lower cost liability accounts such as core deposits; and

      o     using Federal Home Loan Bank advances to better structure maturities
            of its interest rate sensitive liabilities.

      Berkshire  Bank's market risk also includes  equity price risk.  Berkshire
Bank's marketable equity securities portfolio had gross unrealized gains of $7.9
million at December 31, 2004 and no gross unrealized  losses which are included,
net of taxes, in accumulated other comprehensive income, a separate component of
Berkshire Bank's  shareholders'  equity. If equity securities prices decline due
to unfavorable market conditions or other factors,  Berkshire Bank and Berkshire
Hills' capital would decrease.  In 2003,  management  began a strategy to reduce
the amount of equity  securities it holds by gradually  selling a portion of its
holdings.

      Quantitative  Aspects of Market  Risk.  Berkshire  Hills uses a simulation
model to measure the  potential  change in net  interest  income,  incorporating
various  assumptions  regarding  the  shape  of the  yield  curve,  the  pricing
characteristics  of loans,  deposits and  borrowings,  prepayments  on loans and
securities  and changes in the balance  sheet mix.  The model  assumes the yield
curve  is  derived  from  the  interpolated  Treasury  yield  curve  and that an
instantaneous  increase  or  decrease  of market  interest  rates  would cause a
simultaneous  parallel shift along the entire yield curve.  Loans,  deposits and
borrowings  are  expected to reprice at the new market  rate on the  contractual
review or maturity date. The Company closely monitors its loan prepayment trends
and uses prepayment guidelines set forth by Freddie Mac and Fannie Mae and other
market sources,  as well as Company generated data where applicable.  Prepayment
cash flows are  rolled  into  various  loan  products  based on a review of loan
originations over the past six months,  discussions with senior loan officers on
the  Bank's  Asset  Liability  Committee  and a review  of the  Bank's  plan for
strategic  growth over the next twelve months.  Berkshire  Hills further assumes
that its securities' cash flows, especially its mortgage-backed  securities cash
flows,  are such that they will  generally  follow  industry  standards and that
prepayments will be reinvested in categories that reflect the current investment
strategy  designed by senior  management and approved by the Board of Directors.
Finally,  the model  assumes  that the  Bank's  balance  sheet  mix will  remain
relatively unchanged throughout the next calendar year.


                                      -49-
      

      The tables below set forth,  as of December  31, 2004 and 2003,  estimated
net interest income and the estimated  changes in Berkshire  Hills' net interest
income  for the next  twelve-month  period,  given  instantaneous  increases  or
decreases in market interest rates of 100 and 200 basis points.

         Increase/(Decrease) in                At December 31, 2004
        Market Interest Rates in       ------------------------------------
        Basis Points (Rate Shock)       Amount      $ Change       % Change
        -------------------------      -------      --------       --------
                                              (Dollars in thousands)
                   200                 $41,376      $ 1,015          2.52%
                   100                  40,661          300          0.74
                  Static                40,361           --            --
                  (100)                 40,413           52          0.13
                  (200)                 36,452       (3,908)        (9.68)

         Increase/(Decrease) in                At December 31, 2003
        Market Interest Rates in       ------------------------------------
        Basis Points (Rate Shock)       Amount      $ Change       % Change
        -------------------------      -------      --------       --------
                                              (Dollars in thousands)
                   200                 $37,144      $(1,757)        (4.52%)
                   100                  38,162         (739)        (1.90)
                  Static                38,901           --            --
                  (100)                 39,478          577          1.48
                  (200)                 37,116       (1,785)        (4.59)

      In the event of a sudden  and  sustained  decrease  in  prevailing  market
interest  rates  of 100 and 200  basis  points,  the  December  31,  2004  table
indicates  that net interest  income  would be expected to increase  $52,000 and
decrease $3.9 million,  respectively.  These results compare to the December 31,
2003 chart that indicates a sudden and sustained  decrease in prevailing  market
interest  rates of 100 and 200  basis  points  would  cause  the  Company's  net
interest  income to increase  by $577,000  and  decrease  by $1.8  million.  The
primary  reason for this change  compared to the previous  year is the strategic
plans that the Company has undertaken to better prepare the Bank for an increase
in  market  interest  rates,   including  the  origination  of  adjustable  rate
commercial and residential  mortgage loans, the origination of home equity lines
of credit and the sale and securitization of fixed rate mortgages.

      In the event of a sudden  and  sustained  increase  in  prevailing  market
interest  rates  of 100 and 200  basis  points,  the  December  31,  2004  table
indicates  that net interest  income would be expected to increase  $300,000 and
$1.0  million,  respectively,  compared to the  December  31, 2003 table,  which
indicates that net interest  income would decrease by $739,000 and $1.8 million,
respectively.  Again, these changes in the Bank's interest rate risk sensitivity
can be  explained  by  management's  desire  to better  position  the Bank for a
potential  rise in  market  interest  rates  and has  done so by  executing  the
above-mentioned strategic plans throughout 2004.

      Computation of prospective  effects of hypothetical  interest rate changes
are  based on a number of  assumptions  including  the level of market  interest
rates,  the  degree  to  which  certain  assets  and  liabilities  with  similar
maturities or periods to repricing  react to changes in market  interest  rates,
the  expected  prepayment  rates on loans and  investments,  the degree to which
early withdrawals occur on certificates of deposit and other deposit flows. As a
result,  these  computations  should not be relied upon as  indicative of actual
results.  Further,  the  computations do not reflect any actions that management
may  undertake in response to changes in interest  rates.  The most  significant
assumption relates to expectations for the interest  sensitivity of non-maturity
deposit  accounts in a rising rate  environment.  The model assumes that deposit
rate  sensitivity  will be a percentage  of the market  interest  rate change as
follows:  Now accounts 25%, money market  accounts - ranging  between 50 and 75%
depending on the balance, and savings accounts 50%.


                                      -50-
      

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------

                                TABLE OF CONTENTS

                                                                            PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM                                                              52

CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 2004 AND 2003                                                   53

CONSOLIDATED STATEMENTS OF INCOME FOR THE
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002                                 54

CONSOLIDATED STATEMENTS OF CHANGES IN                                        55
STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003 AND 2002

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR                                    56
THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                   58


                                      -51-
      

WOLF                                                Certified Public Accountants
& COMPANY, P.C.                                       and Business Consultants


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
  Berkshire Hills Bancorp, Inc.


We have audited the accompanying  consolidated balance sheets of Berkshire Hills
Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 2004.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). 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 Berkshire  Hills
Bancorp,  Inc. and subsidiaries as of December 31, 2004 and 2003 and the results
of their operations and their cash flows for each of the years in the three-year
period  ended  December  31,  2004  in  conformity  with  accounting  principles
generally accepted in the United States of America.


/s/ Wolf & Company, P.C.

Boston, Massachusetts
March 9, 2005

              99 High Street o Boston, Massachusetts o 02210-2320
                    o Phone 617-439-9700 o Fax 617-542-0400

       1500 Main Street o Suite 1908 o Springfield, Massachusetts o 01115
                    o Phone 413-747-9012 o Fax 413-739-5149

                               www.wolfandco.com

                                      -52-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2004 and 2003

       
         
                                                                                2004            2003
                                                                            -----------     -----------
                                                                                  (In thousands)
                                                                                               
Assets
Cash and due from banks                                                     $    15,237     $    15,583
Short-term investments                                                            2,665           1,859
                                                                            -----------     -----------
          Total cash and cash equivalents                                        17,902          17,442

Securities available-for-sale, at fair value                                    365,404         307,425
Securities held-to-maturity (fair value approximates $29,899,000 and
    $36,868,000 at December 31, 2004 and 2003, respectively)                     29,942          36,903
Federal Home Loan Bank stock, at cost                                            16,974          12,923
Savings Bank Life Insurance stock, at cost                                        2,043           2,043
Loans held for sale                                                               1,053              --

Total loans                                                                     828,179         792,227
Less: Allowance for loan losses                                                  (9,337)         (8,969)
                                                                            -----------     -----------
          Net loans                                                             818,842         783,258

Premises and equipment, net                                                      14,780          12,626
Accrued interest receivable                                                       5,472           5,080
Goodwill and other intangibles                                                    7,254          10,233
Net deferred tax asset                                                              819           1,725
Bank owned life insurance                                                        18,200           7,721
Due from broker                                                                      --           7,089
Other assets                                                                     11,430          14,080
                                                                            -----------     -----------
          Total assets                                                      $ 1,310,115     $ 1,218,548
                                                                            ===========     ===========

Liabilities and Stockholders' Equity
Deposits                                                                    $   845,789     $   830,244
Federal Home Loan Bank advances                                                 327,926         251,465
Loans sold with recourse                                                             --             473
Due to broker                                                                        --           5,646
Accrued expenses and other liabilities                                            4,664           5,293
                                                                            -----------     -----------
               Total liabilities                                              1,178,379       1,093,121
                                                                            -----------     -----------
Minority Interests (Note 19)                                                         --           2,252
                                                                            -----------     -----------
Commitments and contingencies (Notes 6, 12 and 13)
Stockholders' equity:
    Preferred stock ($.01 par value; 1,000,000 shares
        authorized; none issued or outstanding)                                      --              --
    Common stock ($.01 par value; 26,000,000 shares authorized;
        7,673,761 shares issued at December 31, 2004 and
        2003;  shares outstanding: 5,873,563 at December 31, 2004
        and 5,903,082 at December 31, 2003)                                          77              77
    Additional paid-in capital                                                   77,588          75,764
    Unearned compensation                                                        (7,414)         (8,507)
    Retained earnings                                                            94,996          86,276
    Accumulated other comprehensive income                                        4,214           5,559
    Treasury stock, at cost (1,800,198 shares at December 31, 2004 and
        1,770,679 at December 31, 2003)                                         (37,725)        (35,994)
                                                                            -----------     -----------
               Total stockholders' equity                                       131,736         123,175
                                                                            -----------     -----------
               Total liabilities and stockholders' equity                   $ 1,310,115     $ 1,218,548
                                                                            ===========     ===========
        

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


                                      -53-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

                  Years Ended December 31, 2004, 2003 and 2002

       
         
                                                            2004         2003         2002
                                                          --------     --------     --------
                                                         (In thousands, except per share data)
                                                                                       
Interest and dividend income
    Loans                                                 $ 43,766     $ 47,683     $ 56,910
    Debt securities, taxable                                15,207        7,298        5,234
    Debt securities, tax-exempt                                893          262          173
    Equity securities dividends                              1,176          956        1,355
    Short-term investments                                      39          109          456
                                                          --------     --------     --------
               Total interest and dividend income           61,081       56,308       64,128
                                                          --------     --------     --------
Interest expense
    Deposits                                                12,393       13,862       17,777
    Borrowings                                               8,331        4,880        5,651
                                                          --------     --------     --------
               Total interest expense                       20,724       18,742       23,428
                                                          --------     --------     --------
Net interest income                                         40,357       37,566       40,700
Provision for loan losses                                    1,565        1,460        6,180
                                                          --------     --------     --------
Net interest income, after provision for loan losses        38,792       36,106       34,520
                                                          --------     --------     --------
Non-interest income
    Customer service fees                                    2,347        2,300        2,140
    Wealth management service fees                           2,697        2,275        1,986
    Loan servicing fees                                        374          386          533
    Gain on sales and dispositions of securities, net        1,402        3,077       15,143
    Loss on impairment of securities                            --           --         (673)
    Gain on sale of securitized loans                           81           --           --
    Gain (loss) on sale of loans                                85       (1,854)     (10,702)
    Loss on impairment of other assets                          --         (206)      (1,262)
    Penalty on prepayment of FHLB borrowings                    --           --       (1,067)
    Other non-interest income                                  778          470          329
                                                          --------     --------     --------
               Total non-interest income                     7,764        6,448        6,427
                                                          --------     --------     --------
Non-interest expense
    Salaries and employee benefits                          16,882       16,166       23,295
    Occupancy and equipment                                  4,085        3,800        4,360
    Marketing and advertising                                  991          678          648
    Data processing                                          1,411        1,204          950
    Professional services                                    1,552        1,227        1,152
    Foreclosed real estate and repossessed assets, net         522        1,047        3,250
    Other non-interest expense                               3,534        4,121        3,624
                                                          --------     --------     --------
               Total non-interest expense                   28,977       28,243       37,279
                                                          --------     --------     --------
Income from continuing operations before income taxes       17,579       14,311        3,668
Provision for income taxes                                   5,639        5,161          885
                                                          --------     --------     --------
Income from continuing operations                           11,940        9,150        2,783
Loss from discontinued operations                             (653)        (282)      (1,040)
Income tax benefit                                            (222)         (97)        (354)
                                                          --------     --------     --------
Net loss from discontinued operations                         (431)        (185)        (686)
                                                          --------     --------     --------
Net income                                                $ 11,509     $  8,965     $  2,097
                                                          ========     ========     ========

Earnings per share
    Basic                                                 $   2.18     $   1.70     $   0.39
    Diluted                                               $   2.01     $   1.57     $   0.36

Weighted average shares outstanding
    Basic                                                    5,284        5,266        5,435
    Diluted                                                  5,731        5,703        5,867
        

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


                                      -54-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  Years Ended December 31, 2004, 2003 and 2002

       
         
                                                                                               Accumulated
                                                         Additional                               other
                                               Common      paid-in     Unearned     Retained  comprehensive  Treasury
                                               stock       capital   compensation   earnings      income       stock        Total
                                             ---------   ----------  ------------  ---------  -------------  ---------    ---------
                                                                                 (In thousands)
                                                                                                                             
Balance at December 31, 2001                 $      77    $  74,146   $ (11,101)   $  80,658    $  18,836    $ (23,292)   $ 139,324
                                                                                                                          ---------

Comprehensive income (loss):
    Net income                                      --           --          --        2,097           --           --        2,097
    Change in net unrealized gain on
        securities available-for-sale, net
        of reclassification adjustments
        and tax effects                             --           --          --           --      (13,294)          --      (13,294)
                                                                                                                          ---------
                Total comprehensive loss                                                                                    (11,197)
                                                                                                                          ---------
Cash dividends declared ($0.48 per share)           --           --          --       (2,737)          --           --       (2,737)
Treasury stock purchased                            --           --          --           --           --       (6,989)      (6,989)
Exercise of stock options (6,907 shares)            --           --          --           (7)          --          123          116
Change in unearned compensation                     --          486       1,566           --           --           --        2,052
                                             ---------    ---------   ---------    ---------    ---------    ---------    ---------

Balance at December 31, 2002                        77       74,632      (9,535)      80,011        5,542      (30,158)     120,569
                                                                                                                          ---------

Comprehensive income:
    Net income                                      --           --          --        8,965           --           --        8,965
    Change in net unrealized gain on
        securities available-for-sale, net
        of reclassification adjustments
        and tax effects                             --           --          --           --           17           --           17
                                                                                                                          ---------
                Total comprehensive income          --           --          --           --           --           --        8,982
                                                                                                                          ---------
Cash dividends declared ($0.48 per share)           --           --          --       (2,628)          --           --       (2,628)
Treasury stock purchased                            --           --          --           --           --       (7,099)      (7,099)
Exercise of stock options (71,064 shares)           --           --          --          (72)          --        1,263        1,191
Change in unearned compensation                     --        1,132       1,028           --           --           --        2,160
                                             ---------    ---------   ---------    ---------    ---------    ---------    ---------

Balance at December 31, 2003                        77       75,764      (8,507)      86,276        5,559      (35,994)     123,175
                                                                                                                          ---------

Comprehensive income:
    Net income                                      --           --          --       11,509           --           --       11,509
    Change in net unrealized gain on
        securities available-for-sale, net
        of reclassification adjustments
        and tax effects                             --           --          --           --       (1,345)          --       (1,345)
                                                                                                                          ---------
                Total comprehensive income          --           --          --           --           --           --       10,164
                                                                                                                          ---------
Reversals from discontinued operations              --          142          --         (142)          --           --           --
Cash dividends declared ($0.48 per share)           --           --          --       (2,614)          --           --       (2,614)
Treasury stock purchased                            --           --          --           --           --       (2,545)      (2,545)
Exercise of stock options (32,415 shares)           --           --          --          (33)          --          576          543
Reissuance of treasury stock - other                --          358          --           --           --          238          596
Change in unearned compensation                     --        1,324       1,093           --           --           --        2,417
                                             ---------    ---------   ---------    ---------    ---------    ---------    ---------

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

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


                                      -55-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years Ended December 31, 2004, 2003 and 2002

       
         
                                                                                 2004          2003          2002
                                                                              ---------     ---------     ---------
                                                                                          (In thousands)
                                                                                                                   
Cash flows from operating activities:
  Continuing operations:
    Net income                                                                $  11,940     $   9,150     $   2,783
    Adjustments to reconcile net income to net cash
        provided by continuing operating activities:
            Provision for loan losses                                             1,565         1,460         6,180
            Net amortizaton of securities                                         1,203         1,795         1,103
            Depreciation and amortization expense                                 1,696         1,614         2,016
            Management awards plan expense                                        1,216         1,066         1,165
            Employee stock ownership plan expense                                 1,378         1,094           887
            Amortization of other intangibles                                         4            --            --
            Increase in cash surrender value of bank owned life insurance          (479)         (221)           --
            Gain on sales and dispositions of securities, net                    (1,483)       (3,077)      (15,143)
            Loss on impairment of securities                                         --            --           673
            (Gain) Loss on sale of loans, net                                       (85)        1,854        10,702
            Loss on sale/writedown of foreclosed real estate, net                     2            44           500
            Loss on impairments of other assets                                      --           206         1,262
            Deferred income tax provision (benefit), net                          1,521         1,088          (262)
            Net change in loans held for sale                                    (1,053)           --         2,540
                Net change in accrued interest receivable and other assets        3,574          (829)        5,511
                Net change in accrued expenses and other liabilities               (629)         (384)          747
                                                                              ---------     ---------     ---------
                      Net cash provided by continuing operating activities       20,370        14,860        20,664
                                                                              ---------     ---------     ---------

  Discontinued operations:
    Net loss                                                                       (653)         (282)       (1,040)
    Adjustments to reconcile net loss to net cash (used)
       provided by operating activities:
            Depreciation and amortization expense                                   188           493           398
            Amortization of other intangibles                                        94           203           203
            Minority interest                                                      (381)         (186)         (685)
                                                                              ---------     ---------     ---------
                      Net cash (used) provided by discontinued operations          (752)          228        (1,124)
                                                                              ---------     ---------     ---------

                      Total net cash provided by operating activities:           19,618        15,088        19,540
                                                                              ---------     ---------     ---------

Cash flows from investing activities:
  Continuing operations:
    Activity in available-for-sale securities:
        Sales                                                                    16,169        20,349        28,255
        Maturities                                                               30,691       130,091        68,232
        Principal payments                                                       61,566        33,182        30,096
        Purchases                                                              (127,633)     (302,014)     (201,258)
    Activity in held-to-maturity securities:
        Maturities                                                               15,656        17,195        16,374
        Principal payments                                                       12,114        38,876        29,132
        Purchases                                                               (20,998)      (49,242)      (56,812)
    Purchase of FHLB stock                                                       (4,051)       (5,483)         (413)
    Purchase of bank owned life insurance                                       (10,000)       (7,500)           --
        

                                   (continued)

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


                                      -56-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)

                  Years Ended December 31, 2004, 2003 and 2002

       
         
                                                                                       2004          2003          2002
                                                                                    ---------     ---------     ---------
                                                                                                (In thousands)
                                                                                                                         
    Loan originations and purchases, net of
        principal payments                                                            (89,458)     (153,674)       (8,616)
    Proceeds from sales of loans                                                       12,737        63,546        66,400
    Additions to premises and equipment                                                (4,583)       (1,386)       (1,042)
    Proceeds from sales of foreclosed real estate                                          23         1,456            --
    Net cash paid for acquisitions                                                     (1,415)           --            --
                                                                                    ---------     ---------     ---------
                   Net cash used by continuing investing activities                  (109,182)     (214,604)      (29,652)
                                                                                    ---------     ---------     ---------

  Discontinued operations:
    Additions to premises and equipment                                                   (76)          (80)         (426)
    Proceeds from sale of interest in discontinued operations                           1,966            --            --
    Proceeds from sale of equipment                                                       621            --            --
                                                                                    ---------     ---------     ---------
                   Net cash provided (used) by discontinued investing activities        2,511           (80)         (426)
                                                                                    ---------     ---------     ---------

                   Total net cash used by investing operations:                      (106,671)     (214,684)      (30,078)
                                                                                    ---------     ---------     ---------

Cash flows from financing activities:
    Net increase in deposits                                                           15,545        47,884        39,631
    Net decrease in securities sold under
        agreements to repurchase                                                           --          (700)       (1,190)
    Proceeds from Federal Home Loan Bank advances                                     675,500       252,000       120,172
    Repayments of Federal Home Loan Bank advances                                    (599,039)     (133,537)     (121,134)
    Increase (decrease) in loans sold with recourse                                      (473)         (728)        1,201
    Treasury stock purchased                                                           (2,545)       (7,099)       (6,989)
    Proceeds from reissuance of treasury stock                                          1,139         1,191           116
    Cash dividends paid                                                                (2,614)       (2,628)       (2,737)
                                                                                    ---------     ---------     ---------
                  Net cash provided by financing activities                            87,513       156,383        29,070
                                                                                    ---------     ---------     ---------

Net change in cash and cash equivalents                                                   460       (43,213)       18,532

Cash and cash equivalents at beginning of year                                         17,442        60,655        42,123
                                                                                    ---------     ---------     ---------

Cash and cash equivalents at end of year                                            $  17,902     $  17,442     $  60,655
                                                                                    =========     =========     =========

Supplemental cash flow information:
    Interest paid on deposits                                                       $  12,386     $  13,887     $  17,835
    Interest paid on borrowed funds                                                     8,073         4,696         6,856
    Income taxes paid, net                                                              2,440         4,175         1,618
    Transfers from loans to foreclosed real estate                                         25            --         2,000
    Securitization of and transfer of loans to securities                              39,657        16,270            --
    Due to broker                                                                      (5,646)        5,646            --
    Due from broker                                                                    (7,089)        7,089            --
        

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


                                      -57-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years Ended December 31, 2004, 2003 and 2002

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

      Basis of presentation and consolidation

Berkshire Hills Bancorp,  Inc. (the "Company") is a Delaware corporation and the
holding company for Berkshire Bank (the "Bank"), a state-chartered  savings bank
headquartered  in  Pittsfield,   Massachusetts.   These  consolidated  financial
statements  include the  accounts  of  Berkshire  Hills  Bancorp,  Inc.  and its
wholly-owned  subsidiaries,  Berkshire Bank, Berkshire Hills Funding Corporation
and Berkshire Hills Technology,  Inc. The Bank's  wholly-owned  subsidiaries are
North Street Securities Corporation, Gold Leaf Insurance Agency, Inc., Berkshire
Financial  Planning,   Inc.,  Gold  Leaf  Securities  Corporation  and  Woodland
Securities,  Inc.  North Street  Securities  Corporation,  Gold Leaf  Securities
Corporation,  and Woodland Securities,  Inc. hold certain investment securities.
Gold Leaf  Insurance  Agency,  Inc.  offers  insurance  products  to  customers.
Berkshire Hills Funding  Corporation was established to loan funds to the Bank's
Employee Stock Ownership Plan. Berkshire Hills Technology was formed during 2001
for the purpose of acquiring a controlling  interest in EastPoint  Technologies,
LLC.  Gold Leaf  Investment  Services was inactive at December 31, 2004.  During
2001,  the Bank  established  a  majority-owned  subsidiary,  Gold Leaf  Capital
Corporation,  which held real estate  mortgages prior to being dissolved  during
2003.  All  significant   inter-company  balances  and  transactions  have  been
eliminated in consolidation.

On June 29, 2001, the Company,  through its wholly-owned  subsidiary,  Berkshire
Hills  Technology,   Inc.,   purchased  a  controlling   interest  in  EastPoint
Technologies,  LLC  ("EastPoint"),  which on the same date  acquired  all of the
domestic  operations and service  contracts of M&I EastPoint  Technology,  Inc.,
Bedford,  New Hampshire,  a software and data processing  provider for financial
institutions,  as  well  as  substantially  all of the  operations  and  service
contracts of Preferred Financial Systems,  Inc., Arden Hills,  Minnesota, a data
processing  service provider,  both of which utilized the EastPoint  Technology,
Inc.  software.  This acquisition was accounted for under the purchase method of
accounting.  The Company's equity interest in EastPoint at December 31, 2003 was
60.3% and  represented a total  investment  of $4.7  million.  On June 18, 2004,
Berkshire  Hills  Technology,  Inc.  sold the business  assets of EastPoint to a
subsidiary  of Open  Solutions  Inc. The  transaction  resulted in a net loss of
$75,000 to the Company  ($49,500  net of taxes),  which was included in net loss
from  discontinued  operations in 2004. The current and prior periods  presented
have  been  adjusted  to  reflect  the sale of  EastPoint  and the  discontinued
operations.  Berkshire  Hills  Technologies,  LLC had no assets or operations at
December 31, 2004.

      Pending merger

On  December  16,  2004,  the  Company  announced  that  it had  entered  into a
definitive  merger  agreement  with Woronoco  Bancorp,  Inc.,  pursuant to which
Woronoco  will  merge  with and into the  Company,  with the  Company  being the
surviving entity.  Immediately following that merger, Woronoco Savings Bank, the
wholly-owned  subsidiary of Woronoco,  will merge with and into  Berkshire  Bank
with  Berkshire  Bank  being  the  surviving  entity.  Under  the  terms  of the
agreement,  the stockholders of Woronoco will have the right to elect to receive
either $36.00 in cash or one share of the Company's common stock in exchange for
each  Woronoco  share held by them,  subject to procedures to ensure that 75% of
the outstanding  Woronoco common shares are converted into the Company's  common
stock and the balance is converted  into cash.  The  completion of the merger is
subject  to  approval  by the  stockholders  of  both  companies  and  customary
regulatory  approvals.  The merger is expected to close in the second quarter of
2005. This merger agreement had no significant effect on the Company's financial
statements for the periods presented.

      Acquisitions

During  the fourth  quarter  of 2004,  the  Company  acquired  a bank  branch in
Oriskany Falls, New York. The acquisition included $8 million in deposits,  real
property  related to the branch,  and certain other related assets.  The Company
also acquired  Berkshire  Financial  Planning,  Ltd,  merging it into the Bank's
wealth  management  group.  The  acquisitions  were  accounted  for as  purchase
transactions with the total cash consideration  funded through internal sources.
The purchase  prices were  allocated to the  underlying  assets and  liabilities
based  on  estimated  fair  values  at the  date  of  acquisition  with  related
adjustments  to goodwill and other  intangibles.  The  operating  results of the
acquisitions  are included with the Company's  results of operations since their
dates of  acquisition.  The branch  acquisition  was  integral to the  expansion
strategy into New York State. The financial  planning  acquisition  strengthened
wealth management services in the core market.


                                      -58-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Business

The  Company   provides  a  variety  of  financial   services  to   individuals,
municipalities  and  businesses  through  its  offices in  Berkshire  County and
Eastern New York. Its primary deposit  products are savings,  checking  accounts
and term  certificate  accounts and its primary lending products are residential
and  commercial  mortgage  loans,  commercial  loans and  automobile  loans.  In
addition,  wealth  management  services  are  offered to  individuals  and small
businesses in the Berkshire County area, which include trust, financial planning
and investment services.

      Use of estimates

In preparing  consolidated  financial  statements in conformity  with accounting
principles  generally  accepted in the United  States of America,  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 sheets and
reported  amounts of revenues and expenses during the reporting  period.  Actual
results  could  differ  from  those  estimates.   Material  estimates  that  are
particularly  susceptible to  significant  change in the near term relate to the
determination of the allowance for loan losses and deferred taxes.

      Reclassifications

Certain amounts in the 2003 and 2002 consolidated financial statements have been
reclassified to conform to the 2004 presentation.

      Cash and cash equivalents

For  purposes  of the  consolidated  statements  of cash  flows,  cash  and cash
equivalents  include cash,  balances due from banks and short-term  investments,
all of which mature within ninety days.

      Short-term investments

Short-term  investments mature within ninety days and are carried at cost, which
approximates fair value.

      Securities

Debt  securities  that management has the positive intent and ability to hold to
maturity are classified as  "held-to-maturity"  and recorded at amortized  cost.
Securities not classified as held-to-maturity,  including equity securities with
readily  determinable fair values,  are classified as  "available-for-sale"  and
recorded at fair value,  with unrealized gains and losses excluded from earnings
and reported in other comprehensive income, with the unrealized gains and losses
determined using the specific identification method.

Purchase  premiums and  discounts are  recognized  in interest  income using the
interest method over the terms of the securities.  Declines in the fair value of
held-to-maturity  and  available-for-sale  securities  below their cost that are
deemed to be other than temporary are reflected in earnings as realized  losses.
In estimating  other-than-temporary  impairment losses, management considers (1)
the  length of time and the  extent  to which the fair  value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of  securities  are  recorded on the trade date and
are determined using the specific identification method.

Federal Home Loan Bank of Boston  ("FHLB")  stock is reflected at cost.  Savings
Bank Life Insurance Company of Massachusetts  ("SBLI") stock is recorded at fair
value at  acquisition  as  determined by an appraisal  performed by  independent
investment consultants retained by SBLI.


                                      -59-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Loan sale activities

Residential   mortgage  loans  originated  and  held  for  sale  are  classified
separately  in the  consolidated  balance  sheets and  reported  at the lower of
amortized cost or market value (based on secondary market prices). An adjustment
to reduce  these loans to market value was not required at December 31, 2004 and
2003. Gains or losses on sale are determined  using the specific  identification
method.  All loans held for sale were  committed  for sale when their rates were
locked; loan sale commitments generally are settled within 30 days of closing.

The Company generally sells its fixed rate residential mortgage loans, servicing
released,  on a flow basis.  The Company also sells  participation  interests in
commercial  loans which the Company holds and services.  All sales are made on a
non-recourse basis and there are no transfers that qualify as secured borrowings
at December 31, 2004.

Statement of Financial  Accounting Standards ("SFAS") No. 133 as amended by SFAS
No.  149,  "Accounting  for  Derivative  Instruments  and  Hedging  Activities,"
establishes  accounting and reporting  standards for derivative  instruments and
hedging  activities  and requires  that all  derivatives  be  recognized  on the
balance sheets at fair value. The Company uses forward delivery  contracts (sale
commitments) to reduce market risk on (i) closed residential mortgage loans held
for sale and (ii) rate-locked  loans  (origination  commitments)  expected to be
closed and held for sale. All such loans are committed for sale without recourse
at prices exceeding cost. Forward sale commitments are entered into with respect
to individual loan  origination  commitments,  with delivery  conditional on the
closing of the related loans.  The forward sale  commitments  generally  require
delivery  within  60 days of  closing  the  related  loan  and  conformity  with
secondary  market  guidelines   including  loan   documentation.   Forward  sale
commitments and interest rate lock (origination) commitments are recorded in the
consolidated  balance sheets at fair value.  The Company had no other derivative
instruments under SFAS No. 133 as amended at December 31, 2004 and 2003.

Changes in the fair value of forward sale  commitments  and related  origination
commitments have not been material, and are equal in amount due to the Company's
practice of entering into a sale commitment at the time it issues an origination
commitment  for a  particular  loan.  Changes in the fair value of forward  sale
commitments,  interest rate lock (origination) commitments and hedged loans held
for  sale  are  included  in  non-interest  income  in the  consolidated  income
statement.

Forward sale commitments related to closed loans are accounted for as fair value
hedges  under SFAS No. 133.  Changes in the fair value of such  commitments  and
loans are both recorded in the consolidated income statements and,  accordingly,
any hedge ineffectiveness is included in reported net income.  However,  because
the Company's forward sale commitments relate to specific closed loans,  changes
in the fair value of the forward commitments offset changes in the fair value of
the related loans and, accordingly, there is no hedge ineffectiveness recognized
as a gain or loss in earnings.  All  components  of the changes in fair value of
the  forward  sale   commitments   are  included  in  the  assessment  of  hedge
effectiveness.

      Loans

The  Bank  grants  mortgage,  commercial  and  consumer  loans to  customers.  A
substantial  portion of the loan  portfolio is  represented by mortgage loans in
Berkshire County.  The ability of the Bank's debtors to honor their contracts is
dependent upon the local economy and the local real estate market.

Loans that  management  has the intent and  ability to hold for the  foreseeable
future or until maturity or pay-off  generally are reported at their outstanding
unpaid  principal  balances  adjusted for  charge-offs,  the  allowance for loan
losses,  and any deferred fees or costs on originated loans.  Interest income is
accrued on the unpaid principal  balance.  Loan origination fees, net of certain
direct  origination  costs,  are deferred and recognized as an adjustment of the
related  loan yield using the  interest  method.  Interest  on loans,  excluding
automobile  loans,  is  generally  not accrued on loans which are ninety days or
more past due unless the loan is well-secured  and in the process of collection.
Past due  status is based on  contractual  terms of the loan.  Automobile  loans
continue  accruing to one hundred and twenty days  delinquent at which time they
are charged off, unless the customer is in bankruptcy proceedings.  All interest
accrued  but  not  collected  for  loans  that  are  placed  on  non-accrual  or
charged-off is reversed against interest income.  The interest on these loans is
accounted for on the cash-basis or  cost-recovery  method,  until qualifying for
return to accrual.  Loans are returned to accrual  status when all the principal
and interest amounts  contractually  due are brought current and future payments
are reasonably assured.


                                      -60-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Allowance for loan losses

The allowance for loan losses is established through a provision for loan losses
charged to  earnings to account for losses  that are  estimated  to occur.  Loan
losses  are  charged  against  the  allowance  when   management   believes  the
uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any,
are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management  and
is based upon management's periodic review of the collectibility of the loans in
light  of  historical  experience,  the  composition  and  volume  of  the  loan
portfolio,  adverse  situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This  evaluation is  inherently  subjective  as it requires  estimates  that are
susceptible to significant revision as more information becomes available.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component  relates to loans that are  classified  as either  doubtful,
substandard  or special  mention.  For such loans  that are also  classified  as
impaired,  an  allowance  is  established  when the  discounted  cash  flows (or
collateral value or observable  market price) of the impaired loan is lower than
the carrying value of that loan.  The general  component  covers  non-classified
loans  and is based on  historical  loss  experience  adjusted  for  qualitative
factors.  An  unallocated  component is maintained to cover  uncertainties  that
could affect management's estimate of probable losses. The unallocated component
of the allowance  reflects the margin of imprecision  inherent in the underlying
assumptions  used in the  methodologies  for  estimating  allocated  and general
losses in the portfolio.

A loan is considered  impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled  payments of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  Impaired  loans are generally  maintained  on a  non-accrual  basis.
Impairment  is measured  on a loan by loan basis by either the present  value of
expected future cash flows discounted at the loan's effective  interest rate, or
the  fair  value  of  the  collateral  if  the  loan  is  collateral  dependent.
Substantially all of the Bank's loans that have been identified as impaired have
been measured by the fair value of existing collateral.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly,  the Company does not separately  identify  individual
consumer loans or residential mortgage loans for impairment disclosures.

      Foreclosed and repossessed assets

Assets acquired  through,  or in lieu of, loan  foreclosure or repossession  are
held for sale and are initially  recorded at the lower of the  investment in the
loan or fair value less  estimated  cost to sell at the date of  foreclosure  or
repossession,  establishing  a new  cost  basis.  Subsequently,  valuations  are
periodically  performed by management and the assets are carried at the lower of
carrying  amount or fair  value less cost to sell.  Revenue  and  expenses  from
operations  and changes in the valuation  allowance are included in net expenses
from foreclosed real estate and repossessed assets.

      Premises and equipment

Land is carried at cost. Buildings and improvements and equipment are carried at
cost,  less  accumulated  depreciation  and  amortization  is  computed  on  the
straight-line  method over the estimated  useful lives of the assets or terms of
the leases, if shorter.

      Goodwill and other intangibles

Goodwill and other  intangibles  are described in the notes to the  consolidated
financial   statements.   Goodwill  and  other  intangibles  are  evaluated  for
impairment  on an annual  basis.  The Company  records as goodwill the excess of
purchase  price over the fair  value of the  identifiable  net assets  acquired.
Statements of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible  Assets",  prescribes a two-step  process for  impairment  testing of
goodwill,  which is  performed  annually,  as well as when an  event  triggering
impairment may have  occurred.  The first step tests for  impairment,  while the
second step, if necessary, measures the impairment.

      Securities sold under agreements to repurchase

Occasionally,  the Company enters into repurchase agreements with customers. The
funds  are  invested  in an  overnight  sweep  account  and  deposited  back  in
customers'  accounts on a daily basis.  These  agreements are secured by pledged
securities in the Bank's investment portfolio.


                                      -61-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Transfers of financial assets

Transfers of financial assets are accounted for as sales,  when control over the
assets has been  surrendered.  Control over  transferred  assets is deemed to be
surrendered  when (1) the assets have been  isolated  from the Company,  (2) the
transferee  obtains the right (free of conditions  that constrain it from taking
advantage  of that right) to pledge or exchange the  transferred  assets and (3)
the Company does not maintain  effective  control  over the  transferred  assets
through an agreement to repurchase them before their maturity.

      Income taxes

Deferred tax assets and  liabilities  are reflected at currently  enacted income
tax  rates  applicable  to the  period  in which  the  deferred  tax  assets  or
liabilities  are  expected to be realized or settled.  As changes in tax laws or
rates are enacted,  deferred tax assets and liabilities are adjusted accordingly
through the provision  for income  taxes.  The Bank's base amount of its federal
income tax reserve for loan losses is a permanent  difference for which there is
no  recognition of a deferred tax  liability.  However,  the loan loss allowance
maintained  for  financial  reporting  purposes is a temporary  difference  with
allowable  recognition  of a  related  deferred  tax  asset,  if  it  is  deemed
realizable.

      Stock compensation plans

Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation,"  encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is  measured  at the  grant  date  based on the  value of the  award and is
recognized  over the  service  period,  which is  usually  the  vesting  period.
However,  it also allows an entity to continue to measure  compensation cost for
those plans using the intrinsic  value based method of accounting  prescribed by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees,"  whereby  compensation  cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee  must pay to acquire  the stock.  SFAS No. 123 was revised as
SFAS No. 123R in December  2004,  with an effective date for the Company of July
2005.   This   revision  is   discussed   further  in  the  "Recent   Accounting
Pronouncements" section of this Note.

At December 31, 2004,  the Company  maintains  stock-based  compensation  plans,
which are  described  more fully in Note 15. The Company has elected to continue
with the accounting methodology in APB No. 25 and, as a result, has provided pro
forma  disclosures  of net income and earnings  per share,  as if the fair value
based method of accounting had been applied. The following table illustrates the
effect on net income and  earnings per share if the Company had applied the fair
value   recognition   provisions  of  SFAS  No.  123  to  stock-based   employee
compensation.

       
         
                                                             Years Ended December 31,
                                                      -------------------------------------
                                                         2004          2003          2002
                                                       -------       -------       -------
                                                      (In thousands, except per share data)
                                                                                      
      Net income, as reported                          $11,509       $ 8,965       $ 2,097
      Deduct: Total stock-based employee
         compensation expense determined under
         fair value based method for all awards,
         net of related tax effects                       (434)         (398)         (324)
                                                       -------       -------       -------
      Pro forma net income                             $11,075       $ 8,567       $ 1,773
                                                       =======       =======       =======

      Earnings per share:
           Basic-as reported                           $  2.18       $  1.70       $  0.39
                                                       =======       =======       =======
           Basic-pro forma                             $  2.10       $  1.63       $  0.33
                                                       =======       =======       =======

           Diluted-as reported                         $  2.01       $  1.57       $  0.36
                                                       =======       =======       =======
           Diluted-pro forma                           $  1.93       $  1.50       $  0.30
                                                       =======       =======       =======
        


                                      -62-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Employee stock ownership plan ("ESOP")

Compensation  expense is recognized as ESOP shares are committed to be released.
Allocated and committed to be released  ESOP shares are  considered  outstanding
for  earnings  per share  calculations.  Other  ESOP  shares are  excluded  from
earnings per share calculations. Dividends declared on allocated ESOP shares are
charged to retained earnings.  Dividends declared on unallocated ESOP shares are
used to satisfy debt  service.  The value of unearned  shares to be allocated to
ESOP  participants  for future  services  not yet  performed  is  reflected as a
reduction of stockholders' equity.

      Stock awards

The fair market value of the stock awards,  based on the market price at date of
grant, is recorded as unearned compensation.  Unearned compensation is amortized
over the vesting period. Stock award shares are considered outstanding for basic
earnings  per share in the period that they vest.  Stock award shares not vested
are considered in the calculation of diluted earnings per share.

      Earnings per common share

Basic  earnings  per share is  determined  by dividing net income by the average
number of net  outstanding  common  shares for the period.  The net  outstanding
common  shares  equals the gross number of common  shares  issued less  Treasury
Stock repurchased,  unallocated shares of the Employee Stock Ownership Plan, and
unallocated  shares of stock  awards  granted  under the  Company's  stock based
compensation plans. This number is computed daily and averaged for the period.

Diluted  earnings per share is  determined by dividing net income by the average
number of net outstanding common shares computed as if all options granted under
the Company's stock based compensation plans were exercised.  The average number
of net outstanding  common shares used for the basic computation is increased by
the  unallocated  shares  of  stock  awards  under  the  Company's  stock  based
compensation  plans  and by the  additional  diluted  shares  calculated  by the
Treasury Stock method.

Earnings per common share have been computed based upon the following:

       
         
                                                                          Years Ended December 31,
                                                                    ------------------------------------
                                                                      2004          2003          2002
                                                                    --------      --------      --------
                                                                    (In thousands, except per share data)
                                                                                                   
Net income applicable to common stock                               $ 11,509      $  8,965      $  2,097
                                                                    ========      ========      ========

Average number of common shares outstanding                            5,895         5,951         6,126
Less: average number of unallocated ESOP shares                         (436)         (473)         (510)
Less: average number of unvested stock award shares                     (175)         (212)         (181)
                                                                    --------      --------      --------
Average number of basic shares outstanding                             5,284         5,266         5,435
Plus: average number of unvested stock award shares                      175           212           251
Plus: average number of dilutive shares based on stock options           272           225           181
                                                                    --------      --------      --------
Average number of diluted shares outstanding                           5,731         5,703         5,867
                                                                    ========      ========      ========

Basic earnings per share                                            $   2.18      $   1.70      $   0.39
Diluted earnings per share                                          $   2.01      $   1.57      $   0.36
        


                                      -63-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Trust assets

Trust  assets  held in a fiduciary  or agent  capacity  are not  included in the
accompanying  consolidated  balance  sheets  because  they are not assets of the
Company.

      Comprehensive income

Accounting principles generally require that recognized revenue, expenses, gains
and losses be  included in net income.  Although  certain  changes in assets and
liabilities,   such  as  unrealized  gains  and  losses  on   available-for-sale
securities,  are reported as a separate  component of the equity  section of the
consolidated balance sheet, such items, along with net income, are components of
comprehensive income.

The  components  of other  comprehensive  income and  related tax effects are as
follows for the years ended December 31, 2004, 2003 and 2002:

       
         
                                                       2004          2003          2002
                                                     --------      --------      --------
                                                                (In thousands)
                                                                                    
   Change in net unrealized holding gains/losses
      on available-for-sale securities               $   (477)     $  2,297      $ (5,151)
   Reclassification adjustment for gains
      realized in income                               (1,483)       (3,077)      (15,143)
   Reclassification adjustment for impairment
      losses recognized in income                          --            --           673
                                                     --------      --------      --------
   Net change in unrealized gains/losses               (1,960)         (780)      (19,621)

   Tax effects                                            615           797         6,327
                                                     --------      --------      --------

   Net-of-tax change                                 $ (1,345)     $     17      $(13,294)
                                                     ========      ========      ========
        


                                      -64-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

      Business segments

An operating  segment is a component of a business for which separate  financial
information  is  available  that is evaluated  regularly by the chief  operating
decision-maker in deciding how to allocate  resources and evaluate  performance.
The Company's  operations are limited to financial  services provided within the
framework of a community  bank,  and decisions  are based  generally on specific
market  areas and or  product  offerings.  Accordingly,  based on the  financial
information  which is  presently  evaluated  by the  Company's  chief  operating
decision-maker, the Company operates in a single business segment.

      Off-balance sheet financial instruments

In the  ordinary  course of  business,  the Bank enters into  off-balance  sheet
financial   instruments,   consisting  primarily  of  credit  related  financial
instruments.  These  financial  instruments  are  recorded  in the  consolidated
financial  statements  when they are  funded or  related  fees are  incurred  or
received.

      Recent accounting pronouncements

In December 2004, the Financial  Accounting Standards Board issued a revision to
Standard No. 123,  "Share-Based  Payment (Revised 2004)" (SFAS 123R).  SFAS 123R
establishes standards for the accounting for transactions in which an entity (i)
exchanges  its  equity  instruments  for  goods  or  services,  or  (ii)  incurs
liabilities  in exchange for goods or services  that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of the
equity instruments.  SFAS 123R eliminates the ability to account for stock-based
compensation  using APB 25 and requires that such  transactions be recognized as
compensation cost in the income statement based on the fair value on the date of
the grant.  SFAS 123R is  effective  for the Company on July 1, 2005.  Under the
modified prospective application,  as it is applicable to the Company, SFAS 123R
applies to new awards and to awards  modified,  repurchased,  or cancelled after
July 1,  2005.  Additionally,  compensation  cost for the  portion of awards for
which the  requisite  service  has not been  rendered  (generally  referring  to
non-vested awards) that are outstanding as of July 1, 2005 must be recognized as
the  remaining  requisite  service is  rendered  during the period of and/or the
periods  after the  adoption  of SFAS  123R.  This  statement  allows the use of
valuation methods other than the Black-Scholes  model.  Therefore,  the proforma
costs of stock-option  expense estimated in Note 1, may not be representative of
the costs recognized by the Company upon adoption. The Company is in the process
of  analyzing  the  adoption  alternatives  under  this  statement  and  has not
determined its impact on the Company's consolidated financial statements.

In January 2003,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Interpretation  No. 46,  "Consolidation of Variable Interest Entities" (FIN 46),
which  establishes  guidance for determining  when an entity should  consolidate
another entity that meets the definition of a variable  interest entity.  FIN 46
requires  a variable  interest  entity to be  consolidated  by a company if that
company will absorb a majority of the expected  losses,  will receive a majority
of  the  expected   residual   returns,   or  both.   Transferors  to  qualified
special-purpose entities ("QSPEs") and certain other interests in a QSPE are not
subject to the  requirements  of FIN 46. On December 17, 2003, the FASB deferred
the  effective  date of FIN 46 to no later  than the end of the first  reporting
period that ends after March 15, 2004; however,  for  special-purpose  entities,
the  Company  would be required to apply FIN 46 as of  December  31,  2003.  The
interpretation had no effect on the Company's consolidated financial statements.


                                      -65-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

Recent accounting pronouncements (concluded)

In March 2004,  the Emerging  Issues Task Force  ratified  Issue No. 03-1,  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments"  (EITF 03-1).  EITF 03-1 provides  guidance for determining when an
investment is considered impaired,  whether impairment is  other-than-temporary,
and measurement of an impairment  loss. An investment is considered  impaired if
the fair value of the investment is less than its cost. Generally, an impairment
is considered  other-than-temporary unless: (i) the investor has the ability and
intent to hold an investment for a reasonable  period of time  sufficient for an
anticipated recovery of fair value up to (or beyond) the cost of the investment;
and (ii) evidence  indicating  that the cost of the  investment  is  recoverable
within a  reasonable  period of time  outweighs  evidence  to the  contrary.  If
impairment  is determined to be  other-than-temporary,  then an impairment  loss
should be recognized equal to the difference  between the investment's  cost and
its fair value.  The disclosure,  recognition  and  measurement  provisions were
initially effective for other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. However, in September 2004, the effective
date of these  provisions  was delayed  until the  finalization  of a FASB Staff
Position  to provide  additional  implementation  guidance.  The Company has not
determined  the effect  that EITF 03-1 will have on its  consolidated  financial
statements, pending review of the planned additional implementation guidance.

SEC  Staff  Accounting  Bulletin  (SAB)  No.  105,  "Application  of  Accounting
Principles to Loan  Commitments."  SAB 105  summarizes the views of the staff of
the SEC regarding the application of generally accepted accounting principles to
loan commitments accounted for as derivative instruments.  SAB 105 provides that
the  fair  value  of  recorded  loan  commitments  that  are  accounted  for  as
derivatives under SFAS 133,  "Accounting for Derivative  Instruments and Hedging
Activities,"  should not  incorporate  the expected future cash flows related to
the  associated  servicing  of the future loan.  In  addition,  SAB 105 requires
registrants  to  disclose  their  accounting  policy for loan  commitments.  The
provisions  of SAB 105 must be  applied  to loan  commitments  accounted  for as
derivatives  that are entered  into after March 31,  2004.  The adoption of this
accounting standard did not have a material impact on the Company's consolidated
financial statements.

SOP No. 03-3,  "Accounting  for Certain Loans or Debt  Securities  Acquired in a
Transfer." SOP 03-3 addresses accounting for differences between the contractual
cash flows of certain loans and debt  securities  and the cash flows expected to
be collected when loans or debt  securities are acquired in a transfer and those
cash flow differences are attributable,  at least in part, to credit quality. As
such, SOP 03-3 applies to loans and debt securities  acquired  individually,  in
pools or as part of a  business  combination  and does not  apply to  originated
loans.  The  application  of SOP 03-3  limits  the  interest  income,  including
accretion of purchase price discounts,  that may be recognized for certain loans
and debt  securities.  Additionally,  SOP 03-3  does not  allow  the  excess  of
contractual cash flows over cash flows expected to be collected to be recognized
as an  adjustment  of yield,  loss accrual or valuation  allowance,  such as the
allowance for possible loan losses. SOP 03-3 requires that increases in expected
cash flows  subsequent to the initial  investment  be  recognized  prospectively
through  adjustment of the yield on the loan or debt security over its remaining
life.

Decreases in expected cash flows should be recognized as impairment. In the case
of loans acquired in a business combination where the loans show signs of credit
deterioration,  SOP 03-3 represents a significant  change from current  purchase
accounting  practice  whereby  the  acquiree's  allowance  for  loan  losses  is
typically  added  to the  acquirer's  allowance  for  loan  losses.  SOP 03-3 is
effective  for loans  and debt  securities  acquired  by the  Company  beginning
January 1, 2005.  The  adoption of this new  standard is not  expected to have a
material impact on the Company's consolidated financial statements.


                                      -66-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.    RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANK
--------------------------------------------------------------------------------

The Bank is required to maintain cash reserve  balances with the Federal Reserve
Bank based upon a percentage of certain deposits. At December 31, 2004 and 2003,
cash and due from banks included  $2,079,000 and  $1,129,000,  respectively,  to
satisfy such reserve requirements.

3.    SHORT-TERM INVESTMENTS
--------------------------------------------------------------------------------

Short-term investments consisted of the following at December 31, 2004 and 2003:

                                                  2004         2003
                                                 ------       ------
                                                    (In thousands)

            Federal funds sold                   $2,600       $   --
            FHLB overnight deposits                  65        1,859
                                                 ------       ------

                                                 $2,665       $1,859
                                                 ======       ======


                                      -67-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.    SECURITIES
--------------------------------------------------------------------------------

The amortized cost and estimated fair value of securities, with gross unrealized
gains and losses, was as follows:

       
         
                                                            December 31, 2004
                                              ------------------------------------------------
                                                            Gross        Gross
                                              Amortized   Unrealized   Unrealized       Fair
                                                 Cost       Gains        Losses         Value
                                              ---------   ----------   ----------     --------
                                                              (In thousands)
                                                                                         
   Securities Available-for-Sale
   Debt securities:
      U.S. Treasury and U.S.
              Government agencies             $  1,106     $     13     $     (6)     $  1,113
      Municipal bonds and obligations           19,169           99          (96)       19,172
      Other bonds and obligations                8,977           45          (45)        8,977
      Mortgaged-backed securities:
              FHLMC/FNMA/GNMA                  323,548        1,829       (3,227)      322,150
              REMICs and CMOs                      408           28           (1)          435
      Asset-backed securities                      441           11           --           452
                                              --------     --------     --------      --------
                    Total debt securities      353,649        2,025       (3,375)      352,299

   Marketable equity securities                  5,193        7,912           --        13,105
                                              --------     --------     --------      --------
                    Total securities
                       available-for-sale     $358,842     $  9,937     $ (3,375)     $365,404
                                              ========     ========     ========      ========

   Securities Held-to-Maturity
   Debt securities:
      Municipal bonds and obligations         $ 11,580     $     --     $     --      $ 11,580
      Mortgaged-backed securities:
              FHLMC/FNMA                         3,381            9          (31)        3,359
              REMICs and CMOs                    1,334           --          (21)        1,313
      Other bonds and obligations               13,647           --           --        13,647
                                              --------     --------     --------      --------
                    Total securities
                       held-to-maturity       $ 29,942     $      9     $    (52)     $ 29,899
                                              ========     ========     ========      ========
        


                                      -68-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                             SECURITIES (continued)

       
         
                                                            December 31, 2003
                                              ------------------------------------------------
                                                            Gross        Gross
                                              Amortized   Unrealized   Unrealized       Fair
                                                 Cost       Gains        Losses         Value
                                              ---------   ----------   ----------     --------
                                                              (In thousands)
                                                                                         
   Securities Available-for-Sale
   Debt securities:
      U.S. Treasury and U.S.
              Government agencies             $ 20,840     $    135     $     (6)     $ 20,969
      Municipal bonds and obligations           12,294           42          (54)       12,282
      Other bonds and obligations               17,102          242          (34)       17,310
      Mortgaged-backed securities:
              FHLMC/FNMA/GNMA                  238,066        1,727       (1,470)      238,323
              REMICs and CMOs                    1,520           33           (6)        1,547
      Asset-backed securities                    2,566           --         (460)        2,106
                                              --------     --------     --------      --------
                    Total debt securities      292,388        2,179       (2,030)      292,537

   Marketable equity securities                  6,515        8,373           --        14,888
                                              --------     --------     --------      --------
                    Total securities
                       available-for-sale     $298,903     $ 10,552     $ (2,030)     $307,425
                                              ========     ========     ========      ========

   Securities Held-to-Maturity
   Debt securities:
      Municipal bonds and obligations         $ 10,590     $     --     $     --      $ 10,590
      Mortgaged-backed securities:
              FHLMC/FNMA                         5,319           28           (8)        5,339
              REMICs and CMOs                   11,039            2          (57)       10,984
      Other bonds and obligations                9,955           --           --         9,955
                                              --------     --------     --------      --------
                    Total securities
                       held-to-maturity       $ 36,903     $     30     $    (65)     $ 36,868
                                              ========     ========     ========      ========
        


                                      -69-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                             SECURITIES (continued)

The amortized  cost and estimated  fair value of debt  securities by contractual
maturity at December 31, 2004 was as follows.  Expected  maturities  will differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay obligations with or without call or prepayment penalties.

       
         
                                                  Available-for-Sale         Held-to-Maturity
                                                ---------------------     ---------------------
                                                Amortized      Fair       Amortized      Fair
                                                  Cost         Value        Cost         Value
                                                ---------    --------     ---------    --------
                                                                (In thousands)
                                                                                          
      Within 1 year                             $  4,882     $  4,922     $  8,634     $  8,634
      Over 1 year to 5 years                         615          611        3,769        3,769
      Over 5 years to 10 years                     4,828        4,814        6,307        6,307
      Over 10 years                               18,927       18,915        6,517        6,517
                                                --------     --------     --------     --------
                Total bonds and obligations       29,252       29,262       25,227       25,227
      Mortgage-backed and asset-backed
          securities                             324,397      323,037        4,715        4,672
                                                --------     --------     --------     --------

                Total debt securities           $353,649     $352,299     $ 29,942     $ 29,899
                                                ========     ========     ========     ========
        

At December  31, 2004 and 2003,  the  Company  had  pledged  securities  with an
amortized  cost of $1,000,000,  and a fair value of $1,013,000  and  $1,022,000,
respectively, as collateral for its treasury tax and loan account.

For the years ended December 31, 2004, 2003 and 2002, proceeds from the sales of
securities   available-for-sale   amounted  to   $16,169,000,   $20,349,000  and
$28,255,000,   respectively.   Gross  realized  gains  amounted  to  $1,914,000,
$3,371,000 and $16,111,000,  respectively.  Gross gains in 2004 included $81,000
in gross  gains on the sale of  securitized  mortgages.  Gross  realized  losses
amounted to $431,000, $294,000 and $968,000, respectively.


                                      -70-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                             SECURITIES (concluded)

Information  pertaining to securities with gross  unrealized  losses at December
31, 2004 and 2003,  aggregated  by  investment  category and length of time that
individual securities have been in a continuous loss position, follows:

       
         
                                                           December 31, 2004
                                           -------------------------------------------------
                                           Less Than Twelve Months      Over Twelve Months
                                           -----------------------    ----------------------
                                               Gross                     Gross
                                            Unrealized      Fair      Unrealized      Fair
                                              Losses       Value        Losses       Value
                                            ----------    --------    ----------    --------
                                                              (In thousands)
                                                                                       
      Securities Available-for-Sale
        Other bonds and obligations          $     75     $  9,338     $     73     $  5,353
        Mortgaged-backed securities             1,474      138,873        1,753       87,220
                                             --------     --------     --------     --------
                  Total securities
                      available-for-sale        1,549      148,211        1,826       92,573
                                             --------     --------     --------     --------

      Securities Held-to-Maturity
        Mortgaged-backed securities                13        1,155           39        2,930
                                             --------     --------     --------     --------

                  Total temporarily
                   Impaired securities       $  1,562     $149,366     $  1,865     $105,503
                                             ========     ========     ========     ========

         
                                                           December 31, 2003
                                           -------------------------------------------------
                                           Less Than Twelve Months      Over Twelve Months
                                           -----------------------    ----------------------
                                               Gross                     Gross
                                            Unrealized      Fair      Unrealized      Fair
                                              Losses       Value        Losses       Value
                                            ----------    --------    ----------    --------
                                                              (In thousands)
                                                                                       
      Securities Available-for-Sale
        Other bonds and obligations          $     79     $  8,722     $      9     $    402
        Mortgaged-backed securities             1,475      113,236            7          144
        Asset-backed securities                    10          809          450        1,297
                                             --------     --------     --------     --------
                  Total securities
                      available-for-sale        1,564      122,767          466        1,843
                                             --------     --------     --------     --------

      Securities Held-to-Maturity
        Mortgaged-backed securities                61       12,740            4          195
                                             --------     --------     --------     --------

                  Total temporarily
                   Impaired securities       $  1,625     $135,507     $    470     $  2,038
                                             ========     ========     ========     ========
        

Based on management's  review,  there were no write-downs of impaired securities
in 2004 and 2003; write-downs of $673,000 were recorded in 2002. The Company did
not own any equity  securities with unrealized losses at December 31, 2004. None
of its rated debt securities were rated below investment grade at that date, and
all securities  were  performing in accordance with their terms. At December 31,
2004,  these  impairments  were deemed to be temporary and related to changes in
market interest rates,  and are not related to the underlying  credit quality of
the issuers.  The Company expects that these securities will continue to perform
in accordance with their terms.  The unrealized  losses primarily relate to pass
through  adjustable  rate mortgage  backed  securities  issued by Fannie Mae and
Freddie  Mac.  The Company has the intent and ability to hold these  investments
for a time necessary to recover the amortized cost.


                                      -71-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.    LOANS
--------------------------------------------------------------------------------

A summary of the balances of loans at December 31, 2004 and 2003 follows:

                                                         2004        2003
                                                       --------    --------
                                                          (In thousands)

            One- to four-family mortgage               $232,498    $266,753
            Commercial mortgage                         207,619     154,244
            Multi-family mortgage                        16,380      15,514
            Construction and land development            38,702      34,719
            Home equity lines of credit                  54,157      45,783
            Consumer                                    127,122     108,180
            Commercial                                  150,932     166,451
                                                       --------    --------
                 Loans subtotal                         827,410     791,644

            Net deferred loan origination costs             574         110
            Unamortized discount on purchased loans         195         473
                                                       --------    --------

            Total loans                                $828,179    $792,227
                                                       ========    ========

An analysis of the  allowance  for loan losses for the years ended  December 31,
2004, 2003 and 2002 follows:

                                         2004         2003         2002
                                       --------     --------     --------
                                                 (In thousands)

      Balance at beginning of year     $  8,969     $ 10,308     $ 11,034
      Provision for loan losses           1,565        1,460        6,180
      Loans charged-off                  (2,202)      (4,364)     (10,028)
      Recoveries                          1,005        1,565        3,122
                                       --------     --------     --------

      Balance at end of year           $  9,337     $  8,969     $ 10,308
                                       ========     ========     ========


                                      -72-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                LOANS (concluded)

The following is a summary of information pertaining to impaired and non-accrual
loans at December 31, 2004 and 2003:

                                                                   2004    2003
                                                                  ------  ------
                                                                  (In thousands)

      Impaired loans with no valuation allowance                  $  787  $  388
      Impaired loans with a valuation allowance                      393   1,994
                                                                  ------  ------

      Total impaired loans                                        $1,180  $2,382
                                                                  ======  ======

      Specific valuation allowance allocated to impaired loans    $  230  $  267
                                                                  ======  ======

      Non-accrual loans                                           $1,152  $3,199
                                                                  ======  ======

      Total loans past due ninety days or more and
          still accruing                                          $   65  $  306
                                                                  ======  ======

For the years ended  December  31,  2004,  2003 and 2002,  the average  recorded
investment in impaired loans amounted to $2,412,000,  $2,693,000 and $2,308,000,
respectively. The Company recognized $18,000, $14,000 and $85,000, respectively,
of interest income on impaired loans, during the period that they were impaired,
on the  cash  basis.  No  additional  funds  are  committed  to be  advanced  in
connection with impaired loans.

Interest income that would have been recorded had nonaccruing loans been current
totaled  $173,000,  $165,000 and $188,000 for the years ended December 31, 2004,
2003 and 2002, respectively.

At December 31, 2004 and 2003, troubled debt restructurings totaled $510,000 and
$214,000,  respectively.  These loans were  classified  as impaired  and did not
require a specific  valuation  allowance.  They were  restructured to extend the
payment  schedule.  Interest  income  recorded  on these  loans  while they were
impaired totaled $14,000 and $13,000 in 2004 and 2003, respectively.  There were
no commitments to lend additional funds to these debtors.

There was no foreclosed real estate at December 31, 2004 or 2003.

The Bank has sold loans in the  secondary  market and has retained the servicing
responsibility and receives fees for the services provided.  Mortgage loans sold
and serviced for others  amounted to $47,600,000 and $24,878,000 at December 31,
2004 and 2003,  respectively,  which  includes  $45,516,000  and  $16,270,000 in
securitized  mortgages in 2004 and 2003.  Additionally,  consumer loans sold and
serviced for others  amounted to $1,742,000  and $7,159,000 at December 31, 2004
and 2003, respectively.

The balance of sold  commercial  loan  participations  totaled  $12,943,000  and
$7,969,000 at December 31, 2004 and 2003. Of this amount,  certain participation
agreements   provide  the  Bank  with  the  optional  right  to  repurchase  the
participations at par. Those agreements more recent than March 31, 2001, totaled
$2,425,000  and  $160,000 at  December  31, 2004 and 2003.  These  amounts  were
considered  by the  Bank  to be  immaterial  for the  purpose  of  applying  the
provisions of SFAS No. 140.

The  estimated  fair  value  of  commitments  to  extend  credit  is  considered
insignificant  at December  31, 2004 and 2003.  In its credit  commitments,  the
Company does not normally  provide interest rate locks exceeding sixty days, and
most credit commitments are for adjustable rate loans.

Forward  commitments  are used to sell  residential  mortgage  loans,  which are
entered  into for the  purpose of  reducing  the  market  risk  associated  with
originating  loans held for sale.  The types of risk that may arise are from the
possible  inability of the Company or the other party to fulfill the  contracts.
At  December  31,  2004,  total loans held for sale were  $1,053,000  consisting
entirely of fixed rate residential  mortgage loans. The Company had best efforts
forward  delivery sales  contracts for all of these loans,  with a fair value of
$14,000.  Additionally,  the  Company had rate  locked  applications  in process
totaling  $2,246,000,  which were also backed by best efforts  forward  delivery
sales contracts with a fair value of $31,000.


                                      -73-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.    PREMISES AND EQUIPMENT
--------------------------------------------------------------------------------

A summary of the cost and accumulated  depreciation and amortization of premises
and equipment and their estimated  useful lives follows at December 31, 2004 and
2003:

       
         
                                                                            Estimated
                                                 2004          2003        Useful Lives
                                               --------      --------      ------------
                                                   (In thousands)
                                                                              
            Banking premises:
                Land                           $  1,587      $  1,558
                Buildings and improvements       20,232        18,448      5 -50 years
            Equipment                            12,751        11,467      2 -38 years
            Construction in process               1,491           550
                                               --------      --------
                                                 36,061        32,023
            Accumulated depreciation and
                amortization                    (21,281)      (19,397)
                                               --------      --------

                                               $ 14,780      $ 12,626
                                               ========      ========
        

The  majority of  construction  in process in 2004 was  software,  hardware  and
related costs in conjunction  with the Bank's core systems  conversion  project,
which was targeted for  completion in the first half of 2005.  The total cost of
this project was estimated at $2,887,000, of which $1,371,000 had been disbursed
at December 31, 2004,  and an additional  $1,406,000  had been committed at that
date.

Construction  in  process  in 2003  related  to  computer  conversion  costs and
renovations to the Great Barrington  branch.  The projects were completed during
2004 and costs were transferred to the applicable categories.

Depreciation  and  amortization  expense for the years ended  December 31, 2004,
2003 and 2002 amounted to $1,884,000, $2,107,000 and $2,414,000, respectively.

7.    OTHER ASSETS
--------------------------------------------------------------------------------

Other assets consisted of the following at December 31, 2004 and 2003:

                                                        2004        2003
                                                      -------     -------
                                                         (In thousands)

            Prepaid dealer reserves                   $ 3,460     $ 3,196
            Repossessed vehicles                          274         352
            Cash surrender values, life insurance       5,862       5,425
            Other                                       1,834       5,107
                                                      -------     -------

                           Total other assets         $11,430     $14,080
                                                      =======     =======


                                      -74-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.    GOODWILL AND OTHER INTANGIBLES
--------------------------------------------------------------------------------

Goodwill  totaled  $6,782,000  and  $10,132,000  at December  31, 2004 and 2003,
respectively.  At both  dates,  goodwill  included a net  balance of  $5,763,000
related to branch  acquisitions in prior years, net of $1,700,000 in accumulated
amortization.  Additionally,  goodwill at December 31, 2004 included  $1,019,000
related  to the  Oriskany  Falls  branch  acquisition  in  October  2004 and the
Berkshire  Financial  Planning,  Ltd.  acquisition  in December  2004.  In 2003,
goodwill included a total of $4,369,000  related to the Company's  investment in
EastPoint  Technologies,  LLC,  which  was sold for  cash in June  2004,  with a
$75,000  loss  recorded on sale.  The  adoption of SFAS 147 in 2002  resulted in
increases  to goodwill of $497,000,  deferred  taxes of $169,000 and $328,000 in
retained earnings.

Other  intangibles  totaled $472,000 and $101,000 at December 31, 2004 and 2003,
respectively,  and were net of  accumulated  amortization  totaling  $4,000  and
$507,000 at those dates,  respectively.  In 2004, other intangibles  represented
core deposit intangibles for the Oriskany Falls branch acquisition and the value
of customer  relationships  related to the Berkshire  Financial  Planning,  Ltd.
acquisition.  In 2003, other intangibles  represented the unamortized balance of
EastPoint customer relationships,  which were sold in June 2004. Amortization of
other  intangible  assets totaled  $98,000,  $203,000 and $203,000 for the years
ended  December  31,  2004,  2003 and 2002.  Other  intangibles  related  to the
Oriskany  Falls  branch  acquisition  are  being  amortized  over ten years on a
straight-line  basis;  other  intangibles  related  to the  Berkshire  Financial
Planning,  Ltd.  purchase are being amortized over five years on a straight-line
basis. The estimated future annual amortization expense for other intangibles is
$73,000 for the years 2005, 2006, 2007 and 2008;  $69,000 for 2009; and $111,000
for later years.

Included in other assets are capitalized  mortgage  servicing  rights with a net
balance of $279,000 and  $100,000 at December  31, 2004 and 2003,  respectively.
These rights are associated with the residential mortgage securitizations to the
Federal National Mortgage  Association  (Fannie Mae) in 2004 and 2003.  Mortgage
servicing  rights  represent  the  capitalized  net present  value of fee income
streams generated from servicing  residential  mortgage loans for this investor.
The Company  utilized a discounted cash flow analysis  prepared by a third party
appraiser to estimate the fair value at origination and to evaluate the asset on
a  quarterly  basis.  The fair value  approximated  the net  carrying  value for
mortgage  servicing  rights at  December  31,  2004 and 2003.  The  amortization
expense for mortgage  servicing  rights  totaled  $54,000 in 2004;  there was no
amortization  expense in 2003 or 2002. The estimated future annual  amortization
expense for mortgage servicing rights is summarized as follows:  2005 - $49,000;
2006 - $41,000;  2007 - $34,000; 2008 - $28,000; 2009 - $23,000; and later years
- $104,000.


                                      -75-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.    DEPOSITS
--------------------------------------------------------------------------------

A summary of deposit  balances,  by type, is as follows at December 31, 2004 and
2003:

                                                            2004        2003
                                                          --------    --------
                                                             (In thousands)

         Demand                                           $110,129    $102,788
         Savings (including escrow)                        163,264     171,603
         NOW                                               100,709      94,606
         Money market                                      156,412     139,897
                                                          --------    --------
                        Total non-certificate accounts     530,514     508,894
                                                          --------    --------

         Term certificates less than $100,000              175,177     180,257
         Term certificates of $100,000 or more             140,098     141,093
                                                          --------    --------
                        Total certificate accounts         315,275     321,350
                                                          --------    --------

                        Total deposits                    $845,789    $830,244
                                                          ========    ========

Interest expense on deposits is summarized as follows:

                                         2004       2003       2002
                                       -------    -------    -------
                                              (In thousands)
               NOW                     $    88    $   155    $   623
               Money market              2,070      1,648      1,988
               Savings                   1,296      1,731      2,669
               Certificate accounts      8,939     10,328     12,497
                                       -------    -------    -------

                      Total            $12,393    $13,862    $17,777
                                       =======    =======    =======

A summary of certificate accounts by maturity is as follows at December 31, 2004
and 2003:

                                           2004                     2003
                                   --------------------     --------------------
                                               Weighted                 Weighted
                                                Average                  Average
                                    Amount       Rate        Amount       Rate
                                   --------    --------     --------    --------
                                               (Dollars in thousands)

         Within 1 year             $177,265      2.22%      $219,622      2.20%
         Over 1 year to 3 years      92,231      3.27         55,084      3.61
         Over 3 years                45,779      4.60         46,644      5.04
                                   --------                 --------

                                   $315,275      2.87%      $321,350      2.85%
                                   ========                 ========


                                      -76-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   BORROWINGS
--------------------------------------------------------------------------------

Federal Home Loan Bank Advances

A summary of outstanding  advances from the Federal Home Loan Bank of Boston, by
contractual maturity, is as follows at December 31, 2004 and 2003:

       
         
                                                       2004                       2003
                                               ---------------------     ---------------------
                                                            Weighted                  Weighted
                                                             Average                   Average
                                                Amount        Rate        Amount        Rate
                                               --------     --------     --------     --------
                                                           (Dollars in thousands)
                                                                                           
            Fixed rate advances maturing:
                          2004                 $     --           %      $125,000       1.43%
                          2005                  152,589*      2.32         17,670*      2.68
                          2006                   39,627       2.82         25,627       2.81
                          2007                   61,946*      3.29         34,397       3.43
                          2008                   10,000       3.53          5,000       1.25
                          2009                   27,000       4.42          7,000       5.40
                          2010                   20,000       5.84         20,000       5.84
                          2011                   10,610       4.46         10,610       4.47
                          2013                    6,000       5.19          6,000       5.18
                          2022                      154*      2.00            161*      2.00
                                               --------                  --------

            Total FHLB advances                $327,926       3.11%      $251,465       2.61%
                                               ========                  ========
        

            ----------
            *     Amortizing  advances  requiring monthly principal and interest
                  payments.

Certain FHLB  advances are  callable in the amount of  $47,000,000  during 2005.
These  advances are reported  based on their  scheduled  maturity in the summary
table above.

The Bank  maintains a line of credit with the Federal  Home Loan Bank of Boston,
which carries  interest at a rate that adjusts daily.  Borrowings under the line
are limited to $13,055,000  and the line of credit may be increased to 2% of the
Bank's total  assets in  accordance  with the credit  policy of the Federal Home
Loan Bank of Boston.  Additionally,  the Bank utilizes overnight cash management
borrowings  from the Federal Home Loan Bank of Boston.  All borrowings  from the
Federal  Home Loan Bank of  Boston  are  secured  by a blanket  lien on  certain
qualified  collateral,  defined  principally  as 75% of the  carrying  value  of
certain first mortgage loans on owner-occupied  residential  property and 90% of
the market value of U.S. Government and federal agency securities pledged to the
Federal Home Loan Bank.

Securities sold under agreement to repurchase

Securities sold under  agreements to repurchase  ("repurchase  agreements")  are
funds  borrowed  from  customers  on an  overnight  basis  that are  secured  by
investment  securities.  There  were no  securities  sold  under  agreements  to
repurchase in 2004.  There were no outstanding  securities sold under agreements
to repurchase at December 31, 2003. During 2003, the average amount  outstanding
during the year was $88,000; the highest month-end balance was $500,000; and the
weighted average interest rate during the year was 1.24%.

The Bank has a  $50,000,000  repurchase  agreement  line of credit  with a major
broker-dealer  to be secured by  securities  or other assets of the Bank.  As of
December 31, 2004 and 2003,  there were no outstanding  borrowings  against this
agreement.


                                      -77-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   INCOME TAXES
--------------------------------------------------------------------------------

Allocation of federal and state income tax expense  between current and deferred
portions is as follows for the years ended December 31, 2004, 2003 and 2002:

                                             2004       2003        2002
                                           -------    -------     -------
                                                   (In thousands)
            Current
                Federal                    $ 3,632    $ 3,210     $   644
                State                          264        766         149
                                           -------    -------     -------
                                             3,896      3,976         793
                                           -------    -------     -------
            Deferred
                Federal                        875        848        (171)
                State                          188        240         (91)
                                           -------    -------     -------
                                             1,063      1,088        (262)
                                           -------    -------     -------

            Change in valuation reserve        458         --          --
                                           -------    -------     -------
                                           $ 5,417    $ 5,064     $   531
                                           =======    =======     =======

The reasons for the  differences  between the statutory  federal income tax rate
and the  effective  tax rates are  summarized  as  follows  for the years  ended
December 31, 2004, 2003 and 2002:

       
         
                                                            2004       2003       2002
                                                           -----      -----      -----
                                                                                     
            Statutory tax rate                              35.0%      34.0%      34.0%
            Increase (decrease) resulting from:
                State taxes, net of federal tax benefit      1.7        4.7        1.5
                Dividends received deduction                (0.9)      (1.1)      (8.1)
                Tax exempt income - investments             (2.4)      (0.9)      (6.1)
                Bank owned life insurance                   (1.3)      (0.8)      (1.0)
                Valuation reserve                            2.7         --         --
                Other, net                                  (2.8)      (0.2)      (0.1)
                                                           -----      -----      -----

            Effective tax rate                              32.0%      35.7%      20.2%
                                                           =====      =====      =====
        

The  components  of the net  deferred  tax asset were as follows at December 31,
2004 and 2003:

                                                   2004        2003
                                                 -------     -------
                                                   (In thousands)
               Deferred tax asset:
                   Federal                       $ 4,400     $ 4,789
                   State                           1,199       1,234
                   Valuation reserve on asset       (458)         --
                                                 -------     -------
                                                   5,141       6,023
                                                 -------     -------
               Deferred tax liability:
                   Federal                        (3,621)     (3,879)
                   State                            (701)       (419)
                                                 -------     -------
                                                  (4,322)     (4,298)
                                                 -------     -------

               Net deferred tax asset            $   819     $ 1,725
                                                 =======     =======


                                      -78-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                            INCOME TAXES (concluded)

The tax effects of each item that gives rise to deferred taxes are as follows at
December 31, 2004 and 2003:

       
         
                                                                  2004        2003
                                                                -------     -------
                                                                   (In thousands)
                                                                               
             Allowance for loan losses                          $ 3,906     $ 3,671
             Employee benefit plans                                 747       1,000
             Charitable contribution carryover                      519         824
             Net unrealized gain on securities held for sale     (2,348)     (2,963)
             Goodwill amortization                                 (624)       (416)
             Investments                                           (693)       (350)
             Other                                                 (230)        (41)
             Valuation reserve                                     (458)         --
                                                                -------     -------

         Deferred tax asset, net                                $   819     $ 1,725
                                                                =======     =======
        

A summary  of the  change in the net  deferred  tax asset  (liabilities)  was as
follows for the years ended December 31, 2004, 2003 and 2002:

       
         
                                                             2004        2003        2002
                                                           -------     -------     -------
                                                                    (In thousands)
                                                                                      
      Balance at beginning of year                         $ 1,725     $ 2,016     $(4,573)
      Deferred tax (expense) benefit                        (1,063)     (1,088)        262
      Change in deferred tax effects of net unrealized
          gains/losses on securities available for sale        615         797       6,327
      Change in valuation reserve                             (458)         --          --
                                                           -------     -------     -------

      Balance at end of year                               $   819     $ 1,725     $ 2,016
                                                           =======     =======     =======
        

There is a contribution carryover that was generated during the year ended 2000,
which expires in 2005.  Management  believes that the deferred tax asset related
to this contribution carryover will be realized.  However, at December 31, 2004,
management believed that it was more likely than not that the state deferred tax
asset  attributable to the Bank will not be realized.  Thus, a valuation reserve
has been  established  in the  amount of  $458,000.  No  valuation  reserve  was
established at December 31, 2003 or December 31, 2002.

The  federal  income tax  reserve  for loan  losses at the  Bank's  base year is
$844,000.  If any  portion  of the  reserve is used for  purposes  other than to
absorb the losses for which it was established, approximately 150% of the amount
actually  used  (limited  to the  amount of the  reserve)  would be  subject  to
taxation in the year in which it is used. As the Bank intends to use the reserve
only to absorb loan losses,  a deferred income tax liability of $346,000 has not
been provided.

In June 2003, the Company reached a settlement with the Massachusetts Department
of Revenue  ("DOR") with respect to the DOR's tax assessment  resulting from the
DOR's disallowance of the Company's deduction of certain dividend  distributions
received  by the Bank  from  its Real  Estate  Investment  Trust  majority-owned
subsidiary Gold Leaf Capital  Corporation (the "REIT"). As a result, the Company
paid approximately  $398,000 to the DOR representing  one-half of the assessment
plus  interest and obtained the DOR's  release from  liability for the remaining
half assessed. The Company dissolved the REIT during the third quarter of 2003.


                                      -79-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.   OFF-BALANCE SHEET ACTIVITIES
--------------------------------------------------------------------------------

In the  normal  course  of  business,  there  are  outstanding  commitments  and
contingencies that are not reflected in the accompanying  consolidated financial
statements.

      Credit related financial instruments

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  Such commitments  involve,  to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
accompanying consolidated balance sheets.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the financial instrument is represented by the contractual amount
of these  commitments.  The  Company  uses the same  credit  policies  in making
commitments as it does for on-balance-sheet  instruments. A summary of financial
instruments  outstanding  whose  contract  amounts  represent  credit risk is as
follows at December 31, 2004 and 2003:

                                                           2004       2003
                                                         -------    -------
                                                           (In thousands)

      Commitments to grant loans                         $35,587    $26,854
      Unused funds on commercial lines-of-credit          44,188     49,380
      Unadvanced funds on home equity, reddi-cash and
          other consumer lines of credit                  58,128     46,904
      Unadvanced funds on construction loans              27,620     18,069
      Standby letters of credit                            3,575      1,811

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon.  Therefore,  the total  commitment  amounts do not necessarily
represent  future cash  requirements.  The  Company  evaluates  each  customer's
creditworthiness  on a case-by-case  basis.  Funds to be disbursed for loans and
home equity lines of credit are collateralized by real estate.  Commercial lines
of credit are generally  secured by business assets and  securities.  Reddi-cash
lines of credit are unsecured.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee  the  performance  of a customer to a third  party.  These  letters of
credit are primarily issued to support borrowing  arrangements.  The credit risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers.


                                      -80-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                    OFF-BALANCE SHEET ACTIVITIES (concluded)

      Operating lease commitments

Pursuant to the terms of  noncancelable  lease  agreements in effect at December
31, 2004, pertaining to premises and equipment,  future minimum rent commitments
are as follows:

                       Years Ending
                       December 31,           (In thousands)
                       ------------

                           2005                   $  491
                           2006                      498
                           2007                      493
                           2008                      481
                           2009                      481
                        Thereafter                 1,741
                                                  ------

                                                  $4,185
                                                  ======

The leases contain options to extend for periods up to twenty years. The cost of
such rental  options is not  included  above.  Total rent  expense for the years
ended  December  31,  2004,  2003 and 2002  amounted to  $401,000,  $371,000 and
$391,000, respectively.

      Employment and change in control agreements

The Company and the Bank have each entered into an employment agreement with one
senior  executive  that  generally  provides  for  a  specified  minimum  annual
compensation,  participation  in stock  benefit  plans and the  continuation  of
benefits currently received.  The original terms of the agreements are for three
years and automatically extend unless either party gives notice to the contrary.
However,  such  agreements  may be  terminated  for cause,  as defined,  without
incurring any continuing obligations.

The Bank has also  entered  into  change  in  control  agreements  with  certain
officers, all of whom are not covered by an employment agreement.  The change in
control  agreements  generally  provide a  severance  payment if the  officer is
terminated following a "change in control," as defined in the agreements.

      Legal claims

Various  legal  claims  also  arise  from time to time in the  normal  course of
business  which,  in the opinion of management,  will have no material effect on
the Company's consolidated financial statements.

      Mortgage securitization

On December  2, 2003,  the  Company  entered  into an  agreement  to  securitize
mortgages with Fannie Mae in the aggregate of  $55,900,000,  plus or minus 5% of
total principal balance,  which would be securitized and transferred back to the
Company.  At December 31, 2003,  the Company had an  outstanding  commitment  to
securitize  mortgage loans under the agreement of  $39,600,000.  This commitment
was fulfilled in 2004 and no further commitment was made in 2004.


                                      -81-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.   STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

      Minimum regulatory capital requirements

The Bank is subject to various regulatory capital  requirements  administered by
the  federal  and  state  banking  agencies.  Failure  to meet  minimum  capital
requirements   can  initiate   certain   mandatory   and   possibly   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect  on the  Company's  consolidated  financial  statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures  of its assets,  liabilities  and  certain  off-balance-sheet  items as
calculated  under  regulatory  accounting  practices.  The  capital  amounts and
classification are also subject to qualitative judgments by the regulators about
components,   risk  weighting  and  other  factors.   Prompt  corrective  action
provisions are not applicable to savings and loan holding companies.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  the Bank to  maintain  minimum  amounts  and  ratios  (set forth in the
following  table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted  assets (as defined)  and of Tier 1 capital to average  assets (as
defined).  Management believed,  as of December 31, 2004 and 2003, that the Bank
met the capital adequacy requirements.

As of December 31, 2004,  Berkshire  Bank met the conditions to be classified as
"well capitalized" under the regulatory  framework for prompt corrective action.
To be categorized as well  capitalized,  an  institution  must maintain  minimum
total risk-based,  Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following tables.

The Company and Bank's actual capital amounts and ratios as of December 31, 2004
and 2003 are presented in the following table.

       
         
                                                                        December 31, 2004
                                            ---------------------------------------------------------------------------
                                                                                                          Minimum
                                                                                                        To Be Well
                                                                              Minimum               Capitalized Under
                                                                              Capital               Prompt Corrective
                                                   Actual                   Requirement             Action Provisions
                                            ---------------------      ---------------------      ---------------------
                                             Amount        Ratio        Amount        Ratio        Amount        Ratio
                                            --------     --------      --------     --------      --------     --------
                                                                       (Dollars in thousands)
                                                                                                                     
Total capital to risk weighted assets:

    Berkshire Hills Bancorp, Inc.           $133,166        14.24%          N/A          N/A           N/A          N/A
    Berkshire Bank                           118,554        12.69      $ 74,766         8.00%     $ 93,457        10.00%

Tier 1 capital to risk weighted assets:

    Berkshire Hills Bancorp, Inc.            120,269        12.86           N/A          N/A           N/A          N/A
    Berkshire Bank                           105,656        11.31        37,383         4.00        56,074         6.00

Tier 1 capital to average assets:

    Berkshire Hills Bancorp, Inc.            120,269         9.18           N/A          N/A           N/A          N/A
    Berkshire Bank                           105,656         8.08        52,324         4.00        65,405         5.00
        


                                      -82-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        STOCKHOLDERS' EQUITY (concluded)

      Minimum regulatory capital requirements (concluded)

       
         
                                                                        December 31, 2003
                                            ---------------------------------------------------------------------------
                                                                                                          Minimum
                                                                                                        To Be Well
                                                                              Minimum               Capitalized Under
                                                                              Capital               Prompt Corrective
                                                   Actual                   Requirement             Action Provisions
                                            ---------------------      ---------------------      ---------------------
                                             Amount        Ratio        Amount        Ratio        Amount        Ratio
                                            --------     --------      --------     --------      --------     --------
                                                                       (Dollars in thousands)
                                                                                                                     
Total capital to risk weighted assets:

    Berkshire Hills Bancorp, Inc.           $120,120        14.10%          N/A          N/A           N/A          N/A
    Berkshire Bank                           106,542        12.55      $ 67,827         8.00%     $ 84,784        10.00%

Tier 1 capital to risk weighted assets:

    Berkshire Hills Bancorp, Inc.            107,383        12.60           N/A          N/A           N/A          N/A
    Berkshire Bank                            93,806        11.05        33,914         4.00        42,392         6.00

Tier 1 capital to average assets:

    Berkshire Hills Bancorp, Inc.            107,383         8.97           N/A          N/A           N/A          N/A
    Berkshire Bank                            93,806         7.87        47,664         4.00        59,580         5.00
        

      Common stock

A dividend  reinvestment/stock purchase plan is available to all shareholders of
record of the  Company's  common  stock,  and  permits  cash  contribution,  the
reinvestment  of all cash  dividends,  the deposit of shares for safekeeping and
the sale and  gifting of shares held under the plan.  A total of 171,197  common
shares  were  participating  in this  plan at  December  31,  2004.  All  shares
purchased  pursuant to the  operations  of the plan are purchased in open market
transactions.

In April 2002,  the Company  announced  a fifth  repurchase  program for 312,516
shares,  or 5%, of its  outstanding  common  stock.  In June 2003,  the  Company
announced the  completion of the fifth program at an average price of $23.08 per
share.  It also  announced  a sixth  stock  repurchase  program of up to 300,000
shares, or approximately 5%, of its outstanding  common stock,  continuing until
its completion.  At December 31, 2004, the Company had 111,955 shares  remaining
to be purchased under this program.

The Company and the Bank are subject to dividend restrictions imposed by various
regulators,  including a limitation on the total of all dividends  that the Bank
may pay to the Company in any calendar  year, to an amount that shall not exceed
the Bank's net income for the current year,  plus the Bank's net income retained
for the two previous years, without regulatory approval.  In addition,  the Bank
may not declare or pay dividends on, and the Company may not repurchase,  any of
its  shares of common  stock if the effect  thereof  would  cause  stockholders'
equity  to  be  reduced  below   applicable   regulatory   capital   maintenance
requirements  or if such  declaration,  payment or  repurchase  would  otherwise
violate regulatory requirements.

In conjunction with Massachusetts conversion regulations, the Bank established a
liquidation  account  for  eligible  account  holders,  which  at  the  time  of
conversion  amounted to approximately $70 million. In the event of a liquidation
of the Bank,  the eligible  account  holders  will be entitled to receive  their
pro-rata  share of the net worth of the Bank prior to  conversion.  However,  as
qualifying deposits are reduced, the liquidation account will also be reduced in
an amount proportionate to the reduction in the qualifying deposit accounts.


                                      -83-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.   EMPLOYEE BENEFIT PLANS
--------------------------------------------------------------------------------

      Defined contribution pension plan

The Company has a qualified  savings plan under  Section  401(k) of the Internal
Revenue Code. Each employee reaching the age of 21 and having completed at least
1,000 hours of service in a twelve-month period,  beginning with such employee's
date of  employment,  automatically  becomes a  participant  in the 401(k) Plan.
Employees  may  contribute  a portion of their  compensation  subject to certain
limits based on federal tax laws. The Company  contributes a non-elective  3% of
gross  annual  wages  for  each  participant,  regardless  of the  participant's
deferral,  in  addition  to a 100%  match up to 4% of gross  annual  wages.  The
Company  made total  contributions  which  amounted to  $624,000,  $603,000  and
$640,000, respectively, for the years ended December 31, 2004, 2003 and 2002.

      Supplemental executive retirement plan

The Company has maintained nonqualified  supplemental executive retirement plans
for the benefit of two senior executives. Benefits generally commence no earlier
than age  sixty-two  and are  payable at the  executive's  option,  either as an
annuity or in a lump sum. As of December  31, 2004 and 2003,  the Company had an
accrued expense payable in the amount of $120,000 and $1,007,000,  respectively,
representing   the  present  value  of  future   payments   under  these  plans.
Supplemental  retirement  expense was  $111,000 and $247,000 for the years ended
December 31, 2004 and 2003, respectively.  There was no expense recorded for the
year ended  December 31, 2002. In the year ended  December 31, 2004, the Company
paid out the accrued liability of $997,000 representing the accrued plan benefit
for one of these executives and this plan was terminated. In some instances, the
Company  previously  entered into  split-dollar  life insurance  agreements with
former senior executives to provide supplemental retirement benefits.

      Incentive plan

The Company has an incentive plan (the "Plan")  whereby all management and staff
members are eligible to receive a bonus, tied to performance in the fiscal year.
The structure of the Plan is reviewed  annually by the  Compensation  Committee.
Incentive  compensation  expense for the years ended December 31, 2004, 2003 and
2002 amounted to $900,000, $925,000 and $620,000, respectively.

      Other benefits

The Company has in the past  offered its  retirees  optional  medical  insurance
coverage.  All participating  retirees are required to contribute in part to the
cost of this coverage.  The retiree  medical plan was terminated on December 31,
1996.  Any retiree  participating  in the plan at that time will  continue to be
covered for life,  however,  no new retirees can  participate  in this plan.  At
December 31, 2004 and 2003,  the Company had an accrued  liability in the amount
of $411,000 and $428,000,  respectively,  for payment of future  premiums  under
this plan. The Company  recorded  expense of $50,000 in 2004 in relation to this
plan; no plan expense was recorded in 2003 or 2002.


                                      -84-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

      Stock options

Under the  Company's  2001  Stock-Based  Incentive  Plan,  the Company may grant
options to its  directors,  officers and employees  for up to 767,366  shares of
common stock. Under the Company's 2003 Equity Compensation Plan, the Company may
grant up to  300,000  options or stock  awards to its  directors,  officers  and
employees.  For both stock  option  plans,  shares may be issued or  transferred
pursuant  to the  exercise of options to purchase  shares of common  stock.  The
exercise price of each option equals the market price of the Company's  stock on
the date of grant and an option's  maximum  term is ten years.  Options  granted
under the 2001 Plan vest at 20% per year. Option and stock awards under the 2003
Plan  vest  based  on a  schedule  established  at the time of the  award.  Both
incentive  stock  options and  non-statutory  stock options may be granted under
these plans.

A summary of the  status of the  Company's  stock  options  for the years  ended
December 31, 2004, 2003 and 2002 are presented below:

       
         
                                                   2004                         2003                         2002
                                         ------------------------     ------------------------     ------------------------
                                                         Weighted                     Weighted                     Weighted
                                                         Average                      Average                      Average
                                                         Exercise                     Exercise                     Exercise
                                           Shares         Price         Shares         Price         Shares         Price
                                         ---------      ---------     ---------      ---------     ---------      ---------
                                                                                                                     
Fixed Options:
    Outstanding at beginning of year       649,927      $   17.80       600,848      $   16.75       767,366      $   16.75
    Granted                                 36,450          37.80       120,143          22.44            --             --
    Exercised                              (32,415)         16.75       (71,064)         16.75        (6,907)         16.75
    Forfeited                              (10,208)         18.81            --             --      (159,611)         16.75
                                         ---------                    ---------                    ---------
    Outstanding at end of year             643,754          18.97       649,927          17.80       600,848          16.75
                                         =========                    =========                    =========

Options exercisable at year-end            316,926      $   17.18       189,081      $   16.75       146,573      $   16.75
Weighted-average fair value of
    options granted during the year      $    7.98                    $    6.15                    $      --
        


                                      -85-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        STOCK-BASED COMPENSATION PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN
                                  (continued)

      Stock options (concluded)

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions:

                                                        Years Ended December 31,
                                                        ------------------------
                                                            2004         2003
                                                          -------      -------

                  Dividend yield                             1.85%        1.85%
                  Expected life                            6 years     10 years
                  Expected volatility                       21.04%       20.34%
                  Risk-free interest rate                    3.17%        3.85%

No options were granted during the year ended December 31, 2002.

Information  pertaining  to options  outstanding  at  December  31,  2004 are as
follows:

                            Options Outstanding        Options Exercisable
                        --------------------------   -----------------------
                                        Weighted
                                         Average                    Weighted
                                        Remaining                    Average
                          Number       Contractual      Number      Exercise
        Grant Period    Outstanding        Life      Exercisable      Price
        ------------    -----------    -----------   -----------    --------

            2001          488,161      6.08 years      292,897      $ 16.75

            2003          120,143      8.10 years       24,029        22.44

            2004           35,450      9.08 years           --           --

      Stock awards

Under the Company's 2001 Stock-Based Incentive Plan, the Company may grant stock
awards to its  directors,  officers and  employees  for up to 306,950  shares of
common stock.  The stock awards vest at 20% per year.  Under the Company's  2003
Equity  Compensation  Plan, the Company may grant up to 300,000 stock options or
stock awards to its directors,  officers and employees.  The Company applies APB
Opinion No. 25 and related  Interpretations  in accounting for stock awards. The
fair market value of the stock allocations, based on the market price at date of
grant, is recorded as unearned compensation.  Unearned compensation is amortized
over the applicable periods.  The Company recorded  compensation cost related to
the stock awards of approximately $1,216,000, $1,066,000 and $1,165,000 in 2004,
2003 and 2002, respectively.

A summary of the status of the Company's stock awards is presented below:

       
         
                                                                 Years Ended December 31,
                                                          -------------------------------------
                                                             2004          2003          2002
                                                          ---------     ---------     ---------
                                                                                         
   Balance at beginning of year                             290,435       206,269       306,945
       Granted                                               15,870        84,166            --
       Cancelled                                                 --            --      (100,676)
                                                          ---------     ---------     ---------
   Balance at end of year                                   306,305       290,435       206,269
                                                          =========     =========     =========

   Fair value of stock awards granted during the year     $   37.80     $   22.38     $      --
                                                          =========     =========     =========
        


                                      -86-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        STOCK-BASED COMPENSATION PLANS AND EMPLOYEE STOCK OWNERSHIP PLAN
                                  (continued)

      Employee Stock Ownership Plan

The Bank has  established an Employee Stock  Ownership Plan (the "ESOP") for the
benefit of each  employee  that has reached the age of 21 and has  completed  at
least 1,000 hours of service in the previous twelve-month period. As part of the
conversion, Berkshire Hills Funding Corporation provided a loan to the Berkshire
Bank  Employee  Stock  Ownership  Plan Trust which was used to  purchase  8%, or
613,900 shares, of the Company's  outstanding stock in the open market. The loan
bears interest equal to 9.5% and provides for quarterly payments of interest and
principal.

At December 31, 2004, the remaining principal balance is payable as follows:

                 Years Ending
                 December 31,                       (In thousands)
                 ------------

                     2005                               $  325
                     2006                                  356
                     2007                                  392
                     2008                                  429
                     2009                                  472
                  Thereafter                             3,985
                                                        ------

                                                        $5,959
                                                        ======

The Bank has committed to make  contributions  to the ESOP sufficient to support
the debt service of the loan. The loan is secured by the shares purchased, which
are held in a suspense account for allocation among the participants as the loan
is  paid.  Total  compensation  expense  applicable  to  the  ESOP  amounted  to
$1,377,500,  $1,094,000 and $887,000 for the years ended December 31, 2004, 2003
and 2002, respectively.

Shares held by the ESOP include the following at December 31, 2004 and 2003:

                                                  2004         2003
                                                -------      -------

            Allocated                           149,545      114,188
            Committed to be allocated            37,853       37,853
            Unallocated                         416,387      454,240
                                                -------      -------

                                                603,785      606,281
                                                =======      =======

Cash dividends  received on allocated  shares are allocated to participants  and
cash  dividends  received on shares  held in  suspense  are applied to repay the
outstanding  debt  of the  ESOP.  The  fair  value  of  unallocated  shares  was
approximately  $15,469,000,  $16,443,000  and  $11,589,000 at December 31, 2004,
2003 and 2002, respectively.


                                      -87-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

In the ordinary course of business, the Company has granted extensions of credit
to directors and officers and their related interests. All loans and commitments
included  in such  transactions  were  made on  substantially  the  same  terms,
including  interest rates and  collateral,  as those  prevailing at the time for
comparable  transactions with other persons. All loans to directors and officers
of the Company and their related  interests were  performing in accordance  with
the contractual terms of the loans as of December 31, 2004.

The  following  is an analysis of  activity  of such  extensions  of credit that
aggregate  more than $60,000 on an  individual  basis to directors and executive
officers of the Company and their related interests.  In any instances where, at
December 31, 2004 or 2003, the individual aggregate extension of credit declined
below  $60,000,  or the  individual  was no longer a director  or  officer,  the
balance was reported as zero and the reduction was included with repayments.

                                              Years Ended December 31,
                                              ------------------------
                                                  2004        2003
                                                -------     -------
                                                   (In thousands)

            Balance at beginning of year        $ 2,205     $ 5,740
            Additions                             4,642       1,127
            Repayments                           (1,337)     (4,662)
                                                -------     -------

            Balance at end of year              $ 5,510     $ 2,205
                                                =======     =======


                                      -88-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.   FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------

The fair value of a financial  instrument  is the  current  amount that would be
exchanged  between willing  parties,  other than in a forced  liquidation.  Fair
value is best  determined  based upon quoted  market  prices.  However,  in many
instances, there are no quoted market prices for the Company's various financial
instruments.  In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.  Those
techniques are  significantly  affected by the assumptions  used,  including the
discount  rate and estimates of future cash flows.  Accordingly,  the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements.  The aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Company.

The  following  methods and  assumptions  were used by the Company in estimating
fair value disclosures for financial instruments:

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

Securities: Fair values for securities, excluding FHLB and SBLI stock, are based
on quoted  market  prices,  where  available.  If quoted  market  prices are not
available,  fair  values  are  based  on  quoted  market  prices  of  comparable
instruments,  where  practicable.  The carrying value of FHLB stock approximates
fair value based on the redemption  provisions of the Federal Home Loan Bank and
SBLI  stock was  recorded  at fair  value at  acquisition  as  determined  by an
appraisal performed by independent investment consultants retained by SBLI.

Loans held for sale:  Fair values are based on forward sales  contracts for each
loan held for sale.

Loans: For variable-rate  loans that reprice  frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
all other  loans are  estimated  using  discounted  cash  flow  analyses,  using
interest rates currently being offered for loans with similar terms to borrowers
of  similar  credit  quality.  Fair  values of loans  held for sale are based on
contracted sale prices.

Deposits:  The fair values for  non-certificate  accounts and tax escrow are, by
definition, equal to the amount payable on demand at the reporting date which is
their carrying  amounts.  Fair values for  certificates of deposit are estimated
using a discounted cash flow  calculation  that applies interest rates currently
being  offered on  certificates  to a schedule of  aggregated  expected  monthly
maturities on time deposits.

Federal  Home Loan Bank  advances:  The fair  values of  Federal  Home Loan Bank
advances are estimated  using  discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.

Accrued  interest:  The carrying  amounts of accrued  interest  approximate fair
value, and are immaterial.


                                      -89-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)

Off-balance-sheet  financial  instruments:  Fair  values  for  off-balance-sheet
lending  commitments  are based on fees currently  charged to enter into similar
agreements,  taking into account the remaining  terms of the  agreements and the
counterparties'   credit  standing.   The  fair  values  of  off-balance   sheet
instruments are immaterial.

The  carrying  amounts  and  estimated  fair values of the  Company's  financial
instruments are as follows at December 31, 2004 and 2003:

       
         
                                                    2004                    2003
                                            --------------------    --------------------
                                            Carrying      Fair      Carrying      Fair
                                             Amount      Value       Amount      Value
                                            --------    --------    --------    --------
                                                           (In thousands)
                                                                                   
   Financial assets:
       Cash and cash equivalents            $ 17,902    $ 17,902    $ 17,442    $ 17,442
       Securities available-for-sale         365,404     365,404     307,425     307,425
       Securities held-to-maturity            29,942      29,899      36,903      36,868
       Federal Home Loan Bank stock           16,974      16,974      12,923      12,923
       Savings Bank Life Insurance stock       2,043       2,043       2,043       2,043
       Loans held for sale                     1,053       1,067          --          --
       Loans, net                            818,842     814,458     783,258     787,490
       Accrued interest receivable             5,472       5,472       5,080       5,080

   Financial liabilities:
       Deposits with no stated maturity      530,514     530,514     508,894     508,894
       Certificate accounts                  315,275     318,056     321,350     329,669
       Federal Home Loan Bank advances       327,926     334,457     251,465     263,218
        


                                      -90-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18.   CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
--------------------------------------------------------------------------------

Condensed financial information pertaining only to the parent company, Berkshire
Hills Bancorp, Inc., is as follows:

                            CONDENSED BALANCE SHEETS

                                                                 December 31,
                                                              ------------------
                                                                2004      2003
                                                              --------  --------
                                                                (In thousands)
      Assets

      Cash due from Berkshire Bank                            $  6,202  $  6,305
      Securities available-for-sale, at fair value                  31        31
      Investment in common stock of Berkshire Bank             117,123   105,128
      Investment in common stock of Berkshire Hills
           Funding Corporation                                   6,680     6,680
      Investment in common stock of Berkshire
          Hills Technology, Inc.                                    --     3,421
      Other assets                                               1,709     1,640
                                                              --------  --------

                 Total assets                                 $131,745  $123,205
                                                              ========  ========

      Liabilities and Stockholders' Equity

      Accounts payable                                        $      9  $     30
      Stockholders' equity                                     131,736   123,175
                                                              --------  --------

                Total liabilities and stockholders' equity    $131,745  $123,205
                                                              ========  ========


                                      -91-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

          CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued)

                         CONDENSED STATEMENTS OF INCOME

       
         
                                                               Years Ended December 31,
                                                          ----------------------------------
                                                            2004         2003         2002
                                                          --------     --------     --------
                                                                    (In thousands)
                                                                                       
Income:
    Dividends from Berkshire Bank                         $     --     $  8,000     $  2,375
    Dividends from Berkshire Hills Funding Corporation         524          559          577
    Interest on securities                                      --           17          273
    Other                                                       11           54           44
                                                          --------     --------     --------
        Total income                                           535        8,630        3,269
                                                          --------     --------     --------
Operating expenses                                             156          361          405
                                                          --------     --------     --------
Income before income taxes and equity in
    undistributed income of subsidiaries                       379        8,269        2,864
Income tax (benefit) provision                                (860)         (99)          80
                                                          --------     --------     --------
Income before equity in undistributed
    income of subsidiaries                                   1,239        8,368        2,784
Equity in undistributed income of Berkshire Bank            10,923          889          612
Equity in undistributed loss of Berkshire Hills
    Funding Corporation                                         --          (10)        (259)
Equity in undistributed loss of Berkshire Hills
    Technology, Inc.                                          (653)        (282)      (1,040)
                                                          --------     --------     --------

      Net income                                          $ 11,509     $  8,965     $  2,097
                                                          ========     ========     ========
        


                                      -92-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

          CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)

                       CONDENSED STATEMENTS OF CASH FLOWS

       
         
                                                                    Years Ended December 31,
                                                               ----------------------------------
                                                                 2004         2003         2002
                                                               --------     --------     --------
                                                                         (In thousands)
                                                                                            
Cash flows from operating activities:
    Net income                                                 $ 11,509     $  8,965     $  2,097
    Adjustments to reconcile net income
        to net cash provided by operating activities:
           Equity in undistributed income of Berkshire Bank     (10,923)        (889)        (612)
           Equity in undistributed loss of  Berkshire Hills
               Funding Corporation                                   --           10          259
           Equity in undistributed loss of
               Berkshire Hills Technology, Inc.                     653          282        1,040
           Net accretion of securities                               --           --           (4)
           Other, net                                                91          (65)         499
                                                               --------     --------     --------
              Net cash provided by operating activities           1,330        8,303        3,279
                                                               --------     --------     --------

Cash flows from investing activities:
    Activity in available-for-sale securities:
        Principal payments                                           --           --          560
    Activity in held-to-maturity securities:
        Maturities                                                   --        3,463        1,932
        Principal payments                                           --           --          169
        Purchases                                                    --           --          (32)
    Sale of investment in Berkshire Hills Technology, Inc.        2,587           --           --
                                                               --------     --------     --------
              Net cash provided by investing activities           2,587        3,463        2,629
                                                               --------     --------     --------

Cash flows from financing activities:
    Proceeds from issuance of treasury stock                      1,139        1,191          116
    Payments to acquire treasury stock                           (2,545)      (7,099)      (6,989)
    Dividends paid                                               (2,614)      (2,628)      (2,737)
                                                               --------     --------     --------
              Net cash used in financing activities              (4,020)      (8,536)      (9,610)
                                                               --------     --------     --------

Net change in cash and cash equivalents                            (103)       3,230       (3,702)

Cash and cash equivalents at beginning of year                    6,305        3,075        6,777
                                                               --------     --------     --------

Cash and cash equivalents at end of year                       $  6,202     $  6,305     $  3,075
                                                               ========     ========     ========
        


                                      -93-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19.   DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------

On June 18, 2004, the business assets of EastPoint  Technologies,  LLC were sold
to a subsidiary  of Open  Solutions,  Inc. for  $7,000,000.  The Company owned a
60.3%  interest in EastPoint,  with the  remaining  39.7%  interest  recorded as
minority interest.  Net of escrows and minority  interest,  the Company received
$2,587,000 in net cash proceeds.  The Company has the potential to receive up to
an  additional  $750,000  in two  years,  representing  its  60.3%  share of the
combined escrowed and conditional payments. No additional proceeds were received
in 2004. Net income and cash flows related to EastPoint  have been  reclassified
as  related  to  discontinued  operations  in  the  financial  statements.   The
transaction  resulted in a net loss of $75,000 ($49,500 after taxes),  which was
included in the net loss from discontinued operations in 2004.

Information  about  discontinued  operations  as of,  and  for the  years  ended
December 31, follows:

                                                  2004        2003        2002
                                                -------     -------     -------
                                                         (In thousands)

            Depreciation and amortization       $   282     $   696     $   601

            Licensing and other fee revenues      2,695       7,262       6,991

            Minority interest                      (381)       (186)       (685)

            Net loss before taxes                  (653)       (282)     (1,040)

            Goodwill and other intangibles           --       4,470       4,673

            Other assets                             --       3,188       3,898

            Capital expenditures                     76          80         424


                                      -94-
      

                 BERKSHIRE HILLS BANCORP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)

20.   QUARTERLY DATA (UNAUDITED)
--------------------------------------------------------------------------------

Quarterly  results of operations  for the years ended December 31, 2004 and 2003
were as follows:

       
         
                                                           2004                                           2003
                                        ------------------------------------------    --------------------------------------------
                                         Fourth     Third      Second      First       Fourth      Third       Second      First
                                         Quarter    Quarter    Quarter     Quarter     Quarter     Quarter     Quarter     Quarter
                                        --------   --------   --------    --------    --------    --------    --------    --------
                                                                 (In thousands, except per share data)
                                                                                                                             
Interest and dividend income            $ 15,807   $ 15,546   $ 14,737    $ 14,990    $ 14,410    $ 13,858    $ 14,139    $ 13,901
Interest expense                           5,608      5,304      4,985       4,828       4,666       4,549       4,706       4,821
                                        --------   --------   --------    --------    --------    --------    --------    --------
Net interest income                       10,199     10,242      9,752      10,162       9,744       9,309       9,433       9,080
Provision (credit) for loan losses           425        365        425         350        (225)        575         785         325
Non-interest income                        2,198      1,726      1,965       1,875         700       1,912       1,896       1,940
Non-interest expense                       7,300      7,181      6,933       7,563       6,906       6,871       7,582       6,884
Income taxes-continuing operations         1,495      1,415      1,402       1,325       1,124       1,360         786       1,891
                                        --------   --------   --------    --------    --------    --------    --------    --------
Income from continuing operations          3,177      3,007      2,957       2,799       2,639       2,415       2,176       1,920

Net loss from discontinued operations         --         --       (255)       (176)        (48)         (1)        (38)        (98)
                                        --------   --------   --------    --------    --------    --------    --------    --------

Net income                              $  3,177   $  3,007   $  2,702    $  2,623    $  2,591    $  2,414    $  2,138    $  1,822
                                        ========   ========   ========    ========    ========    ========    ========    ========

Earnings per share:
    Basic                               $   0.60   $   0.57   $   0.51    $   0.50    $   0.50    $   0.46    $   0.40    $   0.34
    Diluted                                 0.55       0.53       0.47        0.46        0.45        0.43        0.38        0.32
        

Results for the second quarter of 2003 included an $800,000  retirement  benefit
charge. Fourth quarter 2003 results were affected by the final sale of sub-prime
automobile  loans,  contributing to a credit for loan losses and to a $2,094,000
loss on sale included in other non-interest  income,  which was partially offset
by net securities gains totaling $1,564,000.  During the second quarter of 2004,
heavy loan prepayment activity caused a decrease in net interest income. Also in
that quarter,  the Company sold EastPoint  Technologies,  LLC. Current and prior
period income and expenses related to EastPoint were  reclassified as a net loss
from discontinued operations, including a $75,000 pre-tax loss recorded on sale.

Quarterly data may not sum to annual data due to rounding.


                                      -95-
      

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

      None.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------

      The Company's  management,  including the  Company's  principal  executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's  "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").  Based upon their evaluation,  the principal  executive officer
and  principal  financial  officer  concluded  that, as of the end of the period
covered by this report,  the Company's  disclosure  controls and procedures were
effective  for the  purpose of  ensuring  that the  information  required  to be
disclosed  in the reports that the Company  files or submits  under the Exchange
Act with the  Securities  and Exchange  Commission  (the "SEC") (1) is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
SEC's rules and forms,  and (2) is accumulated and communicated to the Company's
management,  including its principal executive and principal financial officers,
as appropriate  to allow timely  decisions  regarding  required  disclosure.  In
addition, based on that evaluation,  no change in the Company's internal control
over  financial  reporting  occurred  during the quarter ended December 31, 2004
that has materially affected,  or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

      The Company is in the  process of  documenting  and  testing its  internal
control   procedures  to  satisfy  the   requirements  of  Section  404  of  the
Sarbanes-Oxley   Act  of  2002,   which   requires   management  to  assess  the
effectiveness of its system of internal controls over financial  reporting as of
December 31, 2004, the end of its latest fiscal year. The Company's  independent
Registered  Public  Accounting  Firm  must  then  attest  to and  report on that
assessment by management. The Company has expended significant resources in this
effort and believes that it has made significant  progress.  To date, management
has not identified any material  weaknesses in the Company's  internal  controls
over financial reporting.  However, the Company has not completed its assessment
of internal controls over financial  reporting and,  therefore,  the independent
auditors have not completed the procedures it requires to issue its  attestation
over  financial  reporting.  Accordingly,  the Company is omitting  management's
annual report on internal control over financial reporting,  as required by Item
308(a) of Regulation  S-K and the related  attestation  report of the registered
public  accounting  firm,  required by Item 308(b) of  Regulation  S-K from this
filing as permitted by Order of the  Securities and Exchange  Commission,  dated
November 30, 2004. Copies of these items will be provided in an amendment to the
Form 10-K no later than May 2, 2005.

ITEM 9B. OTHER INFORMATION
--------------------------------------------------------------------------------

      None.


                                      -96-
      

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------------------------------

      For information  concerning the directors of the Company,  the information
contained under the sections captioned  "Proposal 1 -- Election of Directors" in
Berkshire  Hills' Proxy Statement for the 2005 Annual Meeting of Stockholders is
incorporated by reference.

      The following table sets forth certain information regarding the executive
officers of Berkshire Hills and Berkshire Bank.

       
         
      Name                 Age(1)   Position
      ----                 ------   --------
                                       
      Michael P. Daly        43     President and Chief Executive Officer
      Wayne F. Patenaude     44     Senior Vice President, Chief Financial Officer and Treasurer
      Gayle P. Fawcett       52     Senior Vice President of Retail Banking and Operations
        

      ----------
      (1)   As of December 31, 2004

      The  executive  officers are elected  annually and hold office until their
successors  have  been  elected  and  qualified  or until  they are  removed  or
replaced.

Biographical Information
------------------------

      Michael P. Daly serves as  President  and Chief  Executive  Officer of the
Company and Berkshire Bank. Prior to this position, Mr. Daly served as Executive
Vice  President of the Company and Bank from January 2000 to October 2002 and as
Senior Vice  President of  Commercial  Lending  from October 1997 until  January
2000.

      Wayne F.  Patenaude  served  as Senior  Vice  President,  Chief  Financial
Officer and Treasurer of the Company and Berkshire Bank since February 2003. Mr.
Patenaude  served as  Executive  Vice  President,  Chief  Financial  Officer and
Treasurer of American Savings Bank,  located in New Britain,  Connecticut,  from
1999 until American  Savings Bank's  acquisition by Banknorth,  N.A. on February
14, 2003. Mr. Patenaude served as Chief Financial Officer of Bancorp Connecticut
from December 1998 to 1999 when he joined American Savings Bank.

      Gayle P.  Fawcett  has been Senior Vice  President  of Retail  Banking and
Operations of the Company and Berkshire  Bank since October 2002.  Prior to this
position,  Ms. Fawcett served as Senior Vice President of Systems and Operations
of Berkshire Bank since May 1999.

      Reference  is made to the cover  page of this  report  and to the  section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement  for  information  regarding  compliance  with  Section  16(a)  of the
Exchange Act. For information  concerning the audit committee  financial expert,
reference is made to the section captioned "Corporate Governance - Committees of
the Board of Directors - Audit Committee" in the Proxy Statement.

      For information  concerning the Company's code of ethics,  the information
contained under the section captioned  "Corporate  Governance - Code of Business
Conduct" in the Proxy  Statement is  incorporated  by  reference.  A copy of the
Company's code of ethics is available to stockholders  on the Company's  website
at "www.berkshirebank.com."

ITEM 11. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------

      The  information   contained  under  the  sections  captioned   "Executive
Compensation"   and  "Directors'   Compensation"   in  the  Proxy  Statement  is
incorporated herein by reference.


                                      -97-
      

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------

      (a)   Security Ownership of Certain Beneficial Owners

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section  captioned  "Stock  Ownership" in the Proxy
            Statement.

      (b)   Security Ownership of Management

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section  captioned  "Stock  Ownership" in the Proxy
            Statement.

      (c)   Changes in Control

            Management of Berkshire  Hills knows of no  arrangements,  including
            any pledge by any  person of  securities  of  Berkshire  Hills,  the
            operation  of which may at a  subsequent  date result in a change in
            control of the registrant.

      (d)   Equity Compensation Plan Information

      The following table sets forth information, as of December 31, 2004, about
Company  common  stock that may be issued  upon  exercise  of options  under the
Berkshire Hills Bancorp,  Inc. 2001 Stock-Based Incentive Plan and the Berkshire
Hills  Bancorp,  Inc.  2003  Equity  Compensation  Plan.  Each of the  plans was
approved by the Company's stockholders.

       
         
                                                                                                           Number of securities
                                                 Number of securities                                    remaining available for
                                                   to be issued upon         Weighted-average             future issuance under
                                                     exercise of            exercise price of           equity compensation plans
                                                 outstanding options,      outstanding options,           (excluding securities
             Plan category                       warrants and rights       warrants and rights        reflected in the first column)
   ----------------------------------            --------------------      --------------------       ------------------------------
                                                                                                                     
   Equity compensation plans
     approved by security holders                       643,754                   $ 18.97                         287,148

   Equity compensation plans
     not approved by security holders                        --                        --                              --

   Total                                                643,754                   $ 18.97                         287,148
        

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------

      The information  required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------------------------------------------------

      The information  required by this item is incorporated herein by reference
to the section  captioned  "Proposal 2 - Ratification of Independent  Registered
Public Accounting Firm" in the Proxy Statement.


                                      -98-
      

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
--------------------------------------------------------------------------------

      (a)   [1]   Financial Statements

                  o     Report of Independent Registered Public Accounting Firm

                  o     Consolidated  Balance Sheets as of December 31, 2004 and
                        2003

                  o     Consolidated  Statements  of Income for the Years  Ended
                        December 31, 2004, 2003 and 2002

                  o     Consolidated  Statements  of  Changes  in  Stockholders'
                        Equity for the Years Ended  December 31, 2004,  2003 and
                        2002

                  o     Consolidated  Statements  of Cash  Flows  for the  Years
                        Ended December 31, 2004, 2003 and 2002

                  o     Notes to Consolidated Financial Statements

            [2]   Financial Statement Schedules

                  All  financial  statement  schedules  are omitted  because the
                  required information is either included or is not applicable.


                                      -99-
      

            [3]   Exhibits

                  2.1   Agreement  and Plan of Merger,  dated as of December 16,
                        2004, by and between  Berkshire Hills Bancorp,  Inc. and
                        Woronoco Bancorp, Inc. (1)

                  3.1   Certificate of Incorporation of Berkshire Hills Bancorp,
                        Inc.(2)

                  3.2   Bylaws of Berkshire Hills Bancorp, Inc. (3)

                  4.0   Draft Stock  Certificate  of  Berkshire  Hills  Bancorp,
                        Inc.(2)

                  10.1  Employment  Agreement between Berkshire Bank and Michael
                        P. Daly(4)

                  10.2  Employment  Agreement  between  Berkshire Hills Bancorp,
                        Inc. and Michael P. Daly(4)

                  10.3  Change in Control  Agreement  between Berkshire Bank and
                        Gayle P. Fawcett(3)

                  10.4  Change in  Control  Agreement  between  Berkshire  Hills
                        Bancorp, Inc. and Gayle P. Fawcett(3)

                  10.5  Change in Control  Agreement  between Berkshire Bank and
                        Wayne F. Patenaude(3)

                  10.6  Change in  Control  Agreement  between  Berkshire  Hills
                        Bancorp, Inc. and Wayne F. Patenaude(3)

                  10.7  Supplemental   Executive  Retirement  Agreement  between
                        Berkshire Bank and Michael P. Daly(3)

                  10.8  Berkshire Hills Bancorp,  Inc. 2003 Equity  Compensation
                        Plan(5)

                  10.9  Letter  Agreement,  dated  June 26,  2003,  by and among
                        Berkshire Hills Bancorp, Inc., Berkshire Bank and Robert
                        A. Wells(4)

                  10.10 Form of Berkshire Bank Employee  Severance  Compensation
                        Plan(2)

                  10.11 Form of Berkshire Bank Supplemental Executive Retirement
                        Plan(2)

                  10.12 Berkshire Hills Bancorp, Inc. 2001 Stock-Based Incentive
                        Plan(6)

                  10.13 Retirement  Agreement,  dated  December 4, 2003,  by and
                        among Berkshire Hills Bancorp,  Inc., Berkshire Bank and
                        Robert A. Wells(3)

                  11.0  Statement  re:  Computation  of Per  Share  Earnings  is
                        incorporated  herein by  reference  to Part II,  Item 8,
                        "Financial Statements and Supplementary Data"

                  21.0  Subsidiary   Information  is   incorporated   herein  by
                        reference  to Part I,  Item 1,  "Business  -  Subsidiary
                        Activities"

                  23.0  Consent of Wolf & Company, P.C.

                  31.1  Rule 13a-14(a) Certification of Chief Executive Officer

                  31.2  Rule 13a-14(a) Certification of Chief Financial Officer

                  32.1  Section 1350 Certification of Chief Executive Officer

                  32.2  Section 1350 Certification of Chief Financial Officer

----------

            (1)   Incorporated herein by reference from the Exhibits to the Form
                  8-K, as filed on December 17, 2004.

            (2)   Incorporated  herein by  reference  from the  Exhibits to Form
                  S-1, Registration Statement and amendments thereto,  initially
                  filed on March 10, 2000, Registration No. 333-32146.

            (3)   Incorporated herein by reference from the Exhibits to the Form
                  10-K as filed on March 11, 2004.

            (4)   Incorporated herein by reference from the Exhibits to the Form
                  10-Q as filed on August 13, 2003.

            (5)   Incorporated  herein by  reference  from the  Appendix  to the
                  Proxy Statement as filed on March 27, 2003.

            (6)   Incorporated  herein by  reference  from the  Appendix  to the
                  Proxy Statement as filed on December 7, 2000.


                                     -100-
      

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                Berkshire Hills Bancorp, Inc.


      Date: March 14, 2005              By: /s/ Michael P. Daly
                                            ------------------------------------
                                            Michael P. Daly
                                            President, Chief Executive Officer
                                            and Director

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

       
                                                                                        

/s/ Michael P. Daly                 President, Chief Executive Officer               March 14, 2005
-------------------------------     and Director
Michael P. Daly                     (principal executive officer)


/s/ Wayne F. Patenaude              Senior Vice President, Treasurer                 March 14, 2005
-------------------------------     and Chief Financial Officer
Wayne F. Patenaude                  (principal accounting and financial officer)


/s/ Lawrence A. Bossidy             Non-Executive Chairman                           March 14, 2005
-------------------------------
Lawrence A. Bossidy


/s/ Thomas O. Andrews               Director                                         March 14, 2005
-------------------------------
Thomas O. Andrews


/s/ Thomas R. Dawson                Director                                         March 14, 2005
-------------------------------
Thomas R. Dawson


/s/ A. Allen Gray                   Director                                         March 14, 2005
-------------------------------
A. Allen Gray


/s/ Peter J. Lafayette              Director                                         March 14, 2005
-------------------------------
Peter J. Lafayette


/s/ Edward G. McCormick, Esq.       Director                                         March 14, 2005
-------------------------------
Edward G. McCormick, Esq.


/s/ Catherine B. Miller             Director                                         March 14, 2005
-------------------------------
Catherine B. Miller


/s/ Corydon L. Thurston             Director                                         March 14, 2005
-------------------------------
Corydon L. Thurston


/s/ Ann H. Trabulsi                 Director                                         March 14, 2005
-------------------------------
Ann H. Trabulsi


/s/ Robert A. Wells                 Director                                         March 14, 2005
-------------------------------
Robert A. Wells
        


                                     -101-


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Section 2: EX-23.0



Exhibit 23.0

                      [Letterhead of Wolf & Company, P.C.]

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Berkshire Hills Bancorp,  Inc.'s
Registration Statement Nos. 333-41766, 333-56446, and 333-105721 on Forms S-8 of
our report dated March 9, 2005 relating to the consolidated financial statements
of Berkshire  Hills Bancorp,  Inc. and  subsidiaries as of December 31, 2004 and
for the  three-year  period then ended  appearing  in the Annual  Report on Form
10-K.


/s/ Wolf & Company, P.C.
------------------------
Boston, MA
March 11, 2005


                                     -102-


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Section 3: EX-31.1



Exhibit 31.1

                                  CERTIFICATION

I, Michael P. Daly, certify that:

      1.    I have reviewed this report on Form 10-K of Berkshire Hills Bancorp,
            Inc.;

      2.    Based on my  knowledge,  this  annual  report  does not  contain any
            untrue statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such  statements  were made, not misleading with respect
            to the period covered by this report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this report,  fairly present in all material
            respects the financial  condition,  results of  operations  and cash
            flows of the  registrant  as of, and for,  the periods  presented in
            this report;

      4.    The registrant's other certifying officers and I are responsible for
            establishing and maintaining  disclosure controls and procedures (as
            defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  for the
            registrant and have:

            a.    Designed such disclosure  controls and  procedures,  or caused
                  such  disclosure  controls and procedures to be designed under
                  our supervision,  to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during  the  period  in  which  this  annual  report  is being
                  prepared;

            b.    Evaluated the  effectiveness  of the  registrant's  disclosure
                  controls  and  procedures  and  presented  in this  report our
                  conclusions about the effectiveness of the disclosure controls
                  and  procedures,  as of the end of the period  covered by this
                  report based on such evaluation; and

            c.    Disclosed  in  this  report  any  change  in the  registrant's
                  internal control over financial reporting that occurred during
                  the registrant's  most recent fiscal quarter (the registrant's
                  fourth  fiscal  quarter in the case of an annual  report) that
                  has materially affected, or is reasonably likely to materially
                  affect,  the  registrant's  internal  control  over  financial
                  reporting; and

      5.    The  registrant's  other  certifying  officers and I have disclosed,
            based  on our  most  recent  evaluation  of  internal  control  over
            financial  reporting,  to the  registrant's  auditors  and the audit
            committee of registrant's  board of directors (or persons performing
            the equivalent functions):

            a.    All  significant  deficiencies  and  material  weakness in the
                  design  or  operation  of  internal   control  over  financial
                  reporting which are reasonably  likely to adversely affect the
                  registrant's ability to record, process,  summarize and report
                  financial information; and

            b.    Any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal control over financial reporting.


Date: March 9, 2005                     /s/ Michael P. Daly
                                        ---------------------------------------
                                        Michael P. Daly
                                        President and Chief Executive Officer


                                     -103-


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Section 4: EX-31.2



Exhibit 31.2

                                  CERTIFICATION

I, Wayne F. Patenaude, certify that:

      1.    I have reviewed  this annual report on Form 10-K of Berkshire  Hills
            Bancorp, Inc.;

      2.    Based on my  knowledge,  this  report  does not  contain  any untrue
            statement  of a  material  fact  or omit to  state a  material  fact
            necessary to make the statements made, in light of the circumstances
            under which such  statements  were made, not misleading with respect
            to the period covered by this report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this report,  fairly present in all material
            respects the financial  condition,  results of  operations  and cash
            flows of the  registrant  as of, and for,  the periods  presented in
            this report;

      4.    The registrant's other certifying officers and I are responsible for
            establishing and maintaining  disclosure controls and procedures (as
            defined in  Exchange  Act Rules  13a-15(e)  and  15d-15(e))  for the
            registrant and have:

            a.    Designed such disclosure  controls and  procedures,  or caused
                  such  disclosure  controls and procedures to be designed under
                  our supervision,  to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during  the  period  in  which  this  annual  report  is being
                  prepared;

            b.    Evaluated the  effectiveness  of the  registrant's  disclosure
                  controls  and  procedures  and  presented  in this  report our
                  conclusions about the effectiveness of the disclosure controls
                  and  procedures,  as of the end of the period  covered by this
                  report based on such evaluation; and

            c.    Disclosed  in  this  report  any  change  in the  registrant's
                  internal control over financial reporting that occurred during
                  the registrant's  most recent fiscal quarter (the registrant's
                  fourth  fiscal  quarter in the case of an annual  report) that
                  has materially affected, or is reasonably likely to materially
                  affect,  the  registrant's  internal  control  over  financial
                  reporting; and

      5.    The  registrant's  other  certifying  officers and I have disclosed,
            based  on our  most  recent  evaluation  of  internal  control  over
            financial  reporting,  to the  registrant's  auditors  and the audit
            committee of registrant's  board of directors (or persons performing
            the equivalent functions):

            a.    All  significant  deficiencies  and  material  weakness in the
                  design  or  operation  of  internal   control  over  financial
                  reporting which are reasonably  likely to adversely affect the
                  registrant's ability to record, process,  summarize and report
                  financial information; and

            b.    Any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal control over financial reporting.


Date: March 9, 2005                     /s/ Wayne F. Patenaude
                                        ----------------------------------------
                                        Wayne F. Patenaude
                                        Senior Vice President, Chief
                                        Financial Officer and Treasurer


                                     -104-


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Section 5: EX-32.1



Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Annual Report of Berkshire Hills Bancorp, Inc. (the
"Company")  on Form 10-K for the period ended  December 31, 2004,  as filed with
the Securities and Exchange Commission (the "Report"), I, Michael P. Daly, Chief
Executive Officer of the Company,  certify,  pursuant to 18 U.S.C. Section 1350,
as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

      1.    The Report fully complies with the  requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      2.    The  information  contained in the Report  fairly  presents,  in all
            material respects, the financial condition and results of operations
            of the Company as of and for the period covered by the Report.


                                        /s/ Michael P. Daly
                                        -------------------
                                        Michael P. Daly
                                        Chief Executive Officer

March 9, 2005


                                     -105-


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Section 6: EX-32.2



Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Annual Report of Berkshire Hills Bancorp, Inc. (the
"Company")  on Form 10-K for the period ended  December 31, 2004,  as filed with
the Securities and Exchange  Commission (the  "Report"),  I, Wayne F. Patenaude,
Senior Vice  President,  Chief  Financial  Officer and Treasurer of the Company,
certify,  pursuant  to 18 U.S.C.  Section  1350,  as added by Section 906 of the
Sarbanes-Oxley Act of 2002, that:

      1.    The Report fully complies with the  requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      2.    The  information  contained in the Report  fairly  presents,  in all
            material respects, the financial condition and results of operations
            of the Company as of and for the period covered by the Report.


                                        /s/ Wayne F. Patenaude
                                        ----------------------
                                        Wayne F. Patenaude
                                        Senior Vice President,
                                        Chief Financial Officer and Treasurer

March 9, 2005


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